RULES AND REGULATIONS
[61 PA. CODE CHS. 101 AND 125]
Payments For Employe Welfare Benefit Plans and Cafeteria Plans
[30 Pa.B. 3938] The Department of Revenue (Department), under the authority contained in section 354 of the Tax Reform Code of 1971 (TRC) (72 P. S. § 7254), by this order amends §§ 101.1, 101.6, 101.6a and 101.7 and deletes §§ 125.21--125.33 to read as set forth in Annex A.
Purpose of Rulemaking
The amendments to §§ 101.1, 101.6, 101.6a and 101.7 are made to explain how employe welfare benefit programs and other wage and salary supplemental programs are taxed and to implement amendments to section 301(d) of the TRC (72 P. S. § 7301(d)) under the act of May 7, 1997 (P. L. 85, No. 7) (Act 7) and the act of April 29, 1998 (P. L. 295, No. 48) (Act 48).
Explanation of Regulatory Requirements
The amendments provide employers and employes with a detailed explanation of how nondiscriminatory employe welfare benefit programs such as self-insured medical reimbursement accounts or cafeteria plans are taxed under the Commonwealth's Personal Income Tax. They also provide a detailed explanation of how programs that discriminate in favor of officers, owners and key employes are taxed.
The amendments are also added to notify employers and employes how the provisions of the Personal Income Tax relating to employe compensation in the form of employer-provided facilities or services will be enforced by the Department.
With the adoption of this rulemaking, the Department is deleting the statement of policy in §§ 125.21--125.33. The statement of policy provided the public with an explanation of the Department's policy on payments for employe welfare benefit plans and cafeteria plans pending the adoption of this rulemaking.
Affected Parties
Wage earners, employers and tax practitioners/preparers may be affected by the rulemaking in that they will need to know what is subject to withholding and how to complete their tax return.
Comment and Response Summary
Notice of proposed rulemaking was published at 28 Pa. B. 1946 (April 25, 1998). This proposal is being adopted with changes as set forth in Annex A.
The Department received one comment from the public during the public comment period. The Department also received comments from the Independent Regulatory Review Commission (IRRC). No comments were received from the Senate and House Finance Committees.
Amendments to the proposed rulemaking in response to comments are as follows:
(1) IRRC suggested that the Department clarify its use of the term ''cafeteria plan.'' In response, the Department amended the definition of ''cafeteria plan'' to mean only plans qualifying under section 125 of the IRC (26 U.S.C.A. § 125).
(2) IRRC suggested that the terminology ''taxable compensation'' was redundant and that the regulation be consistent in its references to compensation. The terminology ''taxable compensation'' has been amended to ''compensation'' throughout the regulation.
(3) IRRC suggested that the definitions of ''employe benefit plan,'' ''employe welfare benefit plan,'' and ''cafeteria plan'' in the proposed rulemaking overlap. The definitions have been amended to eliminate the definition of ''employe benefit plan.'' Although cafeteria plans can offer the same benefits as employe welfare benefit plans (such as, health, accident or death plan benefits or dependent care assistance), they can also offer 401(k) plan benefits.
(4) IRRC noted in its comments that the definition of ''cafeteria plan'' used the undefined term ''flexible benefit plans'' and suggested that the term be defined in the final rulemaking. The revisions to the definition of ''cafeteria plan'' previously discussed have addressed this concern.
(5) In response to IRRC's comment and the act of April 23, 1998 (P. L. 239, No. 45) (Act 45), several of the examples set forth in the definition of ''employe welfare benefit plan'' are deleted.
(6) IRRC recommended that the proposed rulemaking be amended to add definitions of the terms ''working condition fringes,'' ''qualified transportation fringes,'' and ''de minimis fringes'' for purposes of § 101.6(c)(10) (relating to compensation) and the definition of ''poverty income.'' The terms are eliminated in final-form regulations and will be addressed in a future rulemaking.
