This section explains many types of employee compensation. The subjects are arranged in alphabetical order followed by Fringe Benefits, Disability Income, and Pension and Annuity Contributions, which are explained in greater detail.

Advance commissions and other earnings. If you receive advance commissions or other amounts for services to be performed in the future, and you are a cash method taxpayer, you must include these amounts in your income in the year you receive them.

If you repay unearned commissions or other amounts in the same year you receive them, reduce the amount to include in your income by the repayment. However, if you repay the unearned commissions or other amounts in a later tax year, you can deduct the repayment as an itemized deduction on your Schedule A (Form 1040), or you may be able to take a credit for that year. See Repayments in chapter 13.

Back pay awards. Include in gross income amounts you are awarded in a settlement or judgment for back pay. This includes payments made to you for damages, unpaid life insurance premiums, and unpaid health insurance premiums. They should be reported to you by your employer on Form W-2.

Bonuses and awards. Amounts you receive for outstanding work, such as bonuses or awards, are included in your gross income and should be shown on your Form W-2. These include prizes such as vacation trips for meeting sales goals. If the prize or award you receive is goods or services, you must include the fair market value of the goods or services in your income. However, if your employer merely promises to pay you a bonus or award at some future time, it is not taxable until you receive it or it is made available to you.

If you receive an award for length of service or safety achievement, see Employee achievement awards under Income Not Taxed in chapter 13.

Child-care providers. If you provide child care, either in the child's home or in your home or other place of business, the pay you receive must be included in your income. You are an employee if you are subject to the will and control of your employer as to what you are to do and how you are to do it.

If you are an employee, you should receive a Form W-2 if your pay is subject to income tax withholding or would be subject to withholding if one exemption were claimed. Include your pay on line 7 of Form 1040 or Form 1040A, or on line 1 of Form 1040EZ, even if you do not receive a Form W-2.

If you are not an employee, you are probably self-employed and must include the payments you receive on Schedule C (Form 1040), Profit or Loss From Business. You may also qualify to use the simpler Schedule C-EZ (Form 1040), Net Profit From Business. Information on who may use it is listed in Part I of Schedule C-EZ.

Babysitting. If you periodically babysit for relatives or neighborhood children, the rules for child-care providers also apply to you.

Employer-provided educational assistance. You can exclude from gross income up to $5,250 of qualified employer-provided educational assistance. The exclusion applies to courses beginning before June 1, 2000. The exclusion does not apply to graduate-level courses. For more information, see Publication 508, Educational Expenses.

Government cost-of-living allowances. Cost-of-living allowances are generally included in your income. However, these allowances are generally not included in your income if you are a federal civilian employee or a federal court employee who is stationed in Alaska, Hawaii, or outside the United States.

Allowances and differentials that increase your basic pay as an incentive for taking a less desirable post of duty are part of your compensation and must be included in your income. For example, your compensation includes Foreign Post, Foreign Service, and Overseas Tropical differentials.

For more information, get Publication 516, U.S. Government Civilian Employees Stationed Abroad.

Holiday gifts. If your employer gives you a turkey, ham, or other item of nominal value at Christmas or other holidays, you do not have to include the value of the gift in your income. However, if your employer gives you cash, a gift certificate, or a similar item that you can easily exchange for cash, you include the value of that gift as extra salary or wages regardless of the amount involved.

Interview expenses. If an employer asks you to appear for an interview and either pays you an allowance or reimburses you for your transportation and other travel expenses, the amount you receive is generally not taxable. You include in your income only the amount you receive that is more than your actual expenses.

Note received for services. If your employer gives you a secured note as payment for your services, you must include the fair market value (usually the discount value) of the note in your income for the year you receive it. When you later receive payments on the note, the proportionate part of each payment is a recovery of the fair market value that you previously included in your income. Do not include that part in your income again. Include the rest of the payment in your income in the year of payment.

If your employer gives you an unsecured note as payment for your services, payments on the note that are credited toward the principal amount of the note are compensation income when you receive them.

