Column: New IRS guide to fringe benefits

BY NORMAN G. GRILL

In January, the IRS released its newly updated Fringe Benefits Guide, publication 5137. Although the guide is directed at federal, state and local government employers, it provides a helpful overview of how the agency defines fringe benefits as well as its tax treatment and reporting rules. Now may be a good time to review your company”™s offerings.

A business can offer many things as fringe benefits. Publication 5137”™s table of contents alone provides an interesting list of what the IRS generally regards as “a form of pay (including property, services, cash or cash equivalent), in addition to stated pay, for the performance of services.”

For instance, two broad categories that every company should re-evaluate from time to time are working-condition fringe benefits and de minimis benefits. The former are expenses that, if employees had paid for the item themselves, could have been deducted on personal tax returns. Examples include employer-paid subscriptions to business periodicals or websites and employer expenditures for some types of on-the-job training.

De minimis fringe benefits include any employer-provided property or service that has a value so small in relation to the frequency with which it is provided that accounting for it is, according to the IRS, “unreasonable or administratively impracticable.” Some examples of these items are group meals; occasional coffee, doughnuts or soft drinks; and permission to make occasional local telephone calls.

Another broad category of fringe benefits is transportation. Employers may provide:

Ӣ General transportation for local business travel that doesnӪt involve an overnight stay.

Ӣ Qualified transportation fringe benefits (such as expenditures related to commuter transportation, transit passes, and some parking and bicycling costs.

Ӣ Vehicles for employee use or reimbursements for the use of employee-owned vehicles.

In a similar vein, your company can cover an employee”™s moving expenses as a fringe benefit ”” as long as the move is for business purposes.

The Fringe Benefits Guide makes clear that potential offerings range from relatively smaller-scale items to truly big-picture benefits.

On the diminutive side, employer-funded awards and prizes can be a fringe benefit. You may also reimburse employees for the cost of their professional licenses and professional organization memberships. Job-related educational reimbursements and allowances are an increasingly popular offering to help employees keep up with technology.

On the larger side, companies may provide dependent care assistance (such as day care facilities) or group-term life insurance coverage.

Generally, the IRS takes one of four tax approaches to fringe benefits:

1. Taxable/includable. The value of benefits in this category are taxable because they must be included in employees”™ gross income as wages and reported on Form W-2. They”™re usually also subject to federal income tax withholding, Social Security tax (unless the employee has already reached the current year Social Security wage base limit) and Medicare tax. Typical examples include cash bonuses and the personal use of a company vehicle.

2. Nontaxable/excludable. Benefits in this category are considered nontaxable because you may exclude them from employees”™ wages under a specific section of the Internal Revenue Code. Many of the examples of fringe benefits mentioned above fall here, including:

Ӣ A wide variety of working-condition and de minimis fringe benefits.

Ӣ Properly documented work-related travel expenses (such as meals and lodging).

Ӣ Up to $50,000 in group-term life insurance, as long as the policy meets certain IRS requirements.

Ӣ Employer-paid health care premiums under a qualifying plan.

3. Partially taxable. In some cases, the value of a fringe benefit will be excluded under an IRC section up to a certain dollar limit with the remainder taxable. A public transportation subsidy under Section 132 is one example.

4. Tax-deferred. This designation applies to fringe benefits that aren”™t taxable when received but that will be subject to tax later. A common example is employer contributions to a defined contribution plan, such as a 401(k).

To be clear, the Fringe Benefit Guide is an overview of the IRS approach to this area. The agency offers other publications covering specific fringe benefits in greater detail.

More importantly, your tax and benefits advisers can examine your company”™s size and workforce to help you tailor the right menu of fringe benefit offerings. Generally, such a menu should allow you to minimize the number of taxable/includable fringe benefits while maximizing the tax benefits, for both your company and employees, of nontaxable/excludable offerings.

Norm Grill is managing partner of Grill & Partners L.L.C., certified public accountants and advisers to closely held companies and high-net-worth individuals, with offices in Fairfield and Darien. Contact him at 203-254-3880 or N.Grill@GRILL1.com, or visit GRILL1.com.