us internal revenue service: p15b--2002

8/14/2019 US Internal Revenue Service: p15b--2002

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Department of the TreasuryContentsInternal Revenue ServiceImportant Changes . . . . . . . . . . . . . . . . . . . . . . . . . 1

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2Publication 15-B(Rev. January 2002) 1. Fringe Benefit Overview . . . . . . . . . . . . . . . . . . . 2Cat. No. 29744N Are Fringe Benefits Taxable? . . . . . . . . . . . . . . . 2

Cafeteria Plans . . . . . . . . . . . . . . . . . . . . . . . . . . 2

2. Fringe Benefit Exclusion Rules . . . . . . . . . . . . . 3

Employers Accident and Health Benefits . . . . . . . . . . . . . . . 5Achievement Awards . . . . . . . . . . . . . . . . . . . . . 5Adoption Assistance . . . . . . . . . . . . . . . . . . . . . . 6Tax Guide toAthletic Facilities . . . . . . . . . . . . . . . . . . . . . . . . . 6De Minimis (Minimal) Benefits . . . . . . . . . . . . . . . 6Dependent Care Assistance . . . . . . . . . . . . . . . . 7FringeEducational Assistance . . . . . . . . . . . . . . . . . . . 7Employee Discounts . . . . . . . . . . . . . . . . . . . . . . 8Employee Stock Options . . . . . . . . . . . . . . . . . . 9BenefitsGroup-Term Life Insurance Coverage . . . . . . . . . 9Lodging on Your Business Premises . . . . . . . . . 11Meals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11For Benefits ProvidedMoving Expense Reimbursements . . . . . . . . . . . 13in 2002 No-Additional-Cost Services . . . . . . . . . . . . . . . . 14Retirement planning services . . . . . . . . . . . . . . . 14Transportation (Commuting) Benefits . . . . . . . . . 14Tuition Reduction . . . . . . . . . . . . . . . . . . . . . . . . 16Working Condition Benefits . . . . . . . . . . . . . . . . . 16

3. Fringe Benefit Valuation Rules . . . . . . . . . . . . . 17General Valuation Rule . . . . . . . . . . . . . . . . . . . 17Cents-Per-Mile Rule . . . . . . . . . . . . . . . . . . . . . . 18Commuting Rule . . . . . . . . . . . . . . . . . . . . . . . . . 19Lease Value Rule . . . . . . . . . . . . . . . . . . . . . . . . 19Unsafe Conditions Commuting Rule . . . . . . . . . . 21

4. Rules for Withholding, Depositing, and

Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

How To Get Forms and Publications . . . . . . . . . . . 23

Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Important Changes

Cents-per-mile rule. The standard mileage rate you canuse under the cents-per-mile rule to value the personal useof a vehicle you provide to an employee in 2002 is 36.5cents a mile. See Cents-Per-Mile Rulein section 3.

Increase in public transit subsidy. Beginning January1, 2002, the maximum benefit an employee may excludefor combined commuter highway vehicle transportationand transit passes increases to $100. See QualifiedTransportation Benefits in section 2.

Extension and expansion of exclusion for educationalassistance plans. The exclusion for educational assis-tance has been extended to years after 2001. Expensesfor graduate level courses may be excluded for coursesbeginning after 2001. See Educational Assistance insection 2.


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Increase in adoption plan exclusion. Beginning with If the recipient of a taxable fringe benefit is your em-2002, the amount of payments and reimbursements that ployee, the benefit is subject to employment taxes andcan be excluded under an adoption assistance plan in- must be reported on Form W2. However, you can usecreases to $10,000 for each eligible child. This amount special rules to withhold, deposit, and report the employ-also applies to special needs adoptions. For more informa- ment taxes. These rules are discussed in section 4.tion, see Adoption Assistance in section 2. If the recipient of a taxable fringe benefit is not your

employee, the benefit is not subject to employment taxes.However, you may have to report it on one of the followinginformation returns.Introduction

This publication supplements Publication 15, Circular E, If the recipientEmployers Tax Guide, and Publication 15-A, Employersreceives the benefit as: Use:

Supplemental Tax Guide. It contains specialized and de-An independent contractor . . . Form 1099 MISCtailed information on the employment tax treatment ofA partner . . . . . . . . . . . . . . Schedule K1 (Form 1065)

fringe benefits. An S corporation shareholder Schedule K 1 (Form 1120S)

For more information, see the instructions for the formslisted above.1. Fringe Benefit Overview

A fringe benefit is a form of pay for the performance ofCafeteria Plansservices given by the provider of the benefit to the recipient

of the benefit. For example, you provide an employee aA cafeteria plan is a written plan that allows your employ-fringe benefit when you allow the employee to use aees to choose between receiving cash or taxable benefitsbusiness vehicle to commute to and from work.

instead of certain qualified benefits for which the law pro-Performance of services. A person who performs ser- vides an exclusion from wages. If an employee chooses tovices for you does not have to be your employee. A person receive a qualified benefit under the plan, the fact that themay perform services for you as an independent contrac- employee could have received cash or a taxable benefittor, partner, or director. Also, for fringe benefit purposes, instead will not make the qualified benefit taxable.treat a person who agrees not to perform services (such as

Generally, a cafeteria plan does not include any planunder a covenant not to compete) as performing services.

that offers a benefit that defers pay. However, a cafeteriaProvider of benefit. You are the provider of a fringe plan can include a qualified 401(k) plan as a benefit. Also,benefit if it is provided for services performed for you. You certain life insurance plans maintained by educational in-may be the provider of the benefit even if it was actually stitutions can be offered as a benefit even though theyfurnished by another person. You are the provider of a defer pay.fringe benefit your client or customer provides to your

Qualified benefits. Qualified benefits include the follow-employee for services the employee performs for you.

ing benefits discussed in section 2.Recipient of benefit. The person who performs servicesfor you is the recipient of a fringe benefit provided for those Accident and health benefits (but not medical sav-services. That person may be the recipient even if the ings accounts or long-term care insurance).benefit is provided to someone who did not perform ser-

Adoption assistance.vices for you. For example, your employee may be the

Dependent care assistance.recipient of a fringe benefit you provide to a member of theemployees family.

Group-term life insurance coverage (including coststhat cannot be excluded from wages).

Are Fringe Benefits Taxable?Benefits not allowed. A cafeteria plan cannot includethe following benefits discussed in section 2.Any fringe benefit you provide is taxable and must be

included in the recipients pay unless the law specifically Archer medical savings accounts.

excludes it. Section 2 discusses the exclusions that apply Athletic facilities.to certain fringe benefits. Any benefit not excluded under

the rules discussed in section 2 is taxable. De minimis (minimal) benefits.

Including taxable benefits in pay. You must include in a Educational assistance.recipients pay the amount by which the value of a fringe

Employee discounts.benefit is more than the sum of the following amounts.

Lodging on your business premises.1) Any amount the law excludes from pay.

Meals.2) Any amount the recipient paid for the benefit.

Moving expense reimbursements.The rules used to determine the value of a fringe benefitare discussed in section 3. No-additional-cost services.

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Scholarships and fellowships. a) A 5% owner of your business.

Transportation (commuting) benefits. b) A 1% owner of your business whose annual paywas more than $150,000.

Tuition reduction.

Working condition benefits.Form 5500. If you maintain a cafeteria plan, you mustreport information about the plan each year by the last day

It also cannot include scholarships or fellowships (dis-of the 7th month after the plan year ends. Use Form 5500,

cussed in Publication 520, Scholarships and Fellow-Annual Return/Report of Employee Benefit Plan, and

ships).Schedule F (Form 5500). See the form instructions for

information on extensions of time to file.Employee. For these plans, treat the following individualsas employees. More information. For more information about cafeteria

plans, see section 125 of the Internal Revenue Code and1) A current common-law employee (see Circular E for

the related regulations.more information).

2) A full-time life insurance agent who is a current statu-tory employee. 2. Fringe Benefit Exclusion

3) A leased employee who has provided services to Rulesyou on a substantially full-time basis for at least ayear if the services are performed under your pri-

This section discusses the exclusion rules that apply tomary direction or control.fringe benefits. These rules exclude all or part of the valueof certain benefits from the recipients pay.Exception for S corporation shareholders. Do not

The excluded benefits are not subject to federal incometreat a 2% shareholder of an S corporation as an employee tax withholding. Also, in most cases, they are not subject toof the corporation. A 2% shareholder for this purpose issocial security, Medicare, or federal unemployment taxsomeone who directly or indirectly owns (at any time dur-and are not reported on Form W2.ing the year) more than 2% of the corporations stock or

This section discusses the exclusion rules for the follow-stock with more than 2% of the voting power.ing fringe benefits.

