400.1 - General
Typically, a fringe benefit is any property or service that an employee receives from the University in lieu of, or in addition to, regular taxable wages. Even though the IRS does not define a "fringe benefit", the regulations do contain several examples which include employer-provided automobiles and complimentary entertainment or sporting tickets.
IRS regulations [1] provide that all fringe benefits provided to an employee are taxable as wages unless they are specifically excluded by provisions in the Internal Revenue Code, or unless they are paid for by the employee. Benefits specifically excluded from income by the Internal Revenue Code include:
- Awards for length of service and safety achievement;
- Group-term life insurance coverage up to $50,000 purchased for employees;
- Contributions by employers to accident and health plans;
- Qualified tuition reduction;
- Meals or lodging furnished for the convenience of the employer; or
- Certain fringe benefits such as de minimis fringe benefits and working condition fringe benefits.
400.2 - De Minimis Fringe Benefits
A de minimis fringe benefit is one whose value is so small that accounting for it would be unreasonable or impractical. [2] Note that while a one-time fringe benefit may be considered de minimis, multiple receipts of that fringe benefit may aggregate to an amount that fails the de minimis test. Examples of de minimis fringe benefits include soft drinks and snacks furnished to employees; occasional sports or theater tickets (not season tickets); flowers provided to employees under special circumstances; and occasional parties or picnics.
If the University provides a benefit that exceeds either the value or the frequency limitations for de minimis fringes, the entire benefit is included in the employee's income, not just the portion that exceeds the de minimis limits. [3] Fringe benefits that do NOT qualify as de minimis fringes include cash payments (or the equivalent of cash payments), season tickets to events and the commuting use of an employer-provided automobile.
400.3 - Working Condition Fringe Benefits
A working condition fringe benefit is any fringe furnished to an employee that would be deductible on the employee's personal income tax return as a trade or business expense, if the employee paid for the property or services received. The value of a working condition fringe benefit is not included on an employee's W-2 as wage income. However, the benefit must be related to the employee's duties at the University.
To be treated as a non-taxable fringe benefit, the expenses must be (1) bona fide business expenses which are (2) sufficiently documented. There are basically four questions to be answered when establishing that expenses are bona fide:
- How much was the expense?
- Where and when was the expense incurred?
- What was the business purpose of the expense?
- Who was involved and what was the business relationship of those individuals to the employee?
Sufficient documentation comes from two types of records, both of which must be maintained by the employee. The first of these is an expense summary of some nature, which answers the questions above. The second type of records are documentary evidence, such as receipts, which corroborate the information maintained in the expense summary. If these records are not maintained, the entire amount paid to the employee is treated as taxable income and reported on the employee's W-2.
400.4 - Fringe Benefits Received from Others
Generally, if a third party other than the University pays a fringe benefit to an employee in connection with the employee's performance of services for the University, the payment is considered taxable income to the employee, and is subject to applicable withholdings. This is the case when the benefit is part of the employee's employment contract, is contemplated during the employment process, or is provided by the third party via an agreement or arrangement with the University. For example, WEA or a local auto dealer may provide a vehicle to a University employee as part of the employee's employment contract. In this situation, the value of the fringe benefit is taxable, subject to withholdings, and reported on the employee's W-2.
On the other hand, if, for example, a local auto dealer provided a vehicle to a University employee on its own, without going through the University, the value of the fringe benefit is not considered taxable wages reportable on the employee's W-2. Note, however, that the employee may still have some income tax consequences resulting from the use of the vehicle. The University has no withholding or reporting obligations with regard to the vehicle.
400.5 - Gifts and Awards to Employees
Cash awards, including gift certificates and use of a credit card, are considered taxable income to the employee. Cash gifts from third parties are also considered taxable income if the gift is provided in connection with the employee's service to the University. (See Section 400.4 above). Non-cash gifts are generally considered to be taxable income unless they are considered to be de minimis or are given as an employee achievement award.
400.5(a) - De Minimis Guidelines
See Section 400.2 for general information on de minimis fringe benefits. In practice, any gift or award with a value of $100 or less usually will be considered de minimis. However, the frequency of such gifts must also be taken into account. Employees should receive such a gift or award no more than twice each calendar year; if more than two gifts or awards are given to an employee, the value of all gifts given to that employee will be included in the employee's income.
Non-cash items given to an employee for special situations such as family death or illness, recognition of special effort, etc., may be excepted from the $100 limitation. In order to receive such an exception, a memorandum describing the situation, documenting the total cost of the gift or award, and requesting an exception must be submitted to the Director of Finance for review and approval.
400.5(b) - Employee Achievement Awards
If employee achievement awards are given pursuant to a qualified plan [4], each employee may receive up to $1,600 in non-taxable awards each calendar year (including awards not made under a qualified plan). If the awards are not made under a qualified plan, each employee may receive up to $400 in non-taxable awards each calendar year.
