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

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.

Importantly, the regulations would have offered guidance for employers interested in offering nontaxable incentives to employees who received the COVID-19 vaccine. Those employers should now exercise caution when using incentives to encourage the vaccine. For example, they should be aware of the need to offer reasonable accommodation for religious beliefs or disability (in other words, they may need to provide an alternative way to earn the incentive for employees who will not get the vaccine because of religious beliefs or disability). Employers should also consider the 30 percent limit when determining whether to impose a health insurance surcharge for employees who elect to remain unvaccinated—as well as the ACA limits on affordability that apply to large employers.

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The frequency with which the employer provides the benefit at issue must be taken into account in determining whether the value is de minimis. The benefits provided must be calculated on a per-employee basis. For example, if an employer provides one meal to only one employee on a daily basis, the value of the free daily meal would not be de minimis to that individual employee, even though the provision of one daily meal to one employee would be de minimis with respect to the employer’s entire workforce.⁶

If, however, it would be administratively difficult to determine the frequency with which the employer provides the fringe benefit to an individual employee, the employer may measure frequency based on the frequency for the provision of the fringe benefit to all employees. The regulations use the example of an employer who uses reasonable means to restrict use of employer-provided copy machines to business-related use and is successful in ensuring that 85 percent of the copying is for business use. Any personal use of the copy machine by a particular employee will be considered a de minimis fringe because it would be administratively difficult for the employer to measure usage on a per-employee basis.⁷

An employer may provide meals, money for meals or local transportation fare as de minimis benefits if the following conditions are satisfied:

(1)  The benefit is provided on an occasional basis, determined by examining the availability of the benefit and the regularity with which the benefit is provided to the employee. If an employer provides one of these benefits, or a combination of the three benefits, on a regular or routine basis, they are not provided on an occasional basis.

(2)  The benefit is provided because of overtime work that requires an extension of the employee’s work schedule, even if the conditions giving rise to the need for overtime are reasonably foreseeable.

(3)  In the case of a meal or meal money, the benefit is provided to enable the employee to work overtime hours.

Meal money and local transportation fare will not qualify as de minimis benefits if the amounts provided are calculated based on the number of hours that the employee works.⁸

The IRS has also issued FAQ⁹ on the tax treatment of work-life referral services as de minimis fringe benefits.  Work-life referral (WLR) programs are a type of employment benefit that, according to IRS language, provide employers with "guidance, support, information, and referrals in connection with" things like childcare services, medical insurance issues, retirement planning services, government benefits, home professionals who can provide care services for family members with special needs and other personal issues and challenges employees may face.  Programs covered by the FAQ are presumed to charge a "per-eligible-employee monthly fee, regardless of how many employees actually utilize the WLR services".  The FAQ is intended to clarify that WLR programs may be excludable from employees' income and exempt from employment taxes as de minimis fringe benefits if they otherwise satisfy the legal requirements established by the IRC and regulations (FAQ are issued as non-binding guidance from the IRS and the law itself actually controls).  The FAQ only applies to referral programs, not to payments for actual resources provided through employee assistance programs (EAPs).