Plans that favor highly compensated employees. If Accident and health benefits.

your plan favors highly compensated employees as to Achievement awards.eligibility to participate, contributions, or benefits, you must

include in their wages the value of taxable benefits they Archer medical savings accounts.

could have selected. A plan you maintain under a collec- Athletic facilities.tive bargaining agreement does not favor highly compen-

sated employees. De minimis (minimal) benefits.

A highly compensated employee for this purpose is any

Dependent care assistance.of the following employees.

Educational assistance.1) An officer.

Employee discounts.2) A shareholder who owns more than 5% of the votingpower or value of all classes of the employers stock. Employee stock options.

3) An employee who is highly compensated based on Group-term life insurance coverage.the facts and circumstances.

Lodging on your business premises.4) A spouse or dependent of a person described in (1),

Meals.(2), or (3).

Moving expense reimbursements.Plans that favor key employees. If your plan favors key

No-additional-cost services.employees, you must include in their wages the value of

Transportation (commuting) benefits.taxable benefits they could have selected. A plan favorskey employees if more than 25% of the total of the nontax-

Tuition reduction.able benefits you provide for all employees under the plan

Working condition benefits.go to key employees. However, a plan you maintain undera collective bargaining agreement does not favor key em-

See Table 21 for an overview of the employment taxployees.treatment of these benefits.A key employee during 2002 is generally an employee

who is either of the following:

1) An officer having annual pay of more than $130,000.

2) An employee who for 2002 was either of the follow-ing:

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Table 21. Special Rules for Various Types of Fringe Benefits(For more information, see the full discussions in this section.)

Type of Fringe Benefit

Treatment Under Employment Taxes

Income Tax Withholding

Social Security andMedicare Federal Unemployment

Accident and health benefits

Achievement awards

Adoption assistance

Athletic facilities

Dependent care assistance

Educational assistance

Employee discounts

Employee stock options

Group-term life insurancecoverage

Lodging on your businesspremises

Meals

Moving expensereimbursements

No-additional cost services

Transportation (commuting)benefits

Working condition benefits

Exempt1,2

, except forcertain long-term carebenefits.

Exempt, except forcertain payments to Scorporation employees

who are 2%shareholders.

Exempt

Exempt1

Taxable Taxable

Exempt1up to $1,600 ($400 for nonqualified awards).

Exempt if substantially all use during the calendar year is by employees,their spouses, and their dependent children.

De minimis (minimal) benefits Exempt Exempt Exempt

Exempt3up to certain limits, $5,000 ($2,500 for married employees filing

separate return).

Exempt up to $5,250 of benefits each year. See page 7.

Exempt4up to certain limits. See page 8.

See Employee Stock Options on page 9.

Exempt Exempt1,5

up to cost of$50,000 of coverage.(Special rules apply toformer employees.)

Exempt

Exempt1if furnished for your convenience as a condition of employment.

Exempt1if furnished on your business premises for your convenience.

Exempt1if expenses would be deductible if the employee had paid them.

Exempt4

Exempt4

Exempt4

Exempt1up to certain limits if for rides in a commuter highway vehicle

($100), transit passes, ($100) or qualified parking ($185). See page 14.

Exempt Exempt Exempt

Exempt if de minimis.

Exempt if de minimis.

Tuition reduction Exempt4if for undergraduate education (or graduate education if the

employee performs teaching or research activities).

1Exemption does not apply to S corporation employees who are 2% shareholders. See page 3.

2Exemption does not apply to certain highly compensated employees under a self-insured plan that favors those employees.

3Exemption does not apply to certain highly compensated employees under a program that favors those employees.

4Exemption does not apply to certain highly compensated employees.

5Exemption does not apply to certain key employees under a plan that favors those employees.

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Exclusion from wages. You can generally exclude thevalue of accident or health benefits you provide to anAccident andemployee from the employees wages.

Health Benefits Exception for certain long-term care benefits. Youcannot exclude contributions to the cost of long-term care

This exclusion applies to contributions you make to an insurance from an employees wages subject to federalaccident or health plan for an employee, including the income tax withholding if the coverage is provided throughfollowing: a flexible spending or similar arrangement. This is a benefit

program that reimburses specified expenses up to a maxi- Contributions to the cost of accident or health insur- mum amount that is reasonably available to the employee

ance. and is less than 5 times the total cost of the insurance.However, you can exclude these contributions from the Contributions to a separate trust or fund that pro-employees wages subject to social security, Medicare,vides accident or health benefits directly or throughand federal unemployment taxes.insurance.

S corporation shareholders. Because you cannot Contributions to Archer MSAs (discussed in Publi-treat a 2% shareholder of an S corporation as an employeecation 969, Medical Savings Accounts (MSAs)).for this exclusion, you must include the value of accident orhealth benefits you provide the employee in theThis exclusion also applies to payments you make (di-employees wages subject to federal income tax withhold-rectly or indirectly) to an employee, under an accident oring. However, you can exclude the value of these benefits,health plan for employees, that are either of the following:other than payments for specific injuries or illnesses, fromthe employees wages subject to social security, Medicare, Payments or reimbursements of medical expenses.and federal unemployment taxes.

Payments for specific injuries or illnesses (such as Exception for highly compensated employees. Ifthe loss of the use of an arm or leg). The payments

your plan is a self-insured medical reimbursement planmust be figured without regard to any period of ab-that favors highly compensated employees, you must in-sence from work.clude all or part of the amounts you pay to these employ-ees in their wages subject to federal income tax

Accident or health plan. This is an arrangement that withholding. However, you can exclude these amounts,provides benefits for your employees, their spouses, and other than payments for specific injuries or illnesses, fromtheir dependents in the event of personal injury, or sick- the employees wages subject to social security, Medicare,ness. The plan may be insured or noninsured and does not and federal unemployment taxes.need to be in writing. A self-insured plan is a plan that reimburses your em-

ployees for medical expenses not covered by an accidentEmployee. For this exclusion, treat the following individu- or health insurance policy.als as employees.

A highly compensated employee for this exception isany of the following individuals.1) A current common-law employee.

1) One of the five highest paid officers.2) A full-time life insurance agent who is a current statu-tory employee. 2) An employee who owns (directly or indirectly) more

than 10% in value of the employers stock.3) A retired employee.

3) An employee who is among the highest paid 25% of4) A former employee that you maintain coverage forall employees, other than those who can be ex-based on the employment relationship.cluded from the plan.

5) A widow or widower of an individual who died whileFor more information on this exception, see sectionan employee.

105(h) of the Internal Revenue Code and the related regu-6) A widow or widower of a retired employee. lations.

7) For the exclusion of contributions to an accident orhealth plan, a leased employee who has providedservices to you on a substantially full-time basis for Achievement Awardsat least a year if the services are performed underyour primary direction or control. This exclusion applies to the value of any tangible personal

property you give to an employee as an award for eitherException for S corporation shareholders. Do not length of serviceor safety achievement. The exclusion

treat a 2% shareholder of an S corporation as an employee does not apply to awards of cash, cash equivalents, giftof the corporation for this purpose. A 2% shareholder is certificates, or other intangible property such as vacations,someone who directly or indirectly owns (at any time dur- meals, lodging, tickets to theater or sporting events,ing the year) more than 2% of the corporations stock or stocks, bonds, and other securities. The award must meetstock with more than 2% of the voting power. the requirements for employee achievement awards dis-

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cussed in chapter 2 of Publication 535, Business Ex- adoption expenses. The determination that an adoptedpenses. child is qualified as a child with special needs must be

made by the employees state.Employee. For this exclusion, treat the following individu-

Employee. For this exclusion, do not treat a 2% share-als as employees.holder of an S corporation as an employee of the corpora-tion. A 2% shareholder is someone who directly or1) A current employee.indirectly owns (at any time during the year) more than 2%

2) A former common-law employee that you maintain of the corporations stock or stock with more than 2% of thecoverage for in consideration of or based on an voting power.agreement relating to prior service as an employee.

