by Robert McLeod
The CPA Journal
May/June 2024
To reduce unnecessary costs, businesses strive to minimize their tax liabilities. Employment taxes, particularly the employer’s share of Social Security and Medicare taxes under FICA, may represent a significant portion of a company’s tax burden. On the other side of the ledger sit employees, eager to maximize their compensation. This sets up a zero-sum game of opposing economic interests. The tax code occasionally disrupts this paradigm by allowing businesses to convert a portion of an employee’s compensation into non-taxable wages. These tax-advantaged benefits largely consist of the standard benefits found in new employee welcome packets, including employer-sponsored comprehensive health coverage, transportation benefits, and Health Savings Accounts.
Yet, the drive for tax savings and competitive compensation packages tempts many employers to go further than these conventional arrangements. For decades, benefit designers have responded by crafting innovative payment arrangements aimed at boosting take-home pay while reducing employment taxes. Many of these arrangements enjoy fleeting popularity until the IRS cracks down.
Perhaps the most enduring—and scrutinized—are variants of “double dip” health plans, particularly fixed indemnity plans. The double dip refers to a plan in which both premiums and benefit payments are purportedly exempt from taxation. Such a proposition is naturally enticing to employers and employees. Unfortunately, the line between legal tax minimization and illegitimate schemes is not always clear, leaving some businesses at risk for significant civil and, in some cases, criminal penalties. Employers considering double dip fixed indemnity plans should therefore consult with tax professionals and legal counsel to carefully consider the potential compliance risks.
To read the whole article, please click here.
Published with permission from The CPA Journal, 2024, a publication of the NYSSCPA.
