Fringe Benefits

September 14, 2023

General Exclusions

Code Section 132(a) - Exclusion from gross income. Gross income shall not
include any fringe benefit which qualifies as a -

1) No-Additional-Cost Service

2) Qualified Employee Discount

3) Working Condition Fringe

4) De Minimis Fringe
General Exclusions

Code Section 132(a) - Exclusion from gross income. Gross income shall not
include any fringe benefit which qualifies as a -

5) Qualified Transportation Fringe

6) Qualified Moving Expense Reimbursements (suspended for 2018 through

2025, except for certain active military duty)

7) Qualified Retirement Planning Services

8) Qualified Military Base Realignment and Closure Payments

Qualified Employee Discount
Qualified Employee Discount

● Employee discount allows employees to obtain property or services from

their employer at price below that which is available to general public.
● For the benefit to be excludable, property or service must be offered to the
public in ordinary course of business.
● Excludable qualified employee discount generally cannot exceed -
○ For merchandise or other property, employer’s “gross profit
percentage” times price charged to public for property
○ For services, no more than 20% of price charged to general public for
service at time of employee’s purchase
● Exclusion applies whether property or service is provided at no charge or
reduced price
● Exclusion applies if benefit is provided through partial or total cash rebate
of amount paid for property or service
Qualified Employee Discount

● Determine gross profit percentage in line of business based on all property

offered to customers (including employee customers) and experience
during tax year immediately before tax year in which discount is available
● Subtract total cost of property from total sales price of poetry and divide
result by total sales price of property
De Minimis Fringe
De Minimis Fringe

● Includes any property or service provided by employer for an employee,

value of which is so small in relation to frequency with which it is provided,
so that accounting for it is unreasonable or administratively impracticable
● Value of benefit is determined by frequency it’s provided to each employee
○ Example - Employer provides employee daily taxi fare valued at $5 for
travel to and from work (and taxi not provided for safety reasons).
Although small in amount, benefit is provided on regular basis and is
therefore taxable as wages
○ Example - Employer provides daily meal to one employee, but not to
any other employees. Benefit is “frequent” for employee and is
therefore not de minimis even thought benefit may be “infrequent”
with respect to entire workforce
De Minimis Fringe

● Statute does not specify value threshold for de minimis fringe

● IRS has provided guidance that benefit valued at $100 did not qualify as de
minimis - Chief Counsel Advice 200108042
● Examples of Excludable De Minimis Fringe Benefits - if provided only on
occasional or infrequent basis
○ Group meals, employee picnics
○ Theater or sporting events tickets
○ Occasional coffee, doughnuts or soft drinks
○ Traditional birthday or holiday gifts (not cash) with low FMV
○ Personal use of cell phone provided by employer primarily for
business purpose - Reg. Section 1.132-6(e)(1); Notice 2011-72
De Minimis Fringe

● Benefits NOT Excludable as De Minimis Fringe Benefits

○ Cash - except infrequent meal money to allow overtime work
○ Cash equivalent - i.e., gift certificate
○ Use of employer’s apartment, vacation home, boat
○ Commuting use of employer’s vehicle more than once a month
○ Membership in country club or athletic facility
Qualified Transportation Fringe
Qualified Transportation Fringe

● Includes following benefits provided to employee for employee’s personal

transportation for commuting to and from work
○ Commuter transportation in commuter highway vehicle
○ Transit passes
○ Qualified parking - parking provided to employees on or near
business work premises
○ Qualified bicycle commuting reimbursements - suspended by TCJA or
2018-2025 tax years
● Dollar Limits
○ For tax year 2023, the monthly limitation for the qualified
transportation fringe benefit and the monthly limitation for qualified
parking increases to $300, up $20 from the limit for 2022.
○
Qualified Moving Expense
Reimbursement
Moving Expenses

● In general, Code Section 132(a)(6) provides that a qualified moving

expense reimbursement received directly or indirectly from an employer is
excludable if the requirements of Code Section 217 are met.
● Allowable expenses under 217
○ Moving household goods and personal effect from fromer to new
residence
○ Travel costs between former and new residence by shortest and most
direct route
○ Certain in-transit storage expenses incurred within a period of 30
consecutive days after teh day the goods and effects are moved from
teh former residence and prior to delivery at the new residence
● TCJA - suspends exclusion for qualified moving expense reimbursements
for 2018-2025, except for US armed forces
Moving Expenses

