Fringe Benefits (Taxable vs. Non-Taxable)

Fringe benefits represent non-cash forms of compensation that employers provide to employees beyond regular wages and salaries. Understanding which benefits are taxable and which are excludable is critical for EA exam candidates and tax practitioners preparing accurate returns.

The General Rule

Any fringe benefit you provide is taxable and must be included in the recipient's wages unless the law specifically excludes it. This fundamental principle appears throughout the Internal Revenue Code and IRS Publication 15-B.

When a fringe benefit is taxable, you must include its fair market value (FMV) in the employee's gross income. The FMV is the amount an individual would pay for the benefit in an arm's-length transaction. Taxable fringe benefits are reported on Form W-2 in Box 1 and are subject to:

• Federal income tax withholding
• Social Security tax (FICA)
• Medicare tax
• Federal unemployment tax (FUTA)

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Tax-Free (Excludable) Fringe Benefits

The following benefits may be excluded from an employee's gross income when provided according to IRS rules:

Health Insurance (Employer-Paid Premiums)

Employer-paid health insurance premiums are 100% excludable from the employee's gross income. This includes:

• Medical insurance
• Dental insurance
• Vision insurance
• Long-term care insurance (within limits)
• Health Savings Account (HSA) contributions

The exclusion applies to coverage for the employee, spouse, and dependents. There is no dollar limit on this exclusion.

Group-Term Life Insurance (Up to $50,000)

Employers may provide group-term life insurance tax-free up to $50,000 of coverage. This is one of the most commonly tested fringe benefit rules on the EA exam.

Key requirements:

• Must be term insurance (not permanent/whole life)
• Must be provided under a policy carried by the employer
• Must be provided to a group of employees

Coverage above $50,000 is taxable - the excess amount is calculated using IRS Table I rates (see below).

Dependent Care Assistance (Up to $5,000)

Employer-provided dependent care assistance is excludable up to $5,000 per year ($2,500 if married filing separately).

Qualifying expenses include:

• Daycare for children under age 13
• Care for a spouse or dependent physically or mentally incapable of self-care
• Expenses must enable the employee to work

Educational Assistance (Up to $5,250)

Under Section 127, employer-paid educational assistance is excludable up to $5,250 per year. The education does NOT need to be job-related to qualify.

Includes:

• Tuition
• Fees
• Books and supplies
• Equipment

Excludes:

• Meals, lodging, and transportation
• Education involving sports, games, or hobbies (unless job-related)

Adoption Assistance (Up to $16,810 for 2024)

Employer-paid adoption assistance is excludable up to $16,810 per eligible child for 2024.

The exclusion phases out completely when modified AGI exceeds $292,150.

Qualified Transportation Benefits (2024 Limits)

Important notes:

• Transit and vanpool benefits share a combined $315 limit
• Parking and transit are separate limits (employee can receive both)
• Any amount over the limit is taxable income
• Bicycle commuting benefit is suspended through 2025

De Minimis Benefits

De minimis benefits are property or services whose value is so small that accounting for them would be unreasonable or administratively impracticable.

Examples of qualifying de minimis benefits:

• Occasional coffee, donuts, or snacks
• Holiday gifts (other than cash) with low FMV
• Occasional personal use of company copier
• Occasional meal money for overtime work
• Flowers for illness or family crisis
• Company picnics or holiday parties

NEVER de minimis:

• Cash (any amount)
• Gift cards or gift certificates
• Season tickets to sporting events
• Country club memberships
• Commuting use of company car (except 1 day/month)

No specific dollar threshold exists in the tax code, but IRS guidance suggests benefits exceeding $100 in value likely do not qualify.

Working Condition Fringe Benefits

A working condition fringe is property or service the employer provides that would be deductible as a business expense if the employee paid for it. These are 100% excludable.

Examples:

• Job-related education
• Business use of company car
• Professional subscriptions and dues
• Business travel expenses
• Employer-provided cell phone for business purposes

Employee Discounts

Excludable limits:

• Property/merchandise: Up to the employer's gross profit percentage
• Services: Up to 20% of the price charged to customers

Any discount exceeding these limits is taxable income.

Meals and Lodging

Meals and lodging are excludable when provided:

1. On the employer's business premises, AND
2. For the employer's convenience (not just employee preference)

For lodging, an additional requirement applies: 3. The employee must accept the lodging as a condition of employment

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Taxable Fringe Benefits

The following benefits are generally taxable and must be included in wages:

Personal Use of Company Car

All personal use of a company vehicle is taxable income (except qualified non-personal use vehicles like police cars, ambulances, or clearly marked delivery trucks).

Three valuation methods:

The cents-per-mile method cannot be used if the vehicle's FMV exceeds $62,000 when first made available in 2024.

Group-Term Life Over $50,000 (Table I)

Coverage exceeding $50,000 is taxable. The taxable amount is calculated using IRS Table I rates - NOT the actual premium the employer pays.

IRS Table I - Monthly Cost per $1,000 of Coverage:

Calculation example: An employee age 52 has $150,000 in group-term life coverage.

• Taxable coverage: $150,000 - $50,000 = $100,000
• Coverage units: 100 (per $1,000)
• Monthly cost: 100 x $0.23 = $23.00
• Annual taxable amount: $23.00 x 12 = $276

This amount is reported on Form W-2, Box 12 with code "C."

Other Taxable Benefits

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Highly Compensated Employee (HCE) Rules

2024 HCE Definition

An employee is a highly compensated employee if they meet EITHER test:

For 2024 testing (using 2023 compensation), the threshold is $155,000.

Nondiscrimination Requirements

Many fringe benefit exclusions require that benefits be offered on a nondiscriminatory basis. If a plan discriminates in favor of highly compensated employees, the HCEs may lose the tax exclusion.

Benefits subject to nondiscrimination rules:

• Self-insured medical plans
• Cafeteria plans (Section 125)
• Dependent care assistance (Section 129)
• Group-term life insurance (Section 79)
• Educational assistance (Section 127)
• Employee discounts

Consequences of discrimination: If a plan is discriminatory, the value of the benefit becomes taxable income for the highly compensated employees - but remains excludable for non-HCEs.

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Summary Comparison Table

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Key Points for the EA Exam

1. Default rule: All fringe benefits are taxable unless specifically excluded
2. Fair market value: Taxable benefits are valued at FMV, not employer cost
3. Table I rates: Memorize the concept - excess life insurance uses IRS rates, not actual cost
4. Cash is never de minimis: Any cash or cash equivalent is always taxable
5. HCE threshold for 2024: $155,000 compensation or >5% ownership
6. Transportation limits for 2024: $315/month parking, $315/month transit
7. Nondiscrimination: Plans favoring HCEs cause HCEs to lose the exclusion