Property received for services. Generally, if you receive property for your services, you must include its fair market value in your gross income in the year you receive the property. However, if you receive stock or other property that has certain restrictions that affect its value, you may not have to include the value of the property in your income in the year you receive it. For details, see Restricted Property Received for Services in Publication 525.

Dividends you receive on restricted stock are extra compensation to you. Restricted stock is stock you received from your employer and did not include in your income because it was not substantially vested. Your employer should include these payments on your Form W-2.

Dividends you receive on stock you chose to include in your income in the year transferred or dividends on substantially vested stock are treated the same as any other dividends. Report them on line 9 of Form 1040. For a discussion of dividends, see chapter 9.

For information on how to treat dividends reported on both your Form W-2 and Form 1099-DIV, see Dividends received on restricted stock in Publication 525.

Severance pay. Amounts you receive as severance pay are taxable. A lump-sum payment for cancellation of your employment contract is income in the tax year you receive it and must be reported in gross income.

Accrued leave payment. If you are a federal employee and receive a lump-sum payment for accrued annual leave when you retire or resign, this amount will be included on your Form W-2.

If you resign from one agency and are reemployed by another agency, you may have to repay part of your lump-sum annual leave payment to the second agency. You can reduce gross wages by the amount you repaid in the same tax year in which you received it. You should attach to your tax return a copy of the receipt or statement furnished by the agency to which you make repayment to explain the difference between the wages on the return and the wages on your Forms W-2.

Employer-provided outplacement services. If you choose to accept a reduced amount of severance pay so that you can receive employer-provided outplacement services (such as training in resum‚ writing and interview techniques), you must include the unreduced amount of the severance pay in income.

Sick pay. Amounts you receive from your employer while you are sick or injured are part of your salary or wages. You must include in your income payments made by any of the following:

1. Your employer,
2. A welfare fund,
3. A state sickness or disability fund,
4. An association of employers or employees, or
5. An insurance company, if your employer paid for the plan.

However, if you paid the premiums on an accident or health insurance policy, the benefits you receive under the policy are not taxable.

Railroad sick pay. Payments you receive as sick pay under the Railroad Unemployment Insurance Act are taxable and you must include them in your income. However, do not include them in your income if they are for an on-the-job injury.

If you received income because of a disability, see Disability Income, later.

Social security and Medicare taxes paid by employer. If you and your employer have an agreement that your employer pays your social security and Medicare taxes without deducting them from your gross wages, you must report the amount of tax paid for you as taxable wages on your tax return. You must also treat the payments as wages for figuring your social security and Medicare taxes and your social security and Medicare benefits. However, these payments are not treated as social security and Medicare wages if you are a household worker or a farm worker.

Stock appreciation rights. Do not include a stock appreciation right in your income until you exercise (use) the right. When you use the right, you are entitled to a cash payment equal to the fair market value of the corporation's stock on the date of use minus the fair market value on the date the right was granted. You include the cash payment in your income in the year you use the right.

Stock options. If you receive a nonstatutory option to buy stock or other property as payment for your services, you will usually have income when you receive the option or when you exercise (use) the option. However, if your option is a statutory stock option (an incentive stock option or an option granted under an employee stock purchase plan), special rules generally delay the tax until you sell or exchange your shares of stock. Your employer can tell you which kind of option you hold. For details, get Publication 525.

Unemployment compensation. You must include in your income all unemployment compensation you receive. You should receive a Form 1099-G showing the unemployment compensation paid to you. Generally, you enter unemployment compensation on line 19 of Form 1040, line 12 of Form 1040A, or line 3 of Form 1040EZ.

Types of unemployment compensation. Unemployment compensation generally includes any amount received under an unemployment compensation law of the United States or of a state. It includes:

1. Benefits paid by a state or the District of Columbia from the Federal Unemployment Trust Fund.
2. State unemployment insurance benefits.
3. Railroad unemployment compensation benefits.
4. Disability payments from a government program paid as a substitute for unemployment compensation. (Amounts received as workers' compensation for injuries or illness are not unemployment compensation.)
5. Trade readjustment allowances under the Trade Act of 1974.
6. Benefits under the Airline Deregulation Act of 1978.
7. Unemployment assistance under the Disaster Relief Act Amendments of 1974.

