For more information about cafeteria plans, see section 125 of the Internal Revenue Code and its regulations.

If the contribution requirements are met using option (2), the rate of contribution to any salary reduction contribution of a highly compensated or key employee can't be greater than the rate of contribution to any other employee.

An amount that is at least 6% of the employee’s compensation for the plan year or twice the amount of the salary reduction contributions of each qualified employee, whichever is less.

A uniform percentage (not less than 2%) of the employee’s compensation for the plan year; or

You must make a contribution to provide qualified benefits on behalf of each qualified employee in an amount equal to:

Are nonresident aliens working outside the United States whose income didn't come from a U.S. source.

Are covered under a collective bargaining agreement if there is evidence that the benefits covered under the cafeteria plan were the subject of good-faith bargaining, or

Have less than 1 year of service with you as of any day during the plan year,

Are under age 21 before the close of the plan year,

These requirements are met if all employees who had at least 1,000 hours of service for the preceding plan year are eligible to participate and each employee eligible to participate in the plan may elect any benefit available under the plan. You may elect to exclude from the plan employees who:

You’re an eligible employer if you employed an average of 100 or fewer employees during either of the 2 preceding years. If your business wasn't in existence throughout the preceding year, you’re eligible if you reasonably expect to employ an average of 100 or fewer employees in the current year. If you establish a simple cafeteria plan in a year that you employ an average of 100 or fewer employees, you’re considered an eligible employer for any subsequent year until the year after you employ an average of 200 or more employees.

Eligible employers meeting contribution requirements and eligibility and participation requirements can establish a simple cafeteria plan. Simple cafeteria plans are treated as meeting the nondiscrimination requirements of a cafeteria plan and certain benefits under a cafeteria plan.

A 1% owner of your business whose annual pay is more than $150,000.

An employee who for 2020 is either of the following.

A key employee during 2020 is generally an employee who is either of the following.

If your plan favors key employees, you must include in their wages the value of taxable benefits they could have selected. A plan favors key employees if more than 25% of the total of the nontaxable benefits you provide for all employees under the plan go to key employees. However, a plan you maintain under a collective bargaining agreement doesn't favor key employees.

An employee who is highly compensated based on the facts and circumstances.

A shareholder who owns more than 5% of the voting power or value of all classes of the employer's stock.

A highly compensated employee for this purpose is any of the following employees.

If your plan favors highly compensated employees as to eligibility to participate, contributions, or benefits, you must include in their wages the value of taxable benefits they could have selected. A plan you maintain under a collective bargaining agreement doesn't favor highly compensated employees.

Don't treat a 2% shareholder of an S corporation as an employee of the corporation for this purpose. A 2% shareholder for this purpose is someone who directly or indirectly owns (at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power. Treat a 2% shareholder as you would a partner in a partnership for fringe benefit purposes, but don't treat the benefit as a reduction in distributions to the 2% shareholder. For more information, see Revenue Ruling 91-26, 1991-1 C.B. 184.

A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control.

Instead of a grace period, you may, at your option, amend your cafeteria plan to allow up to $500 of an employee's unused contributions to carry over to the immediately following plan year. For more information, see Notice 2013-71, 2013-47 I.R.B. 532, available at IRS.gov/irb/2013-47_IRB#NOT-2013-71 .

A cafeteria plan that doesn't limit health FSA contributions to the dollar limit isn't a cafeteria plan and all benefits offered under the plan are includible in the employee's gross income.

For plan years beginning in 2020, a cafeteria plan may not allow an employee to request salary reduction contributions for a health FSA in excess of $2,750.

Health savings accounts (HSAs). Distributions from an HSA may be used to pay eligible long-term care insurance premiums or qualified long-term care services.

Generally, a cafeteria plan doesn't include any plan that offers a benefit that defers pay. However, a cafeteria plan can include a qualified 401(k) plan as a benefit. Also, certain life insurance plans maintained by educational institutions can be offered as a benefit even though they defer pay.

A cafeteria plan, including an FSA, provides participants an opportunity to receive qualified benefits on a pre-tax basis. It is a written plan that allows your employees to choose between receiving cash or taxable benefits, instead of certain qualified benefits for which the law provides an exclusion from wages. If an employee chooses to receive a qualified benefit under the plan, the fact that the employee could have received cash or a taxable benefit instead won't make the qualified benefit taxable.

For more information, see the instructions for the forms listed above.

If the recipient of a taxable fringe benefit isn't your employee, the benefit isn't subject to employment taxes. However, you may have to report the benefit on one of the following information returns.

If the recipient of a taxable fringe benefit is your employee, the benefit is generally subject to employment taxes and must be reported on Form W-2, Wage and Tax Statement. However, you can use special rules to withhold, deposit, and report the employment taxes. These rules are discussed in section 4 .

The rules used to determine the value of a fringe benefit are discussed in section 3 .

You must include in a recipient's pay the amount by which the value of a fringe benefit is more than the sum of the following amounts.

Any fringe benefit you provide is taxable and must be included in the recipient's pay unless the law specifically excludes it. Section 2 discusses the exclusions that apply to certain fringe benefits. Any benefit not excluded under the rules discussed in section 2 is taxable.

The person who performs services for you is considered the recipient of a fringe benefit provided for those services. That person may be considered the recipient even if the benefit is provided to someone who didn't perform services for you. For example, your employee may be the recipient of a fringe benefit you provide to a member of the employee's family.

You’re the provider of a fringe benefit if it is provided for services performed for you. You’re considered the provider of a fringe benefit even if a third party, such as your client or customer, provides the benefit to your employee for services the employee performs for you. For example, if, in exchange for goods or services, your customer provides day care services as a fringe benefit to your employees for services they provide for you as their employer, then you’re the provider of this fringe benefit even though the customer is actually providing the day care.

A person who performs services for you doesn't have to be your employee. A person may perform services for you as an independent contractor, partner, or director. Also, for fringe benefit purposes, treat a person who agrees not to perform services (such as under a covenant not to compete) as performing services.

A fringe benefit is a form of pay for the performance of services. For example, you provide an employee with a fringe benefit when you allow the employee to use a business vehicle to commute to and from work.

2. Fringe Benefit Exclusion Rules

This section discusses the exclusion rules that apply to fringe benefits. These rules exclude all or part of the value of certain benefits from the recipient's pay.

In most cases, the excluded benefits aren't subject to federal income tax withholding, social security, Medicare, federal unemployment (FUTA) tax, or Railroad Retirement Tax Act (RRTA) taxes and aren't reported on Form W-2.

This section discusses the exclusion rules for the following fringe benefits.

Accident and health benefits.

Achievement awards.

Adoption assistance.

Athletic facilities.

De minimis (minimal) benefits.

Dependent care assistance.

Educational assistance.

Employee discounts.

Employee stock options.

Employer-provided cell phones.

Group-term life insurance coverage.

Health savings accounts (HSAs).

Lodging on your business premises.

Meals.

No-additional-cost services.

Retirement planning services.

Transportation (commuting) benefits.

Tuition reduction.

Working condition benefits.

See Table 2-1 for an overview of the employment tax treatment of these benefits.

