Nontaxable fringe benefits: made more valuable by the Revenue Reconciliation Act of 1993.

The 36% and 39.6% tax brackets added by the Revenue Reconciliation Act of 1993 can make a nontaxable fringe benefit worth considerably more to both the employee and the employer than cash wages. For example, assuming a $1,000 wage and 36% Federal, 5% state and 7.65% FICA tax rates, an employee will take home only $513.50 (51.35% X $1,000). Even if the employee's wages are in excess of the Social Security wage base ($61,200 in 1995), all wages are now subject to the Medicare portion of FICA (1.45%).

Nontaxable fringe benefits can provide an advantage over cash wages for the employer, too. The employer is allowed a deduction for the payment of wages and for most fringe benefits furnished to the employee. The advantage for the employer is that by providing fringe benefits that are not included in an employee's gross income, the employer is relieved of paying the matching FICA contribution. For a large employer, the savings accumulate quickly. If, for example, a $1,000 nontaxable fringe benefit is provided to 200 employees, the total FICA matching may be as much as $15,300 ($1,000 X 200 X 7.65%). In addition, some fringe benefits cost the employer less than their value to the employee (e.g., parking on the employer's premises, meals and lodging).

This article examines several popular noncash fringe benefits--employee achievement awards, group-term life insurance, employee meals, transportation, moving expenses and education--and provides guidance on how to ensure that the value of the benefit is excluded from the employee's income.(1) The table on page 501 provides a summary of the important points for each of the benefits discussed.

Gross Income

Under Sec. 61, gross income includes all income from whatever source derived. Unless the taxpayer can specifically identify a Code section that allows an exclusion, all value received is included in income. Sec. 102(a) excludes gifts, bequests and inheritances from gross income, but amounts transferred from an employer to an employee are not excluded, under Sec. 102(c).(2) Therefore, employers wishing to provide a tax-free benefit to employees must do so outside of the format of a gift.

Most tax-free noncash benefits have discrimination provisions associated with them. If the provision of the benefit by the employer discriminates in favor of a prohibited class of employees (e.g., highly compensated employees (HCEs), as defined in Sec. 414(q)), the value of the benefit is taxable to the favored employees. The Code identifies who is an employee for purposes of each benefit. The glossary on page 495 provides some key definitions in determining who is an employee and who is a member of a discriminatory group.

Noncash Fringe Benefits

* Employee achievement awards

Sec. 74(c) provides an exclusion from income for employee achievement awards. The value of a qualifying award is excluded from income by the employee as long as the cost of the award does not exceed the employer's deduction under Sec. 274(j). Under Sec. 274(j)(2), the maximum annual deduction is $400 per employee if the award is made under a nonqualified award plan and $1,600 if made under a qualified plan. Sec. 274(j)(2)(B) bars aggregating the amounts to deduct $2,000 in awards to a single employee.

For this purpose, a qualified plan is a written plan or program that does not (1) discriminate in favor of HCEs as to eligibility or benefits or (2) provide awards with an average cost in excess of $400 (without taking into account awards of only nominal value). Prop. Regs. Sec. 1.274-8(c)(5)(ii) states that an award costing $50 or less is nominal.

To ensure that bonuses are not disguised as employee achievement awards, Sec. 274(j)(3) defines a qualifying award as meeting all of the following:

1. An item of tangible personal property transferred to an employee for a length-of-service or safety achievement.

2. Awarded as part of a meaningful presentation.

3. Awarded under conditions and circumstances that do not create a significant likelihood of the payment of disguised compensation. Under Prop. Regs. Sec. 1.274-8(c)(2), "tangible personal property" does not include cash, negotiable gift certificates, vacations, meals, lodging, tickets to theater and sporting events, stocks, bonds and other securities.

If the cost or fair market value (FMV) of the award exceeds the $400 (or $1,600) allowed, the excess is included in the employee's income under Sec. 74(c).

Example 1: Under a qualifying plan, an employer makes a length-of-service award in the form of a large-screen television set to an employee. The cost of the television set to the employer is $1,450 and its FMV is $1,775. The amount excluded by the employee is $1,775. Because the cost to the employer ($1,450) is less than the allowable deduction amount ($1,600) and is fully deductible, the FMV of the award is excluded from the employee's income.