3) A leased employee who has provided services toyou on a substantially full-time basis for at least a Athletic Facilitiesyear if the services are performed under your pri-mary direction or control. You can exclude the value of an employee s use of an

on-premises gym or other athletic facility you operate fromException for S corporation shareholders. Do not the employees wages if substantially all use of the facility

treat a 2% shareholder of an S corporation as an employee during the calendar year is by your employees, theirof the corporation. A 2% shareholder is someone who spouses, and their dependent children. For this purpose,directly or indirectly owns (at any time during the year) an employees dependent child is a child or stepchild whomore than 2% of the corporations stock or stock with more is the employees dependent or who, if both parents arethan 2% of the voting power. deceased, is age 24 or younger.

On-premises facility. The athletic facility must be locatedExclusion from wages. You can generally exclude theon premises you own or lease. It does not have to be

value of achievement awards you give to an employee located on your business premises. However, the exclu-from the employees wages if their cost is not more thansion does not apply to an athletic facility for residential use,the amount you can deduct as a business expense for thesuch as athletic facilities that are part of a resort.year. That amount is $1,600 ($400 for awards that are not

qualified plan awards). See chapter 2 of Publication 535 Employee. For this exclusion, treat the following individu-for more information on the limit on deductions for em- als as employees.ployee achievement awards.

1) A current employee.To determine for 2002 whether an achievementaward is a qualified plan award under the de- 2) A former employee who retired or left on disability.duction rules described in Pub. 535, treat anyCAUTION

!3) A widow or widower of an individual who died whileemployee who received more than $90,000 in pay for 2001

an employee.as a highly compensated employee.4) A widow or widower of a former employee who re-

tired or left on disability.If the cost of awards given to an employee is more than

your allowable deduction, include in the employees wages 5) A leased employee who has provided services tothe largerof the following amounts. you on a substantially full-time basis for at least a

year if the services are performed under your pri- The part of the cost that is more than your allowable

mary direction or control.deduction (up to the value of the awards).

6) A partner who performs services for a partnership. The amount by which the value of the awards ex-

ceeds your allowable deduction.

You exclude the remaining value of the awards from theDe Minimis (Minimal) Benefitsemployees wages.

You can exclude the value of a de minimis benefit youprovide to an employee from the employees wages. A deAdoption Assistanceminimis benefit is any property or service you provide to anemployee that has so little value (taking into account how

You can exclude payments or reimbursements you makefrequently you provide similar benefits to your employees)

under an adoption assistance program for an employee sthat accounting for it would be unreasonable or administra-

qualified adoption expenses of up to $10,000 per qualify-tively impracticable. Cash, no matter how little, is never

ing child from the employees wages subject to federalexcludable as a de minimis benefit, except for occasional

income tax withholding. However, you cannot excludemeal money or transportation fare.

these payments from wages subject to social security,Examples of de minimis benefits include the following:

Medicare, and federal unemployment taxes. For more in-formation, see Publication 968, Tax Benefits for Adoption. Copying machine use. Occasional personal use of

Beginning in 2003, you may exclude $10,000 from an a company copying machine, if you sufficiently con-employees wages for the adoption of a child with special trol its use so that at least 85% of its use is forneeds regardless of whether the employee has qualified business purposes, is a de minimis benefit.

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Holiday gifts. Holiday gifts, other than cash, with a assistance program each year. This limit is reduced tolow fair market value are de minimis benefits. $2,500 for married employees filing separate returns.

However, the exclusion cannot be more than the earned Life insurance on spouse or dependent.

income of either:Group-term life insurance payable on the death of anemployees spouse or dependent is a de minimis 1) The employee, orbenefit if the face amount is not more than $2,000.

2) The employees spouse. Meals. De minimis meals are discussed under

Special rules apply to determine the earned income of aMeals, later.spouse who is either a student or not able to care for

Parties and picnics. Occasional parties or picnics himself or herself. For more information on the earnedfor employees and their guests are de minimis bene- income limit, see Publication 503.fits.

Exception for highly compensated employees. You Tickets for entertainment or sporting events. Oc- cannot exclude dependent care assistance from the

casional tickets for entertainment or sporting events wages of a highly compensated employee unless the ben-are de minimis benefits. efits provided under the program do not favor highly com-

pensated employees and the program meets the Transportation fare. De minimis transportation farerequirements described in section 129(d) of the Internalis discussed under Transportation (Commuting)Revenue Code.Benefits, later.

For this exclusion, a highly compensated employee for Typing. Occasional typing of personal letters by a 2002 is an employee who meets either of the following

company secretary is a de minimis benefit. tests.

1) The employee was a 5% owner at any time during

Employee. For this exclusion, treat any recipient of a de the year or the preceding year.minimis benefit as an employee.2) The employee received more than $90,000 in pay for

the preceding year.

Dependent Care You can choose to ignore test (2) if the employee was notalso in the top 20% of employees when ranked by pay for

Assistance the preceding year.Form W2. Report the value of all dependent care assis-This exclusion applies to household and dependent caretance you provide to an employee under a dependent careservices you pay for (directly or indirectly) or provide to anassistance program in box 10 of the employees Formemployee under a dependent care assistance programW2. Include any amounts you cannot exclude from thethat covers only your employees. The services must be foremployees wages in boxes 1, 3, and 5.a qualifying persons care and must allow the employee to

work. These requirements are basically the same as the

tests the employee would have to meet to claim the depen-dent care credit if the employee paid for the services. For Educational Assistancemore information, see Qualifying Person Test andWork-Related Expense Test in Publication 503, Child This exclusion applies to educational assistance you pro-and Dependent Care Expenses. vide to employees under an educational assistance pro-

gram. For expenses relating to courses beginning in 2002,Employee. For this exclusion, treat the following individu- the exclusion also applies to graduate level courses.als as employees. Educational assistance means amounts you pay or in-

cur for your employees education expenses. These ex-1) A current employee.

penses generally include the cost of books, equipment,2) A leased employee who has provided services to fees, supplies, and tuition. Also, these expenses do not

you on a substantially full-time basis for at least a include the cost of a course or other education involvingyear if the services are performed under your pri- sports, games, or hobbies, unless the education:

mary direction or control. 1) Has a reasonable relationship to your business, or3) Yourself (if you are a sole proprietor).

2) Is required as part of a degree program.4) A partner who performs services for a partnership.

Education expenses do not include the cost of tools orsupplies (other than textbooks) that your employee is al-

Exclusion from wages. You can exclude the value of lowed to keep at the end of the course. Nor do they includebenefits you provide to an employee under a dependent the cost of lodging, meals, or transportation.care assistance program from the employees wages if youreasonably believe that the employee can exclude the Educational assistance program. An educational assis-benefits from gross income. tance program is a separate written plan that provides

An employee can generally exclude from gross income educational assistance only to your employees. The pro-up to $5,000 of benefits received under a dependent care gram qualifies only if all of the following tests are met.

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Form 5500. Generally, if you maintain an educational1) The program benefits employees who qualify under assistance program, you must report information about the

rules set up by you that do not favor highly compen- program each year by the last day of the 7th month aftersated employees. To determine whether your pro- the program year ends. Use Form 5500 and Schedule Fgram meets this test, do not consider employees (Form 5500). However, if the education assistance pro-excluded from your program who are covered by a gram provides only job-related training that is deductible bycollective bargaining agreement if there is evidence the employee as an ordinary and necessary businessthat educational assistance was a subject of expense, you are not required to file Form 5500. See thegood-faith bargaining. form instructions for information on extensions of time to

file.2) The program does not provide more than 5% of its

benefits during the year for shareholders or owners.A shareholder or owner is someone who owns (onany day of the year) more than 5% of the stock or of Employee Discountsthe capital or profits interest of your business.

This exclusion applies to a price reduction you give an3) The program does not allow employees to choose toemployee on property or services you offer to customers inreceive cash or other benefits that must be includedthe ordinary course of the line of business in which thein gross income instead of educational assistance.employee performs substantial services. However, it does

4) You give reasonable notice of the program to eligible not apply to discounts on real property or discounts onemployees. personal property of a kind commonly held for investment

(such as stocks or bonds).Your program can cover former employees if their employ-ment is the reason for the coverage. Employee. For this exclusion, treat the following individu-

For this exclusion, a highly compensated employee for als as employees.

2002 is an employee who meets either of the followingtests. 1) A current employee.