Table 2-1. Special Rules for Various Types of Fringe Benefits (For more information, see the full discussion in this section.) Treatment Under Employment Taxes Type of Fringe Benefit Income Tax Withholding Social Security and Medicare (including Additional Medicare Tax when wages are paid in excess of $200,000)1 Federal Unemployment (FUTA) Accident and health benefits Exempt,2 except for long-term care benefits provided through a flexible spending or similar arrangement. Exempt, except for certain payments to S corporation employees who are 2% shareholders. Exempt Achievement awards Exempt2 up to $1,600 for qualified plan awards ($400 for nonqualified awards). Adoption assistance Exempt2,3 Taxable Taxable Athletic facilities Exempt if substantially all use during the calendar year is by employees, their spouses, and their dependent children, and the facility is operated by the employer on premises owned or leased by the employer. De minimis (minimal) benefits Exempt Exempt Exempt Dependent care assistance Exempt3 up to certain limits, $5,000 ($2,500 for married employee filing separate return). Educational assistance Exempt up to $5,250 of benefits each year. (See Educational Assistance Employee discounts Exempt3 up to certain limits. (See Employee Discounts Employee stock options See Employee Stock Options Employer-provided cell phones Exempt if provided primarily for noncompensatory business purposes. Group-term life insurance coverage Exempt Exempt2,4,6 up to cost of $50,000 of coverage. (Special rules apply to former employees.) Exempt Health savings accounts (HSAs) Exempt for qualified individuals up to the HSA contribution limits. (See Health Savings Accounts Lodging on your business premises Exempt2 if furnished on your business premises, for your convenience, and as a condition of employment. Meals Exempt2 if furnished on your business premises for your convenience. Exempt if de minimis. No-additional-cost services Exempt3 Exempt3 Exempt3 Retirement planning services Exempt5 Exempt5 Exempt5 Transportation (commuting) benefits Exempt2 up to certain limits if for rides in a commuter highway vehicle and/or transit passes ($270) or qualified parking ($270). (See Transportation (Commuting) Benefits Exempt if de minimis. Tuition reduction Exempt3 if for undergraduate education (or graduate education if the employee performs teaching or research activities). Working condition benefits Exempt Exempt Exempt 1 Or other railroad retirement taxes, if applicable. 2 Exemption doesn't apply to S corporation employees who are 2% shareholders. 3 Exemption doesn't apply to certain highly compensated employees under a program that favors those employees. 4 Exemption doesn't apply to certain key employees under a plan that favors those employees. 5 Exemption doesn't apply to services for tax preparation, accounting, legal, or brokerage services. 6 You must include in your employee's wages the cost of group-term life insurance beyond $50,000 worth of coverage, reduced by the amount the employee paid toward the insurance. Report it as wages in boxes 1, 3, and 5 of the employee's Form W-2. Also, show it in box 12 with code "C." The amount is subject to social security and Medicare taxes, and you may, at your option, withhold federal income tax.

Accident and Health Benefits This exclusion applies to contributions you make to an accident or health plan for an employee, including the following. Contributions to the cost of accident or health insurance including qualified long-term care insurance.

Contributions to a separate trust or fund that directly or through insurance provides accident or health benefits.

Contributions to Archer MSAs or health savings accounts (discussed in Pub. 969). This exclusion also applies to payments you directly or indirectly make to an employee under an accident or health plan for employees that are either of the following. Payments or reimbursements of medical expenses.

Payments for specific permanent injuries (such as the loss of the use of an arm or leg). The payments must be figured without regard to the period the employee is absent from work. Accident or health plan. This is an arrangement that provides benefits for your employees, their spouses, their dependents, and their children (under age 27 at the end of the tax year) in the event of personal injury or sickness. The plan may be insured or noninsured and doesn't need to be in writing. Employee. For this exclusion, treat the following individuals as employees. A current common-law employee.

A full-time life insurance agent who is a current statutory employee.

A retired employee.

A former employee you maintain coverage for based on the employment relationship.

A widow or widower of an individual who died while an employee.

A widow or widower of a retired employee.

For the exclusion of contributions to an accident or health plan, a leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control. Special rule for certain government plans. For certain government accident and health plans, payments to a deceased employee's beneficiary may qualify for the exclusion from gross income if the other requirements for exclusion are met. See section 105(j) for details. Exception for S corporation shareholders. Don't treat a 2% shareholder of an S corporation as an employee of the corporation for this purpose. A 2% shareholder is someone who directly or indirectly owns (at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power. Treat a 2% shareholder as you would a partner in a partnership for fringe benefit purposes, but don't treat the benefit as a reduction in distributions to the 2% shareholder. For more information, see Revenue Ruling 91-26, 1991-1 C.B. 184. Exclusion from wages. You can generally exclude the value of accident or health benefits you provide to an employee from the employee's wages. Exception for certain long-term care benefits. You can't exclude contributions to the cost of long-term care insurance from an employee's wages subject to federal income tax withholding if the coverage is provided through a flexible spending or similar arrangement. This is a benefit program that reimburses specified expenses up to a maximum amount that is reasonably available to the employee and is less than five times the total cost of the insurance. However, you can exclude these contributions from the employee's wages subject to social security, Medicare, and FUTA taxes. S corporation shareholders. Because you can't treat a 2% shareholder of an S corporation as an employee for this exclusion, you must include the value of accident or health benefits you provide to the employee in the employee's wages subject to federal income tax withholding. However, you can exclude the value of these benefits (other than payments for specific injuries or illnesses not made under a plan set up to benefit all employees or certain groups of employees) from the employee's wages subject to social security, Medicare, and FUTA taxes. See Announcement 92-16 for more information. You can find Announcement 92-16 on page 53 of Internal Revenue Bulletin 1992-5. Exception for highly compensated employees. If your plan is a self-insured medical reimbursement plan that favors highly compensated employees, you must include all or part of the amounts you pay to these employees in box 1 of Form W-2. However, you can exclude these amounts (other than payments for specific injuries or illnesses not made under a plan set up to benefit all employees or certain groups of employees) from the employee's wages subject to income tax withholding, social security, Medicare, and FUTA taxes. A self-insured plan is a plan that reimburses your employees for medical expenses not covered by an accident or health insurance policy. A highly compensated employee for this exception is any of the following individuals. One of the five highest paid officers.

An employee who owns (directly or indirectly) more than 10% in value of the employer's stock.

An employee who is among the highest paid 25% of all employees (other than those who can be excluded from the plan). For more information on this exception, see section 105(h) of the Internal Revenue Code and its regulations. COBRA premiums. The exclusion for accident and health benefits applies to amounts you pay to maintain medical coverage for a current or former employee under the Combined Omnibus Budget Reconciliation Act of 1986 (COBRA). The exclusion applies regardless of the length of employment, whether you directly pay the premiums or reimburse the former employee for premiums paid, and whether the employee's separation is permanent or temporary. Qualified small employer health reimbursement arrangements (QSEHRAs). QSEHRAs allow eligible small employers to pay or reimburse medical care expenses, including health insurance premiums, of eligible employees and their family members. A QSEHRA isn’t a group health plan, and, therefore, isn't subject to group health plan requirements. Generally, payments from a QSEHRA to reimburse an eligible employee’s medical expenses aren’t includible in the employee’s gross income if the employee has coverage that provides minimum essential coverage as defined in section 5000A(f) of the Internal Revenue Code. See the Instructions for Form 8965 for the types of plans and arrangements that are minimum essential coverage. A QSEHRA is an arrangement that meets all the following requirements. The arrangement is funded solely by you, and no salary reduction contributions may be made under the arrangement. The arrangement provides, after the eligible employee provides proof of coverage, for the payment or reimbursement of the medical expenses incurred by the employee or the employee’s family members. The amount of payments and reimbursements don’t exceed $5,250 ($10,600 for family coverage) for 2020. The arrangement is generally provided on the same terms to all your eligible employees. However, your QSEHRA may exclude employees who haven’t completed 90 days of service, employees who haven’t attained age 25 before the beginning of the plan year, part‐time or seasonal employees, employees covered by a collective bargaining agreement if health benefits were the subject of good-faith bargaining, and employees who are nonresident aliens with no earned income from sources within the United States. Eligible employer. To be an eligible employer, you must not be an applicable large employer, which is defined as an employer that generally employed at least 50 full‐time employees, including full‐time equivalent employees, in the prior calendar year. You must also not offer a group health plan (including a health reimbursement arrangement (HRA) or a health flexible spending arrangement (FSA)) to any of your employees. For more information about the Affordable Care Act and group health plan requirements, go to IRS.gov/ACA. For more information about QSEHRAs, including information about the requirement to give a written notice to each eligible employee, see Notice 2017‐67, 2017-47 I.R.B. 517, available at IRS.gov/irb/2017-47_IRB#NOT-2017-67. Reporting requirements. You must report in box 12 of Form W‐2 using code "FF" the amount of payments and reimbursements that your employee is entitled to receive from the QSEHRA for the calendar year without regard to the amount of payments or reimbursements actually received. For example, if your QSEHRA provides a permitted benefit of $3,000 and your employee receives reimbursements of $2,000, on Form W‐2, you would report a permitted benefit of $3,000 in box 12 using code "FF."

Achievement Awards This exclusion applies to the value of any tangible personal property you give to an employee as an award for either length of service or safety achievement. The exclusion doesn't apply to awards of cash, cash equivalents, gift cards, gift coupons, or gift certificates (other than arrangements granting only the right to select and receive tangible personal property from a limited assortment of items preselected or preapproved by you). The exclusion also doesn't apply to vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, other securities, and other similar items. The award must meet the requirements for employee achievement awards discussed in chapter 2 of Pub. 535. Employee. For this exclusion, treat the following individuals as employees. A current employee.

A former common-law employee you maintain coverage for in consideration of or based on an agreement relating to prior service as an employee.

