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:
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:
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:
Qualifying expenses generally do not include:
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: