SENATE, No. 479

STATE OF NEW JERSEY

INTRODUCED JANUARY 22, 1996

By Senator PALAIA

An Act excluding certain qualified cafeteria plan benefits from gross income under the gross income tax, supplementing Title 54A of the New Jersey Statutes.

    Be It Enacted by the Senate and General Assembly of the State of New Jersey:

    1. Gross income shall not include amounts paid by an employer on behalf of and at the election of an employee for a qualified benefit of a cafeteria plan which meets the requirements of section 125 of the federal Internal Revenue Code of 1986, 26 U.S.C.§125, if the amount so paid is excludable from federal taxable income.

    2. This act shall take effect immediately and section 1 shall apply to taxable years beginning after its enactment.

STATEMENT

    This bill provides for an exclusion of the value of non-cash employee benefit elections under employer provided cafeteria benefit plans. Cafeteria plans, authorized under section 125 of the federal Internal Revenue Code of 1986, permit an employer to offer employees individual choices both among federally nontaxable employer provided benefits and between benefits and cash. The employee must recognize federally taxable income only if receipt of cash is actually chosen. The five permitted benefits are group life insurance, group accident and health insurance, medical cost reimbursement, dependent care services, and cash or deferred arrangements.

    Currently, employees may exclude the value of cafeteria plan benefits from New Jersey taxable income only to the extent that excludable benefits are offered under the plan. An employee allowed to select a taxable benefit is taxed on the value of the benefit whether or not the taxable benefit is actually taken. That means that to the extent that a New Jersey taxpayer can elect cash (or dependent care services, which are not an excluded employer provided benefit under the gross income tax) the cafeteria plan is taxable, whether or not the taxable benefit is actually chosen. This bill provides a gross income tax exclusion for both dependent care services and the value of a cash option, and under this bill an employee will only recognize income under a cafeteria plan if a cash option is chosen.