Governmental program. If you contribute to a governmental unemployment compensation program and your contributions are not deductible, amounts you receive under the program are not included as unemployment compensation until you recover your contributions.

Supplemental unemployment benefits. Benefits received from a company-financed fund (to which the employees did not contribute) are not unemployment compensation. They are taxable as wages subject to income tax withholding but not subject to social security, Medicare, or federal unemployment taxes. Report these payments on line 7 of Form 1040 or Form 1040A.

You may have to repay some of your supplemental unemployment benefits to qualify for trade readjustment allowances under the Trade Act of 1974. If you repay supplemental unemployment benefits in the same year you receive them, reduce the total benefits by the amount you repay. If you repay the benefits in a later year, you must include the full amount of the benefits received in your income for the year you received them.

Deduct the repayment in the later year as an adjustment to gross income. Include the repayment on line 32 of Form 1040, and put "Sub-pay TRA" and the amount on the dotted line next to line 32. If the amount you repay in a later year is more than $3,000, you may be able to take a credit against your tax for the later year instead of deducting the amount repaid. For more information on this, see the discussion on Repayments in chapter 13.

Private unemployment fund. Unemployment benefit payments from a private fund to which you voluntarily contribute are taxable only if the amounts you receive are more than your total payments into the fund. Report the taxable amount on line 21 of Form 1040.

Payments by a union. Benefits paid to you as an unemployed member of a union from regular union dues are included in your gross income on line 21 of Form 1040.

Guaranteed annual wage. Payments you receive from your employer during periods of unemployment, under a union agreement that guarantees you full pay during the year, are taxable as wages.

State employees. Payments can be made by a state to its employees who are not covered by the state's unemployment compensation law. If the payments are similar to benefits under that state law, they are fully taxable. Report these payments on line 21 of Form 1040.

Repayment of unemployment compensation benefits. If you repaid in 1998 unemployment compensation benefits you received in 1998, subtract the amount you repaid from the total amount you received and enter the difference on line 19 of Form 1040, line 12 of Form 1040A, or line 3 of Form 1040EZ. Also, enter "Repaid" and the amount you repaid on the dotted line next to line 19, line 12, or line 3. If, in 1998, you repaid unemployment compensation that you included in gross income in an earlier year, you may deduct the amount repaid on Schedule A (Form 1040) if you itemize deductions. For more information, see Repayments in chapter 13.

Tax withholding and estimated tax. You can choose to have federal income tax withheld from your unemployment compensation. To make this choice, complete Form W-4V, Voluntary Withholding Request, and give it to the paying office. Tax will be withheld at 15% of your payment.

If you do not choose to have tax withheld from your unemployment compensation, you may be liable for estimated tax. For more information on estimated tax, see chapter 5.

Union benefits and dues. Amounts deducted from your pay for union dues, assessments, contributions, or other payments to a union cannot be excluded from your gross income.

You may be able to deduct some of these payments as a miscellaneous deduction subject to the 2% limit if they are related to your job and if you itemize your deductions on Schedule A (Form 1040). For more information, see Union Dues and Expenses in chapter 30.

Strike and lockout benefits. Benefits paid to you by a union as strike or lockout benefits, including both cash and the fair market value of other property, are usually included in your income as compensation. You can exclude these benefits from your income only when the facts show that the union intended them as gifts to you.

Fringe Benefits

The value of fringe benefits you receive from your employer is taxable and must be included in your income as compensation unless the benefits are specifically excluded by law or you pay fair market value for them.

Generally, your employer determines the amount of your fringe benefits and includes this amount on your Form W-2. Some benefits you may receive are discussed here. More information on fringe benefits can be found in chapter 4 of Publication 535, Business Expenses.

