Employee Fringe Benefits

<div class="Section1">Generally, certain employee achievement awards granted by an employer to recognize the employee’s length of service or safety achievements are not taxable to the employee and are deductible by the employer. Under the 2017 tax reform legislation, certain awards are excluded from this treatment, including cash, cash equivalents, gift certificates, vacations, meals, lodging, tickets to sports or theater events, stocks, bonds, securities and other similar items.<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="Section1"><br /> <br /> This essentially means that employee achievement awards must be received in the form of tangible personal property in order to receive favorable tax treatment. These provisions are effective for tax years beginning after December 31, 2017.<br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC §§ 74, 274(j)(3).<br /> <br /> </div>

<div class="Section1">A stock bonus plan is required to pass through certain voting rights to participants or beneficiaries. If an employer’s securities are “registration-type,” each participant or beneficiary generally must be entitled to direct the plan as to how securities allocated to him or her are to be voted.<a href="#_ftn1" name="_ftnref1">¹</a> “Registration-type” securities are securities that must be registered under Section 12 of the Securities and Exchange Act of 1934 or that would be required to be registered except for an exemption in that law.<a href="#_ftn2" name="_ftnref2">²</a></div><br /> <div class="Section1"><br /> <br /> If securities are not “registration-type” and more than 10 percent of a plan’s assets are invested in securities of the employer, each participant (or beneficiary) must be permitted to direct voting rights under securities allocated to his or her account with respect to approval of corporate mergers, consolidations, recapitalizations, reclassifications, liquidations, dissolutions, sales of substantially all of the business’s assets, and similar transactions as provided in future regulations.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> If the plan contains non-registration-type securities, the plan satisfies this requirement if each participant is given one vote with respect to an issue and the trustee votes the shares held by the plan in a proportion that takes this vote into account.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC §§ 401(a)(28), 4975(e)(7), 409(e)(2).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  IRC § 409(e)(4).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.  IRC § 409(e)(3).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.  IRC §§ 401(a)(22), 409(e)(3), 409(e)(5).<br /> <br /> </div>

<div class="Section1">An employee may generally exclude from income amounts received pursuant to an employer-sponsored Educational Assistance Program (EAP) that was established in order to fund employee education-related expenses, subject to the maximum limitation discussed below.<a href="#_ftn1" name="_ftnref1">¹</a> This exclusion was made permanent by EGTRRA 2001 following a number of extensions in preceding years. Amounts received under an EAP may be excluded whether or not the educational expenses are job related.<a href="#_ftn2" name="_ftnref2">²</a> An employee cannot exclude from income more than $5,250 in educational assistance benefits in any calendar year.<a href="#_ftn3" name="_ftnref3">³</a></div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 127(a)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  Treas. Reg. § 1.127-2(c)(4).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.  IRC § 127(a)(2).<br /> <br /> </div>

<div class="Section1"><br /> <br /> The &ldquo;qualified employee discount&rdquo; exclusion applies to employee discounts provided by the employer on any property (other than real property or personal property of a kind held for investment) or services which are offered for sale to customers in the ordinary course of the line of business of the employer for which the employee works. For the benefit to be excludable from income, the discount may not exceed:<br /> <blockquote>(1)&nbsp; the gross profit&nbsp;percentage of the price at which the property is being offered by the employer to customers in the case of property; or<br /> <br /> (2)&nbsp; 20&nbsp;percent of the price at which services are offered by the employer to customers, in the case of services.<a href="#_ftn1" name="_ftnref1">¹</a></blockquote><br /> For purposes of this provision, an insurance policy or a commission or similar fee charged by a brokerage house or an underwriter on sales of securities is considered a service.<a href="#_ftn2" name="_ftnref2">²</a>&nbsp;The qualified employee discount will generally be available for employees of leased sections of department stores.<a href="#_ftn3" name="_ftnref3">³</a>&nbsp;The same nondiscrimination rules apply to qualified employee discounts as apply to no-additional-cost services (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8905">8905</a>).<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect;&nbsp;132(c).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.132-2(a)(2).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; IRC &sect;&nbsp;132(j)(2).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; IRC &sect;&nbsp;132(j)(1).<br /> <br /> </div></div><br />

<div class="Section1">The 2017 tax reform legislation increased the aggregate amount of length of service awards that may accrue for a bona fide volunteer with respect to any year of service to $6,000 (from $3,000) for tax years beginning after December 31, 2017.<a href="#_ftn1" name="_ftnref1">¹</a> The $6,000 amount will be adjusted for inflation in $500 increments ($6,500 in 2022, $7,000 in 2023 and $7,500 in 2024).</div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 457(e)(11)(B).<br /> <br /> </div>