Code Section 132(g) Qualified moving expense reimbursement - For purposes

of this section—
(1) In general. The term “qualified moving expense reimbursement”
means any amount received (directly or indirectly) by an individual
from an employer as a payment for (or a reimbursement of) expenses
which would be deductible as moving expenses under section 217 if
directly paid or incurred by the individual. Such term shall not include
any payment for (or reimbursement of) an expense actually deducted
by the individual in a prior taxable year.
(2) Suspension for taxable years 2018 through 2025. Except in the case
of a member of the Armed Forces of the United States on active duty
who moves pursuant to a military order and incident to a permanent
change of station, subsection (a)(6) shall not apply to any taxable year
beginning after December 31, 2017, and before January 1, 2026.
Moving Expenses

Code Section 217 Moving Expenses

(k) Suspension of deduction for taxable years 2018 through 2025. Except in
the case of an individual to whom subsection (g) applies, this section shall not
apply to any taxable year beginning after December 31, 2017, and before
January 1, 2026.
Specific Exclusions
Gifts and Awards
Gifts and Awards

❖ Unless specifically excluded, gifts, prizes and awards given to employees

are taxable as wages based on the fair market value of such item, subject
to payroll tax withholding and reporting on Form W-2.
❖ Two main types of excludable non-cash awards
➢ De minimis awards and prizes
➢ Employee achievement awards
Employee Achievement Awards

❖ IRC Sec. 74(c) provides that gross income shall not include the value of an
employee achievement award if the cost to the employer of the employee
achievement award does not exceed $400 (for nonqualified plan awards)
or $1,600 (for qualified plan awards) as defined by IRC Sec. 274(j) relating
to the business deduction limitation of these expenses.
❖ An award will qualify as a length-of-service award only if either of the
following applies:
➢ The employee receives the award after his/her first 5 years of
employment
➢ The employee didn’t receive another length-of-service award (other
than one of very small value) during the same year or in any of the
prior 4 years.
Employee Achievement Awards

❖ An achievement award is an item of “tangible personal property” that

meets all of the following requirements:
➢ It is given to an employee for length of service
➢ It is awarded as part of a meaningful presentation
➢ It is awarded under conditions and circumstances that don’t create a
significant likelihood of disguised pay
❖ The definition of “tangible personal property” states that an award of cash,
cash equivalents, gift cards, gift coupons, or gift certificates (other than
arrangements granting only the right to select and receive tangible
personal property from a limited assortment of items preselected or
preapproved by the employer) is not considered tangible personal property.
Additionally, tangible property does not include vacations, meals, lodging,
tickets to theater or sporting events, stocks, bond, other securities, and
other similar items.
Employee Achievement Awards

❖ Example - An employer only makes awards to employees that are

non-cash, qualifying length-of-service or safety awards. To avoid the
extensive recordkeeping and tracking required for determining the
taxability of awards, the employer has a policy of not making awards that
exceed $400 per employee annually. In this situation, none of the awards
would be taxable to the employees.
Employee Achievement Awards
Cell Phones
Cell phones

❖ 2010 Small Business Act removed cell phones “listed property” category
❖ Employer may deduct cost of cell phones without burdensome
recordkeeping requirements for listed property
❖ Employee may exclude cost of employer provided cell phone as working
condition fringe if used in connection with business
❖ Employee may exclude personal use of employer provided cell phone as de
minimis fringe
❖ Notice 2011-72 - Employer must provide cell phone primarily for
“noncompensatory business purposes” and must have a “substantial
business related reason” for providing cell phone
Cell phones

❖ IRS Memo to Field Agents - SBSE-04-0913-03

❖ As noted in the IRS guidance to its field examiners regarding
reimbursements, the employee must maintain the type of cell phone
coverage that is reasonably related to the needs of the employer’s
business, and the reimbursement must be reasonably calculated so as not
to exceed expenses the employee actually incurred in maintaining the cell
phone.
Cell phones

“An example of a reimbursement arrangement that does not result in additional

income or wages is as follows: an employer has a substantial
noncompensatory business reason for requiring the employee to maintain a
personal cell phone to facilitate communication with the employer's clients
during hours outside the employee's normal tour of duty in the office and
reimbursing the employee for the use of the phone. The employee uses the cell
phone for both business purposes and personal purposes and the employee’s
basic coverage plan charges a flat-rate per month for a certain number of
minutes for domestic calls. The employer reimburses the employee for the
monthly basic plan expense to enable the employee to maintain contact with
business clients throughout the United States after hours.”
Cell phones

Examples

❖ Employer needs to contact employee at all times for work related

emergencies
❖ Need to speak with clients who are in other time zones at times outside
normal working hours
❖ Need to be available to speak with clients when away from office
Cell phones

