Nontaxable Employee Benefits to Boost Satisfaction and Retention

Every year, you hear stories of employers with deep pockets promoting trendy perks to attract and retain their staff. And yet, year over year, employees rank health-related benefits at the top of their wish list.

What does that mean to the average small or midsize business owner wanting to compete with large employers for talent?

It means you should worry less about the latest fad and focus more on providing nontaxable health and health-related benefits for your employees.

Here at Stratus HR, we can help you boost employee satisfaction and retention with comprehensive nontaxable benefits solutions. From accessing top-tier benefits to seamless administration and expert guidance, we've got you covered. Book a free consultation today and let us transform your employee benefits strategy.

How Do Nontaxable Employee Benefits Differ From Taxable Benefits?

A fringe benefit is any type of compensation beyond salary or wages that companies offer to attract and retain employees. Employee fringe benefits can include property, cash, or services. Depending on your business, its budget, and your strategy to compete for talent, a fringe benefits package typically includes some combination of both nontaxable and taxable employee benefits.

In most cases, employers promote their nontaxable health-related benefits for recruiting purposes, whereas taxable fringe benefits are usually offered during the course of employment as perks to motivate and inspire employees.

While there may be some overlap when limits are exceeded, the primary difference between nontaxable and taxable employee benefits is how the IRS views them for tax purposes.

What are nontaxable employee benefits?

Nontaxable employee benefits are certain fringe benefits that meet specific regulations of the Internal Revenue Code because the law specifically excludes them from federal income tax withholding and Social Security and Medicare when the rules are met, as well as from federal unemployment (FUTA). In most instances, these benefits are not reported on Form W-2, and qualifying exclusions mean the benefit is not included in the employee's wages.

According to IRS Publication 15-B, nontaxable employee benefits include:

• Accident and health benefits
• Achievement awards
• Adoption assistance
• Athletic facilities
• De minimis benefits
• Dependent care assistance
• Educational assistance
• Employee discounts
• Employee stock options
• Employer-provided cell phones
• Group-term life insurance coverage
• HSAs
• Lodging on your business premises
• Meals
• No-additional-cost services
• Retirement planning services
• Transportation (commuting) benefits
• Tuition reduction
• Working condition benefits

Several of these nontaxable benefits can be broken down into more specific benefit offerings, and many common fringe benefits on this list have annual limits or other qualification rules. Be sure your payroll team is familiar with the special rules identified for each of these fringe benefits, as outlined in Table 2-1 of the IRS Publication.

What are taxable employee benefits?

Taxable fringe benefits are everything else you offer to employees as perks, with the exception of those deemed “de minimis benefits.” In other words, fringe benefits are taxable unless the law specifically excludes them, and those benefits are taxable and must be reported on Form W-2. Their fair market value is included in the employee's gross income and becomes part of the employee's taxable income.

While the list could be endless, traditional examples of common taxable fringe benefits include:

• Bonuses
• Gift cards or gift certificates
• Paid vacations
• Personal use of a company car, such as commuting or use on weekends
• Employee expense reimbursements that have no receipts for accounting
• Life insurance policies over $50,000 coverage
• Anything paid in surplus of the IRS maximum caps for nontaxable employee benefits

When in doubt, the fringe benefit you would like to offer is probably taxable.

What are “de minimis” fringe benefits?

A “de minimis” fringe benefit is something that is so small and infrequent that accounting for it would be administratively impractical. These are often treated as tax free fringe benefits when their fair market value is very low, generally under $100. Common examples of de minimis fringe benefits include:

• Movie tickets
• Theater or sports tickets
• Breakroom snacks and soft drinks
• Coffee cups
• Flowers for a special occasion
• Holiday gifts like a turkey or ham

Some public transit passes provided at a discount under $21 per month may also be treated as de minimis under IRS rules.

A key element of a de minimis benefit is that it cannot be a form of disguised compensation. This means cash and cash equivalents like gift cards cannot be considered de minimis fringe benefits; they are taxable income.

Are employer reimbursements considered taxable or nontaxable fringe benefits?

Reimbursements are nontaxable on behalf of the employer to the employee when the tax treatment reflects a true reimbursement for a business expense or health-related expense, rather than a flat allowance treated as taxable compensation. This is because the employee would have already paid for these services with post-tax earnings.

In order to legally be reimbursable, employees must submit receipts for their business- or health-related benefit. Reimbursements can receive tax free treatment as working condition benefits when they would otherwise be deductible business expenses for the employee. Common examples include internet service, personal cell phones, per diem for travel expenses, gym memberships, fitness classes and competitions, as well as company cars used for work and job-related education expenses. Working condition benefits are nontaxable if they qualify as business expenses, and cash payments tied to specific costs can also qualify, with no strict dollar limit so long as documentation supports the payroll tax and employment tax treatment.

Why would employers offer both nontaxable employee benefits and taxable fringe benefits?

While every employee is motivated differently, nontaxable employee benefits like health, dental, 401(k), and other tax-excluded benefits are key to recruiting and retaining talent. They are major drivers for workers considering a new position and play a significant role with deterring employees from leaving.

