Hewitt Recommends Expanded Relief for Reporting Imputed Income

Dear Ms. Livingston:

[1] Thank you for offering Hewitt Associates the opportunity to suggest an addition to future guidance from the Internal Revenue Service.

Who We Are

[2] Hewitt Associates is a global human resources outsourcing and consulting firm. We are one of the largest providers of outsourced employee benefit plan administration, and we serve over 18,000,000 participants. We also provide payroll administration services to over 300 clients and 1,400 organizations. Due to our position in the marketplace, we believe we are uniquely positioned to identify and suggest a solution to this particular imputed income reporting and withholding issue.

Background

[3] As you may recall from my comments at the ABA Section of Taxation Employment Taxes meeting last Friday, our clients are struggling with a problem that exists at the intersection of employee benefits and employment taxes. Namely, many individuals receive imputed income as a result of certain employee benefits. The imputed income is usually due to participation in group term life insurance, long-term disability plans, or domestic partner medical coverage. This imputed income represents wages, is subject to state and federal income taxation, and is also subject to FICA and FUTA withholding.

The Issue

[4] Unfortunately, many individuals receiving this imputed income do not have any current wages. This is because they may be on leave for an extended period of time (due to health issues, military leave, etc.), may be retired from employment, or other circumstances. Because there are no wages, employers are not able to do the necessary employment tax withholding.

A Proposed Solution

[5] This issue was first identified in the 1980s and resulted in limited relief for imputed income triggered by retiree group term life insurance (See Notice 88-82). We propose extending this same relief to other individuals who are not receiving wages but do receive imputed income due to group term life insurance, long-term disability plans, or domestic partner medical coverage.

[6] The current limited relief instructs employers to report the retiree group term life insurance imputed income as wages in boxes 1, 3 and 5 on Form W-2, and also to identify the imputed income with a code C, M and N in Box 12. No employment tax withholding is performed on behalf of the retiree, but the employer deposits its share of Social Security and Medicare taxes.

[7] The Form W-2 recipient is informed, through the instructions for line 60 of the Form 1040, to pay the uncollected Social Security and Medicare taxes associated with the imputed income through the individual income tax filing process.

[8] The net result of the current limited relief is that employers have a method of reporting the imputed income so that it is treated as wages and the individual 1040 filing process functions as a collection mechanism for the individual's share of their Social Security and Medicare taxes. We believe the current limited relief increases employer and individual compliance with our tax system.

[9] We believe that the current limited relief should be extended to other individuals receiving imputed income due to group term life insurance, long-term disability plans, or domestic partner medical coverage. This would be preferable to the options available to employers today, which range from ignoring the imputed income; reporting on Form 1099 (which does not have a box related to Social Security or Medicare taxes); or forwarding the withholding on behalf of the individual and billing the individual for the withheld taxes.

Prevalence of the Issue

[10] Our research and experience indicates that the average employer has approximately 3% to 5% of its workforce on leave at any particular time (also, over any given year, approximately 15% of an employer's workforce was on leave at some time during the year). Further, while on leave, many individuals are not receiving wages. Finally, since almost all of our clients offer group term life insurance and long-term disability plans, and approximately one-half offer domestic partner medical coverage, we believe that a significant number of employers would benefit from expanding the current limited relief.

Conclusion

[11] We believe that the current limited relief for reporting imputed income generated by retiree group term life insurance should be expanded to cover other types of imputed income generated by employee benefits such as group term life insurance, long-term disability plans, and domestic partner medical coverage. Such extended relief would ensure correct reporting and taxation of the imputed income in a situation where no current wages exist to permit withholding.

[12] Finally, we recognize that this issue cannot be adequately addressed in this short letter. As such, we would be happy to participate in future discussions with you and your agency about this issue.

catherine.e.livingston@irs.gov