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Am I Offering a Taxable Fringe Benefit? Check the Code

Posted in Plan Administration, Welfare Plans

In the fiscal cliff debates last quarter, there was some discussion about limiting deductions or changing the tax code to eliminate certain exclusions from compensation.  It is not uncommon for employers to offer fringe benefits to employees as an alternative to direct compensation because fringes are not always taxable.  But it is important to know whether what you are offering is treated as taxable income and what the limitations are on that "fringe."  Fortunately, the IRS Code contains specific provisions related to the taxation or exemption of fringe benefits.

The big ones are under Sections 104, 105 and 106 that exclude from compensation (and thus taxation) injury or sickness benefits, benefits received from employer health insurance and health insurance premiums paid by employers.  Section 119 excludes certain meals and lodging.  Section 125 establishes cafeteria plans and allows for flexible spending accounts.  Section 127 allows for educational assistance programs, while Section 129 provides for dependent care assistance programs.  Section 132 allows for employee discounts, de minimus fringes, transportation expenses, moving expenses and other similar working condition fringe benefits.  Section 137 provides for adoption assistance.  These name but a few of the Code sections related to fringe benefits.

The point to this is that there are actually specific guidelines provided in each of these sections that can help employers administer employee fringe benefit programs to make sure they remain non-taxable.  Employers who assume that they are giving a qualified non-taxable fringe benefit because it just seems like it should be frequently find themselves knee-deep in an audit, trying to explain why they did not follow the rules.  So before providing a "fringe" because it makes employees happy or because it sounds like a good idea, check the Code and see if what you are doing is permissible.  Check with your legal counsel and get an opinion as to the limitations.  And then follow the rules.  After all, you don’t want to end up having to pay taxes on a "fringe" just because you did not understand it.