There are two categories of employee achievement awards specified by the IRS: length of service awards and safety achievement awards. [5] Each of these categories has specific restrictions as to frequency of the awards or number of awards presented. To be considered non-taxable, a length of service award cannot be presented to an employee until s/he has been employed by the University for at least five years. In addition, length of service awards must be presented at least five years apart.
To be non-taxable, safety achievement awards can be presented to 10% or less of the eligible employees in a calendar year. Any award to a manager, administrator, clerical employee, or other professional employee is taxable. If more than 10% of eligible employees receive safety awards, the awards are taxable to those employees who receive their awards after the 10% limitation is reached.
400.5(c) - Retirement Gifts
Retirement gifts are not specifically addressed by the IRS. However, they can be treated as length of service awards (as long as the employee has not received a length of service award in the preceding five years) or as de minimis awards. Awards in excess of the de minimis amount may be considered non-taxable if the amount of the award is proportionate to the retiring employee's length of service at the University. It is critical to document the relationship between the value of the gift and the length of service.
400.6 - Housing Provided by the University
Housing provided to an employee by the University is not included in the employee's income if three conditions are met: [6]
- The employee is required to accept the housing as a condition of employment;
- The housing is located on the University's business premises; and
- The housing is furnished for the convenience of the University.
If any of these conditions are not met, the value of the housing is considered taxable income, subject to withholdings and reportable on the employee's W-2.
400.6(a) - Condition of Employment
The "condition of employment" test requires the employee to accept the housing in order to enable him/her to properly perform the duties of her/his employment. The University must be able to show either (1) the residence is necessary to the performance of the employee's duties, or (2) the residence is necessary to allow the employee to be available for University business at all times. The test is generally met if, based on the manner in which the institution conducts its educational activities, the housing is necessary for the employee to be available extended work hours. The employee's acceptance of housing does not need to be included in an employment contract, as long as the proper performance of the employee's duties essentially requires that s/he live in the University-provided residence.
400.6(b) - University's Business Premises
This requirement is obviously met when the housing is physically located on campus. An issue sometimes arises as to whether off-campus housing meets this test. If the off-campus housing either (1) constitutes an integral part of the University's operations or (2) is a place where the employee performs a meaningful portion of his/her duties, it may qualify as "on the business premises". The duties performed by an employee at off-campus housing must be significant and not merely incidental in order for the housing to be treated as "on" campus.
400.6(c) - Convenience of the University
This condition requires a direct relation between the housing that is furnished to the employee and the business interest of the University. This test has received relatively little emphasis in court cases because the "condition of employment" and the "business premises" tests are the key factors of most of the analyses. If these two conditions are satisfied, the courts have always concluded that the housing was also furnished for the convenience of the employer. Note that there is no requirement that housing be furnished primarily for the employer's convenience - the requirement is only that convenience to the employer exists.
400.6(d) - Resident Assistants
Resident assistants (RAs) are usually required to live in the residence hall in which they are employed as an RA. As noted above, the value of housing furnished to an employee is excluded from wages if the three requirements are met. Thus, if an RA is required to live in the residence hall, the value of the housing is not reported on the RA's W-2. If the RA has an option to receive either additional compensation for the lodging or the lodging itself, then the amount of the optional additional compensation is includable in taxable income.
400.6(e) - Residence Hall Directors and Faculty in Residence
The discussion in Section 400.6(d) also applies to residence hall directors and faculty in residence.
400.7 - Educational Assistance Program
The University currently offers an educational assistance program which provides one class per semester to an employee free of charge. Under IRS guidelines, this is referred to as a tuition reduction program. Such tuition reductions generally qualify as tax-free scholarships because only tuition and fees are reduced. [7]
A qualified tuition reduction plan will only be nontaxable to the employee if the plan does not discriminate in favor of highly compensated employees. In addition, the exclusion only applies to undergraduate education. A tuition reduction for graduate-level work does not qualify for the exclusion. However, under the University's Section 127 plan, assistance for graduate-level courses is tax-free to the employee up to the IRS-mandated annual limit.
Notes:
[1] Treasury Regulation Sec. 1.61-21
[2] Treasury Regulation Sec. 1.132-6
[3] Treasury Regulation Sec. 1.132-6(d)(4)
[4] Internal Revenue Code Sec. 274(j)(3)(B)
[5] Internal Revenue Code Sec. 274(j)(3)(A)(i)
[6] Internal Revenue Code Sec. 119(a)
[7] Internal Revenue Code Sec. 117(d)
The WUTH is presented here in HTML format. Click on the links in the link box on the right to go to a specific section of the handbook. A printable version of the handbook in PDF format will be forthcoming in the future. Significant portions of the WUTH are adapted from The Texas A&M University System Tax Manual, the nonresident alien tax websites of Towson University, Cornell University, and The University of Missouri, and information provided by Arctic International LLC.