Page 17 - Employers Tax Guide to Fringe Benefits

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The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
Form W-2 using codes “M” and “N.” See the General In- Your plan doesn't favor key employees as to benefits if
structions for Forms W-2 and W-3 and the Instructions for all benefits available to participating key employees are
Form 941. also available to all other participating employees. Your
Exception for key employees. Generally, if your plan doesn't favor key employees just because the
amount of insurance you provide to your employees is
group-term life insurance plan favors key employees as to uniformly related to their pay.
participation or benefits, you must include the entire cost
of the insurance in your key employees' wages. This ex- S corporation shareholders. Because you can't
ception generally doesn't apply to church plans. When fig- treat a 2% shareholder of an S corporation as an em-
uring social security and Medicare taxes, you must also ployee for this exclusion, you must include the cost of all
include the entire cost in the employees' wages. Include group-term life insurance coverage you provide the 2%
the cost in boxes 1, 3, and 5 of Form W-2. However, you shareholder in his or her wages. When figuring social se-
don't have to withhold federal income tax or pay FUTA tax curity and Medicare taxes, you must also include the cost
on the cost of any group-term life insurance you provide to of this coverage in the 2% shareholder's wages. Include
an employee. the cost in boxes 1, 3, and 5 of Form W-2. However, you
For this purpose, the cost of the insurance is the don't have to withhold federal income tax or pay FUTA tax
greater of the following amounts. on the cost of any group-term life insurance coverage you
• The premiums you pay for the employee's insurance. provide to the 2% shareholder.
See Regulations section 1.79-4T(Q&A 6) for more in-
formation. Health Savings Accounts
• The cost you figure using Table 2-2. A health savings account (HSA) is an account owned by a
For this exclusion, a key employee during 2020 is an qualified individual who is generally your employee or for-
employee or former employee who is one of the following mer employee. Any contributions that you make to an
individuals. See section 416(i) of the Internal Revenue HSA become the employee's property and can't be with-
Code for more information. drawn by you. Contributions to the account are used to
1. An officer having annual pay of more than $185,000. pay current or future medical expenses of the account
owner, his or her spouse, and any qualified dependent.
2. An individual who for 2020 is either of the following. The medical expenses must not be reimbursable by insur-
a. A 5% owner of your business. ance or other sources and their payment from HSA funds
(distribution) won't give rise to a medical expense deduc-
b. A 1% owner of your business whose annual pay is tion on the individual's federal income tax return.
more than $150,000. Eligibility. A qualified individual must be covered by a

A former employee who was a key employee upon re- High Deductible Health Plan (HDHP) and not be covered
tirement or separation from service is also a key em- by other health insurance except for permitted insurance
ployee. listed under section 223(c)(3) or insurance for accidents,
Your plan doesn't favor key employees as to participa- disability, dental care, vision care, or long-term care. For
tion if at least one of the following is true. calendar year 2020, a qualifying HDHP must have a de-
• It benefits at least 70% of your employees. ductible of at least $1,400 for self-only coverage or $2,800
for family coverage and must limit annual out-of-pocket
• At least 85% of the participating employees aren't key expenses of the beneficiary to $6,900 for self-only cover-
employees. age and $13,800 for family coverage.
• It benefits employees who qualify under a set of rules There are no income limits that restrict an individual's
you set up that don't favor key employees. eligibility to contribute to an HSA nor is there a require-
Your plan meets this participation test if it is part of a ment that the account owner have earned income to make
a contribution.
cafeteria plan (discussed earlier in section 1) and it meets
the participation test for those plans. Exceptions. An individual isn't a qualified individual if he
When applying this test, don't consider employees or she can be claimed as a dependent on another per-
who: son's tax return. Also, an employee's participation in a
• Have not completed 3 years of service; health FSA or health reimbursement arrangement (HRA)
• Are part time or seasonal; generally disqualifies the individual (and employer) from
making contributions to his or her HSA. However, an indi-
• Are nonresident aliens who receive no U.S. source vidual may qualify to participate in an HSA if he or she is
earned income from you; or participating in only a limited-purpose FSA or HRA or a
• Aren’t included in the plan but are in a unit of employ- post-deductible FSA. For more information, see Other em-
ployee health plans in Pub. 969.
ees covered by a collective bargaining agreement, if
the benefits provided under the plan were the subject Employer contributions. Up to specified dollar limits,
of good-faith bargaining between you and employee cash contributions to the HSA of a qualified individual (de-
representatives. termined monthly) are exempt from federal income tax

Publication 15-B (2020) Page 15