2) A former employee who retired or left on disability.1) The employee was a 5% owner at any time duringthe year or the preceding year. 3) A widow or widower of an individual who died while

an employee.2) The employee received more than $90,000 in pay forthe preceding year. 4) A widow or widower of an employee who retired or

left on disability.You can choose to ignore test (2) if the employee was notalso in the top 20% of employees when ranked by pay for 5) A leased employee who has provided services tothe preceding year. you on a substantially full-time basis for at least a

year if the services are performed under your pri-Employee. For this exclusion, treat the following individu-mary direction or control.als as employees.

6) A partner who performs services for a partnership.1) A current employee.

2) A former employee who retired, left on disability, or Exclusion from wages. You can generally exclude thewas laid off. value of an employee discount you provide to an employee

from the employees wages, up to the following limits.3) A leased employee who has provided services toyou on a substantially full-time basis for at least a 1) For a discount on services, 20% of the price youyear if the services are performed under your pri- charge nonemployee customers for the service.mary direction or control.

2) For a discount on merchandise or other property,4) Yourself (if you are a sole proprietor). your gross profit percentage times the price you

charge nonemployee customers for the property.5) A partner who performs services for a partnership.

Determine your gross profit percentage based on allExclusion from wages. You can exclude up to $5,250 of property you offer to customers (including employee cus-

educational assistance you provide to an employee under tomers) and your experience during the tax year immedi-an educational assistance program from the employee s ately before the tax year in which the discount is available.wages each year. To figure your gross profit percentage, subtract the total

cost of the property from the total sales price of the prop-Assistance over $5,250. If you do not have an educa-erty and divide the result by the total sales price of thetional assistance plan, or you provide an employee withproperty.assistance exceeding $5,250, you can exclude the value

of these benefits from wages if they are working condition Exception for highly compensated employees. Youbenefits. Property or a service provided is a working condi- cannot exclude from the wages of a highly compensatedtion benefit to the extent that if the employee paid for it, the employee any part of the value of a discount that is notamount paid would have been deductible as a business or available on the same terms to one of the following groups.depreciation expense. See Working Condition Benefits,later. 1) All your employees, or

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2) A group of employees defined under a reasonable1) It provides a general death benefit that is not in-classification you set up that does not favor highly

cluded in income.compensated employees.

2) You provide it to a group of employees. See TheFor this exclusion, a highly compensated employee for10-employee rule, below.2002 is an employee who meets either of the following

tests. 3) It provides an amount of insurance to each employeebased on a formula that prevents individual selec-

1) The employee was a 5% owner at any time during tion. This formula must use factors such as thethe year or the preceding year. employees age, years of service, pay, or position.

2) The employee received more than $90,000 in pay for 4) You provide it under a policy you carry directly orthe preceding year. indirectly. Even if you do not pay any of the policyscost, you are considered to carry it if you arrange forYou can choose to ignore test (2) if the employee was notpayment of its cost by your employees and charge atalso in the top 20% of employees when ranked by pay forleast one employee less than, and at least one otherthe preceding year.employee more than, the cost of his or her insur-ance. Determine the cost of the insurance, for thispurpose, as explained in the discussion on coverage

Employee Stock Options over the limit under Exclusion from wages, on page10.

There are three classes of stock options incentive stockGroup-term life insurance does not include the followingoptions, employee stock purchase plan options, and non-

insurance.qualified (nonstatutory) stock options.

Generally, for income tax purposes, incentive stock Insurance that does not provide general death bene-options and employee stock purchase plan options are fits, such as travel insurance or a policy providing

excluded from wages both when the options are granted only accidental death benefits.and when they are exercised (unless the stock is disposed

Life insurance on the life of your employees spouseof in a disqualifying disposition). However, the spreador dependent. However, you may be able to exclude(between the exercise price and fair market value of thethe cost of this insurance from the employeesstock at the time of exercise) is included in wages subjectwages as a de minimis benefit. See De Minimisto social security, Medicare, and federal unemployment(Minimal) Benefits, earlier.taxes when the options are exercised. Income tax with-

holding is not required at the time of exercise. Insurance provided under a policy that provides apermanent benefit (an economic value that extendsThe spread on nonqualified options normally is includedbeyond 1 policy year, such as paid-up or cash sur-in wages for income tax purposes when the options arerender value), unless certain requirements are met.exercised. (See section 1.83-7 of the regulations.) TheSee section 1.79-1(b) of the regulations for details.spread on nonstatutory options is also subject to social

security, Medicare, and FUTA taxes, and income tax with-holding at the time of exercise.

Employee. For this exclusion, treat the following individu-The IRS will not enforce the application of social secur- als as employees.

ity, Medicare, and FUTA taxes at the time of exercise onthe spread on incentive stock options and employee stock 1) A current common-law employee.purchase plan options, for exercises that occur before

2) A full-time life insurance agent who is a current statu-January 1, 2003. In addition, if stock acquired pursuant totory employee.the exercise of an incentive stock option or employee stock

purchase plan option that occurred before January 1, 3) An individual who was formerly your employee under2003, is subsequently sold in a disqualifying disposition, (1) or (2), above.the income is not subject to income tax withholding. How-

4) A leased employee who has provided services toever, the income should be reported to the employee oryou on a substantially full-time basis for at least aformer employee, generally in box 1 of Form W-2. Seeyear if the services are performed under your pri-

Notice 2001-14 (2001-16 I.R.B. 516) for more information. mary direction and control.For more information about employee stock options,see sections 421, 422, and 423 of the Internal Revenue Exception for S corporation shareholders. Do notCode and the related regulations. treat a 2% shareholder of an S corporation as an employee

of the corporation. A 2% shareholder is someone whodirectly or indirectly owns (at any time during the year)more than 2% of the corporations stock or stock with moreGroup-Term Lifethan 2% of the voting power.

Insurance CoverageThe 10-employee rule. Generally, life insurance is not

This exclusion applies to life insurance coverage that group-term life insurance unless you provide it to at leastmeets all the following conditions. 10 full-time employees at some time during the year.

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For this rule, count employees who choose not to re- participation or benefits, you must include the entire cost ofceive the insurance unless, to receive it, they must contrib- the insurance in your key employees wages subject toute to the cost of benefits other than the group-term life social security and Medicare taxes. You must also includeinsurance. For example, count an employee who could the entire cost of the insurance in the employees wagesreceive insurance by paying part of the cost, even if that shown in boxes 1, 3, and 5 of Form W-2. However, you canemployee chooses not to receive it. However, do not count exclude the cost of this insurance from the employeesan employee who must pay part or all of the cost of wages subject to federal income tax withholding and fed-permanent benefits to get insurance, unless that employee eral unemployment tax.chooses to receive it. This exception generally does not apply to church plans.

For this purpose, the cost of the insurance is the greaterExceptions. Even if you do not meet the 10-employee

of the following amounts.rule, two exceptions allow you to treat insurance asgroup-term life insurance. 1) The premiums you pay for the employees insurance.

Under the first exception, you do not have to meet the2) The cost you figure using the table shown later under10-employee rule if all the following conditions are met.

Coverage over the limit.1) If evidence that the employee is insurable is re-

For this exclusion, a key employee during 2002 is anquired, it is limited to a medical questionnaire (com-employee or former employee who is one of the followingpleted by the employee) that does not require aindividuals. See section 416(i) for more information.physical.

1) An officer having annual pay of more than $130,000.2) You provide the insurance to all your full-time em-ployees or, if the insurer requires the evidence men- 2) An individual who for 2002 was either of the follow-tioned in (1), to all full-time employees who provide ing:evidence the insurer accepts.

a) A 5% owner of your business.3) You figure the coverage based on either a uniformpercentage of pay or the insurers coverage brack- b) A 1% owner of your business whose annual payets. was more than $150,000.

Under the second exception, you do not have to meetA former employee who was a key employee uponthe 10-employee rule if all the following conditions are met.

retirement or separation from service is also a key em-ployee.1) You provide the insurance under a common plan

Your plan does not favor key employees as to partici-covering your employees and the employees of atpationif at least one of the following is true.least one other employer who is not related to you.

2) The insurance is restricted to, but mandatory for, all 1) It benefits at least 70% of your employees.your employees who belong to or are represented by

2) At least 85% of the participating employees are notan organization (such as a union) that carries onkey employees.substantial activities besides obtaining insurance.

3) It benefits employees who qualify under a set of3) Evidence of whether an employee is insurable doesrules you set up that do not favor key employees.not affect an employees eligibility for insurance or

the amount of insurance that employee gets. Your plan meets this participation test if it is part of acafeteria plan (discussed in section 1) and it meets theTo apply either exception, do not consider employeesparticipation test for those plans.who were denied insurance for anyof the following rea-

When applying this test do not consider employeessons.who:

1) They were 65 or older.1) Have not completed 3 years of service.