(7) IRRC noted that the criteria in the definition of ''program covering hospitalization, sickness, disability or death'' were confusing and questioned the need for the language. IRRC suggested that if the Department retained the language in the final rulemaking, the Department should explain why the criteria were necessary. The Department recognizes the concern raised by IRRC and deleted the proposed definition and added a new definition for ''health, accident or death plan.'' The definition includes an example to add clarity.
(8) IRRC and a public commentator suggested that the proposed rulemaking be amended to reflect the exclusion of the personal use of an employer's property and employer-provided services under Act 45. The Department acknowledges the need, deletes those provisions in the proposed rulemaking that consider employer provided service or property to be compensation, and adds § 101.6a (relating to fringe benefits in the form of use of property or services) to explain the new exclusions.
(9) IRRC questioned why the Department included the term ''collectively bargained'' in subsection (c)(9) and recommended that the Department either delete or explain the need for the terminology. Although collectively bargained for supplemental unemployment benefit pay arrangements would seldom be discriminatory, the language has been deleted.
(10) IRRC and a public comment questioned whether the proposed rulemaking referred not only to qualified and unqualified stock options and restricted stock options but also to incentive stock options (ISOs), noting that there is confusion in the community as to whether the current § 101.6(b) includes ISOs. The Department acknowledges that, because the Federal tax treatment of ISOs varies from the Federal treatment of other stock options, it would be helpful to clarify that they are taxed the same as other stock options for Personal Income Tax purposes. The Department amended § 101.6(f) for that purpose.
(11) IRRC recommended that the words ''they'' and ''conditions,'' in § 101.6(i)(1)(i) and (ii) be clarified. The terminology has been clarified by referencing the payments in question and the requirements of paragraph (1). The word ''rules'' in paragraph (2) refers to all personal income tax regulatory provisions relating to employer payments for employe welfare benefit plans.
(12) IRRC raised several clarity concerns regarding § 101.6(i)(2) and suggested that the provision should be redrafted. The Department recognizes IRRC's concerns and revised the paragraph accordingly.
(13) IRRC recommended changes to the first, fifth and sixth examples under § 101.6(i)(3). After consideration, the Department deleted paragraph (3) in its entirety.
(14) Section 101.7(f) (relating to receipt of income) is amended in response to IRRC's request for clarity.
(15) IRRC also made a comment relating to the deletion of the Department's statement of policy relating to payments for employe welfare benefit plans and cafeteria plans set forth in §§ 125.21--125.33. IRRC notes that the preamble for the proposed rulemaking did not mention the statement of policy, nor did it indicate that the statement of policy would be deleted upon adoption of the proposal; therefore, IRRC suggested that the statement of policy be deleted upon adoption of rulemaking.
It was the Department's intention to delete §§ 125.21-- 125.33 with the adoption of this rulemaking; therefore, consistent with IRRC's comment and the Department's intent, language has been added to the regulation which deletes §§ 125.21--125.33 upon the adoption of the rulemaking.
Revisions initiated during the Department's internal review of the regulation are as follows:
(1) Consistent with the Department's deletion of detailed examples throughout the regulation, the example in proposed § 101.6(g)(3) is deleted.
(2) The example in § 101.6(i)(2) was based on the Federal law in effect at the time the proposal was published. The Federal law subsequently changed requiring the deletion of the example.
(3) As part of the amendments to address Act 45, the Department believed it was necessary to add § 101.6(l) to specifically provide that the form of payment of compensation does not affect its taxable status, except as provided in § 101.6a.
(4) Stylistic changes were made throughout this rulemaking for clarity.
Comments that did not result in amendments to the regulation are as follows:
(1) IRRC saw a need to specifically address when benefits will be considered compensation. Although the Department understands that need, the proposed rulemaking takes a different approach to meet it, because there are substantially more categories of taxable benefits than excludible categories. It provides the general rule that all wage and salary supplements are taxable. The term ''wage and salary supplement'' is broadly defined to include any of the following:
(a) Employer-provided coverage under a plan.