Accident or Health Plan

Generally, the value of accident or health plan coverage provided to you by your employer is not included in your gross income.

Contributions to Plan Providing Long-Term Care Benefits

Contributions by your employer to provide coverage for long-term care services are generally not included in income. However, contributions made through a flexible spending or similar arrangement (such as a cafeteria plan) must be included in your income. This amount will be reported as wages in box 1 of your Form W-2.

Contributions you make to the plan are discussed in Publication 502, Medical Expenses.

Contributions to Medical Savings Accounts (MSAs)

Contributions by your employer to your medical savings account are not included in your income. This amount will, however, be reported in box 13 of Form W-2 with code R designating that the amounts are excludable from income. This amount must be reported on your tax return.

If your employer does not make contributions to your MSA, you can make your own contributions to your MSA. These contributions are discussed in Publication 969, Medical Savings Accounts (MSAs). Also, see Form 8853, Medical Savings Accounts and Long-Term Care Insurance Contracts.

Adoption Expenses

You may be able to exclude from gross income amounts paid or expenses incurred by your employer for qualified adoption expenses in connection with your adoption of an eligible child. The amounts must be paid or the expenses must be incurred before January 1, 2002 as part of an adoption assistance program.

See Publication 968, Tax Benefits for Adoption, for more information.

Transportation

If your employer provides you with a qualified transportation fringe benefit, it can be excluded from your gross income, up to certain limits. A qualified transportation fringe benefit is:

1. Transportation in a commuter highway vehicle (such as a van) between your home and work place,
2. A transit pass, or
3. Qualified parking.

Cash reimbursement by your employer for these expenses under a bona fide reimbursement arrangement is also excludable. However, cash reimbursement for a transit pass is excludable only if a voucher or similar item which can be exchanged only for a transit pass is not readily available for direct distribution to you.

Exclusion limit. The exclusion for commuter highway vehicle transportation and transit pass fringe benefits cannot be more than a total of $65 a month, regardless of the total value of both benefits.

The exclusion for the qualified parking fringe benefit cannot be more than $175 a month, regardless of its value. If the benefits have a value that is more than these limits, the excess must be included in your income.

Commuter highway vehicle. This is a highway vehicle that seats at least six adults (not including the driver). At least 80% of the vehicle's mileage must reasonably be expected to be:

1. For transporting employees between their homes and work place, and
2. On trips during which employees occupy at least half of the vehicle's adult seating capacity (not including the driver).

Transit pass. This is any pass, token, farecard, voucher, or similar item entitling a person to ride mass transit (whether public or private) free or at a reduced rate or to ride in a commuter highway vehicle operated by a person in the business of transporting persons for compensation.

Qualified parking. This is parking provided to an employee at or near the employer's place of business. It also includes parking provided on or near a location from which the employee commutes to work in a commuter highway vehicle or carpool. It does not include parking at or near the employee's home.

Group-Term Life Insurance Premiums

Generally, the cost of up to $50,000 of group-term life insurance coverage that is provided to you by your employer is not included in your income. However, you must include in your income the cost of insurance that is more than the cost of $50,000 of insurance reduced by the amount you pay towards the purchase of the insurance.

The amount included in your income is reported as part of your wages in box 1 of your Form W-2. It is also shown separately in box 13 with code C. See Your payment, later.

Retired employees. If you are a retired employee, you generally will have to include in your income the cost of providing you with more than $50,000 of insurance coverage. For more information, see Retired employees in Publication 525.

Group-term life insurance. This insurance is term life insurance protection (insurance for a fixed period of time) that:

1. Provides a general death benefit,
2. Is provided to a group of employees,
3. Is provided under a policy carried by the employer, and
4. Provides an amount of insurance for each employee based on a formula that prevents individual selection.