A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control. Exception for S corporation shareholders. Don't treat a 2% shareholder of an S corporation as an employee of the corporation for this purpose. A 2% shareholder is someone who directly or indirectly owns (at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power. Treat a 2% shareholder as you would a partner in a partnership for fringe benefit purposes, but don't treat the benefit as a reduction in distributions to the 2% shareholder. For more information, see Revenue Ruling 91-26, 1991-1 C.B. 184. Exclusion from wages. You can generally exclude the value of achievement awards you give to an employee from the employee's wages if their cost isn't more than the amount you can deduct as a business expense for the year. The excludable annual amount is $1,600 ($400 for awards that aren't "qualified plan awards"). See chapter 2 of Pub. 535 for more information about the limit on deductions for employee achievement awards. To determine for 2020 whether an achievement award is a "qualified plan award" under the deduction rules described in Pub. 535, treat any employee who received more than $125,000 in pay for 2019 as a highly compensated employee. If the cost of awards given to an employee is more than your allowable deduction, include in the employee's wages the larger of the following amounts. The part of the cost that is more than your allowable deduction (up to the value of the awards).

The amount by which the value of the awards exceeds your allowable deduction. Exclude the remaining value of the awards from the employee's wages.

Adoption Assistance An adoption assistance program is a separate written plan of an employer that meets all of the following requirements. It benefits employees who qualify under rules set up by you, which don't favor highly compensated employees or their dependents. To determine whether your plan meets this test, don't consider employees excluded from your plan who are covered by a collective bargaining agreement if there is evidence that adoption assistance was a subject of good-faith bargaining. It doesn't pay more than 5% of its payments during the year for shareholders or owners (or their spouses or dependents). A shareholder or owner is someone who owns (on any day of the year) more than 5% of the stock or of the capital or profits interest of your business. You give reasonable notice of the plan to eligible employees. Employees provide reasonable substantiation that payments or reimbursements are for qualifying expenses. For this exclusion, a highly compensated employee for 2020 is an employee who meets either of the following tests. The employee was a 5% owner at any time during the year or the preceding year. The employee received more than $125,000 in pay for the preceding year. You can choose to ignore test (2) if the employee wasn't also in the top 20% of employees when ranked by pay for the preceding year. You must exclude all payments or reimbursements you make under an adoption assistance program for an employee's qualified adoption expenses from the employee's wages subject to federal income tax withholding. However, you can't exclude these payments from wages subject to social security, Medicare, and FUTA taxes. You must report all qualifying adoption expenses you paid or reimbursed under your adoption assistance program for each employee for the year in box 12 of the employee's Form W-2. Report all amounts including those in excess of the $14,300 exclusion for 2020. Use code "T" to identify this amount. Exception for S corporation shareholders. For this exclusion, don't treat a 2% shareholder of an S corporation as an employee of the corporation. A 2% shareholder is someone who directly or indirectly owns (at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power. Treat a 2% shareholder as you would a partner in a partnership for fringe benefit purposes, but don't treat the benefit as a reduction in distributions to the 2% shareholder. For more information, see Revenue Ruling 91-26, 1991-1 C.B. 184. More information. For more information on adoption benefits, see Notice 97-9, which is on page 35 of Internal Revenue Bulletin 1997-2 at IRS.gov/pub/irs-irbs/irb97-02.pdf PDF. Advise your employees to see the Instructions for Form 8839.

Athletic Facilities You can exclude the value of an employee's use of an on-premises gym or other athletic facility you operate from an employee's wages if substantially all use of the facility during the calendar year is by your employees, their spouses, and their dependent children. For this purpose, an employee's dependent child is a child or stepchild who is the employee's dependent or who, if both parents are deceased, hasn't attained the age of 25. The exclusion doesn't apply to any athletic facility if access to the facility is made available to the general public through the sale of memberships, the rental of the facility, or a similar arrangement. On-premises facility. The athletic facility must be located on premises you own or lease and must be operated by you. It doesn't have to be located on your business premises. However, the exclusion doesn't apply to an athletic facility that is a facility for residential use, such as athletic facilities that are part of a resort. Employee. For this exclusion, treat the following individuals as employees. A current employee.

A former employee who retired or left on disability.

A widow or widower of an individual who died while an employee.

A widow or widower of a former employee who retired or left on disability.

A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control.

A partner who performs services for a partnership.

De Minimis (Minimal) Benefits You can exclude the value of a de minimis benefit you provide to an employee from the employee's wages. A de minimis benefit is any property or service you provide to an employee that has so little value (taking into account how frequently you provide similar benefits to your employees) that accounting for it would be unreasonable or administratively impracticable. Cash and cash equivalent fringe benefits (for example, gift certificates, gift cards, and the use of a charge card or credit card), no matter how little, are never excludable as a de minimis benefit. However, meal money and local transportation fare, if provided on an occasional basis and because of overtime work, may be excluded as discussed later. Examples of de minimis benefits include the following. Personal use of an employer-provided cell phone provided primarily for noncompensatory business purposes. See Employer-Provided Cell Phones , later in this section, for details.

Occasional personal use of a company copying machine if you sufficiently control its use so that at least 85% of its use is for business purposes.

Holiday or birthday gifts, other than cash, with a low fair market value. Also, flowers or fruit or similar items provided to employees under special circumstances (for example, on account of illness, a family crisis, or outstanding performance).

Group-term life insurance payable on the death of an employee's spouse or dependent if the face amount isn't more than $2,000.

Certain meals. See Meals , later in this section, for details.

Occasional parties or picnics for employees and their guests.

Occasional tickets for theater or sporting events.

Certain transportation fare. See Transportation (Commuting) Benefits , later in this section, for details. Some examples of benefits that aren’t excludable as de minimis fringe benefits are season tickets to sporting or theatrical events; the commuting use of an employer-provided automobile or other vehicle more than 1 day a month; membership in a private country club or athletic facility, regardless of the frequency with which the employee uses the facility; and use of employer-owned or leased facilities (such as an apartment, hunting lodge, boat, etc.) for a weekend. If a benefit provided to an employee doesn't qualify as de minimis (for example, the frequency exceeds a limit described earlier), then generally the entire benefit must be included in income. Employee. For this exclusion, treat any recipient of a de minimis benefit as an employee.

Dependent Care Assistance This exclusion applies to household and dependent care services you directly or indirectly pay for or provide to an employee under a written dependent care assistance program that covers only your employees. The services must be for a qualifying person's care and must be provided to allow the employee to work. These requirements are basically the same as the tests the employee would have to meet to claim the dependent care credit if the employee paid for the services. For more information, see Can You Claim the Credit? in Pub. 503. Employee. For this exclusion, treat the following individuals as employees. A current employee.

A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control.

Yourself (if you’re a sole proprietor).

A partner who performs services for a partnership. Exclusion from wages. You can exclude the value of benefits you provide to an employee under a dependent care assistance program from the employee's wages if you reasonably believe that the employee can exclude the benefits from gross income. An employee can generally exclude from gross income up to $5,000 of benefits received under a dependent care assistance program each year. This limit is reduced to $2,500 for married employees filing separate returns. However, the exclusion can't be more than the smaller of the earned income of either the employee or employee's spouse. Special rules apply to determine the earned income of a spouse who is either a student or not able to care for himself or herself. For more information on the earned income limit, see Pub. 503. Exception for highly compensated employees. You can't exclude dependent care assistance from the wages of a highly compensated employee unless the benefits provided under the program don't favor highly compensated employees and the program meets the requirements described in section 129(d) of the Internal Revenue Code. For this exclusion, a highly compensated employee for 2020 is an employee who meets either of the following tests. The employee was a 5% owner at any time during the year or the preceding year. The employee received more than $125,000 in pay for the preceding year. You can choose to ignore test (2) if the employee wasn't also in the top 20% of employees when ranked by pay for the preceding year. Form W-2. Report the value of all dependent care assistance you provide to an employee under a dependent care assistance program in box 10 of the employee's Form W-2. Include any amounts you can't exclude from the employee's wages in boxes 1, 3, and 5. Report in box 10 both the nontaxable portion of assistance (up to $5,000) and any assistance above that amount that is taxable to the employee. Example. Oak Co. provides a dependent care assistance FSA to its employees through a cafeteria plan. In addition, it provides occasional on-site dependent care to its employees at no cost. Emily, an employee of Oak Co., had $4,500 deducted from her pay for the dependent care FSA. In addition, Emily used the on-site dependent care several times. The fair market value of the on-site care was $700. Emily's Form W-2 should report $5,200 of dependent care assistance in box 10 ($4,500 FSA plus $700 on-site dependent care). Boxes 1, 3, and 5 should include $200 (the amount in excess of the nontaxable assistance), and applicable taxes should be withheld on that amount.