2) They customarily work 20 hours or less a week or 52) Are part time or seasonal.months or less in a calendar year.

3) Are nonresident aliens who receive no U.S. source3) They have not been employed for the waiting periodearned income from you.given in the policy. This waiting period cannot be

more than 6 months. 4) Are not included in the plan but are in a unit ofemployees covered by a collective bargaining agree-

Exclusion from wages. You can generally exclude all ment, if the benefits provided under the plan weregroup-term life insurance coverage you provide to an em- the subject of good-faith bargaining between you andployee from the employees wages subject to federal in- employee representatives.come tax withholding and federal unemployment tax. In

Your plan does not favor key employees as to benefitsaddition, you can exclude the cost of up to $50,000 of

if all benefits available to participating key employees arecoverage from wages subject to social security and Medi-

also available to all other participating employees. Yourcare taxes.

plan does not favor key employees just because theException for key employees. Generally, if your amount of insurance you provide to your employees is

group-term life insurance plan favors key employees as to uniformly related to their pay.

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S corporation shareholders. Because you cannot Different tests may apply to lodging furnished by educa-treat a 2% shareholder of an S corporation as an employee tional institutions. For information, see section 119(d) offor this exclusion, you must include the value of all the Internal Revenue Code.group-term life insurance coverage you provide the em- This exclusion does not apply if you allow your em-ployee in the employees wages subject to social security ployee to choose to receive additional pay instead of lodg-and Medicare taxes. You must also include the value of ing.this coverage in the employees wages shown in boxes 1,

On your business premises. For this exclusion, your3, and 5 of Form W2. However, you can exclude thebusiness premises is generally your employees place ofvalue of this coverage from the employees wages subjectwork. (For special rules that apply to lodging furnished in ato federal income tax withholding and federal unemploy-camp located in a foreign country, see section 119(c) of the

ment tax. Internal Revenue Code and the related regulations.)Coverage over the limit. You must include in your

For your convenience. Whether you furnish lodging foremployees wages subject to social security and Medicareyour convenience as an employer depends on all the factstaxes the cost of group-term life insurance that is moreand circumstances. You furnish the lodging to your em-than the cost of $50,000 of coverage, reduced by theployee for your convenience if you do this for a substantialamount the employee paid toward the insurance. Report itbusiness reason other than to provide the employee withas wages in boxes 1, 3, and 5 of the employees Form W-2.additional pay. This is true even if a law or an employmentAlso, show it in box 12 with code C.contract provides that the lodging is furnished as pay.Former employees must pay the employees part ofHowever, a written statement that the lodging is furnishedsocial security and Medicare taxes on the cost of thefor your convenience is not sufficient.excess coverage with their Form 1040. You are not re-

quired to collect these taxes. Report the uncollected socialCondition of employment. Lodging meets this test if you

security tax with code M and the uncollected Medicare taxrequire your employees to accept it because they need to

with code N in box 12 of Form W2. live on your business premises to be able to properlyFigure the monthly cost of the insurance to include in the perform their duties. Examples include employees who

employees wages by multiplying the number of thousands must be available at all times and employees who couldof dollars of insurance coverage over $50,000 (figured to not perform their required duties without being furnishedthe nearest $100) by the cost shown in the following table. the lodging.Use the employees age on the last day of the tax year. It does not matter whether you must furnish the lodgingYou must prorate the cost from the table if less than a full as pay under the terms of an employment contract or a lawmonth of coverage is involved. fixing the terms of employment.

COST PER $1,000 OF PROTECTIONExample. A hospital gives Joan, an employee of theFOR ONE MONTH

hospital, the choice of living at the hospital free of charge orAge Cost living elsewhere and receiving a cash allowance in additionUnder 25 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .05 to her regular salary. If Joan chooses to live at the hospital,25 through 29 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .06

the hospital cannot exclude the value of the lodging from30 through 34 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .08 her wages because she is not required to live at the35 through 39 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .0940 through 44 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 hospital to properly perform the duties of her employment.45 through 49 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1550 through 54 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23 S corporation shareholder-employee. For this exclu-55 through 59 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43

sion, do not treat a 2% shareholder of an S corporation as60 through 64 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .66an employee of the corporation. A 2% shareholder is65 through 69 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.27

70 and older . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.06 someone who directly or indirectly owns (at any time dur-ing the year) more than 2% of the corporations stock orYou figure the total cost to include in the employee sstock with more than 2% of the voting power.wages by multiplying the monthly cost by the number of full

months coverage at that cost.

Meals

Lodging on Your This section discusses the exclusion rules that apply to thefollowing meals.Business Premises De minimis meals

You can exclude the value of lodging you furnish to an Meals on your business premisesemployee from the employees wages if it meets the follow-

ing tests.

1) It is furnished on your business premises. De Minimis Meals2) It is furnished for your convenience.

This exclusion applies to any meal or meal money you3) The employee must accept it as a condition of em- provide to an employee that has so little value (taking into

ployment. account how frequently you provide meals to your employ-

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ees) that accounting for it would be unreasonable or ad-1) The employee was a 5% owner at any time duringministratively impracticable. The exclusion applies, for

the year or the preceding year.example, to the following items.

2) The employee received more than $90,000 in pay for Coffee, doughnuts, or soft drinks.the preceding year.

Occasional meals or meal money provided to enableYou can choose to ignore test (2) if the employee was notan employee to work overtime. (However, the exclu-also in the top 20% of employees when ranked by pay forsion does not apply to meal money figured on thethe preceding year.basis of hours worked.)

Occasional parties or picnics for employees and

Meals on Your Business Premisestheir guests.You can exclude the value of meals you furnish to an

This exclusion also applies to meals you provide at anemployee from the employees wages if they meet the

employer-operated eating facility for employees if the following tests.annual revenue from the facility equals or exceeds thedirect costs of the facility. For this purpose, your revenue They are furnished on your business premises.from providing a meal is considered equal to the facility s

They are furnished for your convenience.direct operating costs to provide that meal if its value canbe excluded from an employees wages under the rules

This exclusion does not apply if you allow your employeeexplained under Meals on Your Business Premises, later.to choose to receive additional pay instead of meals.

If food or beverages you furnish employees qual-ify as a de minimis benefit, you can deduct their

On your business premises. Generally, for this exclu-full cost. The 50% limit on deductions for the costTIP

sion, the employees place of work is your business prem-of meals does not apply. The deduction limit on meals is ises.discussed in chapter 2 of Publication 535.

For your convenience. Whether you furnish meals foryour convenience as an employer depends on all the facts

Employee. For this exclusion, treat any recipient of a de and circumstances. You furnish the meals to your em-minimis meal as an employee. ployee for your convenience if you do this for a substantial

business reason other than to provide the employee withadditional pay. This is true even if a law or an employmentEmployer-operated eating facility for employees. Thiscontract provides that the meals are furnished as pay.is an eating facility that meets all the following conditions.However, a written statement that the meals are furnished

1) You own or lease the facility. for your convenience is not sufficient.

2) You operate the facility. You are considered to oper- Meals excluded for all employees if excluded for

ate the eating facility if you have a contract with more than half. If more than half of your employees whoanother to operate it. are furnished meals on your business premises are fur-nished the meals for your convenience, you can treat all3) The facility is on or near your business premises.meals you furnish to employees on your business prem-

4) You provide meals (food, drinks, and related ser- ises as furnished for your convenience.vices) at the facility during, or immediately before or

Food service employees. Meals you furnish to a res-after, the employees workday.taurant or other food service employee during, or immedi-ately before or after, the employees working hours arefurnished for your convenience. For example, if a waitressExclusion from wages. You can generally exclude theworks through the breakfast and lunch periods, you canvalue of de minimis meals you provide to an employeeexclude the value of the breakfast and lunch you furnish infrom the employees wages.your restaurant for each day she works from her wages.

Exception for highly compensated employees. Youcannot exclude from the wages of a highly compensated

Example. You operate a restaurant business. You fur-employee the value of a meal provided at an employer-op- nish your employee, Carol, who is a waitress working 7erated eating facility that is not available on the same a.m. to 4 p.m., two meals during each workday. Youterms to one of the following groups. encourage but do not require Carol to have her breakfast

on the business premises before starting work. She must1) All your employees.have her lunch on the premises. Since Carol is a food

2) A group of employees defined under a reasonable service employee and works during the normal breakfastclassification you set up that does not favor highly and lunch periods, you can exclude the value of her break-compensated employees. fast and lunch from her wages.