(b) An employer payment to provide benefits under a plan, separation, vacation, holiday or guaranteed pay, reimbursement for personal expenses, and any other amount paid, under an agreement, to one or more of the following:
(i) An independently controlled trust or pooled fund established or maintained for the purpose of funding or providing benefits under the plan.
(ii) An insurance company for the purchase of insurance.
(iii) A third party for the benefit of the employe.
(c) Any benefit under a plan to the extent attributable to plan coverage or contributions by the employer which were not includible in income of the employe.
(d) Any benefit under a plan which is paid by the employer.
The rulemaking also spells out what contributions are deemed to be made by an employer even when deducted from an employe's gross pay. See § 101.6(i). The amendments continue the pattern of spelling out the exceptions, specifically including:
(a) Periodic payments for periods of sickness or disability. See § 101.6(c)(1).
(b) Payments made by an employer or labor union or elective contributions deemed to be made by an employer under a cafeteria plan for a nondiscriminatory health, accident or death plan and program benefits payable on condition of hospitalization, sickness, disability or death under a health, accident or death plan. See § 101.6(c)(6) and (12).
(c) Payments made by an employer or labor union for fringe benefits described in § 101.6a.
(2) In its comments regarding subsection (g), IRRC questioned the relevancy a cafeteria plan has to do with the taxation of vacation benefits and whether it mattered if the vacation benefits are part of a cafeteria plan in order to determine if they are compensation. IRRC suggested the Department explain the intent of this subsection. The inclusion of language relating to vacation benefits in a cafeteria plan was to show that cafeteria plans can cover a multitude of benefits, including vacation benefits.
(3) In its review of § 101.6(c)(5), IRRC questioned how the section would be applied for reimbursements for service or property that involved both personal and business use. The mixed use of property owned by an employe will be addressed in a separate rulemaking. The use of employe-owned property for business use is distinguishable from that addressed by Act 45 which related to the mixed use of property owned or leased by the employer.
(4) With regard to proposed § 101.6(e)(3), now § 101.6(e)(2), IRRC noted that because Federal taxable noncash fringe benefits may include the ''personal use of an employer's owned or leased property or of employer provided services,'' the paragraph needed to be amended to clarify the proper tax treatment for Pennsylvania purposes. In accordance with Act 48, the Department amended § 101.6(c) by adding paragraph (12). The purpose of paragraph (2) in § 101.6(e) is to advise taxpayers that the Commonwealth will accept the value established for Federal income tax purposes and that no special calculation is required for Pennsylvania tax purposes.
(5) IRRC raised a number of concerns regarding health, accident and death plans. The final-form regulations have been substantially changed to resolve those concerns. However, it is the position of the Department that benefits are not excludible as health, accident or death benefits if they would also be payable under circumstances having no connection with hospitalization, sickness, disability or death. Bickford v. Commonwealth, 533 A.2d 822 (Pa.Cmwlth. 1987).
IRRC's final comment suggested that because the Department would be adding new provisions to the proposal resulting from Act 45, it would be beneficial to allow further public comment prior to the submission of the final-form rulemaking. Neither the Regulatory Review Act nor the Commonwealth Documents Law provides for the republication of a proposed rulemaking. However, under the Governor's Executive Order 1996-1, the Department has actively sought input from affected parties including professional associations, business associations, all parties who commented on the proposal as well as IRRC and the Legislative Standing Committees. In addition, this rulemaking is listed in the Department's Agenda of Regulations and will be forwarded to all interested parties upon request. Therefore, the Department believes that its public outreach program sufficiently addresses this concern.
Fiscal Impact
The Department has determined that the amendments will have no fiscal impact on the Commonwealth.
Paperwork
The amendments will not require additional paperwork for the public or the Commonwealth.
Effectiveness/Sunset Date
The amendments will become effective upon final publication in the Pennsylvania Bulletin. The rulemaking is scheduled for review within 5 years of final publication. No sunset date has been assigned.
Contact Person
The contact person for an explanation of the amendments is Anita M. Doucette, Office of Chief Counsel, PA Department of Revenue, Dept. 281061, Harrisburg, PA 17128-1061.