Educational Assistance This exclusion applies to educational assistance you provide to employees under an educational assistance program. The exclusion also applies to graduate-level courses. Educational assistance means amounts you pay or incur for your employees' education expenses. These expenses generally include the cost of books, equipment, fees, supplies, and tuition. However, these expenses don't include the cost of a course or other education involving sports, games, or hobbies, unless the education: Has a reasonable relationship to your business, or

Is required as part of a degree program. Education expenses don't include the cost of tools or supplies (other than textbooks) your employee is allowed to keep at the end of the course. Nor do they include the cost of lodging, meals, or transportation. Your employee must be able to provide substantiation to you that the educational assistance provided was used for qualifying education expenses. Educational assistance program. An educational assistance program is a separate written plan that provides educational assistance only to your employees. The program qualifies only if all of the following tests are met. The program benefits employees who qualify under rules set up by you that don't favor highly compensated employees. To determine whether your program meets this test, don't consider employees excluded from your program who are covered by a collective bargaining agreement if there is evidence that educational assistance was a subject of good-faith bargaining.

The program doesn't provide more than 5% of its benefits during the year for shareholders or owners (or their spouses or dependents). A shareholder or owner is someone who owns (on any day of the year) more than 5% of the stock or of the capital or profits interest of your business.

The program doesn't allow employees to choose to receive cash or other benefits that must be included in gross income instead of educational assistance.

You give reasonable notice of the program to eligible employees. Your program can cover former employees if their employment is the reason for the coverage. For this exclusion, a highly compensated employee for 2020 is an employee who meets either of the following tests. The employee was a 5% owner at any time during the year or the preceding year. The employee received more than $125,000 in pay for the preceding year. You can choose to ignore test (2) if the employee wasn't also in the top 20% of employees when ranked by pay for the preceding year. Employee. For this exclusion, treat the following individuals as employees. A current employee.

A former employee who retired, left on disability, or was laid off.

A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control.

Yourself (if you’re a sole proprietor).

A partner who performs services for a partnership. Exclusion from wages. You can exclude up to $5,250 of educational assistance you provide to an employee under an educational assistance program from the employee's wages each year. Assistance over $5,250. If you don't have an educational assistance plan, or you provide an employee with assistance exceeding $5,250, you must include the value of these benefits as wages, unless the benefits are working condition benefits. Working condition benefits may be excluded from wages. Property or a service provided is a working condition benefit to the extent that if the employee paid for it, the amount paid would have been allowable as a business or depreciation expense. See Working Condition Benefits , later in this section.

Employee Discounts This exclusion applies to a price reduction you give your employee on property or services you offer to customers in the ordinary course of the line of business in which the employee performs substantial services. It applies whether the property or service is provided at no charge (in which case only part of the discount may be excludable as a qualified employee discount) or at a reduced price. It also applies if the benefit is provided through a partial or total cash rebate. The benefit may be provided either directly by you or indirectly through a third party. For example, an employee of an appliance manufacturer may receive a qualified employee discount on the manufacturer's appliances purchased at a retail store that offers the appliances for sale to customers. Employee discounts don't apply to discounts on real property or discounts on personal property of a kind commonly held for investment (such as stocks or bonds). They also don't include discounts on a line of business of the employer for which the employee doesn't provide substantial services, or discounts on property or services of a kind that aren't offered for sale to customers. Therefore, discounts on items sold in an employee store that aren't sold to customers, aren't excluded from employee income. Also, employee discounts provided by another employer through a reciprocal agreement aren't excluded. Employee. For this exclusion, treat the following individuals as employees. A current employee.

A former employee who retired or left on disability.

A widow or widower of an individual who died while an employee.

A widow or widower of an employee who retired or left on disability.

A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control.

A partner who performs services for a partnership. Treat discounts you provide to the spouse or dependent child of an employee as provided to the employee. For this fringe benefit, dependent child means any son, stepson, daughter, stepdaughter, or eligible foster child who is a dependent of the employee, or both of whose parents have died and who hasn't reached age 25. Treat a child of divorced parents as a dependent of both parents. Exclusion from wages. You can generally exclude the value of an employee discount you provide an employee from the employee's wages, up to the following limits. For a discount on services, 20% of the price you charge nonemployee customers for the service.

For a discount on merchandise or other property, your gross profit percentage times the price you charge nonemployee customers for the property. Generally, determine your gross profit percentage in the line of business based on all property you offer to customers (including employee customers) and your experience during the tax year immediately before the tax year in which the discount is available. To figure your gross profit percentage, subtract the total cost of the property from the total sales price of the property and divide the result by the total sales price of the property. Employers that are in their first year of existence may estimate their gross profit percentage based on its mark-up from cost or refer to an appropriate industry average. If substantial changes in an employer's business indicate at any time that it is inappropriate for the prior year's gross profit percentage to be used for the current year, the employer must, within a reasonable period, redetermine the gross profit percentage for the remaining portion of the current year as if such portion of the year were the first year of the employer's existence. Exception for highly compensated employees. You can't exclude from the wages of a highly compensated employee any part of the value of a discount that isn't available on the same terms to one of the following groups. All of your employees.

A group of employees defined under a reasonable classification you set up that doesn't favor highly compensated employees. For this exclusion, a highly compensated employee for 2020 is an employee who meets either of the following tests. The employee was a 5% owner at any time during the year or the preceding year. The employee received more than $125,000 in pay for the preceding year. You can choose to ignore test (2) if the employee wasn't also in the top 20% of employees when ranked by pay for the preceding year.

Employee Stock Options There are three kinds of stock options—incentive stock options, employee stock purchase plan options, and nonstatutory (nonqualified) stock options. Wages for social security, Medicare, and FUTA taxes don't include remuneration resulting from the exercise of an incentive stock option or an employee stock purchase plan option, or from any disposition of stock acquired by exercising such an option. Additionally, federal income tax withholding isn't required on the income resulting from a disqualifying disposition of stock acquired by the exercise of an incentive stock option or an employee stock purchase plan option, or on income equal to the discount portion of stock acquired by the exercise of an employee stock purchase plan option resulting from any qualifying disposition of the stock. The employer must report as income in box 1 of Form W-2 (a) the discount portion of stock acquired by the exercise of an employee stock purchase plan option upon a qualifying disposition of the stock, and (b) the spread (between the exercise price and the fair market value of the stock at the time of exercise) upon a disqualifying disposition of stock acquired by the exercise of an incentive stock option or an employee stock purchase plan option. An employer must report the excess of the fair market value of stock received upon exercise of a nonstatutory stock option over the amount paid for the stock option on Form W-2 in boxes 1, 3 (up to the social security wage base), 5, and in box 12 using the code "V." See Regulations section 1.83-7. An employee who transfers his or her interest in nonstatutory stock options to the employee's former spouse incident to a divorce isn't required to include an amount in gross income upon the transfer. The former spouse, rather than the employee, is required to include an amount in gross income when the former spouse exercises the stock options. See Revenue Ruling 2002-22 and Revenue Ruling 2004-60 for details. You can find Revenue Ruling 2002-22 on page 849 of Internal Revenue Bulletin 2002-19 at IRS.gov/pub/irs-irbs/irb02-19.pdf PDF. Revenue Ruling 2004-60, 2004-24 I.R.B. 1051, is available at IRS.gov/irb/2004-24_IRB#RR-2004-60. Employee stock options aren't subject to Railroad Retirement Tax. In Wisconsin Central Ltd. v. United States, 138 S. Ct. 2067, the U. S. Supreme Court ruled that employee stock options (whether statutory or nonstatutory) aren't "money remuneration" subject to the Railroad Retirement Tax Act (RRTA). If you're a railroad employer, don't withhold Tier 1 and Tier 2 taxes on compensation from railroad employees covered by the RRTA exercising such options. You must still withhold federal income tax on taxable compensation from railroad employees exercising their options. Section 83(i) election to defer income on equity grants. Under section 83(i) of the Internal Revenue Code, qualified employees who are granted stock options or restricted stock units (RSUs) and who later receive stock upon exercise of the option or upon settlement of the RSU (qualified stock) may elect to defer the recognition of income for up to 5 years if the corporation's stock wasn’t readily tradable on an established securities market during any prior calendar year, if the corporation has a written plan under which not less than 80% of all U.S. employees are granted options or RSUs with the same rights and privileges to receive qualified stock, and if certain other requirements are met. An election under section 83(i) applies only for federal income tax purposes. The election has no effect on the application of social security, Medicare, and unemployment taxes. For federal income tax purposes, the employer must withhold federal income tax at 37% in the tax year that the amount deferred is included in the employee's income. If a section 83(i) election is made for an option exercise, that option will not be considered an incentive stock option or an option granted pursuant to an employee stock purchase plan. These rules apply to stock attributable to options exercised, or RSUs settled, after December 31, 2017. For more information, see section 83(i) and Notice 2018-97, 2018-52 I.R.B. 1062, available at IRS.gov/irb/2018-52_IRB#NOT-2018-97. Reporting requirements. For each employee, you must report in box 12 of Form W-2 using code "GG" the amount included in income in the calendar year from qualified equity grants under section 83(i). You must also report in box 12 using code "HH" the total amount of income deferred under section 83(i) determined as of the close of the calendar year. More information. For more information about employee stock options, see sections 83, 421, 422, and 423 of the Internal Revenue Code and their related regulations.