In general, since the “reimbursement must be reasonably calculated so as not

to exceed expenses the employee actually incurred in maintaining the cell
phone” coverage reasonably related to the needs of the employer’s business, it
would be reasonable and arguably necessary to consider different amounts for
categories of employees with different levels of personal cell phone usage for
business purposes. The key would be establish the substantial
noncompensatory business reason for personal cell phone usage in the first
instance and then determine the appropriate reimbursement amount to meet
that business need.
Education Expenses
Educational Benefit, Reimbursement and Allowances

● Employers often pay educational expenses on behalf of employees or

reimburse them for educational expenses incurred
● Determine which provision of Code applies
○ 127 - Qualified educational assistance program
○ 132(d) - Education as working condition fringe
○ An educational payment that is not exempt from tax under one Code
Section may be exempt under a different section
○ Educational benefit under 132(d) can be excludable only if benefits
under any other Section do not apply
Code Section 127 - Qualified Educational Assistance Plan

(a) Exclusion from gross income. (1) In general. Gross income of an

employee does not include amounts paid or expenses incurred by the
employer for educational assistance to the employee if the assistance is
furnished pursuant to a program which is described in subsection (b).
…

(b) Educational assistance program. (1) In general. For purposes of this

section an educational assistance program is a separate written plan of an
employer for the exclusive benefit of his employees to provide such
employees with educational assistance. The program must meet the
requirements of paragraphs (2) through (6) of this subsection.
Code Section 127 - Qualified Educational Assistance Plan

❖ Employer may exclude up to $5,250 paid or incurred on behalf of employer

from wages of each employee if certain requirements are met.
❖ Education may be at undergraduate or graduate level and is not required to
be job related.
❖ Requirements
➢ Employer must have written plan
➢ Plan may not offer other benefits that can be selected instead of
education
➢ Assistance does not exceed $5,250 per calendar year
➢ Plan must not discriminate in favor of highly compensated employee
Code Section 132(a)(3) - Working Condition Fringe

§ 1.132-5 Working condition fringes.

(a) In general—(1) Definition. Gross income does not include the value of a
working condition fringe. A “working condition fringe” is any property or
service provided to an employee of an employer to the extent that, if the
employee paid for the property or service, the amount paid would be allowable
as a deduction under section 162 or 167.
§ 1.162-5 Education expenses.

(a) General rule. Expenditures made by an individual for education (including

research undertaken as part of his educational program) which are not
expenditures of a type described in paragraph (b) (2) or (3) of this section are
deductible as ordinary and necessary business expenses (even though the
education may lead to a degree) if the education—

(1) Maintains or improves skills required by the individual in his employment or

other trade or business, or

(2) Meets the express requirements of the individual's employer, or the

requirements of applicable law or regulations, imposed as a condition to the
retention by the individual of an established employment relationship, status, or
rate of compensation.
§ 1.162-5 Education expenses.

(b) Nondeductible educational expenditures—

(1) In general. Educational expenditures described in subparagraphs (2) and (3)

of this paragraph are personal expenditures or constitute an inseparable
aggregate of personal and capital expenditures and, therefore, are not
deductible as ordinary and necessary business expenses even though the
education may maintain or improve skills required by the individual in his
employment or other trade or business or may meet the express requirements
of the individual's employer or of applicable law or regulations.
§ 1.162-5 Education expenses.

(b) Nondeductible educational expenditures—

(2) Minimum educational requirements.

(i) The first category of nondeductible educational expenses… are expenditures

made by an individual for education which is required of him in order to meet
the minimum educational requirements for qualification in his employment or
other trade or business. The minimum education necessary to qualify for a
position or other trade or business must be determined from a consideration of
such factors as the requirements of the employer, the applicable law and
regulations, and the standards of the profession, trade, or business involved. …
Minimum educational requirements.

Examples
❖ Computer technician. Employer pays employee to take graduate computer
course to enhance current job skills. Excludable.
❖ Teacher shortage. Teaching position normally requires 120 hours of
college credit. Employee has 80 hours of credit. Employer pays employee
to take night school to complete 40 hours of credit to satisfy teaching
position requirements. Not excludable.
❖ Fiscal technician hired into Accountant I position does not have all
accounting credits needed for job. Employee registers for and takes
courses required for position. Employer reimburses employee for classes.
Not excludable.
❖ 3L summer law firm associate. Firm requires law degree and passage of
State bar examination. Associate takes bar review course to prepare for
the State bar examination paid by firm. Not excludable.
§ 1.162-5 Education expenses.

(b) Nondeductible educational expenditures—

(3) Qualification for new trade or business.

