8905 / What types of benefits can an employer provide in the form of services that do not require an employee to include the value of the benefit in income?
Generally, fringe benefits not expressly excluded from income by the Code must be included in gross income for income tax purposes and in wages for purposes of FICA and FUTA.1 IRC Section 132 provides that certain fringe benefits that are classified as “no-additional-cost-services” may be excluded from income.2 As the name suggests, a “no-additional-cost-service” is one offered by the employer (1) at no substantial additional cost (including foregone revenue) to the employer for providing such service to the employee when (2) such service is offered to customers in the ordinary course of the line of business of the employer in which the employee is working.
For example, the cost of a flight provided to an airline employee traveling on a space-available basis is an excess capacity service and is eligible for treatment as a no-additional-cost-service. In addition, the services of a flight attendant and the cost of in-flight meals given to the airline employee traveling on a space-available basis are merely incidental to the services being provided (i.e. the flight) and, thus, the employee does not have to include them in income.3 Reciprocity is allowed between unrelated employers if certain conditions are met.4
The no-additional-cost services exclusion applies to services provided to retired and disabled employees, spouses and dependent children, as well as to current employees. Widowers and widows of employees who died while employed also qualify for the exclusion.5 A partner who performs services for a partnership will be considered employed by the partnership.6