Fringe Benefit Exclusion Rules Per the IRS
Many of the fringe benefits provided by employers to employees are considered by the IRS as a part of the pay of the employee. They are subject to federal income tax withholding, including social security, Medicare, FUTA (Federal Unemployment tax.
However, there is a substantial list of fringe benefits that are excluded and not considered part of the recipient’s pay and not subject to federal income tax withholding. This is an overview, and details should be discussed with your tax advisor or accountant.
Accident and Health Benefits
Certain contributions made by an employer to an employee’s health plan are excluded as part of the employee’s pay and include:
- Contributions to the premiums or cost of accident and health care insurance. This includes long term healthcare insurance.
- If a trust or fund directly or through insurance provides health or accident insurance, contributions would be exclusions.
- Contributions to Archer MSAs or HSAs.
This exclusion applies to tangible personal property, not cash or cash equivalents. Tangible personal property given to an employee as an award for safety achievement or length of service would apply as an exclusion from consideration as pay for withholding. The exclusion does not apply to vacations, meals, lodging, or event tickets.
An adoption assistance program is a separate written plan that meets all the following requirements:
- It benefits employees under rules set by the employer and does not favor highly compensated employees or their dependents.
- It does not pay more than 5% during the year for shareholders, owners, or their dependents.
- Reasonable notice of the plan must be given to all employees.
- Employees must provide reasonable substantiation to verify that payments are for qualifying expenses.
The employer can exclude from wages the value of an employee’s use of an on-premises gym or athletic facility. This applies to employees, their spouses, and dependent children.
De Minimis Benefits
This is an exclusion for benefits of so little value that accounting and reporting of them would be unreasonable or administratively impractical. There are a number of these described in detail in IRS Publication 15-B and include things like holiday or birthday gifts other than cash, occasional parties or picnics, or flowers/fruits for special circumstances such as hospitalization.
Dependent Care Insurance
The exclusion applies to household or dependent care services you pay for or provide to an employee. The services must be provided under a written Dependent Care Assistance Program provided only for your employees.
Educational assistance, including graduate-level courses, provided by an employer to employees under an educational assistance program would apply as an exclusion. Qualified expenses include books, tuition, equipment, fees, and supplies.
Exclusion includes discounts that you provide to employees for products or services you offer to customers in the normal course of business, and for which the employee provides substantial services. The benefit may be provided directly by the employer or by a third party.
Employer-Provided Cell Phones
An exclusion is approved for cell phones provided by an employer to an employee for business purposes. These can include:
- Employer needs to contact employee at all times for work-related reasons or emergencies.
- Employee must be available to speak to clients or customers during non-business hours or away from the business.
- Employee must speak to clients/customers in other time zones.
Lodging on Business Premises
The employer can exclude the value of lodging provided to the employee on the business premises if:
- The lodging is on the premises.
- It is for the convenience of the business.
- The employee must accept the lodging as a condition of employment.
An occasional meal of little value may be excluded from compensation. Examples include:
- Coffee, pastries, soft drinks.
- Occasional meals to allow an employee to work overtime.
- Occasional parties or picnics for employees and their guests.
Retirement Planning Services
The employer may exclude from wages the value of retirement planning services or advice to an employee or their spouse if the business maintains a qualified retirement plan.
Transportation (Commuting) Benefits
Exclusions are allowed for certain de minimis (low value) or qualified transportation benefits provided by the employer to the employee. These can include transit passes and qualified parking. The word “qualified” is used a lot in this section of Publication 15-B, so it is advisable to discuss with your tax professional or accountant.
This is not a complete list of the exclusions allowed, nor a detailed breakdown of each. It is imperative that every considered employee benefit be discussed with an accountant or tax professional due to the complexity of the of the topic.