October 17, 1983
You request a ruling regarding the Massachusetts income tax treatment of benefits provided under a "cafeteria plan" as defined in Internal Revenue Code Section 125. You inquire whether employer contributions for benefits which are excluded from federal gross income and which are not subject to federal withholding are subject to Massachusetts income taxation and income tax withholding.
Massachusetts gross income is federal gross income with certain modifications not relevant here. (G.L. c. 62, § 2). No amount is included in the federal gross income of a participant in a cafeteria plan solely because, under the plan, the participant may choose among the benefits of the plan. (I.R.C. § 125).
A cafeteria plan is a written plan under which employee participants may choose among two or more fringe benefits, which may be nontaxable benefits, or cash, property, or other taxable benefits. The term does not include any plan which provides for deferred compensation. (I.R.C. § 125(d)).
A nontaxable benefit is one not includible in the federal gross income of the employee (I.R.C. § 125(f)), such as group term life insurance coverage up to $50,000, disability benefits, accident and health plans, and group legal services. (I.R.C. §§ 79, 106, 120).
Employee benefits under and employer contributions to a cafeteria plan are treated as constructively received and included in the federal gross income of highly compensated participants in any taxable year in which the plan discriminates in favor of such participants. (I.R.C. § 125(b)). A highly compensated participant is defined as an officer, a shareholder owning more than 5 per cent of the voting power or value of all classes of stock, one who is highly compensated, or a spouse or dependent of the preceding persons. (I.R.C. § 125(e)).
Income is subject to Massachusetts withholding if it is both taxable under Massachusetts General Laws Chapter 62 and either constitutes wages as defined in Code Section 3401(a) or is a periodic payment or nonperiodic distribution as defined in Code Section 3405 and subject to federal withholding. (G.L. c. 62B, §§ 1, 2).
Based upon the foregoing, it is ruled that employer contributions to, and employee benefits provided under a cafeteria plan are subject to Massachusetts income taxation to the extent they are subject to federal income taxation. Such contributions and benefits are subject to Massachusetts income tax withholding if they are subject to federal income tax withholding.
Very truly yours,
/s/Ira A. Jackson
Ira A. Jackson
Commissioner of Revenue