Regulatory Review
Under section 5(a) of the Regulatory Review Act (71 P. S. § 745.5(a)), on April 15, 1998, the Department submitted a copy of the notice of proposed rulemaking, published at 28 Pa.B. 1946, to IRRC and the Chairpersons of the House Committee on Finance and the Senate Committee on Finance for review and comment.
In compliance with section 5(c) of the Regulatory Review Act, the Department also provided IRRC and the Committees with copies of the comments received, as well as other documentation. In preparing these final-form regulations, the Department has considered the comments received from IRRC, the Committees and the public.
These final-form regulations were deemed approved by the Committees on June 8, 2000, and were approved by IRRC on June 22, 2000, in accordance with section 5.1(e) of the Regulatory Review Act (71 P. S. § 745.5a(e)).
Findings
The Department finds that:
(1) Public notice of intention to amend the regulations has been given under sections 201 and 202 of the act of July 31, 1968 (P. L. 769, No. 240) (45 P. S. §§ 1201 and 1202) and the regulations thereunder, 1 Pa. Code §§ 7.1 and 7.2.
(2) The amendments are necessary and appropriate for the administration and enforcement of the authorizing statute.
Order
The Department, acting under the authorizing statute, orders that:
(a) The regulations of the Department, 61 Pa. Code Chapter 101, are amended by amending §§ 101.1, 101.6 and 101.7 by adding § 101.6a and by deleting the statements of policy in §§ 125.21--125.33 to read as set forth in Annex A with ellipses referring to the existing text of the regulations.
(b) The Secretary of the Department shall submit this order and Annex A to the Office of General Counsel and the Office of Attorney General for approval as to form and legality as required by law.
(c) The Secretary of the Department shall certify this order and Annex A and deposit them with the Legislative Reference Bureau as required by law.
(d) This order shall take effect upon publication in the Pennsylvania Bulletin.
ROBERT A. JUDGE, Sr.,
Secretary(Editor's Note: The proposed rulemaking which appeared at 28 Pa.B. 1946 did not include the adoption of § 101.6a included herein. For the text of the order of the Independent Regulatory Review Commission, relating to this document, see 30 Pa.B. 3534 (July 8, 2000).)
Fiscal Note: Fiscal Note 15-402 remains valid for the final adoption of the subject regulations.
Annex A
TITLE 61. REVENUE
PART I. DEPARTMENT OF REVENUE
Subpart B. GENERAL FUND REVENUES
ARTICLE V. PERSONAL INCOME TAX
CHAPTER 101. GENERAL PROVISIONS § 101.1. Definitions.
The following words and terms, when used in this article, have the following meanings, unless the context clearly indicates otherwise:
* * * * * Cafeteria plan--A plan qualifying under section 125 of the IRC (26 U.S.C.A. § 125).
* * * * * Discriminatory plan--A plan that treats highly compensated participants more favorably in coverage, contributions or benefits. In determining whether a cafeteria plan is discriminatory, the special rules of section 125(g) of the IRC apply.
* * * * * Employe welfare benefit plan--
(i) A plan established or maintained to provide to eligible employes or their beneficiaries plan benefits, such as:
(A) Medical, surgical or hospital care or benefits in the event of sickness, accident or disability.
(B) Death benefits.
(C) Scholarships.
(D) Personal expense reimbursements, advancements or allowances such as rental vehicle, dependent care, food or housing allowances.
(ii) The term does not include:
(A) Plans that offer a benefit that defers the receipt of compensation or operate in a manner that enables participants to defer the receipt of compensation.
(B) Plans established or maintained to provide fringe benefits described in § 101.6a (relating to fringe benefits in the form of use of property or services).
* * * * * Health, accident or death plan--
(i) The term means:
(A) An accident, health or term life insurance policy issued by an insurance company.
(B) A self-insured employe welfare benefit plan under which benefits are payable upon hospitalization, sickness, disability or death or for the prevention of sickness or disability.
