As soon as employers find some untaxed reward item valued by their workers, the U.S. government taxes it. It seems inevitable that anything that costs money eventually shows up as a target on the radar screens of the legislatures whose expenditures are funded by tax income. If something is appreciated by employees and its cost can be easily tracked, it probably will become a target for taxation.
Governments look for income from things companies buy, where careful records are accumulated and summary information can be easily produced and processed. Elements of the employee value proposition that are intangible or difficult to identify tend to be ignored. For example, airine mileage programs were weighed for potential tax capture at various times, but it would have been difficult to determine the imputed value for individual charges. Besides, so many legislators and normal citizens benefit from frequent flyer deals that insufficient support could be found for taxation… so far. When the term “loophole” is used by politicians and regulators, that is the first clue that an advantageous personal benefit is once again a potential tax target.
Perquisites that are unpopular with the electorate are more swiftly singled out for “discouragement” through taxation. Punishment is more easily levied on goodies possessed by few than on things held by many. Luxury goods like expensive yachts and excessive executive compensation (over one million dollars a year) have fallen as easy prey to the tax collectors in the past. Company cars, on the other hand, survived as “tax-free” benefits to salespeople and executives for many years before finally being included on the tax rolls. Anything considered bad for you (i.e., fossil fuels or tanning beds) is more likely to attract punitive taxes. Good things, on the other hand, get tax incentives.
The newest law affecting the IRS tax treatment of employee benefits may be the Patient Protection and Affordable Care Act. Frequently abbreviated as ACA (which is confusing to many people, for various reasons) or called Obamacare, it imposes a new tax on “cadillac health plans,” while providing tax credits in other cases. ACA/Obamacare encourages company-provided wellness facilities by treating those related expenses as deductible from corporate taxes but leaves individually taxable most cash payments like reimbursements to workers for their wellness spending. Employers who reimburse people for wellness activities like gym memberships and weight-loss programs can get into trouble by failing to report such cash payments as taxable employee compensation. Remember, the de minimus rules surrounding tax-exmpt expenditures do not apply to cash. Favorable tax treatments do apply to health benefits like contributions to a health reimbursement plan, a premium discount, deductibles or co-payments, and other indirect subsidies; but discrimination rules also must be met before tax exemption is granted. As always, American tax treatments are governed by law rather than by opinion or employer choice, so be sure to seek the advice of proper legal counsel for a defensible decision.
Total rewards professionals often joke about the futile attempts of consultants and attorneys (increasingly the same people in the field of executive compensation) to discover tax-free goodies worthy of implementation that last long. Once a scheme proves successful, it earns attention and new regulations target it, quickly ending its cost/benefit value.
What valuable perquisites still exist that have thus far escaped taxation? It will be understandable if readers are reluctant to openly identify any, fearing those few remainders might also draw IRS interest.
E. James (Jim) Brennan is Senior Associate of ERI Economic Research Institute, the premier publisher of interactive pay and living-cost surveys. After over 40 years in HR corporate and consulting roles throughout the U.S. and Canada, he’s pretty much been there done that (articles, books, speeches, seminars, radio/TV, advisory posts, in-trial expert witness stuff, etc.), serves on the Advisory Board of the Compensation and Benefits Review and will express his opinion on almost anything.
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