For this exclusion, a highly compensated employee for If you also allow Carol to have meals on your business2002 is an employee who meets either of the following premises without charge on her days off, you cannot ex-tests. clude the value of those meals from her wages.

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Employees available for emergency calls. Meals you the value of meals you furnish on a day when the employeeis not working. However, you can exclude these meals iffurnish during working hours so an employee will be avail-they are furnished with lodging that is excluded from theable for emergency calls during the meal period are fur-employees wages under the rules discussed under Lodg-nished for your convenience. You must be able to showing on Your Business Premises, earlier.that these emergency calls have occurred or can reasona-

bly be expected to occur. Meals with a charge. The fact that you charge for themeals and that your employees may accept or decline the

Example. A hospital maintains a cafeteria on its prem- meals is not taken into account in determining whetherises where all of its 230 employees may get meals at no meals are furnished for your convenience.charge during their working hours. The hospital furnishes

meals to have 120 employees available for emergencies. S corporation shareholder-employee. For this exclu-Each of these employees is at times called upon to perform sion, do not treat a 2% shareholder of an S corporation asservices during the meal period. Although the hospital an employee of the corporation. A 2% shareholder isdoes not require these employees to remain on the prem- someone who directly or indirectly owns (at any time dur-ises, they rarely leave the hospital during their meal period. ing the year) more than 2% of the corporations stock orSince the hospital furnishes meals on its premises to its stock with more than 2% of the voting power.employees so that more than half of them are available foremergency calls during meal periods, the hospital canexclude the value of these meals from the wages of all its Moving Expenseemployees.

ReimbursementsShort meal periods. Meals you furnish during workinghours are furnished for your convenience if the nature of

This exclusion applies to any amount you give an em-your business restricts an employee to a short meal period

ployee, directly or indirectly (including services furnished in(such as 30 or 45 minutes) and the employee cannot be kind), as a payment for, or a reimbursement of, movingexpected to eat elsewhere in such a short time. For exam-

expenses. You must make the reimbursements underple, meals can qualify for this treatment if your peak wor-

rules similar to those described in chapter 13 of Publicationkload occurs during the normal lunch hour. However, they

535 for reimbursements of expenses for travel, meals, anddo not qualify if the reason for the short meal period is to

entertainment under accountable plans.allow the employee to leave earlier in the day. This exclusion applies only to reimbursements of mov-

ing expenses that the employee could deduct if he or sheExample. Frank is a bank teller who works from 9 a.m.

had paid or incurred them without reimbursement. How-to 5 p.m. The bank furnishes his lunch without charge in a ever, it does not apply if the employee actually deductedcafeteria the bank maintains on its premises. The bank the expenses in a previous year.furnishes these meals to Frank to limit his lunch period to Deductible moving expenses include only the reasona-30 minutes, since the banks peak workload occurs during ble expenses of:the normal lunch period. If Frank got his lunch elsewhere, itwould take him much longer than 30 minutes and the bank

1) Moving household goods and personal effects fromstrictly enforces the time limit. The bank can exclude the the former home to the new home, andvalue of these meals from Franks wages.

2) Traveling (including lodging) from the former home toProper meals not otherwise available. Meals you fur- the new home.

nish during working hours are furnished for your conve-nience if the employee could not otherwise eat proper Deductible moving expenses do not include any

expenses for meals.meals within a reasonable period of time. For example,meals can qualify for this treatment if there are insufficient CAUTION

!eating facilities near the place of employment.

Meals after work hours. Meals you furnish to an em- For more information on deductible moving expenses,ployee immediately after working hours are furnished for see Publication 521, Moving Expenses.your convenience if you would have furnished them during

Employee. For this exclusion, treat the following individu-working hours for a substantial nonpay business reason

als as employees.but, because of the work duties, they were not eaten duringworking hours.

1) A current employee.Meals you furnish to promote goodwill, boost mo-

2) A leased employee who has provided services torale, or attract prospective employees. Meals you fur-you on a substantially full-time basis for at least anish to promote goodwill, boost morale, or attractyear if the services are performed under your pri-

prospective employees are not considered furnished formary direction or control.

your convenience. However, you may be able to excludetheir value under the rules discussed under De Minimis

Exception for S corporation shareholders. Do notMeals, earlier.

treat a 2% shareholder of an S corporation as an employeeMeals furnished on nonworkdays or with lodging. of the corporation. A 2% shareholder is someone who

You generally cannot exclude from an employees wages directly or indirectly owns (at any time during the year)

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more than 2% of the corporations stock or stock with more 5) A leased employee who has provided services tothan 2% of the voting power. you on a substantially full-time basis for at least a

year if the services are performed under your pri-Exclusion from wages. You can generally exclude quali- mary direction or control.fying moving expense reimbursements you provide to an

6) A partner who performs services for a partnership.employee from the employees wages. If you paid thereimbursements directly to the employee, report their Treat services you provide to the spouse or dependentamount in box 12 of the Form W2 with the code P. Do not child of an employee as provided to the employee. For thisreport payments to a third party for the employees moving fringe benefit, dependent child means any son, stepson,expenses or the value of moving services you provide. daughter, or stepdaughter who is a dependent of the em-

ployee, or both of whose parents have died and who hasnot reached age 25. Treat a child of divorced parents as adependent of both parents.No-Additional-Cost Services

Treat any use of air transportation by the parent of anThis exclusion applies to a service you provide to an employee as use by the employee. This rule does notemployee that does not cause you to incur any substantial apply to use by the parent of a person considered anadditional costs. The service must be offered to customers employee because of item (3) above.in the ordinary course of the line of business in which the

Exclusion from wages. You can generally exclude theemployee performs substantial services.value of a no-additional-cost service you provide to anGenerally, no-additional-cost services are excess ca-employee from the employees wages.pacity services, such as airline, bus, or train tickets; hotel

rooms; or telephone services provided free or at a reduced Exception for highly compensated employees. Youprice to employees working in those lines of business. cannot exclude from the wages of a highly compensated

employee the value of a no-additional-cost service that isSubstantial additional costs. To determine whether you not available on the same terms to one of the followingincur substantial additional costs to provide a service to an

groups.employee, count any lost revenue as a cost. Do not reducethe costs you incur by any amount the employee pays for

1) All your employees, orthe service. You are considered to incur substantial addi-tional costs if you or your employees spend a substantial 2) A group of employees defined under a reasonableamount of time in providing the service, even if the time classification you set up that does not favor highlyspent would otherwise be idle or if the services are compensated employees.provided outside normal business hours.

For this exclusion, a highly compensated employee for2002 is an employee who meets either of the followingReciprocal agreements. A no-additional-cost servicetests.provided to your employee by an unrelated employer may

qualify as a no-additional-cost service if all the following1) The employee was a 5% owner at any time duringtests apply:

the year or the preceding year.

1) The service is the same type of service generally 2) The employee received more than $90,000 in pay forprovided to customers in both the line of business in the preceding year.which the employee works and the line of business

You can choose to ignore test (2) if the employee was notin which the service is provided.also in the top 20% of employees when ranked by pay for

2) You and the employer providing the service have a the preceding year.written reciprocal agreement under which a group ofemployees of each employer, all of whom performsubstantial services in the same line of business, Retirement Planning Servicesmay receive no-additional-cost services from theother employer.

You may exclude from wages the value of any retirement3) Neither you nor the other employer incurs any sub- planning advice or information provided to your employee

stantial additional cost either in providing the service or his or her spouse if you maintain a qualified retirement

or because of the written agreement. plan. The advice and information may concern retirementgenerally, and not only the employer plan. However, the

Employee. For this exclusion, treat the following Individu- exclusion does not apply to services for tax preparation,als as employees. accounting, legal, or brokerage services.

1) A current employee.

2) A former employee who retired or left on disability. Transportation (Commuting)3) A widow or widower of an individual who died while Benefits

an employee.

4) A widow or widower of a former employee who re- This section discusses exclusion rules that apply to bene-tired or left on disability. fits you provide your employees for their personal transpor-

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tation, such as commuting to and from work. These rules Transit pass. A transit pass is any pass, token, farecard,voucher, or similar item entitling a person to ride, free ofapply to the following transportation benefits.charge or at a reduced rate, one of the following:

De minimis transportation benefits. Mass transit.

Qualified transportation benefits. In a vehicle that seats at least 6 adults (not including

Special rules that apply to demonstrator cars and qualified the driver) if a person in the business of transportingnonpersonal-use vehicles are discussed under Working persons for pay or hire operates it.Condition Benefits, later.

Mass transit may be publicly or privately operated andincludes bus, rail, or ferry.

De Minimis Transportation BenefitsQualified parking. Qualified parking is parking you pro-

You can exclude the value of any de minimis transportation vide to your employees on or near your business premises.benefit you provide to an employee from the employees It also includes parking on or near the location from which

your employees commute to work using mass transit,wages. A de minimis transportation benefit is any transpor-commuter highway vehicles, or carpools. It does not in-tation benefit you provide to an employee that has so littleclude parking at or near your employees home.value (taking into account how frequently you provide

transportation to your employees) that accounting for itEmployee. For this exclusion, treat the following individu-would be unreasonable or administratively impracticable.als as employees.For example, it applies to occasional transportation fare

you give an employee because the employee is working 1) A current employee.overtime, if the benefit is reasonable and is not based on

2) A leased employee who has provided services tohours worked.

you on a substantially full-time basis for at least ayear if the services are performed under your pri-Employee. For this exclusion, treat any recipient of a demary direction or control.minimis transportation benefit as an employee.

Exception for S corporation shareholders. Do notQualified Transportation Benefits treat a 2% shareholder of an S corporation as an employee

of the corporation. A 2% shareholder is someone whoThis exclusion applies to the following benefits.

directly or indirectly owns (at any time during the year)more than 2% of the corporations stock or stock with more1) A ride in a commuter highway vehicle between thethan 2% of the voting power.employees home and work place.

Relation to other fringe benefits. You cannot exclude a2) A transit pass.qualified transportation benefit you provide to an employee

3) Qualified parking.under the de minimis or working condition benefit rules.

However, if you provide a local transportation benefit otherThe exclusion applies whether you provide one or a combi-than by transit pass or commuter highway vehicle, or to anation of these benefits to your employees.person other than an employee, you may be able to ex-Qualified transportation benefits can be provided di-clude all or part of the benefit under other fringe benefitrectly by you or through a bona fide reimbursement ar-rules (de minimis, working condition, etc.).rangement. However, cash reimbursements for transit

passes qualify only if a voucher or a similar item that theExclusion from wages. You can generally exclude theemployee can exchange only for a transit pass is notvalue of transportation benefits you provide to an em-

readily available for direct distribution by you to your em-ployee during 2002 from the employees wages up to the

ployee. A voucher is readily available for direct distributionfollowing limits.

only if an employee can obtain it from a voucher providerthat does not impose fare media charges or other restric- 1) $100 per month for combined commuter highwaytions that effectively prevent the employer from obtaining vehicle transportation and transit passes.vouchers. See Regulation section 1.132-9 for more infor-

2) $185 per month for qualified parking.mation.

You can exclude qualified transportation fringe benefitsBenefits more than the limit. If the value of a benefit

from an employees wages even if you provide them in for any month is more than its limit, include in theplace of pay. employees wages the amount over the limit minus any

amount the employee paid for the benefit. You cannotCommuter highway vehicle. A commuter highway vehi- exclude the excess from the employees wages as a decle is any highway vehicle that seats at least 6 adults (not minimis transportation benefit.including the driver). In addition, you must reasonablyexpect that at least 80% of the vehicle mileage will be for More information. For more information on qualifiedtransporting employees between their homes and work transportation benefits, including van pools, and how toplace, with employees occupying at least one-half of the determine the value of parking, see Regulation sectionvehicles seats (not including the drivers). 1.132-9.

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Employee. For this exclusion, treat the following individu-als as employees.Tuition Reduction1) A current employee.An educational organization can exclude the value of a

qualified tuition reduction it provides to an employee from 2) A partner who performs services for a partnership.the employees wages.

3) A director of your company.A tuition reduction for undergraduate education gener-

ally qualifies for this exclusion if it is for the education of the 4) An independent contractor who performs services forfollowing individuals. you.

1) A current employee. Vehicle allocation rules. If you provide a car for an2) A former employee who retired or left on disability. employees use, the amount you can exclude as a working

condition benefit is the amount that would be allowable as3) A widow or widower of an individual who died whilea deductible business expense if the employee paid for itsan employee.use. That is, if the employee uses the car for both business

4) A widow or widower of a former employee who re- and personal use, the value of the working condition bene-tired or left on disability. fit is the part determined to be for business use of the

vehicle. See Business use of your car under Personal5) A dependent child or spouse of any individual listedExpenses in chapter 1 of Publication 535. Also, see thein (1) through (4), above.special rules for certain demonstrator cars and qualified

A tuition reduction for graduate education qualifies fornonpersonal-use vehicles, discussed next.

this exclusion only if it is for the education of a graduateHowever, instead of excluding the value of the workingstudent who performs teaching or research activities for

condition benefit, you can include the entire annual leasethe educational organization. value of the car in the employees wages. The employee

For more information on this exclusion, see Publicationcan then claim any deductible business expense for the

520, Scholarships and Fellowships.car as an itemized deduction on his or her personal incometax return. This option is available only if you use the leasevalue rule (discussed in section 3) to value the benefit.

Working Condition BenefitsDemonstrator cars. All of the use of a demonstrator car

This exclusion applies to property and services you pro- by your full-time auto salesperson generally qualifies as avide to an employee so that the employee can perform his working condition benefit if the use is primarily to facilitateor her job. It applies to the extent the employee could the services the salesperson provided for you and therededuct the cost of the property or services as a business are substantial restrictions on personal use. For moreexpense or depreciation expense if he or she had paid it. information and the definition of full-time auto salesper-The employee must meet any substantiation requirements son, see section 1.132-5(o) of the regulations.

that apply to the deduction. Examples of working conditionbenefits include an employees use of a company car for Qualified nonpersonal-use vehicles. All of anbusiness and job-related education provided to an em- employees use of a qualified nonpersonal-use vehicle is aployee.

working condition benefit. A qualified nonpersonal-use ve-This exclusion also applies to a cash payment you hicle is any vehicle the employee is not likely to use more

provide for an employees expenses for a specific or prear- than minimally for personal purposes because of its de-ranged business activity for which a deduction is allowable sign. Qualified nonpersonal-use vehicles generally includeto the employee. You must require the employee to verify all of the following vehicles.that the payment is actually used for those expenses andto return any unused part of the payment. 1) Clearly marked police and fire vehicles.

For information on deductible employee business ex-2) Unmarked vehicles used by law enforcement officerspenses, see Unreimbursed Employee Expenses in Pub-

if the use is officially authorized.lication 529, Miscellaneous Deductions.

The exclusion does notapply to the following items. 3) An ambulance or hearse used for its specific pur-pose. A service or property provided under a flexible

4) Any vehicle designed to carry cargo with a loadedspending account in which you agree to provide thegross vehicle weight over 14,000 pounds.employee, over a time period, a certain level of un-

specified noncash benefits with a predetermined 5) Delivery trucks with seating for the driver only, or thecash value.

driver plus a folding jump seat. A physical examination program you provide, even if 6) A passenger bus with a capacity of at least 20 pas-

mandatory.sengers used for its specific purpose.

Any item to the extent the employee could deduct its7) School buses.

cost as an expense for a trade or business other8) Tractors and other special purpose farm vehicles.than your trade or business.

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Pickup trucks. A pickup truck with a loaded gross vehi- Exception for independent contractors. You cannotcle weight of 14,000 pounds or less is a qualified nonper- exclude the value of parking or the use of consumer goodssonal use vehicle if it has been specially modified so it is you provide in a product testing program from the compen-not likely to be used more than minimally for personal sation you pay to an independent contractor who performspurposes. For example, a pickup truck qualifies if it is services for you.clearly marked with permanently affixed decals, special

Exception for company directors. You cannot ex-painting, or other advertising associated with your trade,

clude the value of the use of consumer goods you providebusiness, or function and meets either of the following

in a product testing program from the compensation yourequirements.

pay to a director.

1) It is equipped with at least one of the following items.

a) A hydraulic lift gate. 3. Fringe Benefit Valuationb) Permanent tanks or drums.

