BENEFITS YOU CAN OFFER ON A NON-TAXABLE BASIS UNDER THE WPA

By Jeffrey S. Ashendorf

Executive Summary

The Wage Parity Act (the “Act”) states that covered benefits include, but are not limited to, “health, education or pension benefits . . .”[i] Further guidance in Home Care Worker Wage Parity Frequently Asked Questions (“FAQs”) states that this definition “does not exclude” (i) those benefits that may be elected under Section 193 of the NY Labor Law, and (ii) those benefits that may be provided under plans regulated under ERISA. This article discusses these categories in detail and also suggests other benefits that may be allowable under the Act and whether they can be provided on a non-taxable basis to home care workers.

DISCUSSION

Under the Wage Parity Act, “total compensation” is defined as “direct compensation paid to or on behalf of the employee including but not limited to wages, health, education or pension benefits, supplements in lieu of benefits and compensated time.”[ii] An initial FAQ said that employers may take credit for “health, education or pension” benefits “without regard to whether such benefits are provided directly by the employer or through a plan or program,” as well as “other employee benefits that an employer may provide through a plan or program”. An FAQ a month later explained that “qualifying benefits are those which primarily benefit the employee” (as distinguished from those that are primarily for the employer’s benefit). An FAQ two years later added that the Act’s definition of “total compensation” did not exclude other benefits that employers may choose to provide through employee benefit plans regulated under the Employee Retirement Income Security Act. Nor, said the FAQ, did it exclude other benefits that employees may choose to obtain through wage deductions permitted under New York State Labor Law §193. From a literal reading of “included but not limited to” in the definition of “total compensation” and the FAQs use of the phrase “does not exclude”,   it is arguable that in addition to those listed benefits, other benefits are allowable under the Act, as long as they “primarily benefit the employee.”

Benefits through “Plans Regulated Under ERISA”

Under ERISA, the term “employee benefit plan” includes “pension benefit plans” and “welfare benefit plans.” A “pension benefit plan”, or “pension plan”, is defined as:

a program established or maintained by an employer (or an employee organization, or both) to the extent that, by its express terms or as a result of surrounding circumstances, it (i) provides retirement income to employees, or (ii) results in a deferral of income by employees for periods extending to the termination of their covered employment or beyond, regardless of the method of calculating contributions to or benefits under the plan, or the method of distributing benefits from the plan[iii]

An “employee welfare benefit plan” or “welfare plan” includes plans providing:

“(A) medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, death or unemployment, or vacation benefits, apprenticeship or other training programs, or day care centers, scholarship funds, or prepaid legal services, or (B) any benefit described in section 302(c) of the Labor Management Relations Act, 1947 (other than pensions on retirement or death, and insurance to provide such pensions).

Under this definition, only plans that provide benefits described in section 3(1)(A) of the Act or in section 302(c) of the Labor-Management Relations Act, 1947 (hereinafter “the LMRA”) (other than pensions on retirement or death) constitute welfare plans.

*         *         *

. . . [Under Section 302(c) of the LMRA] only paragraph (6) describes benefits not described in section 3(1)(A) of the Act. The benefits described in section 302(c)(6) of the LMRA but not in section 3(1)(A) of the Act are “* * * holiday, severance or similar benefits.” Thus, the effect of section 3(1)(B) of the Act is to include within the definition of “welfare plan” those plans which provide holiday and severance benefits, and benefits which are similar (for example, benefits which are in substance severance benefits, although not so characterized). “[iv]

Distilling this definition down to a simple list, “welfare benefits under ERISA” includes: (i) health benefits (in all forms), (ii) disability benefits, (iii) death benefits (including life insurance), (iv) unemployment, (iv) vacation benefits, (v) apprenticeship and training programs, (vi) holiday benefits, (vii) severance benefits, and (viii) benefits that qualify as “similar” to holiday or severance benefits.

Benefits Employees “May Choose to Obtain” Under NYLL Section 193

Section 193 of the New York Labor Law exists to limit the types of deductions employers can take from employee wages. Other than deductions made in accordance with law (e.g., tax withholding), the only authorized deductions are specified in a list that groups categories of like items. For purposes of the Wage Parity Act, the benefits most likely to be chosen by home care employees for wage deduction are:

(i)     insurance premiums
(ii)     prepaid legal plans
(iii)     pension benefits
(iv)     health and welfare benefits (see “ERISA benefits”, below)
(v)     U.S. bonds
(vi)     discounted parking or transit fare media
(vii)     gym/health club membership
(viii)     day care expenses
(ix)     tuition, room, board and fees for (A) pre-school, (B) nursery, (C) primary,   (D) secondary, or (E) post-secondary education items.

Though there is a catchall item for “similar types of benefits,” the NYS Department of Labor has not given any guidance on what this includes.

Because all the items on the list are, by definition, for the primary benefit of the employee, they would all be allowable under the Wage Parity Act. But there are two caveats to consider.

First, an employer cannot provide the benefit to employees in addition to cash wages. The employee must elect the benefit instead of cash wages. This could be desirable to an employee if a benefit, like a gym membership, could be received at a corporate discount rate. Otherwise, the employee would likely want the cash wages.

