How to treat fringe benefits for employees

June 12th, 2018 by C. John Wentzell, Jr at Ogletree Deakins

This chapter provides an overview of some fringe benefits that are not among the benefits that can trigger coverage under the Employee Retirement Income Security Act (ERISA) and are not discussed elsewhere in this book. Generally, a fringe benefit is a form of non-cash compensation paid to an employee. Fringe benefits provided to employees are taxable unless there is a specifically applicable income tax exclusion. If taxable, the fringe benefits discussed are wages reportable on Form W-2 and are subject to withholding.

The following sections describe some of the more common excludable fringe benefits that might be provided by the typical employer. The list is not exhaustive. Among other things, benefits that could be offered only by employers engaged in a particular line of business (such as reduced tuition for dependents of college and university faculty members) have been omitted.

De minimis fringe benefits

A “de minimis" fringe benefit is an item of property or a service of so little value it is impractical or unreasonable to account for the benefit. Examples of de minimis fringe benefits include:

  • non-cash holiday gifts (such as a Thanksgiving turkey)
  • dependent group term life insurance of $2,000 or less
  • company parties or picnics
  • occasional use of company property or machinery
  • occasional tickets for sporting or entertainment events
  • occasional meals
  • occasional transportation fare.

Qualified transportation benefits

In general, prepayment or reimbursement of an employee’s transportation costs between home and work are included in the employee’s gross income. However, the following qualified transportation benefits can be excluded:

  • ​Transit passes - Transit passes or cash reimbursements for passes if a voucher or similar item for exchange is not readily available. Transit passes can be for transportation on mass transit or in vehicles seating at least six adult passengers (excluding the driver) used in the business of providing transportation for hire
  • Commuter highway vehicles - Transportation in vehicles that seat at least six adult passengers (excluding the driver) that provides transportation between the employees’ home and place of work for at least 80% of the vehicles’ mileage.
  • Qualified parking - Qualified parking is parking that is provided to employees (excluding certain S corporation shareholders) at or near their place of business or commuter parking locations.

The value of excludable qualified transportation benefits is limited to maximum monthly amounts that are indexed for inflation. For 2017, the monthly exclusion is $255 combined for transit passes and commuter highway vehicles, and $255 for qualified parking. Excess reimbursements are includable wages subject to withholding.

Taxes and employee discounts

Discounts provided to employees on property or services normally provided to customers in the ordinary course of business operations in which an employee provides services may be excludable from the employee’s taxable income. Often, the discount program can be of benefit to the employer as a means of advertising its products to potential customers through use by employees. The discount can be offered through a third-party, as in cases where a manufacturer might offer a qualified employee discount for its products even if purchased at retail. The exclusion does not apply to real property or property commonly held for investment. The excludable discount for an item of merchandise or property is limited to the gross profit percentage multiplied by the amount normally charged to customers. The excludable discount for services is limited to 20% of the amount normally charged to customers.

The employee discount exclusion is applicable only if provided on a basis that does not discriminate in favor of highly compensated employees. In addition, if the product or service is a benefit that is governed by another specific section of the Internal Revenue Code (IRC), the question of whether the benefits of the discount program are excludable must be based solely on whether the discount program meets the requirements of the more specific IRC section. Thus, for instance, a discount program sponsored by an optometry practice that covers eye examinations is a group health plan, and the discount is excludable, if at all, only under the provisions of the IRC dealing with coverage under a group health plan.

Taxes and no additional cost services

Services provided to employees that do not cause the company to incur any substantial additional cost are not taxable to employees. The services must be services offered to customers in the company’s ordinary course of business, and must be for the employees’ personal use. Once again, the services provided to employees must not discriminate in favor of highly compensated employees. In addition, no additional cost services (such as treatment of hospital staff members by resident hospital physicians) that constitute benefits governed by a different and more specific section of the IRC must meet the requirements of the more specific IRC section to be excludable.

Adoption assistance plans

An employer may provide adoption assistance benefits to employees on a tax-advantaged basis. There are a number of reasons why an employer might consider offering an adoption assistance plan as a benefit to employees. The cost of providing an adoption assistance plan is generally very low, because few employees actually utilize the plan. At the same time, employees appreciate the availability of such programs, and as such adoption assistance plans can help to generate goodwill among employees. The maximum amount of adoption assistance benefits excludable from the employee’s income is $13,570 for 2017. The ability to exclude the full amount of otherwise-excludable adoption assistance benefits is phased out as a taxpayer’s income increases. Employers may also provide adoption assistance directly through onsite courses or by providing information, referrals to agencies and other support.

