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Member, Beacon International Group, Ltd.
TRENTON, N.J.--The New Jersey Division of Taxation is reminding employers and employees that amounts contributed to Section 125 flexible benefit plans through salary reduction and are exempt from federal taxes are considered taxable income under New Jersey law.
In Technical Bulletin 39, the department said the value of flexible benefit plan benefits "typically is includable in New Jersey taxable wages and is subject to" tax withholding.
For example, if an employee reduced his or her salary to pay premiums that the employer charges for coverage in its health care plan, that amount would be considered taxable income under New Jersey law. Similarly, contributions made to a flexible spending account to pay for uncovered medical expenses would be taxable income, the division said.
New Jersey is the only state where contributions to Section 125 plans receive unfavorable tax treatment. Pennsylvania had a similar law but repealed it in 1997.
Under Section 125 of the Internal Revenue Code, contributions to flexible benefit plans are considered pretax for federal income tax purposes.