That doesn't mean that taxable and nontaxable de minimis fringe benefits do not contribute to retaining employees.

Part of your Human Resources Manager's role is to understand what motivates your staff to boost productivity, improve morale, increase loyalty, and reduce employee turnover. This all plays into your HR strategy to reach your company's goals, meaning your total compensation package of both taxable and nontaxable employee benefits may look differently than your competitor's.

Top 10 Nontaxable Employee Benefits

Of all the IRS-approved nontaxable fringe benefit categories, here are the top 10 nontaxable employee benefits to offer your staff.

1. Health insurance

Despite the annual rise in cost, health insurance continues to outrank all other benefits and perks by employees and should be your top priority for maintaining healthy and productive workers. In many employer-sponsored health plans, premiums paid under a properly structured group health plan are generally excluded from an employee's income.

2. Retirement plan

Offering a retirement plan provides employees with a tool to save for retirement, shows workers you care about their long-term financial well-being, and provides you with matching options to encourage retention.

3. Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs)

Whether you offer an FSA, HSA, or both, allowing employees to set aside tax-free dollars for health expenses provides a unique advantage over employers who do not offer this type of benefit. HSA contributions are tax-free up to $4,400 for self-only coverage, and higher limits may apply with family coverage.

4. Education and tuition assistance

Employees who increase their education or learn new skills have better overall health, improved self-worth, and develop more opportunities for career growth. In addition, employer provided educational assistance can be tax-free up to $5,250 per employee per year. Covered costs can include tuition, books, and fees, and graduate-level courses may also qualify.

To stay compliant, the benefit should be offered through a formal written plan, and amounts above $5,250 are taxable unless they separately qualify as a working condition benefit.

5. Childcare and dependent care assistance

Supporting working parents with childcare or dependent care assistance has been critical to increase applicant pools, reduce absenteeism, and increase retention. Dependent care assistance can also qualify as a nontaxable fringe benefit up to $5,000 annually per household, though some sources reference a $7,500 annual limit depending on applicable tax rules. Employers should confirm the current limit with a tax professional.

6. Employee Assistance Programs (EAPs)

EAPs are a cost-effective support system to help employees deal with personal problems that may be interfering with their job performance.

7. Life and disability insurance

Life and disability insurance protect workers from potentially devastating financial losses to their families in the event of an unforeseen accident. Group-term life insurance above the exclusion limit becomes taxable through payroll and can affect social security and medicare taxes. In some cases, limited coverage for an employee's spouse may still qualify for exclusion, and some IRS rules extend certain exclusions to former employees.

8. Wellness programs

Inspire your team to be healthier with a wellness program and receive big benefits to your bottom line like an increase in productivity, a decrease in sick days, lower health insurance claims, and fewer workers' compensation claims. For fringe benefit taxation purposes, wellness stipends or gym reimbursements may become taxable fringe benefits paid to employees unless they qualify under a specific exclusion and are properly documented.

9. Transportation benefits

Providing transportation benefits not only helps the environment and your community's goodwill, but it means less of your employees' paychecks will be spent on fuel and car maintenance, and qualified transportation benefits can reduce commuting costs on a tax-free basis up to $340 per month. Employers can also offer transit passes as qualified transportation benefits. In addition, qualified parking may also qualify for tax-free treatment up to $340 per month.

10. Flexible work arrangements

Finding ways to implement work-from-home arrangements, hybrid work schedules, or other flexible work schedules can be your strategic staffing solution for an employee-friendly labor market. An employer provided cell phone issued for noncompensatory business reasons can also remain nontaxable fringe benefits treatment even if employees have some personal use.

How do I Start Implementing Nontaxable Employee Benefits?

Setting up a nontaxable employee benefit plan can be overwhelming. The easiest route is to partner with a third-party administrator that can also help you manage the day-to-day administration tasks of offering benefits, classify common fringe benefits correctly for payroll processing and tax forms, and flag when special reporting rules apply.

Partnering with a PEO like Stratus HR provides you access to Fortune 500 employee benefits at economies-of-scale pricing. This levels the playing field for small and midsize businesses competing for talent with large companies. And most Stratus offerings are voluntary, meaning employees can pick and choose which benefits they want, though some tax-free treatment depends on plan rules that do not favor highly compensated employees.

Stratus HR also assumes all benefits administration duties, including filing paperwork to create a nontaxable plan, enrolling employees, setting up deductions, remitting payments, and reconciling bills. Accurate setup matters because some employee fringe benefits affect employment taxes, federal income tax withholding, and reporting on tax forms. Meals provided for employer convenience can be nontaxable when structured properly. You can even direct all benefits-related inquiries from your employees to our Stratus benefits team to answer their questions and help them manage their claims.

For complex cases, review IRS Publication 15-B and the employer's tax guide, especially where rules may favor highly compensated employees, or consult a tax professional. For more information, please book a free consultation and our team will contact you shortly.