(ii) The term does not include a program under which benefits are payable either upon hospitalization, sickness, disability, death or for the prevention of sickness or disability; or upon separation from employment or some other contingency.
Example: Under A's benefit plan, B qualifies for a lump sum payment equal to 26 weeks' pay upon proof of permanent disability or separation from employment. The plan does not constitute a health, accident or death plan because program benefits are also payable upon separation from employment. Instead, it constitutes a severance pay plan.Highly compensated participant--
(i) A plan participant who is one of the following:
(A) An officer.
(B) A shareholder owning more than 5% of the voting power or value of all classes of stock of the employer.
(C) An individual who, for the preceding taxable year:
(I) Received compensation from the employer in excess of the Federal limitation (after adjustment by the Secretary of the United States Treasury for inflation) set forth in section 414(q)(1)(B) of the IRC (26 U.S.C.A. § 414(q)(1)(B)).
(II) Is in the group consisting of the top 20% of all full-time employes of the employer with at least 3 years of service when ranked on the basis of compensation paid during the taxable year.
(ii) A partner or other self-employed individual.
(iii) A spouse or dependent of a highly compensated individual.
* * * * * Plan--A cafeteria plan or other wage and salary supplemental or replacement program or arrangement established or maintained by an employer or by an employe organization, or by both, for the benefit of eligible employes or their beneficiaries. The term includes temporary or permanent programs or arrangements covering hospitalization, sickness, disability or death, supplemental unemployment benefits, strike benefits, social security or retirement, a trust that forms part of a plan, and a contract of insurance.
* * * * * Poverty income--
(i) For the purpose of determining eligibility for special tax provisions, moneys or property, including interest, gains or income derived from obligations which are statutorily free from State or local taxation under any other act of the General Assembly of the Commonwealth or under the laws of the United States, received of whatever nature and from whatever source derived, but not including the following:
* * * * * (E) Payments to reimburse actual expenses.
(F) Payments made by employers to labor unions for programs covering hospitalization, sickness, disability or death, supplemental unemployment benefits, strike benefits, social security and retirement.
* * * * * (iii) The following income may not be included: Social Security and Medicare benefits; periodic payments for sickness and disability; workers' compensation payments; public assistance and relief (welfare); unemployment compensation; reimbursed actual expenses; pensions or annuities, including railroad retirement benefits received by reason of retirement; and military pay received by servicemen for duty in a combat zone.
* * * * * Wage or salary supplement--
(i) Employer-provided coverage under a plan.
(ii) Separation pay, vacation pay, holiday pay, guaranteed pay, reimbursement for personal expenses, an employer payment to provide benefits under a plan and any other amount paid, under an agreement, to one or more of the following:
(A) An independently controlled trust or pooled fund established or maintained for the purpose of funding or providing benefits under the plan.
(B) An insurance company for the purchase of insurance.
(C) A third party for the benefit of the employe.
(iii) Any benefit under a plan to the extent attributable to plan coverage or contributions by the employer which were not includible in income of the employe.
(iv) Any benefit under a plan which is directly paid by the employer.
§ 101.6. Compensation.
(a) Compensation includes items of remuneration received by an employe, whether directly or through an agent, in cash or in property, or based on payroll periods or piecework, for services rendered as an employe, agent or officer of an individual, partnership, but not guaranteed payments to a partner for services rendered to the partnership, business or nonprofit corporation, or government agency. These items include salaries, wages, commissions, bonuses, stock options, incentive payments, fees, tips, termination or severance payments, rewards, vacation and holiday pay and other wage and salary supplements, tax assumed by the employer, the entire cost of employer-provided coverage provided to a highly compensated participant under any discriminatory employe welfare benefit plan, and other remuneration received for services rendered.
(b) Scholarships, stipends, grants and fellowships shall be taxable as compensation, if services are rendered in connection therewith.