<div class="Section1">Yes, an employer can provide employees with benefits through a stock bonus plan. Generally, a stock bonus plan is a profit sharing plan that holds employer securities and generally distributes those securities to participants when benefits are paid.<a href="#_ftn1" name="_ftnref1">¹</a><div class="Section1"><br /> <br /> Stock bonus plans can be funded through an employer&rsquo;s contribution of employer securities, cash, or both.&nbsp;Traditionally, the IRS has taken the position that the distribution must be in the form of employer stock (except for the value of a fractional share).<a href="#_ftn2" name="_ftnref2">²</a>&nbsp;The&nbsp;Tax Court has agreed with the IRS position.<a href="#_ftn3" name="_ftnref3">³</a> A stock bonus plan may provide for payment of benefits in cash if certain conditions are met (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8917">8917</a>). For the purpose of allocating contributions and distributing benefits, the plan is subject to the same requirements as a profit sharing plan.<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.401-1(a)(2)(iii).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; Rev. Rul. 71-256, 1971-1 CB 118.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; <em>Miller v. Comm.</em>, 76&nbsp;TC 433 (1981).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> <em>Editor&rsquo;s Note</em>: The Affordable Care Act (&ldquo;ACA&rdquo;) imposes an annual limitation on contributions to a health FSA. For taxable years beginning after 2012, FSA contributions will not be treated as a qualified benefit unless the cafeteria plan provides that an employee may not elect for any taxable year to have salary reduction contributions in excess of $2,500 made to the arrangement. The limit will be indexed for inflation ($3,300 in 2025 and $3,200 in 2024).<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> A health flexible spending arrangement (FSA) is a program that is established under IRC Section 125 to provide for the reimbursement of certain expenses that have already been incurred. This benefit may be provided as a stand-alone plan or as part of a traditional cafeteria plan.<br /> <br /> Health coverage under an FSA is not required to be provided under commercial insurance plans, but the coverage that is provided must demonstrate the risk shifting and risk distribution characteristics of insurance. Reimbursements under a health FSA must be paid specifically to reimburse medical expenses that have been incurred previously.<br /> <br /> A health FSA cannot provide coverage only for periods during which the participants expect to incur medical expenses if the period is shorter than a plan year. Further, the maximum reimbursement amount must always be available throughout the period of coverage (properly reduced for prior reimbursements for the same period of coverage).<br /> <br /> This must be true without regard to the extent to which the participant has paid the required premiums for the coverage period, and without a premium payment schedule based on the rate or amount of covered claims incurred in the coverage period.<a href="#_ftn2" name="_ftnref2">²</a>&nbsp;Though there was no statutory limit on contributions to a health FSA prior to 2013, most employers imposed a limit to protect themselves against large claims that had not yet been funded by salary reductions.<br /> <br /> The period of coverage must be 12 months, or in the case of a short first plan year, the entire first year (or the short plan year where the plan year is changed). Elections to increase or decrease coverage may not be made during a coverage year, but prospective changes may be allowed consistent with certain changes in family status.<br /> <br /> The plan may permit the period of coverage to be terminated if the employee fails to pay premiums, provided that the terms of the plan prohibit the employee from making a new election during the remaining period of coverage.&nbsp;The plan may permit revocation of existing elections by an employee who terminated service.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> As is the case with a cafeteria plan, a health FSA may provide a grace period of no more than 2&frac12; months following the end of the plan year for participants to incur and submit expenses for reimbursement.&nbsp;The grace period must apply to all participants in the plan. Plans may adopt a grace period for the current plan year by amending the plan document before the end of the current plan year.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> For tax years beginning in 2014 and beyond, a health FSA may be amended so that $500 ($660 for 2025, $640 in 2024, $610 in 2023, $570 in 2022 and $550 in 2020 and 2021) of unused amounts remaining at the end of the plan year may be carried forward to the next plan year. However, plans that incorporate the carry forward provision may not also offer the grace period.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> The plan may not reimburse premiums paid for other health plan coverage, but it may reimburse medical expenses of the kind described under IRC Section&nbsp;213(d).<a href="#_ftn6" name="_ftnref6">⁶</a> Beginning in 2011, reimbursements for medicine are limited to doctor-prescribed drugs and insulin. Before 2020, over-the-counter medicines were not qualified expenses unless the participant obtained a doctor&rsquo;s prescription.<a href="#_ftn7" name="_ftnref7">⁷</a> However, beginning in 2020 the CARES Act now allows these over-the-counter medical expenses to be reimbursed by an FSA without a prescription.<a href="#_ftn8" name="_ftnref8">⁸</a><br /> <br /> The reimbursed medical expenses must be expenses incurred to obtain medical care during the period of coverage.&nbsp;The employee must provide substantiation that the expense claimed has been incurred and is not reimbursable under other health coverage.<a href="#_ftn9" name="_ftnref9">⁹</a>&nbsp;The IRS has approved the use of employer-issued debit and credit cards to pay for medical expenses as incurred, provided that the employer requires subsequent substantiation of the expenses or has in place sufficient procedures to substantiate the payments at the time of purchase.<a href="#_ftn10" name="_ftnref10">¹⁰</a> On a one-time basis, a plan may allow a qualified HSA distribution (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8834">8834</a>).<br /> <br /> An employee must include the value of employer-provided coverage for qualified long-term care services provided through an FSA in gross income. <a href="#_ftn11" name="_ftnref11">¹¹</a><br /> <p style="text-align: center;"><strong>Substantiation Requirements</strong></p><br /> The IRS has released guidance<a href="#_ftn12" name="_ftnref12">¹²</a> on the types of substantiation that are acceptable for health FSAs offered via IRC Section 125 cafeteria plans. The IRS is clear that the plan must adopt procedures to ensure that all claims are substantiated.<br /> <br /> The IRS guidance approved a system where a plan will only reimburse Section 213(d) medical expenses that are substantiated by information from a third party that is independent of the employee and the employee&rsquo;s spouse and dependents (where the information from the third party describes the service or product, the date of service or sale, and the amount of the expense). The approved system also reimburses expenses based on information from independent third parties (such as an explanation of benefits from an insurance company) and requires that information from the independent third party include (i) the date of the medical care and (ii)&nbsp;the employee&rsquo;s share of the cost of the medical care (i.e., coinsurance payments and amounts below the deductible). Employee must also certify that any expense paid by the plan has not been reimbursed by insurance or otherwise and that the employee will not seek reimbursement from any other plan covering health benefits.<br /> <br /> Under the guidance, self-certification of claims that are not otherwise substantiated does not ensure that all claims are substantiated, meaning that cafeteria plans are prohibited from adopting a self-certification regime. Similarly, plans that (1) adopt a &ldquo;sampling&rdquo; technique, (2)&nbsp;only require substantiation of claims below a certain dollar threshold or (3) do not require substantiation of claims paid via a debit card to certain preferred dentists, doctors, hospitals, or other health care providers fail to ensure that all claims are substantiated.<br /> <br /> For cafeteria plans that adopt prohibited substantiation rules, all amounts paid under their health FSAs will be included in gross income.<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect;&nbsp;125(i), as added by PPACA 2010; Notice 2012-40, 2012-1 CB 1046.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; Prop.&nbsp;Treas. Reg. &sect;&nbsp;1.125-5(d).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; Prop.&nbsp;Treas. Reg. &sect;&nbsp;1.125-5(e).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; Prop.&nbsp;Treas. Reg. &sect;&nbsp;1.125-1(e); Notice 2005-42, 2005-1 CB 1204; Notice 2012-40, 2012-1 CB 1046.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; Notice 2013-71, 2013-47 IRB 532.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp; Prop.&nbsp;Treas. Reg. &sect;&nbsp;1.125-5(k).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp; IRC &sect;&nbsp;106(f).<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp; CARES Act &sect;&nbsp;3702.<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp; Prop.&nbsp;Treas. Reg. &sect;&nbsp;1.125-6(b); Rev. Proc. 2003-43, 2003-1 CB 935; superseded and modified by Notice 2013-30, 2013-21 IRB 1099. See <em>Grande v. Allison Engine Co.</em>, 2000 U.S Dist. LEXIS 12220 (S.D. Ind. 2000).<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.&nbsp; Notice 2006-69, 2006-2 CB 107. See also Notice 2007-2, 2007-1 CB 254.<br /> <br /> <a href="#_ftnref11" name="_ftn11">11</a>.&nbsp; IRC &sect;&nbsp;106(c)(1).<br /> <br /> <a href="#_ftnref12" name="_ftn12">12</a>.&nbsp; IRC OCC Memo 202317020.<br /> <br /> </div></div><br />