Expenses that qualify for the exclusion include adoption fees, court costs, and attorney fees.  Reimbursements of qualified adoption expenses are generally excluded from wages for income tax withholding purposes, but they are subject to withholding for purposes of the Federal Income Contributions Act (FICA). The benefit can be either reimbursed or paid directly to a third party provider. To provide the intended tax benefit, an adoption assistance plan must not discriminate in favor of highly compensated employees.

Educational assistance programs

An employer may provide assistance to employees for certain education expenses incurred by its employees on a tax-advantaged basis. Subject to satisfaction of a non-discrimination standard and a maximum percentage of overall benefits (5%) that may be received by shareholder-employees or owner-employees, qualifying reimbursements up to $5,250 per year that are provided under a written plan may be excluded by each employee. Qualifying expenses include all of the following:

  • tuition
  • fees
  • supplies
  • books
  • equipment.

Qualifying expenses generally do not include:

  • education related to hobbies
  • games
  • sports.

Undergraduate and graduate degree courses may qualify.

If the employer is a qualified educational organization, the employee can exclude from gross income “qualified tuition reductions” on the cost of education in any amount from the employer. The education can be provided by the same organization or another qualifying educational organization. The employee, his or her spouse and/or his or her dependents can use these reductions. However, unless the employee is a graduate teaching or research assistant, the discount can only be used for education below the graduate level.

Employee achievement awards

Non-cash awards of tangible personal property provided to employees as safety or length-of-service awards are generally excludable from the recipient’s wages. The annual exclusion is generally limited to $1,600 per employee. The exclusion does not apply to cash, cash equivalents, vacations, or tickets to recreational events.

Dependent care assistance programs

Dependent care reimbursement plans have been discussed briefly in Chapter 8, Cafeteria plans, because reimbursement from a pre-tax account for qualifying dependent care expenses is a permitted benefit under a cafeteria plan. However, dependent care benefits also can be provided to employees directly rather than through a reimbursement plan.

Moving expense benefits

Moving expenses reimbursed by the employer can be provided on a pre-tax basis so long as the moving expenses would have qualified for a deduction on the employee’s tax return. The moving expenses must be incurred within one year of taking a full time job at a new location at least 50 miles farther from his/her home than the job at the old location. Generally, the new home must also be as close to the new job as the old home was to the old job. Finally, the employee must work full time at least 39 weeks in the first year after arriving at the new location.

The expenses covered are only for members of the employee’s household. When driving, the employee can either seek reimbursement for the actual expenses incurred, or can use the standard mileage rate for moving expense purposes. Qualifying expenses generally include all of the following:

  • vehicle rental
  • travel by other means of transportation
  • lodging
  • packing and transporting household goods.

Related posts

401(k) plan + payroll provider = 401k good things

This blog is courtesy of Jennifer Ready at HK Finanical Services and the Iowa Association of Business and Industry (ABI) and can be found on the ABI website.   Top Reasons to Integrate Your 401(k) Plan with Your Payroll Provider Jennifer Ready Combining your 401(k) plan administration... more

Open enrollment – personalizing perks pays off

SHRMS's third in a series of articles on meeting fall 2018 open-enrollment challenges deals with providing employees with the opportunity to tailor benefits to meet their needs. How can customized benefits increase loyalty? Would employees pay for them on their own? Would they take a pay cut f... more

Help hiring holiday help here

This blog was written by John Monroe and Kristina Griffin at FordHarrison, which authors our "Hiring, Firing and Discipline for Employers" and "An Employer's Guide to FMLA and ADA". You can find the original blog post and their Legal Alerts on their website.   Welcome to the Holiday Season!... more

I've changed my name – to Optimus Prime

So say an employee, let's call him, for purposes of this exercise, Scott Edward Nall, walks into your office to let you know he has changed his name to Optimus Prime.  Do you: snicker and ask him if his Laser Axe Hand is really made of energy wonder why he isn't riding a dinosaur fall t... more

Four-legged office mates and the pawternity policies they benefit

This blog was written by Danielle Krauthamer at Fisher Phillips, which authors several of our resources. You can find the original post and the On the Front Lines newsletter on their website.   Pawternity Leave: Are Employers Barking Up the Wrong Tree With Pet-Based Leave? We’ve all hear... more

Employment agreements – what to do before you do

This blog was written by Judy Yi at Polsinelli. Polsinelli authors hrsimple resources in Missouri, Kansas and Illinois. You can find the original blog post and their labor and employment blog Polsinelli at Work (which is excellent) on their website.   Five Issues When An Employer Is Consi... more

Milk Stork delivers for working mom's and their baby

If you are in the practice of sending employees on overnight business trips AND you employ new mothers AND you believe in treating your employees right we’ve got just the bird for you.  Milk Stork is the first breast milk shipping company to support nursing mothers who are on the road and need... more

PTO on the house!

