Employee benefits, once considered an "addition" towages, have now become an integral part of virtually allcompensation packages.

This overview evaluates the tax attributes of various employee benefit plans.

Characterization of a benefit as either bad, better, or best,can be made according to its effect upon the income taxes of theemployer and the employee.

For example, assume that in 2016 we have an employer in a 34percent marginal tax bracket and an employee in a 25 percent taxbracket. (However, for the first time in recent memory, it ispossible for the corporate income tax rate to be less than theindividual income tax rate. For this reason, it is very importantto consider relative tax brackets when considering employee benefitplanning.)

Bad. A bad employee benefit is one that isnondeductible to the employer yet taxable to theemployee, such as one that results in unreasonable compensation oris treated as a dividend.

Because it is nondeductible, on each $1.00 of income theemployer must pay 34 cents in taxes. Since the remaining 66 centsis taxable to the employee, 17 cents of employee taxes will furtherreduce the original $1.00 to only 49 cents.

Better. A better employee benefit is one thatis deductible to the employer, although stilltaxable to the employee.

Since there are no employer taxes, the full $1.00 is taxableincome to the employee. Now 25 cents goes to pay employee taxes,and the remaining 75 cents actually benefits the employee.

Better benefits include salary allotment plans, executive equityplans, split-dollar insurance, survivor income plans, disabilityincome plans, and deferred compensation.

Best. The best employee benefit is one that isdeductible to the employer and either nontaxableor tax deferred to the employee.

Now the entire $1.00 benefits the employee, without any currentreduction for either employer or employee taxes.

"Best" benefits include group term insurance, medical expensereimbursement plans, SIMPLE IRAs, and qualified retirement plans,including 401(k) plans. (Specific benefits may not be available toall employees and employers. Although SIMPLE IRAs and qualifiedretirement plans, including 401(k) plans, are listed among the"best," it must be recognized that the employee pays taxes whenretirement income is actually received. Tax-free group terminsurance is limited to $50,000 of coverage. The term leveraged benefit can be used to describe someof the best employee benefits.)