Example 2: Under a qualifying plan, an employer makes a safety achievement award in the form of a pearl necklace to an employee. The cost of the necklace to the employer is $1,635 and its FMV is $1,670. The deduction to the employer is $1,600, the cost of the necklace as limited by Sec. 274(j)(2)(B). Under Sec. 74(c)(2), the amount included by the employee in income is the greater of (1) $35 (the difference between the cost, $1,635, and the allowable deduction, $1,600), or (2) $70 (the difference between the FMV, $1,670, and the deduction, $1,600). Thus, the employee includes $70 in income.

Example 3: The facts are the same as in Example 2, except that the FMV of the necklace is $2,900. Under these circumstances, Regs. Sec. 1.274-8(c)(4) indicates that the FMV is so disproportionate to the employer's cost of the item that it will be considered payment of disguised compensation. As a result, no portion of the award qualifies as an employee achievement award, and the FMV of the award is compensation subject to withholding.

The employer's advantage in establishing a qualified plan is that the deductible amount can exceed $400. Without the qualified plan in Example 1, only $400 of the cost of the television set would be deductible and the IRS could raise the issue of hidden compensation. The qualified plan increases the deductible amount to $1,600 and avoids the compensation issue for awards up to that amount. To retain qualified plan award status, the employer should time the purchase of gifts to ensure that the average cost of all awards provided per tax year does not exceed the $400 limit of Sec. 274(j)(3)(B)(ii).

* De minimis gifts

Sec. 274(b) allows employers to give de minimis business gifts and to deduct the cost up to $25 per employee; the employee need not include such a gift in income. A written achievement award plan is not needed.

* Group-term life insurance

Sec. 79(a) excludes from income the cost of the first $50,000 of group-term life insurance provided by an employer to an employee. The cost of any additional life insurance provided by the employer to the employee is includible in the employee's income; such cost is determined under Regs. Sec. 1.79-3(d)(2), Table I, then reduced by any employee contributions.

To qualify as group-term life insurance under Regs. Sec. 1.79-1(a), the insurance plan must meet all of the following conditions:

* Provide a general death benefit excludible from gross income under Sec. 101(a).

* Be provided to a group of employees (at least 10, according to Regs. Sec. 1.79-1(c)).

* Be provided under a policy carried directly or indirectly by the employer.

* Compute the amount of insurance provided to each employee under a formula that precludes individual selection.

Because insurance coverage must be based on the employment relationship, the exclusion does not apply to insurance provided to a director, stockholder, owner or partner. However, Regs. Sec. 1.79-0 provides that a former employee who performs service for a company as an independent contractor qualifies because of the prior service.

The insurance policy is considered "carried" by the employer under that regulation if (1) the employer pays any part of the cost of the life insurance directly or indirectly or (2) the employer (or two or more employers) arranges for payment of the cost of the insurance and charges at least one employee less than the cost of the insurance and at least one other employee more than the cost of the insurance.

Under Sec. 79(d), if the plan discriminates in favor of key employees (as defined in Sec. 416(i)(1)), there is no income exclusion. In addition, the plan must pass at least one of the four discrimination tests specified in Sec. 79(d)(3):

1. The plan must benefit 70% or more of all employees of the employer.

2. At least 85% of all employees who are participants must not be key employees.

3. The plan must benefit employees who qualify under a classification set up by the employer and found by the Treasury not to discriminate in favor of key employees.

4. In the case of a plan that is part of a cafeteria plan, it must meet the requirements of Sec. 125.

Sec. 79(d)(1) provides that if the plan fails all the discrimination tests, the cost of the first $50,000 of life insurance is taxable to the key employee. The cost included in a key employee's income is the greater of the actual cost of the insurance or the cost calculated using Regs. Sec. 1.79-3(d)(2), Table I.

Example 4: A 48-year-old employee receives group-term life insurance coverage through his employer equal to his $75,000 annual salary. Under Regs. Sec. 1.79-3(d)(2), Table I, he must include in income 29 cents for every $1,000 of insurance provided per month by the employer over $50,000 [$0.29 X ($75,000 - $50,000) X 12], for a total inclusion of $87.

* Meals for employees--regular basis

Regs. Sec. 1.119-1(a)(1) excludes the value of meals(3) provided by the employer from the employee's income if such meals are (1) for the convenience of the employer and (2) provided by the employer on the business premises. In determining whether meals are provided for the convenience of the employer, Sec. 119(b)(1) states that neither employment contracts nor state statutes fixing terms of employment are determinative. In addition, under Sec. 119(b)(2), the fact that a charge is made for these meals, and that the employee may accept or decline them, is not taken into account.

