INDIVIDUAL INCOME TAX - TAXABILITY OF CAFETERIA PLAN BENEFITS

RAB-88-27. This Bulletin describes the income tax treatment of benefits provided under a "cafeteria plan" as defined in Section 125 in the Internal Revenue Code of 1986 (IRC).

Federal Treatment

Cafeteria Plan Defined

A cafeteria plan is a plan provided by employer to an employee where the employee may choose among 2 or more qualified benefits consisting of cash and qualified benefits, or among 2 or more qualified benefits. A qualified benefit means any benefit which is expressly excluded from the employee's gross income under provisions of the Internal Revenue Code.

Michigan Income Tax Treatment

Taxability of Benefits

Taxable income is defined in MCL 206.30(l) as adjusted gross income as determined in the Internal Revenue Code subject to certain adjustments.

Cafeteria plan benefits will not be taxed to the extent these benefits are excluded from adjusted gross income. An amount not qualifying for the exclusion under IRC Section 125 will be fully taxable to the extent included in adjusted gross income to a resident individual. These benefits will be taxable to a nonresident individual to the extent earned, received or acquired for rendition of personal services performed in this State. [See MCL 206.110(l) and (2)]

Withholding Tax Requirement

MCL 206.351(l) requires that an employer in this State who is required under the provisions of the Internal Revenue Code to withhold a tax on compensation of an individual is required to deduct and withhold Michigan income tax on the compensation. MCL 206.6 defines "compensation" as ". . . wages as defined in section 3401 and other payments as provided in section 3402 of the Internal Revenue Code".

To the extent these benefits are treated as compensation and subject to collection of withholding tax in accordance with Section 3401 and 3402 of the IRC, this State will withhold Michigan income tax on the same amount of taxable benefits.