Your payment. If you pay any part of the cost of the insurance, your entire payment reduces, dollar for dollar, the amount your employer would otherwise include in your income. However, you cannot reduce the amount to include in your income by either:

1. Payments for coverage in a different tax year,
2. Payments for coverage through a cafeteria plan, unless the coverage is purchased with after-tax employee contributions, or
3. Payments not taxed to you because of the exceptions discussed later.

Permanent benefits. If your group-term life insurance policy includes permanent benefits, such as a paid-up or cash surrender value, you must include in your income, as wages, the cost of the permanent benefits minus the amount you pay for them. Your employer should be able to tell you the amount to include in your income.

Accidental or other death benefits. Accidental or other death benefits from a policy that does not provide general death benefits (travel insurance, for example) are not included as group-term life insurance coverage.

Exceptions. You are not taxed on the cost of group-term life insurance if any of the following apply.

1. You are disabled and have ended your employment.
2. Your employer is the beneficiary of the policy for the entire period the insurance is in force during the tax year.
3. The only beneficiary is a qualified charitable organization (defined in chapter 26) for the entire period the insurance is in force during the tax year. You are not entitled to a deduction for a charitable contribution for naming a charitable organization as the beneficiary of your policy.

Entire cost taxed. You are taxed on the entire cost of group-term life insurance protection provided by your employer through a qualified employees' trust, such as a pension trust or a qualified annuity plan.

You are also taxed on the entire cost of the group-term life insurance coverage provided by your employer if you are a key employee and your employer's plan discriminates in favor of key employees.

Life insurance agents. Full-time life insurance agents who are considered employees for social security and Medicare tax withholding purposes are treated as employees in applying the provisions relating to group-term life insurance under a policy carried by their employer.

More than $50,000 from one employer. If you have only one employer and you were insured at any time during the tax year for more than $50,000 under a group-term life insurance policy, your taxable income from this source is included as other compensation on the Form W-2 you receive.

More than $50,000 from two or more employers. If two or more employers provide you group-term life insurance coverage totaling more than $50,000, you must figure how much to include in your income. You must include the cost of life insurance provided to you during the tax year, regardless of when your employers paid the premiums.

You figure the cost for each month of coverage by multiplying the number of thousands of dollars of insurance coverage (figured to the nearest tenth), less $50,000 of insurance, by the cost from the following table. You must prorate the cost from the table if less than a full month of coverage is involved.

COST PER $1,000 OF PROTECTION
FOR ONE MONTH

Age	Cost
Under 30	$ .08
30 through 34	.09
35 through 39	.11
40 through 44	.17
45 through 49	.29
50 through 54	.48
55 through 59	.75
60 through 64	1.17
65 through 69	2.10
70 and older	3.76

Example. You are 51 years old and work for Employers A and B. Both employers provide group-term life insurance coverage for you for the entire year. Your coverage is $35,000 with Employer A and $45,000 with Employer B. You pay premiums of $50 a year under the Employer B group plan. You figure the amount to include in your income as follows:

Employer A coverage (in thousands)	$35
Employer B coverage (in thousands)	+ 45
Total coverage (in thousands)	$80
Minus: Exclusion (in thousands)	- 50
Excess amount (in thousands)	$30
Multiply by cost per $1,000 per month,  age 51 (from table)	× .48
Cost of excess insurance for 1 month	$14.40
Multiply by number of full months  coverage at this cost	× 12
Cost of excess insurance for tax year	$172.80
Minus: Premiums you paid	-50.00
Cost to include in your income  as wages	$122.80

Employer-provided vehicles. If your employer provides a car (or other highway motor vehicle) to you, your personal use of the car is usually a taxable noncash fringe benefit.

Your employer must determine the actual value of this fringe benefit to include in your income.

Certain employer-provided transportation can be excluded from gross income. See the discussion on Transportation, earlier.

Accounting period. You must use the same accounting period your employer uses to report your taxable noncash fringe benefits. Your employer has the option to report taxable fringe benefits by using either of the following rules:

1. The general rule: value the benefit for a full calendar year (January 1- December 31), or
2. The special accounting period rule: treat the value of benefits provided during the last 2 months of the calendar year (or any shorter period) as paid during the following calendar year. For example, each year your employer includes the value of benefits provided the last 2 months of the prior year and the first 10 months of the current year.