Meals furnished without charge must be for a substantial noncompensatory business reason to be excludible from income. Regs. Sec. 1.119-1(a)(2)(ii) provides that a meal is excludible if furnished during working hours because the employee must be available for emergency calls during the meal period. The employer must show that emergencies have actually occurred, or can reasonably be expected to occur, in the employer's business. A meal is also excludible if furnished because the employee is restricted to a short meal period (e.g., 30 or 45 minutes) because of the employer's line of business. The employer should document any emergencies that actually arise and have a written policy for the length of meal periods.

Example 5: A bank teller who works from 9 a.m. to 5 p.m. is provided with lunch without charge in a cafeteria that the bank maintains on its premises. The bank provides tellers with these meals to limit the lunch period to 30 minutes, because the bank's peak work load occurs during the normal lunch period. If the teller had to obtain lunch elsewhere, it would take considerably longer than 30 minutes, and the bank strictly enforces the 30-minute time limit. The teller may exclude from income the value of the meals obtained in the bank cafeteria.

Regs. Sec. 1.119-1(a)(2)(iii) provides that meals are compensatory if furnished to promote the morale or goodwill of the employee. The value of cash allowances or groceries purchased with an allowance and prepared on the employer's premises are not excludible.(4) Reimbursements for meals consumed on the job are also includible in the employee's income.(5)

The Sec. 132(e)(2) de minimis fringe benefit exclusion applies to meals in an employer-provided eating facility if (1) the facility's annual revenues normally(6) equal or exceed its direct operating costs and (2) the facility is located on or near the employer's business premises.

Under Regs. Sec. 1.132-7(b)(1), direct operating costs of an eating facility include the cost of food and beverages and the cost of labor for personnel who perform services primarily on the premises of the eating facility. If the employer contracts with an outside operator, direct costs include payments to the operator and any additional direct operating costs attributable to the facility. Regs. Sec. 1.132-7(b)(2) provides that if there is more than one facility, the costs may be aggregated or tested separately. The employer may also aggregate costs and revenues of any vending machines provided by the employer on the eating premises. Since vending machines usually have a high profit margin, the inclusion of their costs and revenues can be very beneficial in meeting the revenue test. Under Regs. Sec. 1.132-7(a)(2), opening the eating facility to the public will not help in meeting the revenue test if nonemployees are charged a greater amount than are employees.

Sec. 132(e)(2) states that meals provided at employer-operated eating facilities must be available on substantially the same terms to each employee who is a member of a reasonable nondiscriminatory classification. The determination of whether a classification is discriminatory depends on the facts and circumstances. However, some classifications are discriminatory per se. For example, a classification that is based on either the amount or rate of compensation is discriminatory if it favors HCEs. However, Regs. Sec. 1.132-8(d)(2) indicates that classifications such as full-time versus part-time or those based on seniority are not discriminatory per se.

Regs. Sec. 1.132-8(b)(2) requires aggregation of all employees of related employers who regularly work at or near the premises on which the eating facility is located, but not if they are in different lines of business. Moreover, each dining room or cafeteria is treated as a separate eating facility and is tested separately. This latter test can have the effect of disqualifying a separate executive dining room limited to officers or HCEs, even when operated in conjunction with an unrestricted employee cafeteria.

Regs. Sec. 1.132-8(d)(5) liberalizes the nondiscrimination rules such that an eating facility may discriminate in favor of HCEs as long as the facility is not used more than a de minimis amount by one or more "executive group employees"; thus, the employer should not plan weekly executive lunch meetings. For this purpose, Sec. 414(q) defines an "executive group employee" as an HCE, except that only the top 1% of employees ranked on the basis of compensation paid during the year are included in the top-paid group.

Whether Sec. 401(c) individuals are employees for purposes of Sec. 119 is not clear. The Fifth Circuit has determined that partners can be employees; the Third, Fourth and Eighth Circuits have held that partners cannot be employees.(7)

* Meals for employees--occasional basis

Under Regs. Sec. 1.132-6(d)(2), meals provided by an employer on an occasional basis (e.g., to employees who work late) may be excluded from income as a de minimis fringe benefit. A meal or meal money is excluded from income if three conditions are met:

1. The meal or money is provided on an occasional basis.

2. Overtime work necessitates an extension of the employee's normal work schedule.

3. The meal or meal money is (a) provided to enable the employee to work overtime or (b) consumed while the employee works overtime.

