Employee benefit staples like health insurance and qualified retirement plan contributions have long been a vital part of attracting and retaining employees. In addition to the valuable coverage they provide, these benefits enjoy a tax-exempt status that allows you and your employees to each save 7.65% in Federal Insurance Contributions Act taxes for qualified amounts.
But the tax savings don’t have to stop there. IRS regulations list a wide array of fringe benefits with the dual value of tax exemptions and tangible financial rewards. Let’s examine four tax-free options that are highly relevant to today’s workforce:
- Student loan repayments
- Employee discounts
- Retirement planning services
- Achievement awards
Student loan repayments
Today’s graduates leave college with an average of $30,000 in student loan debt, according to U.S. News and World Report.
In addition to causing financial stress, this debt may be hindering your employees’ ability to:
- Build emergency savings
- Buy a house
- Pay for child care
- Save for retirement
Recent legislation allows you to use your educational assistance program to provide tax-free dollars to employees to help pay off student loans.
The Coronavirus Aid, Relief and Economic Security Act allowed employers to contribute up to $5,250 toward an employee’s student loan repayments for the year 2020. In December 2020, the Consolidated Appropriations Act extended that ability through 2025.
Student loan repayments are considered educational assistance benefits under Section 127 of the Internal Revenue Code (IRC). Therefore, the annual limit of $5,250 per employee applies to student loan repayments and any other benefits provided in your educational assistance program, including:
- Tuition reimbursement
- Supplies and equipment
You can still provide benefits above the $5,250 limit, but they must be counted as taxable income.
For educational assistance contributions to be considered tax exempt, you must have a written plan document that details:
- Employee eligibility
- Covered expenses
- Plan administration
If you are adding student loan repayment benefits to an existing educational assistance program, you will need to amend plan documents to include this information.
Employee discounts allow you to provide a tangible benefit that can help increase employee loyalty. Offerings like disability, life insurance and even retirement contributions can seem abstract, despite their immense value. On the other hand, discounts on everyday shopping items are an immediate, concrete benefit.
Under Section 132 of the IRC, you can provide tax-free employee discounts for qualified services or property. Discounts can be as high as 20% off the normal price.
Examples of qualified items include:
- Hotel stays
- Sporting and entertainment events
Employee discounts can be provided to:
- Current and retired employees
- Spouses and widows
- Dependent children
- Former employees who no longer work due to disability
It’s important to note that discounts cannot be extended to friends on a tax-free basis. And any savings above 20% must be counted as taxable income.
Employee discounts don’t have to be limited to your own products or services. You can also provide discounts by:
- Working directly with vendors or merchants to secure discounts on their items
- Using an online platform that works with vendors and merchants to create a prepopulated list of items
Retirement planning services
If you maintain a qualified retirement plan, IRC Section 132 permits you to provide tax-advantaged benefits for retirement planning services.
A recent survey by the Alliance for Lifetime Income revealed that 80% of employees are concerned about inadequate retirement savings. Employees who feel prepared for retirement can reduce their stress levels and focus more on their immediate work.
Qualified benefits under retirement planning services include providing information and general advice on:
- Accumulation and decumulation strategies
- Current and potential value of retirement assets
- Plan distributions
- Rollover options
- Tax implications in retirement
- Social Security benefits
Benefits that do not qualify for tax exemption include:
- Tax return and tax management services
- Legal opinions from tax attorneys
- Offerings that discriminate in favor of highly compensated employees
With so much emphasis on the Great Resignation and employees leaving, don’t forget about those who stay. Rewarding employees for their commitment to their job and your organization can increase engagement and morale. IRS regulations allow you to provide tax-exempt awards for:
- Length of service
Under IRC regulations, the earliest you can provide a length-of-service award to an employee is on their five-year anniversary. Thereafter, length-of-service awards must be spaced out at least every five years.
Safety awards can be given annually, but they must be limited. To remain tax-qualified, safety awards cannot be provided to more than 10% of your employees in any given year.
The Tax Cuts and Jobs Act clarified that achievement awards must take the form of tangible personal property. Examples include:
- Plaques or trophies
Awards that are not tangible personal property, such as cash or cash equivalents, must be counted as taxable income. Other examples that would trigger taxes include:
- Gift cards
- Sporting or entertainment tickets
- Hotel stays
- Stocks or bonds
Values can be as high as $1,600 for qualified plan awards and $400 for nonqualified plan awards. A plan award is considered qualified if it:
- Is part of an established, written awards program
- Does not favor highly compensated employees
Assessing your benefit options
Talk with your insurance broker or benefits adviser about tax-advantaged benefits. They can help you assess the market and identify benefits that meet the needs of both your business and your employees.
Timothy G. Russell, CPCU
trussell [at] therussellagency [dot] com
The Russell Agency, LLC
317 Pequot Avenue
PO Box 528
Southport, CT 06890
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This content is for informational purposes only and not for the purpose of providing professional, financial, medical or legal advice. You should contact your licensed professional to obtain advice with respect to any particular issue or problem.
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