<div class="Section1">A surviving spouse who receives death benefits payable under a contract, or pursuant to an established plan of the employer, must include such amounts in income.<a href="#_ftn1" name="_ftnref1">¹</a> However, if the employee death benefits are payable because of the death of certain terrorist attack victims or astronauts, they may be excluded from gross income.<a href="#_ftn2" name="_ftnref2">²</a></div><br /> <div class="Section1"><br /> <br /> Frequently, death benefits are funded by insurance on the life of the employee, with the insurance owned by and payable to the employer. These death benefits do not become tax-exempt to the employee’s surviving spouse simply because the proceeds of the insurance policy are received tax-free by the employer. While the employer receives the proceeds as life insurance proceeds, the surviving spouse receives them as compensation payments from the employer.<a href="#_ftn3" name="_ftnref3">³</a> As a result, employee death benefits rarely qualify as life insurance benefits wholly excludable under IRC Section 101(a).<a href="#_ftn4" name="_ftnref4">⁴</a> Death benefits payable to an employee’s surviving spouse under a split-dollar arrangement, however, may be received free of income tax obligations.<br /> <br /> Contractual death benefits are treated as “income in respect of a decedent.”<a href="#_ftn5" name="_ftnref5">⁵</a> As a result, where an estate tax has been paid, the recipient of the death payments is entitled to an income tax deduction for that portion of the estate tax attributable to the value of the payments.<br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  <em>Simpson v. U.S.</em>, 261 F.2d 497 (7th Cir. 1958); <em>Robinson v. Comm.</em>, 42 TC 403 (1964).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  IRC § 101(i).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.  <em>Essenfeld v. Comm.</em>, 311 F.2d 208 (2d Cir. 1962).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.  See <em>Edgar v. Comm.</em>, TC Memo 1979-524.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.  <em>Est. of Wright v. Comm.</em>, 336 F.2d 121 (2d Cir. 1964).<br /> <br /> </div>