There is no clear guidance for determining how often "occasional" is. Regs. Sec. 1.132-6(d)(2)(A) states that that determination is based on how frequently the benefit is provided to the employee; however, benefits provided on a routine basis will not qualify. Once a week may be more than "occasional." In addition, Regs. Sec. 1.132-6(d)(2)(C) states that meal money cannot be excluded if it is based on the number of hours of overtime worked. Assuming equally qualified employees, employers who provide this benefit should plan to rotate overtime work to avoid providing meals more than occasionally.

* Transportation

Although commuting expenses are not deductible, Sec. 132(f) allows an employer to provide several commuting-type excludible benefits to employees. The employer may provide a transit pass, qualified parking or transportation in a commuter highway vehicle for travel between the employee's residence and place of employment.

Sec. 132(f)(5)(B) defines a commuter highway vehicle as any highway vehicle that seats at least six adults (excluding the driver), at least 80% of the mileage of which is for transporting employees in connection with travel between their residences and their place of employment. At least one-half of the adult seating capacity of the vehicle (excluding the driver) must be occupied by qualifying employees.

Alternatively, the employer may purchase a transit pass for the employee: a pass, token, fare-card, voucher or similar permit for transportation in public or private mass-transit vehicles. If the employer provides a commuter vehicle, qualifying employees should be required to document use to avoid problems in the event of an IRS examination.

The value of commuting trips plus the FMV of any transit pass provided by the employer in excess of $60 per month is included in the employee's income under Sec. 132(f)(2). Presumably, employers will be permitted to calculate the value of commuting in an employer-provided commuter highway vehicle under the Regs. Sec. 1.61-21(f) valuation rules ($1.50 per one-way commute).(8)

Example 6: An employer provides van pooling worth $15 a week (five days at $3 per round trip) to its employees. The employer also provides $25 per week transit passes. If during one month, an employee uses the van pool for two weeks and transit passes for two weeks, he receives $80 ($30 + $50) in employer-provided transportation. However, he can exclude only $60; the remaining $20 is includible in income.

Under Sec. 132(f)(5)(C), qualified parking is parking for an employee's vehicle either (1) on or near the employer's business premises or (2) in a commuter lot for mass transit or carpool vehicles. The exclusion is limited to $160 per month, regardless of any other transportation fringe benefits provided. Whether free employee parking provides economic value is a facts-and-circumstances determination. If the place of business offers unrestricted free parking to the general public, there is no value imputed. Under Sec. 132(f)(6), the limits for both transportation and parking are adjusted for inflation.

Finally, for the purpose of transportation fringe benefits, Sec. 132(f)(5)(E) explicitly excludes from the term "employee" an individual who is an employee within the meaning of Sec. 401(c)(1) (i.e., self-employed individuals and partners).

* Moving expense reimbursements

Amounts paid on behalf of or reimbursements to an employee for qualified moving expenses are excluded under Sec. 132(g), if the amounts (1) were not deducted in a prior year and (2) qualify for deduction under Sec. 217. After 1993, moving expenses are an above-the-line deduction in computing adjusted gross income. Under Sec. 217(a) and (b)(1), deductible moving expenses are the reasonable direct expenses of (1) moving family and household goods and (2) travel (including lodging, but not meals) to the new place of residence. An employer should treat moving expenses as excludible unless there is actual knowledge that the employee deducted the expenses in a prior year. An employer has no obligation to determine whether the employee deducted the expenses.(9)

Example 7: L made a qualifying employment-related move and received no moving allowance or reimbursement from her employer. L made one house-hunting trip to her new job location ($500), rented a truck to move her household goods ($1,000), paid hotel lodging for two nights ($95), paid $60 for meals on the two-day trip, and incurred $400 in temporary living expenses before moving into her new home. L can deduct, above the line, $1,095 of the expenses (i.e., the cost of the truck and the lodging).

Example 8: The facts are the same as in Example 7, except that L is reimbursed by her employer for her moving expenses. None of the reimbursement allowable as a deduction ($1,095) is included in L's income unless she deducted the moving expenses in a prior tax year.