Employer-Provided Cell Phones The value of the business use of an employer-provided cell phone, provided primarily for noncompensatory business reasons, is excludable from an employee's income as a working condition fringe benefit. Personal use of an employer-provided cell phone, provided primarily for noncompensatory business reasons, is excludable from an employee's income as a de minimis fringe benefit. The term "cell phone" also includes other similar telecommunications equipment. For the rules relating to these types of benefits, see De Minimis (Minimal) Benefits , earlier in this section, and Working Condition Benefits , later in this section. Noncompensatory business purposes. You provide a cell phone primarily for noncompensatory business purposes if there are substantial business reasons for providing the cell phone. Examples of substantial business reasons include the employer's: Need to contact the employee at all times for work-related emergencies,

Requirement that the employee be available to speak with clients at times when the employee is away from the office, and

Need to speak with clients located in other time zones at times outside the employee's normal workday. Cell phones provided to promote goodwill, boost morale, or attract prospective employees. You can't exclude from an employee's wages the value of a cell phone provided to promote goodwill of an employee, to attract a prospective employee, or as a means of providing additional compensation to an employee. Additional information. For additional information on the tax treatment of employer-provided cell phones, see Notice 2011-72, 2011-38 I.R.B. 407, available at

IRS.gov/irb/2011-38_IRB#NOT-2011-72.

Group-Term Life Insurance Coverage This exclusion applies to life insurance coverage that meets all the following conditions. It provides a general death benefit that isn't included in income.

You provide it to a group of employees. See The 10-employee rule , later.

It provides an amount of insurance to each employee based on a formula that prevents individual selection. This formula must use factors such as the employee's age, years of service, pay, or position.

You provide it under a policy you directly or indirectly carry. Even if you don't pay any of the policy's cost, you’re considered to carry it if you arrange for payment of its cost by your employees and charge at least one employee less than, and at least one other employee more than, the cost of his or her insurance. Determine the cost of the insurance, for this purpose, as explained under Coverage over the limit , later. Group-term life insurance doesn't include the following insurance. Insurance that doesn't provide general death benefits, such as travel insurance or a policy providing only accidental death benefits.

Life insurance on the life of your employee's spouse or dependent. However, you may be able to exclude the cost of this insurance from the employee's wages as a de minimis benefit. See De Minimis (Minimal) Benefits , earlier in this section.

Insurance provided under a policy that provides a permanent benefit (an economic value that extends beyond 1 policy year, such as paid-up or cash-surrender value), unless certain requirements are met. See Regulations section 1.79-1 for details. Employee. For this exclusion, treat the following individuals as employees. A current common-law employee. A full-time life insurance agent who is a current statutory employee. An individual who was formerly your employee under (1) or (2). A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction and control. Exception for S corporation shareholders. Don't treat a 2% shareholder of an S corporation as an employee of the corporation for this purpose. A 2% shareholder is someone who directly or indirectly owns (at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power. Treat a 2% shareholder as you would a partner in a partnership for fringe benefit purposes, but don't treat the benefit as a reduction in distributions to the 2% shareholder. For more information, see Revenue Ruling 91-26, 1991-1 C.B. 184. The 10-employee rule. Generally, life insurance isn't group-term life insurance unless you provide it at some time during the calendar year to at least 10 full-time employees. For this rule and the first exception discussed next, count employees who choose not to receive the insurance as if they do receive insurance, unless, to receive it, they must contribute to the cost of benefits other than the group-term life insurance. For example, count an employee who could receive insurance by paying part of the cost, even if that employee chooses not to receive it. However, don't count an employee who chooses not to receive insurance if the employee must pay part or all of the cost of permanent benefits in order to obtain group-term life insurance. A permanent benefit is an economic value extending beyond 1 policy year (for example, a paid-up or cash-surrender value) that is provided under a life insurance policy. Exceptions. Even if you don't meet the 10-employee rule, two exceptions allow you to treat insurance as group-term life insurance. Under the first exception, you don't have to meet the 10-employee rule if all the following conditions are met. If evidence that the employee is insurable is required, it is limited to a medical questionnaire (completed by the employee) that doesn't require a physical. You provide the insurance to all your full-time employees or, if the insurer requires the evidence mentioned in (1), to all full-time employees who provide evidence the insurer accepts. You figure the coverage based on either a uniform percentage of pay or the insurer's coverage brackets that meet certain requirements. See Regulations section 1.79-1 for details. Under the second exception, you don't have to meet the 10-employee rule if all the following conditions are met. You provide the insurance under a common plan covering your employees and the employees of at least one other employer who isn't related to you.

The insurance is restricted to, but mandatory for, all your employees who belong to, or are represented by, an organization (such as a union) that carries on substantial activities besides obtaining insurance.

Evidence of whether an employee is insurable doesn't affect an employee's eligibility for insurance or the amount of insurance that employee gets. To apply either exception, don't consider employees who were denied insurance for any of the following reasons. They were 65 or older.

They customarily work 20 hours or less a week or 5 months or less in a calendar year.

They haven't been employed for the waiting period given in the policy. This waiting period can't be more than 6 months. Exclusion from wages. You can generally exclude the cost of up to $50,000 of group-term life insurance coverage from the wages of an insured employee. You can exclude the same amount from the employee's wages when figuring social security and Medicare taxes. In addition, you don't have to withhold federal income tax or pay FUTA tax on any group-term life insurance you provide to an employee. Coverage over the limit. You must include in your employee's wages the cost of group-term life insurance beyond $50,000 worth of coverage, reduced by the amount the employee paid toward the insurance. Report it as wages in boxes 1, 3, and 5 of the employee's Form W-2. Also, show it in box 12 with code "C." The amount is subject to social security and Medicare taxes, and you may, at your option, withhold federal income tax. Figure the monthly cost of the insurance to include in the employee's wages by multiplying the number of thousands of dollars of all insurance coverage over $50,000 (figured to the nearest $100) by the cost shown in Table 2-2. For all coverage provided within the calendar year, use the employee's age on the last day of the employee's tax year. You must prorate the cost from the table if less than a full month of coverage is involved. Table 2-2. Cost Per $1,000 of Protection for 1 Month Age Cost Under 25 $ 0.05 25 through 29 0.06 30 through 34 0.08 35 through 39 0.09 40 through 44 0.10 45 through 49 0.15 50 through 54 0.23 55 through 59 0.43 60 through 64 0.66 65 through 69 1.27 70 and older 2.06

You figure the total cost to include in the employee's wages by multiplying the monthly cost by the number of months' coverage at that cost. Example. Tom's employer provides him with group-term life insurance coverage of $200,000. Tom is 45 years old, isn't a key employee, and pays $100 per year toward the cost of the insurance. Tom's employer must include $170 in his wages. The $200,000 of insurance coverage is reduced by $50,000. The yearly cost of $150,000 of coverage is $270 ($0.15 x 150 x 12), and is reduced by the $100 Tom pays for the insurance. The employer includes $170 in boxes 1, 3, and 5 of Tom's Form W-2. The employer also enters $170 in box 12 with code "C." Coverage for dependents. Group-term life insurance coverage paid by the employer for the spouse or dependents of an employee may be excludable from income as a de minimis fringe benefit if the face amount isn't more than $2,000. If the face amount is greater than $2,000, the dependent coverage may be excludable from income as a de minimis fringe benefit if the excess (if any) of the cost of insurance over the amount the employee paid for it on an after-tax basis is so small that accounting for it is unreasonable or administratively impracticable. Former employees. When group-term life insurance over $50,000 is provided to an employee (including retirees) after his or her termination, the employee share of social security and Medicare taxes on that period of coverage is paid by the former employee with his or her tax return and isn't collected by the employer. You’re not required to collect those taxes. You must, however, pay the employer share of social security and Medicare taxes. Use the table above to determine the amount of additional income that is subject to social security and Medicare taxes for coverage provided after separation from service. Report the uncollected amounts separately in box 12 of Form W-2 using codes "M" and "N." See the General Instructions for Forms W-2 and W-3 and the Instructions for Form 941. Exception for key employees. Generally, if your group-term life insurance plan favors key employees as to participation or benefits, you must include the entire cost of the insurance in your key employees' wages. This exception generally doesn't apply to church plans. When figuring social security and Medicare taxes, you must also include the entire cost in the employees' wages. Include the cost in boxes 1, 3, and 5 of Form W-2. However, you don't have to withhold federal income tax or pay FUTA tax on the cost of any group-term life insurance you provide to an employee. For this purpose, the cost of the insurance is the greater of the following amounts. The premiums you pay for the employee's insurance. See Regulations section 1.79-4T(Q&A 6) for more information.

