What are fringe benefits, exactly? We've built a guide outlining everything you need to know about employee fringe benefits. If you'd like to download it for free, you can do so here.
As discussed in our previous article, all fringe benefits are taxable unless they are specifically excluded from an employee's income. Here we will take a deeper dive into the most common ones that can be excluded from income.
Common Employee Fringe Benefits That Can Be Excluded From Income
In the chart below, the last column contains certain notations. These correspond to the list of employees in the previous article who may be excluded from receiving a fringe benefit on a tax-free basis.
The following chart is current for the 2014 calendar year. In October of each year the IRS issues any changes to the exclusion limits. The descriptions in the chart below are general. For detailed information refer to IRS Publication 15-B, Employer's Tax Guide to Fringe Benefits.
|Fringe Benefit||Description/Requirements for Exclusion||Ineligible Employees|
|Accident & health benefits (3rd party)||Accident & health plans. Also applies to payments made to an employee under an accident plan.||S2%|
|Accident & health benefits (Self-insured)||Self-insured plans that do not favor highly compensated employees. Includes medical care reimbursement plans.||HCE10%|
|Achievement awards||Length of service or safety achievement awards only. Cannot include cash or intangible property such as vacations, meals, lodging, tickets, stocks, or securities. Limited to a value of $1,600 per year. See chapter 2 of IRS Publication 535, Business Expenses, for more details.||S2%|
HCEs are ineligible only if the HCE receives more than 5% of all adoption assistance payments made to all employee during the year. All payments must be reported on Form W-2 in Box 12 with Code “T”. For more information see Instructions for Form 8839, Qualified Adoption Expenses.
|Athletic facilities||Facility must be located on premises the employer owns or leases, and it is operated exclusively for the use of current or retired employees, their spouses, and dependent children. Partners in a partnership are treated as employees for this benefit.|
|De Minimis benefits||Publication 15-B states that “a de minimis benefit is any property or service you provide to an employee that has so little value (taking into account how frequently you provide similar benefits to your employees) that accounting for it would be unreasonable or administratively impracticable.” Cash or cash equivalents (such as gift cards) are never excludable. Specific types of de minimis benefits are included elsewhere in this chart.|
|Copy machine use||De minimis fringe. 85% of overall copier use must be for business purposes.|
|Dependent care assistance||$5,000 per year. Value of all payments must be reported in Box 10 of Form W-2. Excess payments must be included in Boxes 1, 3 and 5.||HCE$115|
|Educational assistance (Not work related)||$5,250 per year. Graduate courses included. Includes the cost of books, equipment, fees, supplies, and tuition. Employer must have a qualified written plan. Value of benefit is based on when a course begins, not when benefit is paid.||HCE$115|
|Educational assistance (Work related)||Course must be related to employee's current job and must help maintain or improve the knowledge or skills required for that job. Reimbursements should be treated as part of an accountable expense reimbursement plan.|
|Employee merchandise discounts||Not more than the gross profit percentage times the price charged to non-employee customers. HCE restriction applies only if not available to all employees.||HCE$115|
|Employee service discounts||Not more than 20% of the price charged non-employee customers. HCE restriction applies only if not available to all employees.||HCE$115|
|Employer-provided cell phones||De minimis fringe only if there are substantial business reasons for providing the phone.|
|Group-term life insurance||$50,000 face value excluded from wages. Excess value subject to federal income tax, but not federal income tax withholding. Excess value subject to FICA taxes, but not subject to FUTA. None of GTL is taxable if (1) the beneficiary is the employer, (2) the beneficiary is a charitable organization, or (3) the employee is permanently disabled.||KeyS2%|
|Health Savings Accounts (HSA)||Employer contributions up to specified dollar limits are exempt from federal income tax withholding, FICA taxes, and FUTA. (For 2014 employers can contribute up to $3,300 for an individual or $6,550 for family coverage.) For more information refer to IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans.|
|Holiday gifts||De minimis fringe. Other than cash with low fair market value.|
|Lodging||Can be excluded only if (1) it is furnished on business premises, (2) it is furnished for the employer's convenience, and (3) the employee must accept it as a condition of employment.||S2%|
|Meals (de minimis)||Meal or meal money that has so little value that accounting for it would be unreasonable. Includes such things as coffee, doughnuts, soft drinks, and occasional meals that enable an employee to work overtime.|
|Meals on business premises||Meals that are furnished on the business premises and are furnished for the employer's convenience.||S2%|
|Moving expenses||Must be qualified moving expenses according to IRS Publication 521, Moving Expenses. Non-qualified moving expenses that are reimbursed are subject of federal income tax and FICA withholding, but not FUTA.||S2%|
|No-additional-cost services||Services that are offered to customers in the ordinary course of business that can be offered to employees without incurring any substantial additional costs. Includes excess capacity services, such as airline, bus, or train tickets; hotel rooms; or telephone services provided free or at a reduced price to employees working in those lines of business. HCE restriction applies only if not available to all employees.||HCE$115|
|Parties & picnics||De minimus fringe. Occasional parties & picnics for employees and their guests.|
|Reciprocal no-additional-cost services||Services provided by an unrelated employer with whom the employee's employer has a written agreement, and the unrelated employer also provides no-additional-cost services to its own employees. HCE restriction applies only if not available to all employees.||HCE$115|
|Retirement planning services||Additional retirement planning advice or information provided to employees or their spouses related to the employer's qualified retirement plan. Does not include services for tax preparation, accounting, legal, or brokerage services.|
|Tickets||De minimus fringe. Occasional tickets for entertainment or sporting events.|
|Transportation benefits (de minimus)||Occasional transportation fare given to an employee because the employee is working overtime, and the benefit is not based on hours worked.|
|Transportation commuting benefits||Exclusion for commuting in a qualified commuter highway vehicle, transit passes, qualified parking, or qualified bicycle commuting reimbursement. See IRS Publication 15-B for details.||S2%|
|Tuition reduction||An educational institution can exclude tuition reductions for qualified employees, dependents, and those retired on disability for undergraduate education. Teaching or research assistants can receive tuition reductions for graduate education. See IRS Publication 970, Tax Benefits for Education, for more information.|
|Typing||De minimus fringe. Occasional typing of personal letters by a company secretary.|
|Working condition benefits||Property and services provided to an employee so that the employee can perform his or her job.|
Want to double check what these ineligible employee codes mean? It's all explained in our previous article, in the section entitled: Classifying An Employee As A Non-Employee For Specific Fringe Benefits. We hope this helps you navigate the tricky terrain of which fringe benefits are taxable!
Fringe benefits like FSAs can be confusing, but they don't have to be.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.