* Employee education

Sec. 127 allows for tax-free educational assistance to employees by the employer.(10) For the value of the education paid for or provided by the employer to be excluded from the employee's income, there must be a separate written plan that meets the five requirements of Sec. 127(b):

1. The plan must be for ethe exclusive benefit of employees (including Sec. 401(c) individuals).

2. The plan may not discriminate in favor of HCEs (within the meaning of Sec. 414(q)) or their dependents.

3. Not more than 5% of the amounts paid or incurred may be provided for individuals who are shareholders or owners of more than 5% of the stock of the employer.(11)

4. The plan cannot allow a choice between educational assistance and other remuneration that is otherwise includible in gross income.

5. Reasonable notification of the availability and terms of the program must be provided to eligible employees.

Sec. 127(c)(5) states that the plan will not fail to qualify simply because of different utilization rates for types of assistance made available or because successful completion or attainment of a particular grade is required for reimbursement.

Example 9: An advertising and marketing consulting firm has an educational assistance program that pays for graduate courses taken by any employee as long as the employee attains at least a "B." The plan is not discriminatory simply because more upper-management employees take advantage of the program or because a minimum grade is required.

Education expenses reimbursed under Sec. 127 do not have to be job related. However, courses involving sports, hobbies or games do not qualify under Sec. 125(c)(1) for tax-free reimbursement, unless directly related to the employer's business. Sec. 125(c)(1) allows tax-free reimbursement for tuition, fees and books, but not for meals, lodging, transportation, or for supplies and tools that may be retained by the employee after completion of the course.

Tax-exempt reimbursement under a qualified plan is limited to $5,250 per calendar year; currently, Sec. 127(d) provides that this exclusion does not apply to tax years after 1994. Historically, however, this section has been repeatedly extended.

Amounts paid or incurred by the employer for employee education and not excluded from the employee's income under Sec. 127 can be excluded under Sec. 132(j)(8), if the education qualifies as a working condition fringe benefit. To qualify, Sec. 132(d) provides that the education must be of a type that, if paid for by the employee, would be allowed as a deduction under Sec. 162. Therefore, amounts in excess of $5,250 can be excluded from income if the education is employment related.

Regs. Sec. 1.162-5 contains rules governing the deduction of educational expenses. The cost of education may be deducted if the education (1) maintains or improves skills required by the individual in his employment or (2) meets the express requirement of the individual's employer or requirements of applicable law or regulations imposed as a condition of retention of employment, status or rate of compensation.

Example 10: J's employer provides a qualifying, nondiscriminatory educational assistance program. J, a sales manager, attends MBA classes directly related to improving his management skills. J's cost for tuition, fees and books in 1994, $6,000, is paid by his employer. The maximum exclusion under Sec. 127 is $5,250. However, since the education improves skills in his current job, the excess $750 can be excluded from J's income under Sec. 132.

Example 11: T, a sales manager, works for the same company and attends law school to improve his understanding of interstate sales law. T's cost for tuition, fees and books in 1994, $6,000, is paid by the employer. However, T's law education is not deductible under Sec. 132 because it will lead to qualifying him in a new trade or business; thus, the excess $750 is included in T's income.

Cafeteria Plans

In general, the constructive receipt doctrine prohibits exclusion of the value of benefits if the employee can receive cash instead. The importance of a cafeteria plan is that the participant is not in constructive receipt of income simply because there is a choice between cash and qualified benefits.(12) Prop. Regs. Sec. 1.125-1, Q&A-4 states that the plan must be maintained for the benefit of employees, although it also may benefit former employees, spouses and beneficiaries; however, self-employed individuals (as defined in Sec. 401(c)) cannot participate. In addition, under Prop. Regs. Sec. 1.125-1, Q&A-16, if a benefit taxable under the Code when offered separately is available under a cafeteria plan, the benefit will continue to be a taxable benefit under the cafeteria plan.

To protect against includibility due to constructive receipt, Prop. Regs. Sec. 1.125-1, Q&A-2 and -3 requires a written plan document that contains all of the following:

* A description of each benefit available and periods of coverage.

* The plan's eligibility rules governing participating.

* Procedures for making elections under the plan.

* The manner of employer and employee contributions.

* The maximum amount of employer contributions available to a participant.

* The plan year on which the plan operates.

According to Prop. Regs. Sec. 1.125-2, Q&A-6, an employee cannot revoke an election during the period of coverage unless one of the following applies:

1. There is a change in family status.

2. There is a separation from service.

3. The employee stops making required contributions.

4. Change is permitted under Sec. 401(k) or (m).

5. There is a significant change in cost.

Sec. 125(b) provides that the value of a benefit is not excluded from the employee's income if the cafeteria plan discriminates in favor of either a highly compensated individual's eligibility, or a participant's contributions or benefits. Prop. Regs. Sec. 1.125-1, Q&A-11, provides that if the plan is discriminatory, highly compensated participants are taxable on the maximum benefits that could have been selected for the plan year, regardless of which benefits were actually selected.