The cost you figure using Table 2-2. For this exclusion, a key employee during 2020 is an employee or former employee who is one of the following individuals. See section 416(i) of the Internal Revenue Code for more information. An officer having annual pay of more than $185,000. An individual who for 2020 is either of the following. A 5% owner of your business. A 1% owner of your business whose annual pay is more than $150,000. A former employee who was a key employee upon retirement or separation from service is also a key employee. Your plan doesn't favor key employees as to participation if at least one of the following is true. It benefits at least 70% of your employees.

At least 85% of the participating employees aren't key employees.

It benefits employees who qualify under a set of rules you set up that don't favor key employees. Your plan meets this participation test if it is part of a cafeteria plan (discussed earlier in section 1) and it meets the participation test for those plans. When applying this test, don't consider employees who: Have not completed 3 years of service;

Are part time or seasonal;

Are nonresident aliens who receive no U.S. source earned income from you; or

Aren’t included in the plan but are in a unit of employees covered by a collective bargaining agreement, if the benefits provided under the plan were the subject of good-faith bargaining between you and employee representatives. Your plan doesn't favor key employees as to benefits if all benefits available to participating key employees are also available to all other participating employees. Your plan doesn't favor key employees just because the amount of insurance you provide to your employees is uniformly related to their pay. S corporation shareholders. Because you can't treat a 2% shareholder of an S corporation as an employee for this exclusion, you must include the cost of all group-term life insurance coverage you provide the 2% shareholder in his or her wages. When figuring social security and Medicare taxes, you must also include the cost of this coverage in the 2% shareholder's wages. Include the cost in boxes 1, 3, and 5 of Form W-2. However, you don't have to withhold federal income tax or pay FUTA tax on the cost of any group-term life insurance coverage you provide to the 2% shareholder.

Health Savings Accounts A health savings account (HSA) is an account owned by a qualified individual who is generally your employee or former employee. Any contributions that you make to an HSA become the employee's property and can't be withdrawn by you. Contributions to the account are used to pay current or future medical expenses of the account owner, his or her spouse, and any qualified dependent. The medical expenses must not be reimbursable by insurance or other sources and their payment from HSA funds (distribution) won't give rise to a medical expense deduction on the individual's federal income tax return. Eligibility. A qualified individual must be covered by a High Deductible Health Plan (HDHP) and not be covered by other health insurance except for permitted insurance listed under section 223(c)(3) or insurance for accidents, disability, dental care, vision care, or long-term care. For calendar year 2020, a qualifying HDHP must have a deductible of at least $1,400 for self-only coverage or $2,800 for family coverage and must limit annual out-of-pocket expenses of the beneficiary to $6,900 for self-only coverage and $13,800 for family coverage. There are no income limits that restrict an individual's eligibility to contribute to an HSA nor is there a requirement that the account owner have earned income to make a contribution. Exceptions. An individual isn't a qualified individual if he or she can be claimed as a dependent on another person's tax return. Also, an employee's participation in a health FSA or health reimbursement arrangement (HRA) generally disqualifies the individual (and employer) from making contributions to his or her HSA. However, an individual may qualify to participate in an HSA if he or she is participating in only a limited-purpose FSA or HRA or a post-deductible FSA. For more information, see Other employee health plans in Pub. 969. Employer contributions. Up to specified dollar limits, cash contributions to the HSA of a qualified individual (determined monthly) are exempt from federal income tax withholding, social security tax, Medicare tax, and FUTA tax if you reasonably believe that the employee can exclude the benefits from gross income. For 2020, you can contribute up to $3,550 for self-only coverage under an HDHP or $7,100 for family coverage under an HDHP to a qualified individual's HSA. The contribution amounts listed above are increased by $1,000 for a qualified individual who is age 55 or older at any time during the year. For two qualified individuals who are married to each other and who are each age 55 or older at any time during the year, each spouse's contribution limit is increased by $1,000 provided each spouse has a separate HSA. No contributions can be made to an individual's HSA after he or she becomes enrolled in Medicare Part A or Part B. Nondiscrimination rules. Your contribution amount to an employee's HSA must be comparable for all employees who have comparable coverage during the same period. Otherwise, there will be an excise tax equal to 35% of the amount you contributed to all employees' HSAs. For guidance on employer comparable contributions to HSAs under section 4980G in instances where an employee hasn't established an HSA by December 31 and in instances where an employer accelerates contributions for the calendar year for employees who have incurred qualified medical expenses, see Regulations section 54.4980G-4. Exception. The Tax Relief and Health Care Act of 2006 allows employers to make larger HSA contributions for a nonhighly compensated employee than for a highly compensated employee. A highly compensated employee for 2020 is an employee who meets either of the following tests. The employee was a 5% owner at any time during the year or the preceding year. The employee received more than $125,000 in pay for the preceding year. You can choose to ignore test (2) if the employee wasn't also in the top 20% of employees when ranked by pay for the preceding year. Partnerships and S corporations. Partners and 2% shareholders of an S corporation aren't eligible for salary reduction (pre-tax) contributions to an HSA. Employer contributions to the HSA of a bona fide partner or 2% shareholder are treated as distributions or guaranteed payments as determined by the facts and circumstances. For more information, see Notice 2005-8, 2005-4 I.R.B. 368, available at IRS.gov/irb/2005-04_IRB#NOT-2005-8. Cafeteria plans. You may contribute to an employee's HSA using a cafeteria plan and your contributions aren't subject to the statutory comparability rules. However, cafeteria plan nondiscrimination rules still apply. For example, contributions under a cafeteria plan to employee HSAs can't be greater for higher-paid employees than they are for lower-paid employees. Contributions that favor lower-paid employees aren't prohibited. Reporting requirements. You must report your contributions to an employee's HSA in box 12 of Form W-2 using code "W." The trustee or custodian of the HSA, generally a bank or insurance company, reports distributions from the HSA using Form 1099-SA.

Lodging on Your Business Premises You can exclude the value of lodging you furnish to an employee from the employee's wages if it meets the following tests. It is furnished on your business premises.

It is furnished for your convenience.