This blog was written by Kat Cunnignham, president of Moresource Inc., a member of the Missouri Chamber. You can find the original blog post on the mobile edition of Missouri Chamber's Missouri Business   Traditionally, most companies have offered a paid leave package to employees that diff... more

Service dogs at work

(Customer) service dogs at work can work. Our authors @Littler help show how here more
HR Webinars
Terminations Got You Down? 5 Tips to Tighten Your Termination Tactics
December 17th, 2018 at 12:00pm CST by Brian T. Benkstein at Fredrikson & Byron

Unconscious bias - whether you realize it or not
December 18th, 2018 at 11:00am CST by Margaret A. Matejkovic, Esq. at Kastner Westman & Wilkins, LLC

HR Articles
SavE tHE offICe hoLidAY PArTy!
MeToo, avoiding women, and the modified Mike Pence Rule
Carnac the Magnificent says – Politicussin
Non-competes for non-skilled – non-productive, non-legal, non-enforceable?
Discrimination CHARGE! – Step 3 Cause or no cause, because you gotta do something
Discrimination CHARGE! – Step 2 Go Kim Possible for the investigation phase
Discrimination CHARGE! – Step 1 Don't panic, ask questions
Depression – what can an employer do?
Employers beware - what you say can and will be used against you
Holiday stew – ingredients for a happy and non-litigious holiday
MO - The weed du jour - marijuana médicale
Biometrics in the workplace - not a measure of bios accumulated by an employee
Thanks-giving isn't just about turkeys - include the good employees too
The best "stay" to help you retain employees
Overtime, daylight savings time and circadian rhythyms
Controlling the political speech of buttons*
Cursing, surfing, weapons, gadgets – illegal, inappropriate or OK?
How to Ghostbuster a new hire or applicant
Election leave – employer's civic duty, migraine, or just wishful thinking (election, leave!)
Costumes, booze and the Great Pumpkin – beware the office Halloween party
Disability – Dr. or employee approved?
401(k) plan + payroll provider = 401k good things
Disability/pregnancy practices – what not to practice
Bad hire! Bad, bad hire!
TN – A drug-free workplace program is good
Open enrollment – personalizing perks pays off
Unpaid intern – depends on who benefits
The #1 office perk is . . . ?
FMLA leave before being eligible for FMLA leave
IL – Required expense reimbursement for your employees, not Bill Self
Help hiring holiday help here
Are the new DOL opinion letters like noses?
Public disclosure of confidential information is easier than you think
Bad mix – accommodation request and firing
If religious accommodation and a flu shot both equal angst, is that the transitive or substitution property?
Workplace shootings – 20 can-dos to prevent them
No call/no show shows. No what about it.
List 10 Up: Top tips for starting a workplace incident interview
Mr. Freeze unveils National Security Freeze tagline: "They can't steal your identity if it's frozen"
If it's called a dress code, can I wear pants?
I've changed my name – to Optimus Prime
TN: Conceal and carry means post to prohibit or permit
I'll take "ADA in 5s?" please Alex
Swearing at work – 7 rules
Is that red light flashing?
Four-legged office mates and the pawternity policies they benefit
Notice: notices and forms for FMLA that were already expired now updated virtually unchanged
Don't feel ripped off when you get ripped off – get even
School-related parental leave does not mean you forge a note from your kid
NY: Draft model sexual harassment policy/training released
Discipline - Demote - Depart or Communicate - Counsel - Channel
ICE audits II – FAQs to make you wiser
Round up stew: sick leave, harassment, non-compete, etc.
Identifying trade secrets does not mean figuring out how to barter better
ICE audits have nothing to do with freezer police
Being at work full time is not an essential function of a job?
List 10 up: Positive employee relations training: reap the benefits of engagement
Employment agreements – what to do before you do
Background checks of the future are continuous
Treating service animal requests (always treat the animal)
Prepare for saying "No" – you need to decide how to refuse service
List 10 up: What's the deal with employee handbook rules?
I cannot tell a lie . . . you're fired for cutting down the cherry tree
