Newspaper article THE JOURNAL RECORD

Potential Nightmares Hidden in Little-Known Tax Provision

Newspaper article THE JOURNAL RECORD

Potential Nightmares Hidden in Little-Known Tax Provision

Article excerpt

EDITOR'S NOTE: This is the first in a series of articles on tax planning strategies.

NEW YORK - Picture this: You've just undergone extensive surgery for which the insurance company has picked up most of the tab. But by year's end you're suddenly forced to pay taxes on those benefits just as if they were part of your regular income.

Then you're socked with taxes on other company-sponsored extras, like the group life insurance policy or the subsidized day-care program and night classes. Even those daily meals in the company cafeteria aren't safe.

Welcome to Section 89, known to some tax experts and companies as the ``Twilight Zone'' of the 1986 tax reform law.

While it's unlikely such a nightmarish scenario could occur, the potential is in place under the little-known provision that mandates changes in corporate America's employee-benefit structure starting next year.

The intention of the new rules had been to encourage employers to offer health insurance and other benefits to more of their workers - and more democratically. But many tax experts say the opposite is likely to occur, and the harsh penalties for companies that break the law could create a slew of tax hardships for employees.

Section 89 is divided into two parts. One requires businesses to communicate to their employees exactly what benefits are being offered and the qualifications for receiving them. Failure to spell these out means employees must include the entire value of the benefits in their gross income.

``If an employee's health insurance paid out $50,000 for surgery ... he could be taxed on that amount,'' explained Thomas J. Zesk, a senior manager with Deloitte Haskins & Sells.

And if companies fail to report that income on their employee's W-2 tax form, they can be fined, he said.

Most big companies already have written benefit plans in place, so their employees need not worry about paying taxes on important health benefits or on the savings derived from company-subsidized child-care programs or meals in the cafeteria, tax experts say. …

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