Chapter 3

Fringe Benefits

Employer-furnished fringe benefits are exempt from tax if the tests discussed in this chapter are met.

The most common tax-free benefits are accident and health plan coverage, including employer contributions to health savings accounts (HSAs), group-term life insurance plans, dependent care plans, education assistance plans, tuition reduction plans, adoption benefit plans, cafeteria plans, and plans providing employees with discounts, no-additional-cost services, or employer-subsidized meal facilities.

Highly compensated individuals may be taxed on certain benefits from such plans if nondiscrimination rules are not met.

3.1 Tax-Free Health and Accident Coverage Under Employer Plans

3.2 Health Savings Accounts (HSAs) and Archer MSAs

3.3 Reimbursements and Other Tax-Free Payments From Employer Health and Accident Plans

3.4 Group-Term Life Insurance Premiums

3.5 Dependent Care Assistance

3.6 Adoption Benefits

3.7 Education Assistance Plans

3.8 Company Cars, Parking, and Transit Passes

3.9 Working Condition Fringe Benefits

3.10 De Minimis Fringe Benefits

3.11 Employer-Provided Retirement Advice

3.12 Employee Achievement Awards

3.13 Employer-Furnished Meals or Lodging

3.14 Minister’s Rental or Housing Allowance

3.15 Cafeteria Plans Provide Choice of Benefits

3.16 Flexible Spending Arrangements

3.17 Company Services Provided at No Additional Cost

3.18 Discounts on Company Products or Services

Table 3-1 Are Your Fringe Benefits Tax Free?

Fringe benefit— Tax Pointer—
Adoption benefits Employer payments to a third party or reimbursements to you in 2012 for qualified adoption expenses are generally tax free up to a limit of $12,650. The exclusion is phased out if modified adjusted gross income is between $189,710 and $229,710 (3.6).
Athletic facilities The fair market value of athletic facilities, such as gyms, swimming pools, golf courses, and tennis courts, is tax free if the facilities are on property owned or leased by the employer (not necessarily the main business premises) and substantially all of the use of the facilities is by employees, their spouses, and dependent children. Such facilities must be open to all employees on a nondiscriminatory basis in order for the company to deduct related expenses.
Child or dependent care plans The value of day-care services provided or reimbursed by an employer under a written, nondiscriminatory plan is tax free up to a limit of $5,000, or $2,500 for married persons filing separately. Expenses are excludable if they would qualify for the dependent care credit; see Chapter 25. On your tax return, you must report employer-provided benefits to figure the tax-free exclusion. Tax-free employer benefits reduce eligibility for the dependent care tax credit (3.5).
De minimis (minor) fringe benefits These are small benefits that are administratively impractical to tax, such as occasional supper money and taxi fares for overtime work, company parties or picnics, and occasional theater or sporting event tickets (3.10).
Discounts on company products and services Services from your employer that are usually sold to customers are tax free if your employer does not incur additional costs in providing them to you (3.16). Merchandise discounts and other discounted services are also eligible for a tax-free exclusion (3.17).
Education plans An up-to-$5,250 exclusion applies to employer-financed undergraduate and graduate courses (3.7).
Employee achievement awards Achievement awards are taxable unless they qualify under special rules for length of service or safety achievement (3.12).
Group-term life insurance Premiums paid by employers are not taxed if policy coverage is $50,000 or less (3.4).
Health and accident plans including HSAs Premiums paid by an employer are tax free. For 2012, employer contributions to a health savings account, or HSA, on behalf of an eligible employee are generally not taxed up to $3,100 for self-only coverage or $6,250 for family coverage (3.2). Health benefits paid from an employer plan are also generally tax free (3.1–3.4).
Interest-free or low-interest loans Interest-free loans received from your employer may be taxed (4.31).
Retirement planning advice Employer-provided retirement income planning advice and information are tax free to employees (and their spouses) so long as the employer maintains a qualified retirement plan. The exclusion does not apply to tax preparation, accounting, legal, or brokerage services.
Transportation benefits Within limits, employer-provided parking benefits, transit passes, and bicycle commuting reimbursements are tax free; see 3.8.
Tuition reductions Tuition reductions for courses below the graduate level are generally tax free. Graduate students who are teaching or research assistants are not taxed on tuition reduction unless the reduction is compensation for teaching services (3.7).
Working condition benefits Benefits provided by your employer that would be deductible if you paid the expenses yourself are a tax-free working condition fringe benefit. These include business use of a company car or employer-provided cell phone (3.9).
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