(i) The second category of nondeductible educational expenses… are

expenditures made by an individual for education which is part of a program of
study being pursued by him which will lead to qualifying him in a new trade or
business. In the case of an employee, a change of duties does not constitute a
new trade or business if the new duties involve the same general type of work
as is involved in the individual's present employment. …
Courses Qualifying Employee for New Position

Examples
❖ Teacher to principal
❖ Elementary school teacher to secondary school teacher
❖ Teacher in one subject area to teacher in another subject area
❖ Teacher to guidance counselor
❖ Accountant to CPA
❖ CPA to lawyer
❖ Mechanic to engineer
Meals Furnished on Premises of
Employer
Code Section 119 - Meals or lodging furnished for the convenience of the employer

(a) Meals and lodging furnished to employee, his spouse, and his dependents,
pursuant to employment. There shall be excluded from gross income of an
employee the value of any meals or lodging furnished to him, his spouse,
or any of his dependents by or on behalf of his employer for the
convenience of the employer, but only if—

(1) in the case of meals, the meals are furnished on the business premises of
the employer, or

(2) in the case of lodging, the employee is required to accept such lodging on
the business premises of his employer as a condition of his employment.
Meals provided for ”convenience of the employer”

❖ In general, a meal satisfies the convenience of employer test if the meal is

furnished for a “substantial noncompensatory business purpose.”
❖ Four primary noncompensatory business purposes -
➢ Meal is provided to employee available for emergency calls during
meal period, and such calls actually occur or are reasonably expected
to occur
➢ Meal is short (30 to 45 minutes) and employee cannot eat elsewhere
because of nature of employer’s business
➢ Employee cannot otherwise secure proper meal within reasonable
meal period - i.e., there are not enough eating facilities near business
➢ Meals are provided to restaurant and feed and service employees
during, immediately before, or immediately after employee’s working
hours
Meals provided for ”convenience of the employer”

❖ Employer may provide unlimited snacks and drinks in designated snack

areas that are available to employees, contractors and escorted guests.
❖ Snacks are considered de minimis fringe benefit. TAM201903017
❖ Substantiation
➢ Business policies must support substantial noncompensatory
business reason for furnishing meals to employees
➢ Substantiate policies exist in substance, not just in form
➢ Substantiate policies are in fact enforced
➢ Form and quality of substantiation will vary according to facts and
circumstances of each case
Meals provided for ”convenience of the employer”

❖ Code Section 274 deduction limitations

❖ Employer may deduct 50% of food and beverage expenses for meals for
the convenience of the employer between 2018 and 2025
❖ Employer may deduct 100% of food and beverage expense if part of
nondiscriminatory employee recreation or social activity
❖ Employer may deduct 100% of food and beverage expense for meals on
premises if expense is de minimis fringe benefit
Disaster Relief
Disaster Relief

❖ In the event of federal disasters or other emergency situations, employers

may offer programs to facilitate assistance to employees.
➢ Code Section 139
➢ Employee Leave Donation and Leave Sharing Programs
Code Section 139 - Disaster Relief Payments

(a) General rule

Gross income shall not include any amount received by an individual as a
qualified disaster relief payment.

(b) Qualified disaster relief payment defined

For purposes of this section, the term “qualified disaster relief payment” means
any amount paid to or for the benefit of an individual—
(1) to reimburse or pay reasonable and necessary personal, family, living, or
funeral expenses incurred as a result of a qualified disaster,
(2) to reimburse or pay reasonable and necessary expenses incurred for the
repair or rehabilitation of a personal residence or repair or replacement of
its contents to the extent that the need for such repair, rehabilitation, or
replacement is attributable to a qualified disaster,
Code Section 139 - Disaster Relief Payments

(c) Qualified disaster defined. For purposes of this section, the term “qualified
disaster” means—
(1) a disaster which results from a terroristic or military action (as defined in
section 692(c)(2)),
(2) a federally declared disaster (as defined by section 165(i)(5)(A)),
…
(d) Coordination with employment taxes. For purposes of chapter 2 and subtitle
C, qualified disaster relief payments and qualified disaster mitigation payments
shall not be treated as net earnings from self-employment, wages, or
compensation subject to tax.
Employee Leave Donation and Leave Sharing Programs

❖ Employee Leave Donation and Leave Sharing Programs

❖ Allows employees to donate unused vacation and sick leave and PTO to
fellow employees who experience medical emergencies or who are
impacted by major disasters
❖ Generally, employee who earns vacation and PTO is taxed even though it is
donated to another person
❖ Exceptions for leave sharing programs
➢ Major disaster relief for fellow employee - Notice 2006-59 - Donating
employee is not taxed, but recipient employee is taxed subject to
payroll tax withholding
➢ Medical emergency - Rev. Rul. 90-29
❖ Administrative challenges