The employee must accept it as a condition of employment. Different tests may apply to lodging furnished by educational institutions. See section 119(d) of the Internal Revenue Code for details. If you allow your employee to choose to receive additional pay instead of lodging, then the lodging, if chosen, isn’t excluded. The exclusion also doesn't apply to cash allowances for lodging. On your business premises. For this exclusion, your business premises is generally your employee's place of work. For example, if you're a household employer, then lodging furnished in your home to a household employee would be considered lodging furnished on your business premises. For special rules that apply to lodging furnished in a camp located in a foreign country, see section 119(c) of the Internal Revenue Code and its regulations. For your convenience. Whether or not you furnish lodging for your convenience as an employer depends on all the facts and circumstances. You furnish the lodging to your employee for your convenience if you do this for a substantial business reason other than to provide the employee with additional pay. This is true even if a law or an employment contract provides that the lodging is furnished as pay. However, a written statement that the lodging is furnished for your convenience isn't sufficient. Condition of employment. Lodging meets this test if you require your employees to accept the lodging because they need to live on your business premises to be able to properly perform their duties. Examples include employees who must be available at all times and employees who couldn't perform their required duties without being furnished the lodging. It doesn't matter whether you must furnish the lodging as pay under the terms of an employment contract or a law fixing the terms of employment. Example of qualifying lodging. You employ Sam at a construction project at a remote job site in Alaska. Due to the inaccessibility of facilities for the employees who are working at the job site to obtain lodging and the prevailing weather conditions, you furnish lodging to your employees at the construction site in order to carry on the construction project. You require that your employees accept the lodging as a condition of their employment. You may exclude the lodging that you provide from Sam's wages. Additionally, since sufficient eating facilities aren’t available near your place of employment, you may also exclude meals you provide to Sam from his wages, as discussed in Proper meals not otherwise available under Meals on Your Business Premises, later in this section. Example of nonqualifying lodging. A hospital gives Joan, an employee of the hospital, the choice of living at the hospital free of charge or living elsewhere and receiving a cash allowance in addition to her regular salary. If Joan chooses to live at the hospital, the hospital can't exclude the value of the lodging from her wages because she isn't required to live at the hospital to properly perform the duties of her employment. S corporation shareholders. For this exclusion, don't treat a 2% shareholder of an S corporation as an employee of the corporation. A 2% shareholder is someone who directly or indirectly owns (at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power. Treat a 2% shareholder as you would a partner in a partnership for fringe benefit purposes, but don't treat the benefit as a reduction in distributions to the 2% shareholder. For more information, see Revenue Ruling 91-26, 1991-1 C.B. 184.

Meals This section discusses the exclusion rules that apply to de minimis meals and meals on your business premises. De Minimis Meals You can exclude any occasional meal you provide to an employee if it has so little value (taking into account how frequently you provide meals to your employees) that accounting for it would be unreasonable or administratively impracticable. The exclusion applies, for example, to the following items. Coffee, doughnuts, or soft drinks.

Occasional meals or meal money provided to enable an employee to work overtime. However, the exclusion doesn't apply to meal money figured on the basis of hours worked (for example, $2.00 per hour for each hour over 8 hours), or meals or meal money provided on a regular or routine basis.

Occasional parties or picnics for employees and their guests. Employee. For this exclusion, treat any recipient of a de minimis meal as an employee. Employer-operated eating facility for employees. The de minimis meals exclusion also applies to meals you provide at an employer-operated eating facility for employees if the annual revenue from the facility equals or exceeds the direct operating costs of the facility. Direct operating costs include the cost of food, beverages, and labor costs (including employment taxes) of employees whose services relating to the facility are performed primarily on the premises of the eating facility. Therefore, for example, the labor costs attributable to cooks, waiters, and waitresses are included in direct operating costs, but the labor cost attributable to a manager of an eating facility whose services aren't primarily performed on the premises of the eating facility aren't included in direct operating costs. For this purpose, your revenue from providing a meal is considered equal to the facility's direct operating costs to provide that meal if its value can be excluded from an employee's wages as explained under Meals on Your Business Premises , later. If you provide free or discounted meals to volunteers at a hospital and you can reasonably determine the number of meals you provide, then you may disregard these costs and revenues. If you charge nonemployees a greater amount than employees, then you must disregard all costs and revenues attributable to these nonemployees. An employer-operated eating facility for employees is an eating facility that meets all the following conditions. You own or lease the facility.

You operate the facility. You’re considered to operate the eating facility if you have a contract with another to operate it.

The facility is on or near your business premises.

You provide meals (food, drinks, and related services) at the facility during, or immediately before or after, the employee's workday. Exclusion from wages. You can generally exclude the value of de minimis meals you provide to an employee from the employee's wages. Exception for highly compensated employees. You can't exclude from the wages of a highly compensated employee the value of a meal provided at an employer-operated eating facility that isn't available on the same terms to one of the following groups. All of your employees.

A group of employees defined under a reasonable classification you set up that doesn't favor highly compensated employees. For this exclusion, a highly compensated employee for 2020 is an employee who meets either of the following tests. The employee was a 5% owner at any time during the year or the preceding year. The employee received more than $125,000 in pay for the preceding year. You can choose to ignore test (2) if the employee wasn't also in the top 20% of employees when ranked by pay for the preceding year. Section 13304 of P.L. 115-97 changed the rules for the deduction of food or beverage expenses that are excludable from employee income as a de minimis fringe benefit. For amounts incurred or paid after 2017, the 50% limit on deductions for food or beverage expenses also applies to food or beverage expenses excludable from employee income as a de minimis fringe benefit. However, food or beverage expenses related to employee recreation, such as holiday parties or annual picnics, aren't subject to the 50% limit on deductions when made primarily for the benefit of your employees other than employees who are officers, shareholders or other owners who own a 10% or greater interest in your business, or other highly compensated employees. The new rules for the deduction limits on meals are discussed in chapter 2 of Pub. 535. While your business deduction may be limited, the fringe benefit exclusion rules still apply and the de minimis fringe benefits may be excluded from your employee's wages, as discussed earlier. Meals on Your Business Premises You can exclude the value of meals you furnish to an employee from the employee's wages if they meet the following tests. They are furnished on your business premises.

They are furnished for your convenience. If you allow your employee to choose to receive additional pay instead of meals, then the meals, if chosen, aren’t excluded. The exclusion also doesn't apply to cash allowances for meals. On your business premises. Generally, for this exclusion, the employee's place of work is your business premises. For your convenience. Whether you furnish meals for your convenience as an employer depends on all the facts and circumstances. You furnish the meals to your employee for your convenience if you do this for a substantial business reason other than to provide the employee with additional pay. This is true even if a law or an employment contract provides that the meals are furnished as pay. However, a written statement that the meals are furnished for your convenience isn't sufficient. Meals excluded for all employees if excluded for more than half. If more than half of your employees who are furnished meals on your business premises are furnished the meals for your convenience, you can treat all meals you furnish to employees on your business premises as furnished for your convenience. Food service employees. Meals you furnish to a restaurant or other food service employee during, or immediately before or after, the employee's working hours are furnished for your convenience. For example, if a waitress works during the breakfast and lunch periods, you can exclude from her wages the value of the breakfast and lunch you furnish in your restaurant for each day she works. Example. You operate a restaurant business. You furnish your employee, Carol, who is a waitress working 7 a.m. to 4 p.m., two meals during each workday. You encourage but don't require Carol to have her breakfast on the business premises before starting work. She must have her lunch on the premises. Since Carol is a food service employee and works during the normal breakfast and lunch periods, you can exclude from her wages the value of her breakfast and lunch. If you also allow Carol to have meals on your business premises without charge on her days off, you can't exclude the value of those meals from her wages. Employees available for emergency calls. Meals you furnish during working hours so an employee will be available for emergency calls during the meal period are furnished for your convenience. You must be able to show these emergency calls have occurred or can reasonably be expected to occur, and that the calls have resulted, or will result, in you calling on your employees to perform their jobs during their meal period. Example. A hospital maintains a cafeteria on its premises where all of its 230 employees may get meals at no charge during their working hours. The hospital must have 120 of its employees available for emergencies. Each of these 120 employees is, at times, called upon to perform services during the meal period. Although the hospital doesn't require these employees to remain on the premises, they rarely leave the hospital during their meal period. Since the hospital furnishes meals on its premises to its employees so that more than half of them are available for emergency calls during meal periods, the hospital can exclude the value of these meals from the wages of all of its employees. Short meal periods. Meals you furnish during working hours are furnished for your convenience if the nature of your business (not merely a preference) restricts an employee to a short meal period (such as 30 or 45 minutes) and the employee can't be expected to eat elsewhere in such a short time. For example, meals can qualify for this treatment if your peak workload occurs during the normal lunch hour. However, they don't qualify if the reason for the short meal period is to allow the employee to leave earlier in the day. Example. Frank is a bank teller who works from 9 a.m. to 5 p.m. The bank furnishes his lunch without charge in a cafeteria the bank maintains on its premises. The bank furnishes these meals to Frank to limit his lunch period to 30 minutes, since the bank's peak workload occurs during the normal lunch period. If Frank got his lunch elsewhere, it would take him much longer than 30 minutes and the bank strictly enforces the time limit. The bank can exclude the value of these meals from Frank's wages. Proper meals not otherwise available. Meals you furnish during working hours are furnished for your convenience if the employee couldn't otherwise get proper meals within a reasonable period of time. For example, meals can qualify for this treatment if there are insufficient eating facilities near the place of employment. For an example of this, see Example of qualifying lodging , earlier in this section. Meals after work hours. Generally, meals furnished before or after the working hours of an employee aren’t considered as furnished for your convenience. However, meals you furnish to an employee immediately after working hours are furnished for your convenience if you would have furnished them during working hours for a substantial nonpay business reason but, because of the work duties, they weren't obtained during working hours. Meals you furnish to promote goodwill, boost morale, or attract prospective employees. Meals you furnish to promote goodwill, boost morale, or attract prospective employees aren't considered furnished for your convenience. However, you may be able to exclude their value as discussed under De Minimis Meals , earlier. Meals furnished on nonworkdays or with lodging. You generally can't exclude from an employee's wages the value of meals you furnish on a day when the employee isn't working. However, you can exclude these meals if they are furnished with lodging that is excluded from the employee's wages. See Lodging on Your Business Premises , earlier in this section. Meals with a charge. The fact that you charge for the meals and that your employees may accept or decline the meals isn't taken into account in determining whether or not meals are furnished for your convenience. S corporation shareholder-employee. For this exclusion, don't treat a 2% shareholder of an S corporation as an employee of the corporation. A 2% shareholder is someone who directly or indirectly owns (at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power. Treat a 2% shareholder as you would a partner in a partnership for fringe benefit purposes, but don't treat the benefit as a reduction in distributions to the 2% shareholder. For more information, see Revenue Ruling 91-26, 1991-1 C.B. 184.

