Publication 15-B Employer'S Tax Guide To Fringe Benefits

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The insurance is restricted to, but mandatory for, all

Your plan does not favor key employees as to partici-

of your employees who belong to, or are repre-

pation if at least one of the following is true.

sented by, an organization (such as a union) that

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carries on substantial activities besides obtaining in-

It benefits at least 70% of your employees.

surance.

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At least 85% of the participating employees are not

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Evidence of whether an employee is insurable does

key employees.

not affect an employee’s eligibility for insurance or

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It benefits employees who qualify under a set of

the amount of insurance that employee gets.

rules you set up that do not favor key employees.

To apply either exception, do not consider employees

Your plan meets this participation test if it is part of a

who were denied insurance for any of the following rea-

cafeteria plan (discussed in section 1) and it meets the

sons.

participation test for those plans.

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They were 65 or older.

When applying this test, do not consider employees

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They customarily work 20 hours or less a week or 5

who:

months or less in a calendar year.

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Have not completed 3 years of service.

They have not been employed for the waiting period

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given in the policy. (This waiting period cannot be

Are part-time or seasonal.

more than 6 months.)

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Are nonresident aliens who receive no U.S. source

earned income from you.

Exclusion from wages. You can generally exclude the

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Are not included in the plan but are in a unit of

cost of up to $50,000 of group-term life insurance from the

employees covered by a collective bargaining agree-

wages of an insured employee. You can exclude the same

amount from the employee’s wages when figuring social

ment, if the benefits provided under the plan were

security and Medicare taxes. In addition, you do not have

the subject of good-faith bargaining between you

to withhold Federal income tax or pay Federal unemploy-

and employee representatives.

ment (FUTA) tax on any group-term life insurance that you

provide to an employee.

Your plan does not favor key employees as to benefits if

all benefits available to participating key employees are

Exception for key employees. Generally, if your

also available to all other participating employees. Your

group-term life insurance plan favors key employees as to

plan does not favor key employees just because the

participation or benefits, you must include the entire cost

of the insurance in your key employees’ wages. (This

amount of insurance you provide to your employees is

exception generally does not apply to church plans.) When

uniformly related to their pay.

figuring social security and Medicare taxes, you must also

S corporation shareholders. Because you cannot

include the entire cost in the employees’ wages. Include

treat a 2% shareholder of an S corporation as an employee

the cost in boxes 1, 3, and 5 of Form W-2. However, you do

for this exclusion, you must include the cost of all

not have to withhold Federal income tax or pay Federal

group-term life insurance coverage that you provide to the

unemployment (FUTA) tax on the cost of any group-term

life insurance that you provide to an employee.

2% shareholder in his or her wages. When figuring social

For this purpose, the cost of the insurance is the greater

security and Medicare taxes, you must also include the

of the following amounts.

cost of this coverage in the 2% shareholder’s wages.

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Include the cost in boxes 1, 3, and 5 of Form W-2. How-

The premiums that you pay for the employee’s insur-

ever, you do not have to withhold Federal income tax or

ance.

pay Federal unemployment tax on the cost of any

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The cost that you figure using the table shown later

group-term life insurance coverage you provide to the 2%

under Coverage over the limit.

shareholder.

For this exclusion, a key employee during 2003 is an

Coverage over the limit. You must include in your

employee or former employee who is one of the following

employee’s wages subject to social security and Medicare

individuals. See section 416(i) for more information.

taxes the cost of group-term life insurance that is more

than the cost of $50,000 of coverage, reduced by the

1) An officer having annual pay of more than $130,000.

amount the employee paid toward the insurance. Report it

2) An individual who for 2003 was either of the follow-

as wages in boxes 1, 3, and 5 of the employee’s Form W-2.

ing:

Also, show it in box 12 with code C.

Figure the monthly cost of the insurance to include in the

a) A 5% owner of your business.

employee’s wages by multiplying the number of thousands

b) A 1% owner of your business whose annual pay

of dollars of insurance coverage over $50,000 (figured to

was more than $150,000.

the nearest $100) by the cost shown in the following table.

Use the employee’s age on the last day of the tax year.

A former employee who was a key employee upon

You must prorate the cost from the table if less than a full

retirement or separation from service is also a key em-

ployee.

month of coverage is involved.

Page 10

Publication 15-B Employer'S Tax Guide To Fringe Benefits - 2003 Page 10

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