<div class="Section1">A fringe benefit not excludable under the rules discussed in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8905">8905</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8910">8910</a> (no-additional-cost, transportation, employee discount and de minimis fringe benefits) is included in the gross income of the employee to the extent that the fair market value of the benefit exceeds the sum of (a) the amount, if any, paid by the employee for the benefit and (b) the amount, if any, specifically excluded by some other section of the IRC.<a href="#_ftn1" name="_ftnref1">¹</a><div class="Section1"><br /> <br /> Therefore, if the employee pays fair market value for the benefit, no amount must be included in gross income.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> The fair market value of a fringe benefit is determined on the basis of objective facts and circumstances.&nbsp;The amount that an individual would have to pay for the fringe benefit in an arm&rsquo;s length transaction is considered in determining the fair market value.<a href="#_ftn3" name="_ftnref3">³</a>&nbsp;The regulations specifically provide that in calculating fair market value, any special relationship that exists between the employer and employee must be disregarded.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> Special optional rules are available for determining the fair market value of employer-provided automobiles. Specifically, the fair market value is based on the amount that the employee would be required to pay in order to lease the same or comparable vehicle, under comparable conditions (for example, taking use restrictions into consideration) in an arm&rsquo;s length transaction in the same geographic area.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.61-21(b)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.61-21(b)(1).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.61-21(b)(2).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.61-21(b)(2).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.61-21(b)(4).<br /> <br /> </div></div><br />

<div class="Section1">A “working condition fringe” benefit is defined as property or services provided by the employer to the extent that, if the employee paid for such property or services, he or she would be able to deduct the expenses as a business expense prior to 2018.<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="Section1"><br /> <br /> For example, qualified automobile demonstration is considered to be a working condition fringe benefit and is defined as the use of an auto by a full-time auto salesman in the area where the dealer’s sales office is located provided that the auto is used to aid the salesman in his job and personal use is substantially restricted.<a href="#_ftn2" name="_ftnref2">²</a> The IRS has ruled that tax preparation services provided by an employer to employees stationed in foreign countries as a part of a tax equalization program were not excludable fringe benefits because the employees would be unable to deduct the expenses if they had paid for them themselves. Further, the IRS found that the fair market value (determined as though the employees had paid for the services in an arm’s length transaction) was both includable in income and treated as wages for employment tax purposes.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> Employers should be particularly conscious of low-value fringe benefits around the holidays. Employers are required to treat “gifts” as wages--meaning that federal withholding and tax withholding requirements will apply. Failure to comply can result in penalties. In order to avoid these requirements, the gift will have to qualify as a fringe benefit. Importantly, “gifts” of cash or cash equivalents can never qualify as fringe benefits. Therefore, things like gift cards must be treated in the exact same way as wages—even if the dollar value is relatively low. Other types of gifts that have a relatively low value can be excluded from income. The gift, however, must be so small that accounting for the value would be impractical or unreasonable. There is no set dollar limit that qualifies as “de minimis” in the eyes of the IRS—but it is generally thought that even infrequent gifts that are valued at more than $100 will not qualify.<br /> <br /> <hr /><br /> <br /> This exclusion is generally available to any current employee, any partner who performs services for the partnership, any director of the employer, and any independent contractor who performs services for the employer.<a href="#_ftn4" name="_ftnref4">⁴</a> There is no nondiscrimination requirement.<br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 132(d).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  IRC § 132(j)(3).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.  ILM 201810007.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.  Treas. Reg. § 1.132-1(b)(2).<br /> <br /> </div>