Milk Stork delivers for working mom's and their baby
Job tasks and essential functions under the ADA
Who are you? Why are you here? Personality testing?
No, you can't sleep on the job
Technology driving the hiring process
Should you give your employees a little Slack – or do they have enough already?
"We need to talk" isn't any easier to say than to hear
Bet employers must make: call and raise your minimum wage
Zero tolerance for "zero tolerance" policies
Ralph Waldo Emerson as a productivity consultant
Is the employee "disabled" under the ADA?
The six step DOL audit polka
PTO on the house!
New rules for work rules
Dr. Strangelabor or: How I Learned to Stop Worrying and Love the Millennial
Did Bartleby the scrivener write his own job description?
"Treating" disgruntled or bad behaving employees
Hiring under the age of 18
DO NOT LICK THE BRAIN! and other obvious stuff
Helping your employees save for emergencies
Right to bare arms in the workplace
#MeToo quiz
Under standing desks
How to approach an employee showing signs of cognitive decline
Dress codes should not be encoded
Foul language *
Rorschach, Horshack and Abednego
Don't ask a woman the gender of her child, especially. . .
Guidelines for a valid no-solicitation/no-distribution policy
All aboard the Love Train for long-term onboarding!
Gender and workplace bathrooms
No FMLA for pet's death
Personal hygiene in the workplace
Yes Virginia, there is a St. Patrick's Day in Ireland
Master the modern method for managing March Madness
Drug testing in The Office
Background checks
"Thank you" and "I'm sorry" – meaningful, simple and impactful
Michael Corleone HR tip for the day
S'not flu or it is, doesn't matter
Be prepared for ICE raids
Looking for employees: an untapped source of talent
Calling Dr. Love(less)
Non-exempt employees – what counts as wages?
HR is not a happy accident
Do new hires have to be a culture club fit?
Remote workers and telecommuting
When former employees ask for references
Model written lock out/tag out program
Wrong table cat
They might be giants . . . transforming healthcare?
Conducting internal I-9 audits
The Nebraska Chamber has issued a W-2 challenge to state taxpayers
The impact of super bowl(ing)
12 steps to handling violence in the workplace
Workplace retaliation: don't give in to the Dark Side
Would you really want to work with a bunch of yous?
What is the ADA?
Monty Python should not write your job descriptions
FMLA definitions
Unemployed or wear a bra – are those the only choices?
What "government shutdown" means for employers
An intern by any other name
FMLA - "leave" as in "leave the employee alone"
 “M,” “F,” Or “X”? Nonbinary Gender Designations in the Workplace
Sexual harassment – can't find it – what now?
Probationary periods
Employee contracts
How to treat fringe benefits for employees
Attendance policies
Different repeal
Temporary and leased employees
Birthdays in the workplace
Needy employees
Holiday parties - acknowledge, avoid, assume (nothing)
Dress codes: who, what, wear
Punch clock
Nepotism: favoring relatives and friends in the workplace
Year-end performance reviews
Hiring interviews
The Form I-9 has changed… Again!
Service dogs at work
Bring your own gun
Social media
Year-end or holiday incentives
Arizona sick day policy
Paternity leave
HRsimple spotlight - Fiona Ong
Permissible post-accident drug testing
Paid family leave: a growing trend
Politics in the workplace: how to remain legally compliant during election season
Termination Series: Communicating the reason for discharge
It’s only a matter of overtime
Interview with attorneys at Kastner Westman & Wilkins
Valentine's Day heartaches around the office
Safety and health tips
Wearable technology
Favorite HR sites
Back to school time is here!
Vacation policies and time off
Interview with author J. Hagood Tighe
Non-compete agreements
Workplace romance
Bullying in the workplace
Employment references
Telecommuting or remote (control) workers
Social media and employment
Performance evaluations
Interview with attorneys at Wilson Worley PC
Interview with attorneys at Knudsen Law Firm
Interview with Kathy Speaker MacNett
Firing, a job to do right the first time
Job advertisement do’s and don’ts
Employee handbooks – getting a handle on your policies
Technology in the workplace
Interview questions: do's and don'ts
Employee personnel files