Thus, Sec. 125 does not provide any fringe benefits. Its purpose is to allow an employee to choose among cash or qualified benefits without being subject to constructive receipt.

Conclusion

Many noncash fringe benefits can be provided by the employer at no tax cost to the employee, including employee achievement awards, group-term life insurance, employee meals, transportation, moving expenses and education. Employees, especially those in upper tax brackets, receive more net value than if they had received cash wages. The advantage for the employer is the ability to provide value to the employee, perhaps reducing turnover or increasing employee morale, while enjoying a tax deduction without employment tax consequences. Noncash fringe benefits, if structured properly, can be a win-win situation. However, the existence of a properly structured written plan and attention to antidiscrimination rules is critical.

RELATED ARTICLE: Important Definitions

Employee: The definition of "employee" changes depending on the specific fringe benefit involved. Sec. 401(c)(1)(A) provides that "employee" includes a self-employed individual; Sec. 401(c)(1)(B) and (c)(2)(A) provide that a self-employed individual is one having "earned income" (i.e., net earnings from self-employment, as defined in Sec. 1402(a)). Thus, a partner is also a self-employed individual. Therefore, when a tax-free fringe benefit is defined as being available to "employees, including individuals identified in Sec. 401(c)(1)," both owner-employees and partners are eligible for the income exclusion. For employee fringe benefit purposes, Sec. 1372(a) treats like a partner any 2%-or-more S shareholder who is also an employee of the S corporation.(1)

Key employee: To provide an excludible fringe benefit, the applicable plan usually cannot discriminate in favor of key employees. Sec. 416(i)(1)(A) defines a key employee as an employee who, at any time during the plan year or any of the four preceding plan years, is one of the following:

1. An officer of the employer having annual compensation greater than 50% of the amount in effect under Sec. 415(b)(1)(A) ($120,000 for 1995) for any such plan year.(2)

2. One of the 10 employees having annual compensation from the employer of more than the limitation in effect under Sec. 415(c)(1)(A) and owning (or considered as owning under Sec. 318) the largest interests in the employer.(3)

3. A 5% owner of the employer.

4. A 1% owner of the employer having an annual compensation from the employer of more than $150,000.

Highly compensated employee (HCE): "HCE" is also used in determining whether or not a plan discriminates in favor of one group of employees. Under Sec. 414(q)(1), an HCE is an individual who, during the year or the preceding year, met any of the following:

1. Was a 5% owner.

2. Received compensation from the employer in excess of $100,000 (for 1995).(4)

3. Received compensation from the employer in excess of $66,000 (for 1995) and was in the top-paid group of employees for such year.(5)

4. Was at any time an officer and received compensation greater than 50% of the amount in effect under Sec. 415(b)(1)(A) for such year ($120,000 for 1995).

Highly compensated participant or individual: As defined in Sec. 125(e)(1), this term includes a person who is:

1. An officer.

2. A shareholder owning more than 5% of the voting power or value of all classes of stock of the employer.

3. An HCE.

4. A spouse or dependent of an individual described above.

(1)See Rev. Rul. 91-26, 1991-1 CB 184.

(2)This amount is subject to a cost-of-living adjustment under Sec. 415(d).

(3)Id.

(4)Id.

(5)Id.

RELATED ARTICLE: Table: Summary of Fringe Benefits

Benefit

Achievement awards

Code section

Sec. 274(j)

Employer deduction for cost

Yes

Employee exclusion limits

$400(a) $1,600(b)

Refers to Sec. 401(c)(1) employees?

Yes

Written plan required?

Yes

Benefit

Group-term life insurance

Code section

Sec. 79

Employer deduction for cost

Yes

Employee exclusion limits

Value of first $50,000

Refers to Sec. 401(c)(1) employees?

No

Written plan required?

Yes

Benefit

Meals for employees

Code section

Sec. 119

Employer deduction for cost

Yes (partial)(c)

Employee exclusion limits

N/A

Refers to Sec. 401(c)(1) employees?

No(d)

Written plan required?

Yes

Benefit

Meals for employees

Code section

Sec. 132(e)

Employer deduction for cost

Yes (partial)(c)

Employee exclusion limits

N/A

Refers to Sec. 401(c)(1) employees?

