8910 / What is a “de minimis” fringe benefit?

Editor’s Note: The 2017 tax reform legislation eliminated the 50 percent deduction for business-related entertainment expenses. Although the 50 percent deduction for meal expenses generally remains in effect (including meals consumed while travelling for business), Congress lifted the 50 percent cap for 2021 and 2022. The 2017 tax reform legislation also expanded the deduction for meals to include expenses associated with meals provided through an eating facility meeting the de minimis fringe benefit requirements discussed below.¹ This deduction for meals provided at the convenience of the employer expires after December 31, 2025.²

The “de minimis fringe” exception allows an employee to exclude from income any property or services provided by the employer, if the value of such property or services is so small as to make accounting for it unreasonable or administratively impractical.³

For example, an employer-operated eating facility is considered a de minimis fringe if it is located on or near the business premises and the revenue from the facility equals or exceeds its operating costs. These rules are applicable to highly-compensated employees only if access to the facility is available 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 (see Q 8905).⁴

The IRS provided specific guidance with respect to meals provided for the convenience of the employer. The IRS has released a technical advice memorandum (TAM) that sheds light on the potential tax implications when employers provide employees with free meals in the office. Post-tax reform, meals provided “for the convenience of the employer” may receive favorable tax treatment. In the TAM, the IRS denied exclusion of the meals’ value from employee compensation. Here, the employer provided free meals to all employees in snack areas, at their desks and in the cafeteria, justifying provision of these meals by citing need for a secure business environment for confidential discussions, employee protection, improvement of employee health and a shortened meal period policy. The IRS rejected these rationales, stating that the employer was required to show that the policies existed in practice, not just in form, and that they were enforced upon specific employees. In this case, the employer had no policies relating to employee discussion of confidential information and provided no factual support for its other claims. General goals of improving employee health were found to be insufficient. The IRS also considered the availability of meal delivery services a factor in denying the exclusion, but indicated that if the employees were provided meals because they had to remain on the premises to respond to emergencies, that would be a factor indicating that the exclusion should be granted.⁵

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Planning Point: Early in 2021, the EEOC released a set of regulations to govern whether employers could permissibly offer certain wellness incentives to employees. Those rules were designed to replace regulations that were vacated by court order in 2018. Under the new regulations, employers would have been permitted to offer certain de minimis incentives to employees who participated in wellness programs, including low value gift cards and other “gifts”. However, employers who also offered a health insurance plan in conjunction with the wellness program would have been permitted to offer incentives valued at up to 30 percent of the cost of coverage.