Q: Tax Playa, what kind of fringe benefits can I get from work?
Seth, Bethesda MD
A: There are 18 tax-free fringe benefits allowed under the Internal Revenue Code. A fringe benefit is a form of compensation that is deductible to your employer, but not taxable to you.
For more on fringe benefits, please consult IRS Publication 15B: Employer's Tax Guide to Fringe Benefits.
Fringe benefits are a form of compensation to employees that is in a form other than cash. In general, fringe benefits are just as taxable as salary.
However, Congress has carved out 18 preferred fringe benefits that enjoy tax-free status. Pensions are not technically considered a fringe benefit, since they are like a deferred salary.
Fringe benefits are extremely limited for more than 2% owner shareholder-employees of S-corporations, highly compensated employees, and key employees. The exact limitations vary from benefit to benefit.
These qualified fringe benefits are always pre-income tax. Only some are pre-FICA (Social Security and Medicare) or pre-FUTA (unemployment insurance).
Without further ado, here is the list of tax-free fringe benefits employers can offer:
1. Accident and health benefits. By far the most common and expensive fringe benefit. This can take the form of direct payments for health services, a health reimbursement arrangement (HRA), a health savings account (HSA), or payments for health insurance premiums.
2. Achievement awards. These cannot take the form of cash, and are limited to $1600 ($400 if certain qualifications are not met).
3. Adoption assistance. Employees who adopt get costs reimbursed by their employer.
4. Athletic facilities. On-site gym can be provided.
5. De Minimis benefits. Benefits that have so little value (like personal use of a copy machine) that keeping track of it would be foolish.
6. Dependent care assistance. Day care allowed to be provided to employees. Limited to $5000 per year per employee ($2500 if married filing separately).
7. Educational assistance. Your employer can pay for up to $5250 in tuition and fees for higher education. The classes either have to be part of a degree program or reasonably related to the business.
8. Employee discounts. Generally capped at 20% off.
9. Employee stock options. No taxes are due until the options are exercised and sold. The gain from receiving the option until its exercise date is the fringe benefit.
10. Group term life insurance coverage. For employers of 10 or more, and generally limited to $50,000 worth of coverage per employee.
11. Lodging on business premises. This is allowed if the lodging is on the business premises, is a condition of employment, and is for the convenience of the employer.
12. Meals on business premises. These are allowed if they are de minimis meals, an employer-operated eating facility that does not make a profit, or if the meal is on-premises and for the convenience of the employer.
13. Moving expense reimbursement. Tax-free under the same rules as the individual tax adjustment for moving expenses.
14. No-additional cost services. Similar to employee discounts.
15. Retirement planning services. Specifically excludes tax preparation.
16. Transportation (commuting) benefits. Limited to $115 per month for a public transit pass, and/or $220 per month for a parking pass.
17. Tuition reduction. For employees and family members of colleges.
18. Working condition benefits. Similar to de minimis benefits.
Tax-free fringe benefits normally are simply paid by the employer and received by the employee. However, some fringe benefits can be provided as a menu of options (including cash) known appropriately as a "cafeteria arrangement." These fringe benefits are chosen on need by the employee and are generally handled as paycheck deductions. Health insurance, HSA contributions, adoption assistance, child care assistance, and group term life insurance are eligible for cafeteria plan treatment. Additionally, the commuter benefit can be done on a payroll-deduction basis.