Tax Type
Corporation Income Tax
Employer Income Tax Withholding
Individual Income Tax
Description
"Cafeteria plan" employee benefits
Topic
Withholding of Tax
Date Issued
01-01-1986
August 14, 1985
Re: Ruling Request: Corporation and Individual/ Income Tax; Withholding
Dear ***************
This will reply to your letter of May 6, 1985, concerning applicability of Virginia income and withholding tax to contributions made by corporate employers to "cafeteria plans."
I.R.C. §125 addresses "cafeteria plans" whereby a participant may choose among two or more benefits consisting of cash and "statutory nontaxable benefits." As you indicate, an employee would exclude from gross income amounts representing "statutory nontaxable benefits." Such amounts would also not be subject to federal withholding. The sponsoring employer would make deductible contributions ("Employer Contributions") to an account for the benefit of each employee and, under some plans, an employee might contribute amounts ("Salary Reduction Amounts") to the plan on a "pre-tax" basis.
You pose four questions which assume that the "cafeteria plan" is qualified under I.R.C. §125. First, you ask whether Employer Contributions made pursuant to a plan on behalf of the sponsoring employer's employees would be deductible by the sponsoring employer in determining its taxable income for Virginia corporation income tax purposes. The starting point for calculating Virginia taxable income of a corporation is federal taxable income. Because Employer Contributions are deductible in computing federal taxable income and because Virginia has no statutory provision requiring their subtraction from federal taxable income, Employer Contributions would have already been deducted in computing Virginia taxable income. This is true whether the employee had elected to receive cash or "statutory nontaxable benefits."
Second, you inquire whether Employer Contributions made pursuant to a plan on behalf of one of the sponsoring employer's employees would be excludible from the employee's Virginia taxable income (and thus not subject to Virginia withholding) to the extent the employee elected "statutory nontaxable benefits" and includible in the employee's Virginia taxable income (and thus subject to Virginia withholding) to the extent the employee elected cash. Federal adjusted gross income is the starting point for determining an individual's Virginia adjusted gross income and Virginia taxable income. Accordingly, those Employer Contributions that are excluded from federal adjusted gross income are similarly excluded from Virginia adjusted gross income. Conversely, Employer Contributions included in federal adjusted gross income would be included in Virginia adjusted gross income. The Code of Virginia is silent on whether Employer Contributions are subject to withholding tax. However, because Virginia is a conformity state, if at the time the Employer Contributions are made the employer reasonably believes the employee will be allowed to exclude them from gross income, no withholding of Virginia income tax will be required.
Your third question is whether Salary Reduction Amounts contributed by a sponsoring employer to a plan on behalf of the sponsoring employer's employees would be deductible by the sponsoring employer in determining its taxable income for Virginia corporation income tax purposes. As with Employer Contributions (addressed in the first question), to the extent Salary Reduction Amounts had been deducted by the employer in computing federal taxable income, such Amounts would already have been deducted in computing Virginia taxable income. Again, this would be true whether the employee had elected to receive cash or "statutory nontaxable benefits."
Finally, you ask whether Salary Reduction Amounts contributed by a sponsoring employee to a plan on behalf of one of the sponsoring employer's employees would be excludible from the employee's Virginia taxable income (and thus not subject to Virginia withholding) to the extent the employee elected "statutory nontaxable benefits," and includible in the employee's Virginia taxable income (and thus subject to Virginia withholding) to the extent the employee elected cash. Again, as with Employer Contributions (addressed in the second question), Salary Reduction Amounts would be excluded from or included in Virginia adjusted gross income to the same extent excluded from or included in federal adjusted gross income. Likewise, withholding of Virginia income tax from Salary Reduction Amounts would not be required if at the time the Amounts are contributed the employer reasonably believes the employee will be allowed to exclude them from gross income.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner