There are very few tax loopholes these days that allow an employer a deduction which is tax free to employees. Health insurance is one such tax free employer provided benefit. But there is another which is overlooked by employers. Achievement awards.
If structured properly, employee achievement awards can provide a tax deduction for the employer while remaining tax free to the employee. There are certain hurdles that must be overcome in order for the achievement award to be tax free. It all starts with the establishment of an Achievement Awards Program. Such a program may be a qualified program or an unqualified program.
Qualified programs must satisfy the following requirements:
1. The plan must be in writing.
2. Award cannot be paid at the same time as annual salary reviews. It must be subsequent to an “achievement event” occurring.
3. It cannot be paid in cash or cash equivalents. It must be property, such as golf clubs, televisions, vacations etc.
4. Award cannot exceed $1,600.
5. Plan cannot be discriminatory and favor highly compensated individuals.
6. The average cost of all employee achievement awards granted during the year cannot exceed $400. Awards of nominal value are not included in the average. Nominal may be $50 or less.
7. Any award with a value in excess of $1,600 must be included in the employee’s W-2 compensation.
8. The award must be part of a “meaningful presentation”, such as an awards ceremony. The ceremony need not be lavish.
Nonqualified programs must satisfy the following requirements:
1. The plan must be in writing.
2. Award cannot be paid at the same time as annual salary reviews. It must be subsequent to an “achievement event” occurring.
3. It cannot be paid in cash or cash equivalents. It must be property, such as golf clubs, televisions, vacations etc.
4. Award cannot exceed $400.
5. Any award with a value in excess of $400 must be included in the employee’s W-2 compensation.
6. The award must be part of a “meaningful presentation”, such as an awards ceremony. The ceremony need not be lavish.
Awards may be given for length of service, safety or some other achievement. The safety award does not qualify if the employer grants safety awards to more than 10% of the eligible employees during the year.
If you meet these requirements the award is exempt from income tax and social security tax.
Tom Corley is an accountant, financial planner and author of “Rich Kids: How to Raise Our Children to Be Happy and Successful in Life”, “Effort-Less Wealth”, “Change Your Habits Change Your Life”, “Rich Habits Poor Habits” and “Rich Habits: The Daily Success Habits of Wealthy Individuals.”