Second, the benefit could also be attractive to the employee instead of cash wages, if its value were non-taxable to the employee. If the employee would be buying the benefit anyway, like a Metrocard, the employee saves money by not paying with after tax dollars. It can also make a benefit, like childcare assistance, more affordable. Most of the benefits on the list above can be made non-taxable to the employee if provided in the proper manner. In most instances, this will require creation of an Internal Revenue Code plan for the benefit. This has some administrative and operational cost to the employer, but usually not enough to offset the tax benefit to the employee as well as the advantage to the employer who is making this benefit available tax-free and may even be saving employment taxes.

For example, an employer may provide commuting tickets (i.e., transit passes) or parking (or under certain circumstances reimburse employees’ own purchases) on a nontaxable basis, subject to monthly limitations and subject to certain rules prescribed by the Internal Revenue Code. So long as the rules and the limitations are followed, the amounts provided to employees would be both (i) nontaxable, and (ii) fully includible as “supplemental wages,” i.e., benefits, for purposes of the Wage Parity Act.

A significant amount of overlap exists among the Section 193 items and welfare plan benefits. For example, “insurance premiums” will most often be paid in connection with a “welfare benefit”, prepaid legal plans are welfare benefits, day care expenses may be welfare benefits depending upon the details, a health club membership may be part of a health plan, etc.

Other Benefits

From a literal reading of the Wage Parity Act and the FAQs, it also appears that benefits other than those provided by plans regulated under ERISA or those listed in NYLL Section 193 may be allowable as “supplemental wages” under the Act. The only requirement is that the benefit must primarily benefit the employee, not the employer. Yet this requirement creates a conflict with income tax law principles, if the employer also wants the benefit to be non-taxable to the employee. A benefit that is primarily for the benefit for the employee will usually be taxable to the employee.

For example, where an item such as reimbursement for cell phone charges is offered, it is taxable compensation subject to income tax withholding and FICA taxes (both employer and employee), and is includible in the employee’s gross wages. The reimbursement is not tax-free to the employee because it is not covered by any fringe benefit exclusion under the Internal Revenue Code that so provides; and absent such an exclusion, the fringe benefit is taxable to the employee who performs the services for which the employee is paid, in cash or in kind.[v] (There are circumstances under which an employer-provided cell phone – but not cash reimbursement of cellphone plan expenses – can be tax-free to an employee when a phone is provided to the employee for “substantial non-compensatory business reasons.”[vi]) IRS auditors will also allow tax-free reimbursement of business-related cell phone expenses where the employer, again for “substantial non-compensatory business reasons”, requires the employee to use her own phone for business purposes, provided that the reimbursement is not paid as wages, or in place of wages or as a substitute for additional wages. However, such a reimbursement would not be “primarily for the benefit of the employee”, but for the employer. Also, it could not be said that the reimbursement of cellphone plan expenses was a non-wage payment, when the employer is simultaneously seeking to take credit for the reimbursement as constituting “supplemental wages”. Therefore, reimbursement for cell phone charges for a home care worker cannot qualify both as “supplemental wages” under the Wage Parity Act, and as a tax-free benefit. With reimbursement of cell phone plan expenses, therefore, the employer could just as well give the additional amount as cash wages with no restrictions on how it could be used. Thus, a taxable benefit is obviously more expensive to both the employee and the employer, since the employee is liable for income tax on the value of the benefit, and both employer and employee are liable for employment taxes.

The only way in which a taxable benefit is preferable to additional cash wages is if the benefit could be provided at a discounted value compared to its standard price (the price at which the employee could purchase the item herself). For example, if the employer were to arrange for discounted cellphone plans for its employees, that could be better than cash in the same amount. However, this will not always have the desired effect. When a fringe benefit is taxable, it is the fair market value of the benefit (reduced by whatever the employee pays for the benefit) that is considered income to the employee – the amount actually paid by the employer to purchase the benefit is irrelevant.[vii]

Four Steps to Offering Allowable Benefits to Your Employees

  1.  Identify and quantify (i.e., value) all benefits you believe your employees would want and that would help you to retain them and recruit new employees who may join you because of the desirable benefits you offer.
  2.  Determine which of those benefits may or may not be primarily for the benefit of the employee.
  3.  Determine which benefits may be delivered under a plan so they would be non-taxable to the employee.
  4.  Develop the required plan under the Internal Revenue Code to provide the benefit on a non-taxable basis to the employee and keep your administrative and operational cost for the plan as low as possible.

[i] N.Y. Public Health Law section 3614-c(1)(b)
[ii] Id.
[iii] ERISA section 3(2) [29 USC 1002(2)]
[iv] U.S. Labor Dept. Reg. 2510.3-1 [29 CFR 2510.3-1]
[v] Internal Revenue Code section 61(a)(1) [26 USC 61(a)(1)]
[vi] IRS Notice 2011-72
[vii] Income Tax Reg. 1.61-21(b)(1) [26 CFR 1.61-21(b)(1)]

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