* * * * * (c) Compensation does not mean or include any of the following:
(1) Periodic payments for periods of sickness or disability paid by or on behalf of an employer under a program or plan unless the payments are regular wages. Additionally, no amount of damages received (whether by suit or agreement and whether as lump sums or as periodic payments) if pain and suffering, emotional distress or other like noneconomic element was, or would have been, a significant evidentiary factor in determining the amount of the taxpayer's damage. No payments made by third-party insurers for periods of sickness or disability would be considered payments of regular wages. A program or plan where any of the following occur would not be considered payment of regular wages:
(i) The periodic payments have no direct relationship to the employe's usual rate of compensation.
(ii) The periodic payments are computed with reference to the nature of the sickness or disability and without regard to the employe's job classification.
(iii) Periodic payments would be reduced by payments arising under Workmen's Compensation Acts, Occupational Disease Acts, Social Security Disability or similar legislation by any government.
(iv) The periodic payments exceed the employe's usual compensation for the period.
* * * * * (5) Payments made by employers to employes to reimburse actual expenses allowable as an ordinary, reasonable and necessary business expense.
(6) Payments made by an employer or labor union or elective contributions deemed to be made by an employer under a cafeteria plan for a nondiscriminatory health, accident or death plan.
Example.
P is a partnership that is engaged in providing accounting services. On a nondiscriminatory basis, it offers the following fringe benefits to both employes and partners of the firm:
Blue Cross/Blue Shield medical coverage.
Dental and eyeglass coverage with a deductible.
Group term life insurance with coverage up to the equivalent of the employe's annual salary.
P pays the premiums on behalf of all employes and partners for all medical, dental, eyeglass and insurance coverage directly to the insurance carrier or benefit provider. P does not add the premium costs for the benefits to any employe's gross wages and it accounts for the benefit costs as nonsalary fringe benefit expenses. In other words, the value of the benefits are not shown as an addition to any employe's wages on the paystubs furnished to employes.
The plan is not a Federally qualifying cafeteria plan.
Conclusion: For the employes of P the employer-provided hospitalization (Blue Cross/Blue Shield), eyeglass, dental coverage and group life insurance benefits are excludable from compensation and are therefore not subject to withholding. The premiums paid on behalf of the partners, however, are not deductible or excludable from the income of the partnership or the partners.
* * * * * (9) Payments made by an employer or labor union for a nondiscriminatory supplemental unemployment benefit or strike benefit plan.
(10) Federally excludable benefits provided for the convenience of the employer.
(11) Fringe benefits described in § 101.6a (relating to fringe benefits in the form of personal use of property or services).
(12) Program benefits payable on condition of hospitalization, sickness, disability or death under a health, accident or death plan.
* * * * * (e) Compensation paid in a medium other than cash shall be valued at its current market value. Compensation paid in the form of employer-provided coverage under an employe welfare benefit plan shall be valued at cost. The cost shall be the total amount of payment made during the year by the employer on account of the plan and plan participant, except in the following situations:
(1) In the case of self-insured insurance plans, the cost shall be the annual cost for financial accounting purposes.
(2) The amount of compensation paid in the form of Federally taxable noncash fringe benefits shall be determined in the same manner as is prescribed by the Internal Revenue Service under Federal statutes and regulations.
(3) In the case of cafeteria plans, amounts specified in the plan document as being available to the participant for the purpose of selecting or purchasing benefits, when so used, shall be included in the total amount of payment made during the year by the employer on account of the plan and plan participant.
(f) Compensation in the form of incentive, qualified, restricted or nonqualified stock options shall be considered to be received:
(1) When the option is exercised if the stock subject to the option is free from any restrictions having a significant effect on its market value.
(2) When the restrictions lapse if the stock subject to the option is subject to restrictions having a significant effect on its market value.
(3) When exchanged, sold or otherwise converted into cash or other property.
(g) The following rules apply if, under a cafeteria plan, plan participants may choose between benefits consisting of cash, additional paid vacation days, and other benefits; or if, outside a cafeteria plan, plan participants can purchase additional paid vacation days:
(1) If additional paid vacation days are elected or purchased and they are used before the next calendar year, the following apply:
(i) The amount of cash foregone in exchange for the paid vacation day is excluded from income.
