Tax Type
Employer Income Tax Withholding
Description
Cafeteria Plans under I.R.C. §125; Wages; Employer contributions
Topic
Withholding of Tax
Date Issued
08-30-1990
August 30, 1990
Re: Ruling Request; Withholding Tax
Cafeteria Plans under I.R.C. §125
Dear*****************
This is in response to your letter of June 21, 1990, in which you requested a ruling concerning the Virginia tax treatment of benefits provided under cafeteria plans and flexible spending accounts.
Internal Revenue Code §125 addresses "cafeteria plans" whereby a participant may choose among two or more benefits consisting of cash and "qualified benefits." As you indicate, for federal withholding purposes an employee would exclude from gross income amounts representing "qualified benefits." 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 two questions which assume that the "cafeteria plan" is qualified under I.R.C. §125. First, you ask whether Virginia follows the federal rule and excludes the benefits received under a §125 plan from gross wages for withholding purposes. 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.
Second, you ask whether Virginia follows federal law by including the benefits received under a §125 plan in gross wages for unemployment insurance purposes. The unemployment tax is administered by the Virginia Employment Commission, that agency should be contacted for a determination concerning the application of the Virginia unemployment tax. Enclosed is §60.2-229 from the Code of Virginia, which may be relevant to your question.
Sincerely
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner