8905 / What types of benefits can an employer provide in the form of services that do not require an employee to include the value of the benefit in income?
Generally, fringe benefits not expressly excluded from income by the Code must be included in gross income for income tax purposes and in wages for purposes of FICA and FUTA.1 IRC Section 132 provides that certain fringe benefits that are classified as "no-additional-cost-services" may be excluded from income.2
As the name suggests, a "no-additional-cost-service" is one offered by the employer (1) at no substantial additional cost (including foregone revenue) to the employer for providing such service to the employee when (2) such service is offered to customers in the ordinary course of the line of business of the employer in which the employee is working. Under IRS regulations proposed in 2025, to determine the employer's line of business, the employer will use the North American Industry Classification System (NAICS) manual (rather than the Enterprise Standard Industrial Classification (ESIC) manual that was previously used).
For example, the cost of a flight provided to an airline employee traveling on a space-available basis is an excess capacity service and is eligible for treatment as a no-additional-cost-service. In addition, the services of a flight attendant and the cost of in-flight meals given to the airline employee traveling on a space-available basis are merely incidental to the services being provided (i.e. the flight) and, thus, the employee does not have to include them in income.3 Reciprocity is allowed between unrelated employers if certain conditions are met.4
The no-additional-cost services exclusion applies to services provided to retired and disabled employees, spouses and dependent children, as well as to current employees. Widowers and widows of employees who died while employed also qualify for the exclusion.5 A partner who performs services for a partnership will be considered employed by the partnership.6
The no-additional-cost services exclusion is not available to highly compensated employees unless the service is provided on substantially the same terms to each member of a group of employees which is defined under a reasonable classification set up by the employer which does not discriminate in favor of highly compensated employees.7 For this purpose, "highly compensated employee" has the same meaning as provided in IRC Section 414(q) for qualified plans.8 Generally, a highly compensated employee is any employee:
(1) who was a five percent owner at any time during the year or the preceding year; or (2) for the preceding year had compensation in excess of $160,000 (as indexed for 2025-2026, the amounts were $155,000 for 2024, $150,000 for 2023 and $135,000 for 2022) and was in the top-paid group of em-ployees for the preceding year.
1. IRC § 61(a)(1).
2. IRC § 132.
3. Treas. Reg. § 1.132-2(a)(5).
4. See Treas. Reg. § 1.132-2(b).
5. IRC § 132(h).
6. Treas. Reg. § 1.132-1(b).
7. IRC § 132(j)(1).
8. IRC § 132(j)(6).