Fringe Benefit Planning
| Publication year | 1989 |
| Pages | 221 |
1989, February, Pg. 221. Fringe Benefit Planning
The Tax Reform Act of 1986 ("1986 Act") added and revised several provisions of the Internal Revenue Code of 1986, as amended ("Code"), affecting tax-free fringe benefit programs.(fn1) The recently enacted Technical and Miscellaneous Revenue Act of 1988 ("TAMRA") made further technical and substantive changes to many of these provisions.(fn2) This article emphasizes the effect of new IRC § 89 on fringe benefit planning.
IRC § 89 is generally effective for years beginning after December 31, 1988. This section imposes qualification requirements for many fringe benefit programs and nondiscrimination requirements for health plans and group-term life insurance plans.
The new qualification requirements for tax-favored fringe benefit programs are similar to some of the qualification requirements for existing tax-qualified pension and profit sharing plans. If a fringe benefit program fails to meet the qualification requirements, participants in the program must include the otherwise excludable benefits in gross income.
The nondiscrimination requirements generally provide that health and life insurance benefits that are provided to highly compensated employees and not to other employees cannot be provided on a tax-free basis. The new law does not require such plans to be nondis-criminatory. It merely reduces the tax benefit for highly compensated employees under discriminatory plans. Plans that provide uniform benefits for all employees will not be affected by the non-discrimination requirements. Other plans that favor highly compensated employees may be kept in place and simply suffer the reduction in tax-free benefits to highly compensated employees. Employers should carefully consider the least expensive method of dealing with the nondiscrimination requirements. A simplified benefit program often can obviate the tremendous administrative costs associated with compliance for a more complex program.
The IRC § 89 qualification requirements are as follows:
1) the plan must be in writing;
2) the employee's rights under the plan must be legally enforceable;
3) employees must be given reasonable notification of benefits available in the plan;
4) the plan must be maintained for the exclusive benefit of employees; and
5) the plan must have been established with the intention of being maintained for an indefinite period of time.
The qualification requirements apply by their terms to group accident and health plans under IRC § 105; group-term life insurance plans under IRC § 79; qualified tuition reduction programs under IRC § 117(d); cafeteria plans under IRC § 125; fringe benefit programs under IRC § 132 providing no additional cost services, qualified employee discounts or employer-operated eating facilities; and plans included in voluntary employees' beneficiary associations under IRC §§ 501(c)(9) and 505.
The sections establishing exemptions for dependent care assistance programs, educational assistance programs, and group legal services plans independently require these programs and plans to meet the qualification requirements.(fn3) However, because the exemptions for educational assistance programs and group legal services plans have been extended only through 1988,(fn4) these plans and programs will first have to meet the qualification requirements if and when the exemptions for them are again extended.
The legislative history to § 89 provides some guidance in applying these qualification requirements. The Conference Report to the 1986 Act provides that the requirement that an employee's rights under a plan be legally enforceable is not met if an employer has discretion to grant or deny benefits under the plan.(fn5) The employer's right to terminate a plan does not fail to meet this requirement if only claims not yet incurred will be disallowed by termination of the plan.(fn6)
The Conference Report to TAMRA provides that the requirement that a plan be in writing can be satisfied by a collection of separate written documents. This particular qualification requirement is satisfied in 1989 if the plan is in writing on the last day of the plan year beginning in 1989.(fn7) The Conference Report to the 1986 Act also specifies that administrators of dependent care assistance programs must provide participants in the program with a description of (1) the dependent care credit under IRC § 21 and (2) the circumstances
where it is more advantageous to take the credit than to receive excludable benefits under the program.(fn8)
If a plan subject to these qualification requirements fails to meet any of them, the value of all benefits received under the plan is included in the gross income of the employee receiving the benefits. In the case of group-term life insurance plans, the value of benefits is included in the gross income of the beneficiary. For these qualification requirements, the value of benefits means the value of reimbursements, services, death benefits or other benefits actually received, rather than the value of coverage under the plan. If a plan included in a voluntary employees' beneficiary association fails to meet the IRC § 89 qualification requirements, it will lose its tax exemption under IRC § 501(c)(9).
The nondiscrimination requirements of IRC § 89 apply to accident and health plans and group-term life insurance plans. Dependent care assistance programs are subject to the nondiscrimination requirements if...
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