IRS Eyes Tightening Rules on Taxing Employee Perks

Wednesday, 30 Apr 2014 05:19 PM

By Jennifer G. Hickey

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With a growing percentage of employee compensation being offered as perks, the IRS is said to be contemplating tougher enforcement of tax rules regarding the lavish benefits given to many workers.

While the IRS is not proposing new rules, The Wall Street Journal recently reported that the agency is considering tightening rules on taxing employee perks such as free lunches and gym memberships.

"There is a very specific set of rules that deals with lunches and gym memberships, and the IRS is very clear about that. The IRS has long focused its attention on fringe benefits, so this would not necessarily be something new," Michael Lloyd, a member of the tax and employee benefits department at the Miller & Chevalier law firm, told Newsmax.

The IRS declined to comment for this story when contacted.

According to a 2012 USA Today survey, employee-paid benefits have risen from 16.6 percent of total compensation in 2000 to 19.7 percent in 2011. In the 1960s, it was less than 10 percent.

Many companies that offer these benefits make the argument that free lunches and gym memberships are incentives and not perks.

Well-known tech companies have some of the most extensive employee freebies. For example, Google reportedly serves 50,000 meals per day in its 120 cafes worldwide.

According to The New York Times, under the guise of increasing employee contentment, Facebook provides new parents $4,000 in spending money, while another biotech company, Genentech, offers take-home dinners, as well as assistance finding baby-sitters if a child falls ill.

In the eye of the IRS, free meals are only permissible if they are noncompensatory or are offered as a "convenience to the employer." In 2014, the IRS published a 25-page pamphlet outlining which fringe benefits can or cannot be excluded.

"Meals have always been a tough issue because there is a natural tension between the IRS and employers who provide certain concessions. The IRS has long focused on fringe benefits and the definitions are actually quite narrow, but when you look at the statutory landscape, the number of exclusions are various," Lloyd said.

Lloyd noted that the IRS provides exclusions for meals if they are for the convenience of an employer, but those primarily relate to industries in which leaving the workplace for a meal is difficult. For instance, workers on an oil rig cannot realistically go off-site to eat and a worker on an assembly line cannot easily change clothing to go off-campus for lunch.

According to Lloyd, there are various rules that may apply to exclude employer-provided meals from an employee's income, including meals provided for the convenience of the employer, group meals, and meals for employees traveling away from home on business.

Group meals would be those provided on an infrequent basis, such as annual holiday meals or those offered at a conference or other work-related event, but not daily sustenance.

Employee benefits "is a pretty complicated area of the law and there are any number of sections of the code which cover various aspects, from fringe benefits to lunches to gym memberships," Annette Nellen, a professor of accounting and finance at San Jose State University, told Newsmax.

The rules covering gym memberships also are quite specific, and no less complicated. Currently, the IRS allows businesses to deduct only the costs of providing on-site gym facilities. Employers are not required to report the fair market value of the use of those facilities as income, and employees do not pay taxes on those benefits.

Employers contend that what the IRS considers to be perks are essential to maintaining an engaged, innovative workforce.

"The Silicon Valley-type of employers has tried to be sensitive to employee happiness and contentment, which is why they clearly are great places to work," Lloyd said.

Many employers also believe the perks reap rewards in terms of employee loyalty and retention.

"Competition for talent is probably about as intense as it has ever been, including during the bubble. It's a really hot hiring climate. People are in high demand. You have to have something superior in order to recruit people," Greg Schott, CEO of MuleSoft, a software and consulting company, told CNBC.

The issue of what constitutes a "perk" may have resurfaced, but it is not new.

As a consequence of the Deficit Reduction Act of 1984, the IRS began cracking down on the use of company cars. In 1985, the Reagan administration proposed limiting the deduction for business lunches to $25 plus half the cost of anything that exceeds that level. Also targeted were country club memberships offered by companies.

The issue arose again in 2013, but it was gyms, not country club memberships, that came under greater scrutiny.

IRS spokesman Bruce Friedland told the Chicago Tribune last year that taxpayers are permitted to expense a gym membership if it is "the cure, mitigation, treatment, or prevention of a specified disease or for the sole purpose of affecting the structure or function of the body."

As a consequence of Obamacare, more companies are offering so-called wellness plans as a means to lower their tax burdens.

"Wellness programs, which have grown more popular and widespread, are a tough area because there is not a whole lot out there in terms of how to deal with them. If it is offered as a cash benefit [to lose weight or improve health] or a cash equivalent, it is generally seen as income," Lloyd said.

IRS rules actually are quite specific in terms of the transportation benefits offered by employers which may be excluded from income. They include commuter vans, mass transit passes, and qualified parking. Biking reimbursements are offered if the employee owns and maintains upkeep for a bicycle.

The myriad of rules and exceptions regarding fringe benefits are likely to continue to grow.

Last year, the Senate Finance Committee outlined potential areas of tax reform, which included the area of fringe-benefit exclusions.

For example, the draft outline proposed a 50 percent tax on employers for the net cost of meals, entertainment, gyms, and dining facilities provided to employees, unless the cost is included in the employee's income and reflected on the employee's Form W-2.

The Senate committee also proposed expanding exclusions for some employee fringe benefits, such as allowing employees to exclude up to $5,000 in payments by an employer under a student loan repayment assistance program and allowing employees to exclude up to $600 in employer contributions to a qualified tuition program.

Nellen argues that the issue is further evidence there is a real need for tax reform.

"There are a whole host of rules that should be examined, but Congress really needs to look at tax reform in terms of lowering the corporate and individual tax rates, rather than when an employee gets a free meal," Nellen said.

All of the perks and fringe benefits, Nellen added, "should be viewed in the context of how we make the tax code simpler, more equitable and fairer to all taxpayers."

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