Many companies use fringe benefit programs as a tool for attracting and retaining talented employees. These programs have become especially vital as the “War for Talent” has gotten more competitive and benefit programs have become more widely known. What was once somewhat of an afterthought, or a small perk, now has dedicated HR professionals and firms searching for innovative and new programs. However, both the employee (as recipient) and employer (as payee) need to be aware of the tax consequences of providing these benefits, especially as these benefits grow in size, scope, and volume.
With the implementation of the Affordable Care Act reforms, these benefits have basically become universal for employees and employers. The benefit is tax free to employees and fully deductible by the employer.
Employers may make both matching and elective contributions to employee’s retirement plans, such as 401(k)s. These contributions will be tax deferred to the employee and fully deductible by the employer.
Businesses can offer employees the option of using pre-tax dollars or reimbursement to purchase public transportation. This amount is limited each month (currently at $260 per month). Employees can receive this benefit tax free; however, under the 2018 Tax Cuts and Jobs Act, employers can no longer deduct these costs, even if done under a pre-tax elective contribution.
Working Condition Fringe Benefits
These are expenses either paid by the employer or reimbursed to the employee under an accountable plan for expenses incurred by the employee that relate to the employer’s business. The most common of these include professional dues and subscriptions, job training and education (including tuition if it “enhances or maintains” the employee’s skill at their current position), employer provided cell phones, incidental use of employer provided automobiles. These expenses are excludable on the employee’s income and deductible to the employer.
Companies may set up a qualified tuition reimbursement plan for their employees, allowing a tax free (to the employees) $5,250 per year for use in higher education, regardless of the field of study (unlike the working condition fringe benefit which must have a direct impact). The plan must be non-discriminatory and available to all employees. The value paid is directly deductible by the employer.
Employee achievement awards have proven to be a valuable program and excellent retention tool. To be a nontaxable fringe benefit, the award must be made at least 5 years after employment and can only be made once every 5 years. The value of the award can be excluded from the employee’s income (so long as its not cash, gift card, sporting tickets, vacation, or other cash equivalent) for either $400 or $1,600, depending on the size and nature of the plan. The expense is fully deductible by the employer.
De Minimis Fringe Benefits
De Minimis fringe benefits are benefits provide to employees that are small and by their very nature impractical to account for. These include items like office snacks, small promotional items like pens, shirts, etc., holiday parties, employer provided meals for the convenience of the employer, and the like. These items are all excludable from employees’ income and deductible by the employer (note: under the 2018 Tax Cuts and Jobs Act, the deduction for employer provided meals has decreased to 50%).
Student Loan Repayment Programs
These programs where employers make payments for employee’s student loans have become more popular as the student loan debt load increases on new graduates. These do NOT have any preferential treatment under the tax code currently, and are compensation to the employee, subject to tax withholding, and deductible as compensation expense for the employer.
Fringe benefits can be a powerful tool for increasing employee compensation without incurring additional payroll taxes or compensation expense. Further, fringe benefits have proven to be an effective tool in mitigating employee turnover and keeping employees engaged. Before offering any program to employees, employers need to consider if the IRS will consider these benefits to be disguised compensation or as nontaxable fringe benefits to employees.
Edward McWilliams, CPA
Ed is a Partner in the firm’s tax and business advisory practice focusing on providing services to middle market private companies across different industries as well as to early stage startups. Ed has over a decade of experience providing tax and business consulting services to these companies of different sizes and across different industries, bringing a broad and diverse knowledge base and strategic solutions to the many complex issues that businesses face.