In general, employees are not taxed on fringe benefits IF offered on a nondiscriminatory basis

“Fringe” Benefits (Section 132)

Chapter 52Employee Benefit & Retirement Planning

Copyright 2011, The National Underwriter Company 1

In general, employees are not taxed on fringe benefits IF offered on a nondiscriminatory basis

If only highly compensated enjoy the benefit, the value of the benefit is considered taxable income




Definition of Highly Compensated

Any employee who, during the current or preceding year:

- Was at any time an owner of more than 5% of the business; or

- Received compensation from the employer in excess of $110,000 (in 2009, as indexed).




Fringe benefits are non-cash compensation benefits

• Employee discounts• No-additional cash services• Company cafeterias and meal plans• Qualified transportation• Qualified retirement planning services• Gyms and athletic facilities• “Working condition fringes”• “De minimis fringes”




Employee Discounts

Employee receives discount on retail merchandise sold

Advantages for employer:– Employees value discount– Low cost to employer– Promotes products




Employee Discounts

Tax implications

Employee discounts are excluded from taxable income IF discount:

– Is offered to employees in nondiscriminatory manner– Does not exceed employer’s gross profit percentage– Items are available to customers in ordinary line of business

(real estate and investment products excepted)




No-Additional-Cost Services

Discounted services provided to employees at low or no cost

Advantages– Services valued by employee

– Low or no extra cost to employer

– Utilizes excess capacity that generates no revenue




No-Additional-Cost Services

Tax implications

No-additional-cost services are excluded from taxable income IF discount:

– Offered to employees in nondiscriminatory manner– Does not cost employer OR is < 20% of retail price– Relates to services offered to customers in ordinary line of

business




Company Cafeterias and Meal Plans

Tax rules are complex

Not taxable IF:– Section 119 “on-premises” plan:

• meals furnished• for convenience of employer • on business premises

– Section 132(e)(2) “on or near” plan: • employer operates eating facility• on or near business premises • revenue covers or exceeds cost of operation• access nondiscriminatory




Company Cafeterias and Meal Plans

Generally, other types of meals or meal plans are taxable to employee unless employees are working away from home

Application Exercise

An employee of Comstock Printing invites her husband to join her for lunch in the company cafeteria, located on the business premises. Must this employee consider her lunch or her husband’s lunch taxable income?




Qualified Transportation

Includes:– Transportation in “commuter highway vehicle”– Transit pass for use on public or private transit system– “Qualified parking”




Qualified Transportation

Advantages

– Benefit is tax-free to employees and tax-deductible for employer

– Unlike other fringe benefits, can be offered on cash-option (salary reduction) basis

– No nondiscrimination requirements




Qualified Retirement Planning Services

Excluded from employee taxable income if offered on nondiscriminatory basis:

– retirement planning services– tax preparation– legal services– brokerage services

Note: Services can go beyond those related to participation in employer’s qualified retirement plan




Gyms and Athletic Facilities

Tax Free to employees IF:

– On employer’s premises (can be away from business)– Operated by employer– Substantially all use is by employees, and their spouses and

dependents




Working Condition Fringes

Property or services an employer provides an employee that IF the employee paid for them, the payment would be allowed as an employee business expense deduction

De Minimis Fringe

Goods or services so small that accounting for them is “unreasonable” or “administratively impractical




Application Exercise

Which of the following would be taxable to an employee?

a. Occasional money for meals or local transportation

b. Taxi fare to travel after business hours to or from unsafe area

c. Group-term life insurance on spouse or child

d. Use of company lodge for the weekend

e. Season theatre tickets

f. Flowers or gifts for reward, illness, family crisis

Documents

In general, employees are not taxed on fringe benefits IF offered on a nondiscriminatory basis