You must use the same accounting period to claim an employee business deduction (for use of a car, for example) that you use to report the benefit. Your employer does not have to use the same accounting period for each fringe benefit, but must use the same period for all employees who receive a particular benefit.

Form W-2. Your employer reports your taxable fringe benefits in box 1 (Wages, tips, other compensation) of Form W-2. The total value of your fringe benefits should also be shown in box 12. The value of your fringe benefits may be added to your other compensation on one Form W-2, or you may receive a separate Form W-2 showing just the value of your fringe benefits in box 1 with a notation in box 12.

Disability Income

Generally, if you retire on disability you must report your pension or annuity as income. There is a tax credit for people who are permanently and totally disabled. For information on this credit and the definition of permanent and total disability, see chapter 34.

Disability pensions. Generally, you must report as income any amount you receive for your disability through an accident or health insurance plan paid for by your employer. If both you and your employer pay for the plan, only the amount you receive for your disability that is due to your employer's payments is reported as income. However, certain payments may not be taxable to you. Your employer should be able to give you specific details about your pension plan and tell you the amount you paid for your disability pension. In addition to disability pensions and annuities, you may be receiving other payments for sickness and injury. See Other Sickness and Injury Benefits in chapter 13.

Cost paid by you. If you pay the entire cost of a health or accident insurance plan, do not include any amounts you receive for your disability as income on your tax return. If your plan reimbursed you for medical expenses you deducted in an earlier year, you may have to include some, or all, of the reimbursement in your income. See Reimbursement in a later year in chapter 23.

Cafeteria plans. Generally, if you pay the premiums of a health or accident insurance plan through a cafeteria plan, and the amount of the premiums was not included in your income, you must include any benefits you receive in your income. If the amount of the premiums was included in your income, you are considered to have paid the premiums and any benefits you receive are not taxable.

Accrued leave payment. If you retire on disability, any lump-sum payment you receive for accrued annual leave is a salary payment. The payment is not a disability payment. You must report it as wages in the tax year you receive it.

Retirement and profit-sharing plans. If you receive payments from a retirement or profit-sharing plan that does not provide for disability retirement, do not report them as disability income. The payments are taxable and should be reported as a pension or annuity. For more information on pensions, see chapter 11.

How to report. If you retired on disability, payments you receive are taxed as wages until you reach minimum retirement age. Minimum retirement age generally is the age at which you can first receive a pension or annuity if you are not disabled. You must report your taxable disability payments as wages on line 7 of Form 1040 or Form 1040A, until you reach minimum retirement age.

Beginning on the day after you reach minimum retirement age, payments you receive are taxable as a pension. Report the payments on lines 16a and 16b of Form 1040, or on lines 11a and 11b of Form 1040A. The rules for reporting pensions are explained in How To Report in chapter 11.

Military and Certain Government Disability Pensions

Generally, you must report these disability pensions as income. But certain military and government disability pensions are not taxable.

You may be able to exclude from income amounts you receive as a pension, annuity, or similar allowance for personal injury or sickness resulting from active service in the:

1. Armed forces of any country,
2. National Oceanic and Atmospheric Administration,
3. Public Health Service, or
4. Foreign Service.

Do not include the disability payments in your income if any of the following apply.

1. You were entitled to receive a disability payment before September 25, 1975.
2. You were a member of a government service or its reserve component, or were under a binding written commitment to become a member, on September 24, 1975.
3. You receive disability payments for a "combat-related injury."
4. You would be entitled to receive disability compensation from the Department of Veterans Affairs (VA) if you filed an application for it.

Combat-related injury. A combat-related injury is a personal injury or sickness that:

1. Results directly from armed conflict,
2. Takes place while you are engaged in extra-hazardous service,
3. Takes place under conditions simulating war, including training exercises such as maneuvers, or
4. Is caused by an instrumentality of war.