Rulesc) Permanent side boards or panels that materially

raise the level of the sides of the truck bed. This section discusses the rules you must use to determinethe value of a fringe benefit you provide to an employee.d) Other heavy equipment (such as an electric gen-You must determine the value of any benefit you cannoterator, welder, boom, or crane used to tow auto-exclude under the rules in section 2 or for which themobiles and other vehicles).amount you can exclude is limited. See Including taxablebenefits in pay under Are Fringe Benefits Taxable? in2) It is used primarily to transport a particular type ofsection 1.load (other than over the public highways) in a con-

In most cases, you must use the general valuation rulestruction, manufacturing, processing, farming, min-

to value a fringe benefit. However, you may be able to useing, drilling, timbering, or other similar operation for a special valuation rule to determine the value of certainwhich it was specially designed or significantly modi-benefits.fied.

This section does not discuss the special valuation ruleused to value meals provided at an employer-operatedVans. A van with a loaded gross vehicle weight ofeating facility for employees. These rules are discussed in14,000 pounds or less is a qualified nonpersonal usesection 1.61-21(j) of the regulations. This section also doesvehicle if it has been specially modified so it is not likely tonot discuss the special valuation rules used to value thebe used more than minimally for personal purposes. Foruse of aircraft. These rules are discussed in sectionsexample, a van qualifies if it is clearly marked with perma-1.61-21(g) and (h) of the regulations.nently affixed decals, special painting, or other advertising

This section discusses the general valuation rule andassociated with your trade, business, or function and has athe following special valuation rules for employee transpor-seat for the driver only (or the driver and one other person)tation benefits.and either of the following items.

Cents-per-mile rule1) Permanent shelving that fills most of the cargo area. Commuting rule2) An open cargo area and the van always carries mer-

chandise, material, or equipment used in your trade, Lease value rulebusiness, or function.

Unsafe conditions commuting rule

Outplacement services. An employees use of outplace-ment services qualifies as a working condition benefit ifyou provide the services to the employee on the basis of General Valuation Ruleneed and you get a substantial business benefit from theservices distinct from the benefit you would get from the You must use the general valuation rule to determine thepayment of additional wages. Substantial business bene- value of most fringe benefits. Under this rule, the value of afits include promoting a positive business image, maintain- fringe benefit is its fair market value.ing employee morale, and avoiding wrongful termination

Fair market value. The fair market value of a fringe bene-suits.fit is the amount an employee would have to pay a thirdOutplacement services do not qualify as a working con-party in an arms-length transaction to buy or lease thedition benefit if the employee can choose to receive cashbenefit. Determine this amount on the basis of all the factsor taxable benefits in place of the services. If you maintainand circumstances.a severance plan and permit employees to get outplace-

Neither the amount the employee considers to be thement services with reduced severance pay, include in thevalue of the fringe benefit nor the cost you incur to provideemployees wages the difference between the unreducedthe benefit determines its fair market value.severance and the reduced severance payments.

Exclusion from wages. You can generally exclude the Employer-provided vehicles. In general, the fair marketvalue of a working condition benefit you provide to an value of an employer-provided vehicle is the amount theemployee from the employees wages. employee would have to pay a third party to lease the

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same or a similar vehicle on the same or comparable terms occasional trips to the airport or between your multi-in the geographic area where the employee uses the ple business premises, is not regular use of the vehi-vehicle. A comparable lease term would be the amount of cle in your trade or business.time the vehicle is available for the employees use, suchas a 1-year period.

Mileage test. A vehicle meets the mileage test for a calen-Do not determine the fair market value by multiplying a

dar year if both of the following requirements are met.cents-per-mile rate times the number of miles driven un-less the employee can prove the vehicle could have been 1) The vehicle is actually driven at least 10,000 milesleased on a cents-per-mile basis. See Cents-Per-Mile during the year. If you own or lease the vehicle onlyRule, next. part of the year, reduce the 10,000 mile requirement

proportionately.

2) The vehicle is used during the year primarily by em-Cents-Per-Mile Ruleployees. Consider the vehicle used primarily by em-ployees if they use it consistently for commuting. DoUnder this rule, you determine the value of a vehicle younot treat use of the vehicle by another individualprovide to an employee for personal use by multiplying thewhose use would be taxed to the employee as usestandard mileage rate by the total miles the employeeby the employee.drives the vehicle for personal purposes. Personal use is

any use of the vehicle other than use in your trade or For example, if only one employee uses a vehiclebusiness. This amount must be included in the employees during the calendar year and that employee drives thewages or reimbursed by the employee. For 2002, the vehicle at least 10,000 miles in that year, the vehicle meetsstandard mileage rate is 36.5 cents a mile. the mileage test even if all miles driven by the employee

are personal.Maximum automobile value. You cannotuse

the cents-per-mile rule for an automobile (any Consistency requirements. I f you use the4-wheeled vehicle, such as a car, pickup, or van)CAUTION!cents-per-mile rule, the following requirements apply:if its value when you first make it available to any employee

for personal use is more than an amount determined by the1) You must begin using this rule the first day you makeIRS as the maximum automobile value for the year. For

the vehicle available to any employee for personalexample, you cannot use the cents-per-mile rule for anuse. However, if you use the commuting rule whenautomobile you first made available to an employee inyou first make the vehicle available to any employee2001 if its value at that time was more than $15,400. Thefor personal use, you can change to themaximum automobile value for 2002 will be published in acents-per-mile rule on the first day for which you dorevenue procedure in the Internal Revenue Bulletin early innot use the commuting rule.2002. If you and the employee own or lease the automobile

together, see section 1.61-21(e)(1)(iii) of the regulations. 2) You must use this rule for all later years in which youmake the vehicle available to any employee and thevehicle qualifies, except that you can use the com-

You can use the cents-per-mile rule if either of the muting rule for any year during which use of thefollowing requirements is met.vehicle qualifies. However, if the vehicle does notqualify for the cents-per-mile rule during a later year,1) You reasonably expect the vehicle to be regularlyyou can use for that year and thereafter any otherused in your trade or business throughout the calen-rule for which the vehicle then qualifies.dar year (or for a shorter period during which you

own or lease it). 3) You must continue to use this rule if you provide areplacement vehicle to the employee and your pri-2) The vehicle meets the mileage test.mary reason for the replacement is to reduce federaltaxes.Vehicle. For this rule, a vehicle is any motorized wheeled

vehicle, including an automobile, manufactured primarilyfor use on public streets, roads, and highways. Items included in cents-per-mile rate. The

cents-per-mile rate includes the value of maintenance andRegular use in your business. A vehicle is regularly

insurance for the vehicle. Do not reduce the rate by theused in your trade or business if at least one of the value of any service included in the rate that you did notfollowing conditions is met. provide. (You can take into account the services actually

provided for the vehicle by using the general valuation rule1) At least 50% of the vehicles total annual mileage isdiscussed earlier.)for your trade or business.

For miles driven in the United States, its territories and2) You sponsor a commuting pool that generally uses possessions, Canada, and Mexico, the cents-per-mile rate

the vehicle each workday to drive at least 3 employ- includes the value of fuel you provide. If you do not provideees to and from work. fuel, you can reduce the rate by no more than 5.5 cents.

For special rules that apply to fuel you provide for miles3) The vehicle is regularly used in your trade or busi-driven outside the United States, Canada, and Mexico, seeness on the basis of all the facts and circumstances.section 1.61-21(e)(3)(ii)(B) of the regulations.Infrequent business use of the vehicle, such as for

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The value of any other service you provide for a vehicle a control employee as any highly compensated employee.is not included in the cents-per-mile rate. Use the general A highly compensated employee for 2002 is an employeevaluation rule to value these services. who meets either of the following tests.

1) The employee was a 5% owner at any time duringthe year or the preceding year.Commuting Rule

2) The employee received more than $90,000 in pay forUnder this rule, you determine the value of a vehicle you the preceding year.provide to an employee for commuting use by multiplying

You can choose to ignore test (2) if the employee was noteach one-way commute (that is, from home to work or from

also in the top 20% of employees when ranked by pay forwork to home) by $1.50. If more than one employee com- the preceding year.mutes in the vehicle, this value applies to each employee.This amount must be included in the employees wages orreimbursed by the employee.

You can use the commuting rule if all the following Lease Value Rulerequirements are met.

Under this rule, you determine the value of an automobile1) You provide the vehicle to an employee for use in you provide to an employee by using its annual lease

your trade or business and, for bona fide noncom- value. For an aut

us internal revenue service: p15b--2002

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