Yes

Written plan required?

Yes

Benefit

Transportation

Code section

Sec. 132(f)

Employer deduction for cost

Yes $60/month(f)

Employee exclusion limits

$160/month(e)

Refers to Sec. 401(c)(1) employees?

No

Written plan required?

Yes

Benefit

Moving expense reimbursement

Code section

Sec. 132(g)

Employer deduction for cost

Yes

Employee exclusion limits

Reasonable direct costs

Refers to Sec. 401(c)(1) employees?

Yes

Written plan required?

Yes

Benefit

Employee education

Code section

Sec. 127

Employer deduction for cost

Yes

Employee exclusion limits

$5,250(g)

Refers to Sec. 401(c)(1) employees?

Yes

Written plan required?

Yes

Benefit

Employee education

Code section

Sec. 132(d)

Employer deduction for cost

Yes

Employee exclusion limits

N/A

Refers to Sec. 401(c)(1) employees?

Yes

Written plan required?

Yes

(a)Nonqualified plan.

(b)Qualified plan.

(c)Under Sec. 274(n), the allowable deduction is 50%.

(d)See note 7, in text. The same reasoning applies to self-employed individuals.

(e)Parking.

(f)Farecard, pass, voucher, etc.

(g)Sec. 127 expired on Dec. 31, 1994, and has not yet been extended.

(1)Health and retirement benefits and Sec. 129 dependent care assistance plans are beyond the scope of this article. Sec. 21(c) indicates that the child care credit is reduced to the extent amounts received for child care are excludible under Sec. 129. See, e.g., Kidder, "Avoiding 401(k) Traps," 176 Journal of Accountancy 42 (Sept. 1993); Tax Clinic, "Partners' and S Shareholders' Fringe Benefits," 23 The Tax Adviser 276 (May 1992); Eggertsen, et al., "Guidance on Partner Health Plans Leaves SelfFunding Questions Unanswered," 76 Journal of Taxation 18 (Jan. 1992); Walker, "Current Developments in Employee Benefits," 22 The Tax Adviser 699 (Nov. 1991).

(2)However, Sec. 274(b)(1) allows an employer to deduct (and an employee to exclude) gifts that do not, in the aggregate, exceed $25 per individual per year.

(3)Sec. 119(a)(2) excludes the value of lodging provided by the employer if the employee is required to accept the lodging on the employer's business premises as a condition of employment.

(4)Regs. Sec. 1.119-1(e); Robert J. Kowalski, 434 US 77 (1977)(40 AFTR2d 77-6128, 77-2 USTC [paragraph]9748); Rev. Rul. 77-80, 1977-1 CB36.

(5)David L. Hammond, TC Memo 1985-252.

(6)Sec. 132(e)(2) uses the word "normally"; Regs. Sec. 1.132-7(a)(1) uses "annually."

(7)Anne L. Armstrong v. Phinney, 394 F2d 661 (5th Cir. 1968)(21 AFTR2d 1260, 68-1 USTC [paragraph]9355), provided that partners can be employees; Everett Doak, 234 F2d 704 (4th Cir. 1956)(49 AFTR 1491, 56-2 USTC [paragraph]9708), Richard E. Moran, 236 F2d 595 (8th Cir. 1956)(50 AFTR 64, 56-2 USTC [paragraph]9879), and Thomas Robinson, 273 F2d 503 (3d Cir. 1959)(5 AFTR2d 315, 60-1 USTC [paragraph]9152), held that partners are not employees. The Tax Court held in George A. Papineau, 16 TC 130 (1951), that a partner could exclude from income his distributive share of the value of meals and lodging provided to him by his partnership.

(8)Thus, a round trip each day for 20 work days in a month would cost $60 ($3 x 20 days).

(9)H. Rep. No. 103-213, 103d Cong., 1st Sess. 103 (1993).

(10)Sec. 125(f) provides that the benefits in Secs. 127, 117 and 132 cannot be included in a cafeteria plan.

(11)For this purpose, Sec. 127(c)(4) specifies use of the ownership attribution rules of Sec. 1563(d) and (e), without regard to Sec. 1563(e)(3)(c).

(12)Sec. 125(d) and (f) exclude from cafeteria plans certain deferred compensation plans, scholarships, educational assistance and Sec. 132 fringe benefits. See Prop. Regs. Sec. 1.125-2, Q&A-4(c),-5.