Disability based on years of service. If you receive a disability pension based on years of service, you generally must include it in your income. But if it is the result of active service in one of the organizations listed earlier, do not include in income the part of your pension that you would have received if the pension had been based on a percentage of disability. You must include the rest of your pension in your income.

Terrorist attack. You do not include in your income disability payments you receive for injuries resulting directly from a violent attack that occurs while you are a U.S. government employee performing official duties outside the United States. For your disability payments to be tax exempt, the Secretary of State must determine the attack was a terrorist attack.

VA disability benefits. Disability benefits you receive from the Department of Veterans Affairs (VA) are not included in your gross income. If you are a military retiree and you receive disability benefits from other than the VA, do not include in your income the amount of disability benefits equal to the VA benefits to which you are entitled.

If you retire from the armed services (based on years of service) and at a later date are given a retroactive service-connected disability rating by the VA, and file a waiver for reduction of your retirement pay in an amount equal to the VA disability compensation, you do not include in your income for the retroactive period (subject to the statute of limitations) the part of your retirement pay you would have been entitled to receive from the VA during that period.

If you receive a lump-sum disability severance payment and are later awarded VA disability benefits, do not include in your income the portion of the severance payment equal to the VA benefit you would have been entitled to receive in that same year. However, you must include in your income any lump-sum readjustment or other non-disability severance payment you received on release from active duty, even if you are later given a retroactive disability rating by the VA.

Pension and Annuity Contributions

Generally, you cannot exclude from income amounts you pay into a pension plan through payroll deductions.

Contributions to Federal Thrift Savings Plan. If you are a federal employee, you can choose to make contributions from your salary to the Federal Thrift Savings Plan. Your contributions are not included in income for income tax purposes. However, your salary before the contributions are taken out is used for purposes of figuring social security and Medicare taxes and benefits. Payments you later receive from the fund are taxable as a distribution from a qualified pension or annuity plan.

Employer's contributions to a qualified plan. Generally, your employer's contributions to a qualified pension plan for you are not included in income at the time contributed. However, if you entered into a salary reduction agreement with your employer (elective deferral), you may have to include part of the employer contributions that are made out of funds that would otherwise have been paid to you as salary.

For 1998, you cannot set aside more than a total of $10,000 for all elective deferrals. If you set aside more than $10,000, the excess is included in your gross income that year.

The cost of life insurance coverage included in an employer's plan may be income if the proceeds of the policy are payable directly or indirectly to your beneficiary. See Group-Term Life Insurance Premiums, earlier, under Fringe Benefits.

Amounts actually distributed or made available to you generally are taxable, unless they are eligible for a tax-free rollover. To qualify, they must be rolled over (normally within 60 days after receipt) to another qualified plan or to an individual retirement account or annuity (IRA). If you elect to have an eligible rollover distribution paid directly to you (even if you plan to roll over the distribution), the payer must withhold part of the distribution for income tax. You can avoid withholding if you choose a direct transfer to another qualified retirement plan or individual retirement account or annuity. Your employer may be able to tell you how the amount you received is taxed. For more information on pension plans, see chapter 11, and for IRAs, see chapter 18.

Employer's contributions to nonqualified plan. If your employer pays into a nonqualified plan for you, you generally must include the contributions in your income as wages for the tax year in which the contributions are made. Report this income on line 7 of Form 1040 or Form 1040A, or on line 1 of Form 1040EZ. However, if your interest is subject to a substantial risk of forfeiture (you have a good chance of losing it) at the time of contribution, you do not have to include the value of your interest in your income when you receive it. When your interest is no longer subject to a substantial risk of forfeiture, you must include the value in your income.

Railroad retirement annuities. The following types of payments are treated as pension or annuity income and are taxable under the rules explained in chapter 11.

1. Tier 1 railroad retirement benefits that are more than the "social security equivalent benefit."
2. Tier 2 benefits.
3. Vested dual benefits.

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