Effective January 1, 2005, a new Postdoctoral Scholar Benefits Plan will be made available to the following University of California postdoctoral scholars: Postdoctoral Scholar-Employee (Title Code 3252), Postdoctoral Scholar-Fellow (Title Code 3253), and Postdoctoral Scholar-Paid Direct (Title Code 3254).
Taxability of Benefits
The taxability of health benefits provided by the University depends on whether the recipient of the benefits is an employee or a fellow:- Employees - Health benefits provided by the University to both U.S. citizen and nonresident alien Postdoctoral Employees (TC 3252) and their dependents are not taxable for U.S. or State purposes. Benefits furnished to the domestic partner of a Postdoctoral Employee, however, are taxable unless the domestic partner qualifies as a dependent of the employee. The imputed income associated with these benefits will be calculated by the Payroll/Personnel System (PPS) in accordance with the procedures invoked for other University employees, i.e., the amount of any additional premiums paid by the University, less any amounts paid by the employee, will be treated as imputed income.
- Fellows - Health benefits provided by the University to Postdoctoral Fellows (TC 3253) and Paid Directs (TC 3254) and their dependents are subject to U.S. income tax with respect to the premiums that are paid by the University, less any amounts paid by the recipient. Benefits provided to the domestic partner of a Postdoctoral Fellow or Paid Direct also are taxable whether or not the domestic partner qualifies as a dependent.
Under Internal Revenue Code section 117(b), only fellowship payments used to pay for "qualified" expenses are non-taxable, including payments for tuition, fees, and related books, supplies, and equipment required for enrollment or attendance an educational institution. Fellowship payments made for other expenses, such as room and board, benefits, and other living expenses are not excludable from the recipient's income.
It is important to note that the rules under section 117(b) apply only to fellowships that do not represent wage payments for services performed by the recipient. In this regard, the Internal Revenue Service (IRS) treats National Research Service Award (NRSA) grants as noncompensatory and thus not wages for FICA (i.e., Social Security and Medicare) tax purposes. The IRS accords the same tax treatment to grant programs modeled after the NRSA program. Non-NRSA fellowships sponsored by the National Institutes of Health or others should be reviewed by campuses to confirm that these awards do not represent payments for services.
Withholding and Reporting on Benefits Provided to Fellows and Paid Directs
The University's withholding and reporting responsibility regarding health benefits furnished to a fellowship recipient varies depending on whether the recipient is a U.S. citizen, including a resident alien, or a nonresident alien.- U.S. Citizens and Residents - Benefits paid for by the University that are provided to Postdoctoral Fellows (TC 3253) and Paid Directs (TC 3254) and their dependents who are U.S. citizens or resident aliens are subject to income tax since these amounts, less any amounts paid by the postdoctoral scholar, represent additional "non-qualified" expenses. Although these benefits are taxable for purposes of U.S. and State income taxes, they are not subject to FICA taxes since the individuals are not receiving wages for performing services. In addition, the University is not required to report these payments to the IRS or withhold tax on the payments.
Postdoctoral Fellows (TC 3253) and Paid Directs (TC 3254) are required to self-report the total annual value of their fellowships, including benefits for themselves and their dependents, when they prepare their U.S. and California income tax returns. Campuses should advise Postdoctoral Fellows and Paid Directs about this responsibility.
- Nonresident Aliens - As a general rule, the value of benefits provided to nonresident alien Postdoctoral Fellows (TC 3253) and Paid Directs (TC 3254) and their dependents is subject to U.S. income tax in the same manner as the provision of these benefits to U.S. residents and resident aliens. If, however, the individual is from a country that has entered into a tax treaty with the U.S. and if that tax treaty provides that fellowship income is not taxable, the individual is exempt from tax on the benefit and the University is not required to withhold tax. But even though nontaxable, the value of the benefit must be reported to the IRS.
In those situations where a treaty exemption is unavailable and the value of the benefit is taxable, the PPS will calculate the imputed income related to the medical, dental, and vision contributions paid by the University on behalf of these nonresident alien individuals. Campuses will need to reduce the calculated value of the imputed income by the amount, if any, that the individual Postdoctoral Fellow (TC 3253) or Paid Direct (TC 3254) pays out-of-pocket (i.e., reimburses the University) for the University benefits contribution.
The campus accounting office will withhold tax on the imputed income and report the income and withholding on a Form 1042-S prepared for each individual. Such withholding will be taken from the stipend payments made to the Postdoctoral Fellows (TC 3253). However, the accounting office will need to bill Postdoctoral Paid Directs (TC 3254) for this withholding since their stipends are not paid by the University. Withholding will be calculated at either 14% for J-1 visa holders (and any F-1, M-1, or Q-1 visa holders) or 30% for all other visa holders.
The PPS currently cannot impute income associated with University-paid life insurance/AD&D and short-term disability insurance. The PPS will be modified to calculate and report the imputed income on these benefits later in 2005. Workers' compensation insurance and broker fees paid by the University in connection with Postdoctoral Fellows and Paid Directs are not taxable to these individuals.
Although no State withholding is required with respect to benefits provided to a Postdoctoral Fellow or Paid Direct, the value of the benefits is reportable on a Form 592-B for any nonresident of California, including a U.S. citizen, resident alien, or nonresident alien.
Summary of Required Tax Withholding and Reporting
The following table summarizes the tax withholding and reporting required for benefits provided to Postdoctoral Scholars| Postdoctoral Scholar |
Taxability of Benefits |
Benefits Paid by the University Subject to Withholding for: |
Benefits Paid by the University Reported on: |
||
|
|
Federal Tax |
State Tax |
Federal Form |
State Form |
|
| Employee - Citizen (1) |
No |
No |
No |
--- |
--- |
| Employee - Nonresident Alien (2) |
No |
No |
No |
--- |
--- |
| Fellow - Citizen |
Yes |
No |
No |
--- |
--- |
| Fellow - Nonresident Alien (3)(4) |
Yes |
Yes |
No |
1042-S |
592-B |
| Paid Direct - Citizen |
Yes |
No |
No |
--- |
--- |
| Paid Direct - Nonresident Alien (3)(4) |
Yes |
Yes |
No |
1042-S |
592-B |
- Imputed income due to the coverage of a domestic partner will be reported on the Form W-2 of the Postdoctoral Employee.
- Imputed income due to the coverage of a domestic partner will be reported on the Form 1042-S of a nonresident alien Postdoctoral Employee who is eligible to claim a tax treaty benefit; if not, the income is reported on a Form W-2.
- Imputed income due to the coverage of a domestic partner will be reported on the Form 1042-S and Form 592-B of a nonresident alien Postdoctoral Fellow or Paid Direct.
- If the individual is from a country that has entered into a
tax treaty with the U.S. and that treaty contains an exclusion
for fellowship payments, the individual is not subject to tax
on the benefits, including domestic partner benefits, and no
income tax withholding is required. The amount of the benefits
is reported, however, on Form 1042-S and Form 592-B.