From CBIA News, December 1997/January 1998

Perk up morale with low-cost, tax-free benefits

Noncash, tax-free perks, on top of basic benefits, can help you recruit or keep employees.

By Bonnie Kreitler

Noncash fringe benefits that are tax-free to employees can help small businesses recruit or retain workers.

When it comes to benefits, many employers think only of the "biggies" like health insurance, retirement plans, group life insurance and group disability insurance, which companies offer to stay competitive in the job market. But there are also many, more-modest tax-free fringes that can boost employee morale without straining the company’s bottom line. Low-cost benefits whose value is not added to an employee’s paycheck are like free gifts from an employer. No federal income, state income or FICA taxes nibble away at their value.

When the value of a benefit is not counted as income to your employees, you win too. Not only do you get to play Santa Claus, you can deduct the cost of the benefit as a business expense. Like your employees, you owe no FICA taxes on the benefit’s value. And this kind of benefit is one way to raise employees’ total compensation without raising base cash wages.

Too insignificant for the IRS

The IRS calls some of these fringes de minimis benefits, says attorney Richard Cohen, a partner in the pension and employee benefits group of Shipman & Goodwin, LLP, in Hartford. That’s because their value is so small relative to the accounting and administration required that the IRS doesn’t want to bother with them. De minimis employee benefits include things like —
• flowers or plants to celebrate important events or a job well-done;
• free coffee or doughnuts at staff meetings or other office events;
• occasional tickets to sporting events, concerts or other entertainment;
• holiday gifts such as a turkey, fruit or candy;
• small birthday gifts for employees or a celebratory cake to share with co-workers; and
• lunch or dinner costs when employers ask employees to work through lunch or stay late.

Watch the cost of individual gifts and the total average cost of noncash gifts per employee, Cohen cautions. If an individual gift is too expensive, the benefits may become taxable. Whether a particular gift would be deemed "too expensive" would depend on the circumstances, says Cohen.

If you want to go beyond the typical "biggies" and can afford more than de minimis benefits, there are other tax-free fringes allowed by the IRS that you can use to attract and retain employees. Some, such as on-site day care, may be pricey but worthwhile if a high proportion of your staff can benefit from them. Many others have more modest price tags. They include —
• medical reimbursement accounts to cover health-insurance plan deductibles, co-payments and noncovered medical expenses;
• employee discounts on the company’s merchandise or services;
• subscriptions to important business periodicals that are shared among staff members;
• uniforms;
• parking worth up to $165 per month (above which it becomes taxable);
• transportation passes or tokens worth up to $65 per month (above which it becomes taxable);
• expenses for education that maintains or improves an employee’s on-the-job skills;
• adoption assistance;
• employment-agency fees for new hires;
• moving expenses for newly hired or relocated employees;
• free travel for employees of airline or train companies or free lodging for hotel employees;
• on-site fitness centers; and
• access to nearby day care.

Check with a financial adviser

Compensation specialists and tax advisers offer a few caveats to consider before you start cranking out memos to employees about new benefits. Checking the IRS rules with an accountant or tax attorney in advance is good advice before announcing a new tax-free benefit to your employees.

First, experts say, think about how many people in your company really want or would use the benefit. Offering a benefit no one wants doesn’t make sense even if it is one that’s easy for you to provide. One way to find out what employees would really value is to ask. Identify potential additions to your benefits package and solicit employee feedback before you start spending money on them.

Second, if only a few employees can take advantage of a benefit (such as employer-provided day care, adoption allowances or parking passes), consider whether employees not able to use the benefit will be resentful. For example, the childless employee who has sworn off coffee, never lets junk food pass her lips, and walks to work may not find company-provided day-care centers, parking passes, or free coffee and doughnuts enticing benefits.

One way around this potential dilemma is to put these benefits into a "cafeteria plan" that lets employees choose among the available benefits up to a certain total dollar level. "Cafeteria plans are simple to do," says Robert Percy, tax attorney with Siegel, O’Connor, Schiff & Zangari in Hartford, "but they require a written plan and an annual filing [with the IRS]."

Third, watch how you structure certain benefits. "Anything given as cash will always be taxable," Cohen points out. So while providing employee uniforms can give an employee’s total compensation a tax-free boost, the IRS would count a cash allowance for uniforms as taxable income. Also, while occasional tickets to a sporting event are considered de minimis, the IRS would consider season tickets a taxable gift.

Fourth, be sure to make the benefit available to all employees without discrimination. "In general, you have to look at fairness. Anything that favors highly compensated employees more than others might not stand up to IRS scrutiny," says Steve Marcoux, chief financial officer for CBIA.

While they may not necessarily put money in people’s pockets, there are other benefits a company can provide that are free to both employer and employee. For example, Bristol Technology Inc., a cross-platform software development company that made this year’s INC. 500 list, recently moved to a more central location in Danbury. Now, the company’s employees can take advantage of exercise trails and an on-site dry cleaner, ATM, travel agent, hair stylist and convenience store. Maureen Mulvey, the company’s human resources manager, says employees appreciate practicality and convenience.

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