(ii) The vacation pay is includable in income when paid.
(2) If additional paid vacation days are purchased outside a cafeteria plan and they are not used before the next calendar year, the amount of cash foregone in exchange for the paid vacation days is excludable for Pennsylvania Personal Income Tax purposes only if both of the following apply:
(i) The value of the vacation day cannot be cashed out or used for any other purpose.
(ii) The vacation day cannot be carried over to the next taxable year.
(h) Employer payments to reimburse employes for uninsured medical or dental expenses are taxable as compensation if the employe is assured of receiving (in cash or any other benefit) amounts available but unused for covered reimbursement during the year without regard to whether the employe incurred covered expenses or not. If the amounts available for covered reimbursement cannot be cashed out or used for any other purpose during the taxable year or be carried over to any other taxable year, normal cash compensation that is forgone by an employe under a spending account or otherwise, and credited to a self-insured medical reimbursement account and drawn upon to reimburse the employe for uninsured medical or dental expenses to which section 105(b) of the IRC (26 U.S.C.A. § 105(b)) applies is excludable from tax.
(i) After December 31, 1996:
(1) Payments made after December 31, 1996, for employe welfare benefit plans under a cafeteria plan will be deemed to be an ''employer contribution'' for Pennsylvania Personal Income Tax purposes if the following apply:
(i) The payments were not actually or constructively received, after taking section 125 of the IRC (26 U.S.C.A. § 125) into account.
(ii) The payments were specified in a written cafeteria plan document as being available to the participant:
(A) For the purpose of selecting or purchasing benefits under a plan.
(B) As additional cash remuneration received in lieu of coverage under a plan.
(iii) The benefits selected or purchased are nontaxable under the IRC when offered under a cafeteria plan.
(iv) The payments made for the plan would be nontaxable under the Pennsylvania Personal Income Tax if made by the employer outside a cafeteria plan.
(2) If the requirements of paragraph (1) are satisfied, cafeteria plan contributions are taxed under such rules as they apply to employer payments for employe welfare benefit plans. However, if the benefits are taxable for Federal Income Tax purposes when offered under a cafeteria plan, the payments will also constitute compensation for Pennsylvania Personal Income Tax purposes. Payments also will constitute compensation if they would be taxable under the Pennsylvania Personal Income Tax if made by the employer outside a cafeteria plan. For example, although not taxable under the IRC, coverage under a dependent care plan providing for the reimbursement of expenses for household or dependent care services would constitute compensation under the Pennsylvania Personal Income Tax because it would be taxable if made by an employer outside a cafeteria plan.
(j) Compensation includes the entire cost of employer-provided coverage provided to a highly compensated participant under any discriminatory employe welfare benefit plan.
(k) Contributions made by an employer for IRC 401(k) plans under a cafeteria plan under which the employe unilaterally may elect to have the employer either make the payments as contributions to a 401(k) plan or other plan on behalf of the employe or to the employe directly in cash are not excludable from the employe's compensation.
(l) Except as provided in § 101.6a (relating to fringe benefits in the form of use of property or services), compensation is taxable regardless of the form of the payment. Examples of taxable forms of payment include:
(1) Cash.
(2) Foreign currency.
(3) A check or other negotiable instrument.
(4) Freely transferable, readily marketable obligations or other cash equivalent.
(5) Tangible property interests, intangible personal property or other rights, claims or things that either:
(i) Can be enforced in courts of equity and transferred and have an ascertainable fair market value.
(ii) Can be reduced to cash or eliminate an expenditure.
(6) A monetary payment in reimbursement of a personal expenditure or to eliminate a personal expenditure.
(7) Below-market rate loans.
(8) A cancellation of indebtedness constituting a quid pro quo or incentive that would be taxable had the amount by which the debt had been forgiven or discharged instead been paid to the debtor in cash or property.
§ 101.6a. Fringe benefits in the form of use of property or services.
(a) Remuneration for services received in the form of personal or business use of property is not taxable as compensation if the following requirements are met:
(1) The property belongs to, or is held under a lease by, the employer at the time of use.
(2) No title, interest or estate therein is conferred upon, or vested in, another person.
(b) Examples of property that are excludible from tax if the requirements of subsection (a) are met include:
(1) Educational or training facilities.
(2) Housing or clothing.
(3) Day care facilities.
(4) Passenger cars and commuter highway vehicles.
(5) Aircraft or water craft.
(6) Construction or recreation vehicles.
(7) Athletic facilities or equipment.
(8) Recreational facilities or equipment.
(9) Entertainment facilities or equipment.
(10) Parking facilities.
(11) Eating facilities.
(12) Office facilities or equipment.
(13) Tools, equipment or supplies.
(c) Remuneration for services received in the form of personal or business use of services is not taxable as compensation if either:
(1) The service is provided or supplied directly by the employer or a co-employe.
(2) Rights to the service were procured beforehand by the employer.
(d) Examples of services that are excludible from tax if the requirements of subsection (c) are met include:
(1) The operation of an eating facility.
(2) Transportation in a commuter highway vehicle.
(3) Air or rail transportation of passengers or cargo.
(4) Parking.
(5) Education or training.
(6) Legal, medical, accounting or other professional or technical services or assistance, including adoption assistance.
(7) Day care services or assistance.
(8) Dependent care assistance.
(9) A tuition reduction provided to an employe or his dependents or to a teaching and research assistant.
(e) Remuneration for services received in the form of consumption of a consumable, such as food and supplies, is not taxable as compensation.
(f) This section applies even if:
(1) The use or service is offered on a discriminatory basis.
(2) The employer incurs substantial additional cost, including forgone revenue, in providing the use or service.
§ 101.7. Receipt of income.
* * * * * (e) Present economic benefit. An amount paid as a contribution shall be considered as received if an employe receives rights, such as coverage under a plan that are the following:
(1) Of a value which can in no event fall materially below the amount of the contribution.
(2) Presently belonging to the employe.
(3) Unequivocally provided for the ultimate benefit of the employe under whatever contingency and whatever circumstance the occasion for the benefit should arise.
(f) Wage and salary deductions; taxability.
(1) Except as provided in paragraph (2), any amount lawfully deducted and withheld by an employer from the remuneration of an employe and accounted for as a part of the employe's total remuneration shall be considered to have been paid to the employe as compensation at the time the deduction is made.
(2) An amount will not be considered to have been paid to the employe because the amount is specified in a written cafeteria plan document as being available to the participant for the purpose of selecting or purchasing benefits under a plan or as additional cash remuneration received in lieu of coverage under a plan. Whether an amount is specified in a cafeteria plan document as being available to a participant shall be determined using Federal rules.
Example.
Employer M is a manufacturing company situated in this Commonwealth and under its collective bargaining agreement with a union, all nonmanagement personnel must contribute $15 per week from their gross salary toward the purchase of Blue Cross/Blue Shield coverage and $3 per week toward the purchase of group life insurance.The plan is not a Federally qualifying cafeteria plan.Conclusion: M shall withhold Pennsylvania Personal Income Tax from the $18 contributed by each nonmanagement employe toward benefits.
CHAPTER 125. PERSONAL INCOME TAX PRONOUNCEMENTS--STATEMENTS OF POLICY § 125.21. (Reserved).
§ 125.22. (Reserved).
§ 125.23. (Reserved).
§ 125.24. (Reserved).
§ 125.25. (Reserved).
§ 125.26. (Reserved).
§ 125.27. (Reserved).
§ 125.28. (Reserved).
§ 125.29. (Reserved).
§ 125.30. (Reserved).
§ 125.31. (Reserved).
§ 125.32. (Reserved).
§ 125.33. (Reserved).
[Pa.B. Doc. No. 00-1320. Filed for public inspection August 4, 2000, 9:00 a.m.]
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