No-Additional-Cost Services This exclusion applies to a service you provide to an employee if it doesn't cause you to incur any substantial additional costs. The service must be offered to customers in the ordinary course of the line of business in which the employee performs substantial services. No-additional-cost services are excess capacity services, such as airline, bus, or train tickets; hotel rooms; or telephone services provided free, at a reduced price, or through a cash rebate to employees working in those lines of business. Services that aren't eligible for treatment as no-additional-cost services are non-excess capacity services, such as the facilitation by a stock brokerage firm of the purchase of stock by employees. These services may, however, be eligible for a qualified employee discount of up to 20% of the value of the service provided. See Employee Discounts , earlier. Substantial additional costs. To determine whether you incur substantial additional costs to provide a service to an employee, count any lost revenue as a cost. Don't reduce the costs you incur by any amount the employee pays for the service. You’re considered to incur substantial additional costs if you or your employees spend a substantial amount of time in providing the service, even if the time spent would otherwise be idle or if the services are provided outside normal business hours. Example. A commercial airline allows its employees to take personal flights on the airline at no charge and receive reserved seating. Because the employer gives up potential revenue by allowing the employees to reserve seats, employees receiving such free flights aren’t eligible for the no-additional-cost exclusion. Reciprocal agreements. A no-additional-cost service provided to your employee by an unrelated employer may qualify as a no-additional-cost service if all the following tests are met. The service is the same type of service generally provided to customers in both the line of business in which the employee works and the line of business in which the service is provided.

You and the employer providing the service have a written reciprocal agreement under which a group of employees of each employer, all of whom perform substantial services in the same line of business, may receive no-additional-cost services from the other employer.

Neither you nor the other employer incurs any substantial additional cost (including lost revenue) either in providing the service or because of the written agreement. Employee. For this exclusion, treat the following individuals as employees. A current employee. A former employee who retired or left on disability. A widow or widower of an individual who died while an employee. A widow or widower of a former employee who retired or left on disability. A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control. A partner who performs services for a partnership. Treat services you provide to the spouse or dependent child of an employee as provided to the employee. For this fringe benefit, dependent child means any son, stepson, daughter, stepdaughter, or eligible foster child who is a dependent of the employee, or both of whose parents have died and who hasn't reached age 25. Treat a child of divorced parents as a dependent of both parents. Treat any use of air transportation by the parent of an employee as use by the employee. This rule doesn't apply to use by the parent of a person considered an employee because of item (3) or (4) above. Exclusion from wages. You can generally exclude the value of a no-additional-cost service you provide to an employee from the employee's wages. Exception for highly compensated employees. You can't exclude from the wages of a highly compensated employee the value of a no-additional-cost service that isn't available on the same terms to one of the following groups. All of your employees.

A group of employees defined under a reasonable classification you set up that doesn't favor highly compensated employees. For this exclusion, a highly compensated employee for 2020 is an employee who meets either of the following tests. The employee was a 5% owner at any time during the year or the preceding year. The employee received more than $125,000 in pay for the preceding year. You can choose to ignore test (2) if the employee wasn't also in the top 20% of employees when ranked by pay for the preceding year.

Retirement Planning Services You may exclude from an employee's wages the value of any retirement planning advice or information you provide to your employee or his or her spouse if you maintain a qualified retirement plan. A qualified retirement plan includes a plan, contract, pension, or account described in section 219(g)(5) of the Internal Revenue Code. In addition to employer plan advice and information, the services provided may include general advice and information on retirement. However, the exclusion doesn't apply to services for tax preparation, accounting, legal, or brokerage services. You can't exclude from the wages of a highly compensated employee retirement planning services that aren't available on the same terms to each member of a group of employees normally provided education and information about the employer's qualified retirement plan.

Transportation (Commuting) Benefits This section discusses exclusion rules that apply to benefits you provide to your employees for their personal transportation, such as commuting to and from work. These rules apply to the following transportation benefits. De minimis transportation benefits.

Qualified transportation benefits. Special rules that apply to demonstrator cars and qualified nonpersonal use vehicles are discussed under Working Condition Benefits, later in this section. De Minimis Transportation Benefits You can exclude the value of any de minimis transportation benefit you provide to an employee from the employee's wages. A de minimis transportation benefit is any local transportation benefit you provide to an employee if it has so little value (taking into account how frequently you provide transportation to your employees) that accounting for it would be unreasonable or administratively impracticable. For example, it applies to occasional local transportation fare you give an employee because the employee is working overtime if the benefit is reasonable and isn't based on hours worked. Local transportation fare provided on a regular or routine basis doesn't qualify for this exclusion. A special rule allows you to exclude as a de minimis benefit public transit passes, tokens, or fare cards you provide at a discount to defray your employee's commuting costs on the public transit system if the discount doesn't exceed $21 in any month. Similarly, you may also provide a voucher or similar instrument that is exchangeable solely for tokens, fare cards, or other instruments that enable your employee to use the public transit system if the value of the vouchers and other instruments in any month doesn't exceed $21. You may also reimburse your employee to cover the cost of commuting on a public transit system, provided your employee doesn't receive more than $21 in reimbursements for commuting costs in any month. The reimbursement must be made under a bona fide reimbursement arrangement, where you establish appropriate procedures for verifying on a periodic basis that your employee's use of public transportation for commuting is consistent with the value of the benefit provided. The exclusion doesn't apply to the provision of any benefit to defray public transit expenses incurred for personal travel other than commuting. Employee. For this exclusion, treat any recipient of a de minimis transportation benefit as an employee. Qualified Transportation Benefits This exclusion applies to the following benefits. A ride in a commuter highway vehicle between the employee's home and work place.

A transit pass.

Qualified parking. You may provide an employee with any one or more of these benefits at the same time. Qualified transportation benefits can be provided directly by you or through a bona fide reimbursement arrangement. A bona fide reimbursement arrangement requires that the employee incur and substantiate expenses for qualified transportation benefits before reimbursement. However, cash reimbursements for transit passes qualify only if a voucher or a similar item that the employee can exchange only for a transit pass isn't readily available for direct distribution by you to your employee. A voucher is readily available for direct distribution only if an employer can obtain it from a voucher provider that doesn't impose fare media charges or other restrictions that effectively prevent the employer from obtaining vouchers. See Regulations section 1.132-9(b)(Q&A 16–19) for more information. Compensation reduction agreements. A compensation reduction agreement is a way to provide qualified transportation benefits on a pre-tax basis by offering your employees a choice between cash compensation and any qualified transportation benefit. A compensation reduction arrangement can be used with a bona fide reimbursement arrangement. For each month, the amount of the compensation reduction can't exceed the monthly limits for transportation benefits described in Exclusion from wages , later. For more information about providing qualified transportation fringe benefits under a compensation reduction agreement, see Regulations section 1.132-9(b)(Q&A 11–15). Commuter highway vehicle. A commuter highway vehicle is any highway vehicle that seats at least 6 adults (not including the driver). In addition, you must reasonably expect that at least 80% of the vehicle mileage will be for transporting employees between their homes and workplace with employees occupying at least one-half the vehicle's seats (not including the driver's). Transit pass. A transit pass is any pass, token, farecard, voucher, or similar item entitling a person to ride, free of charge or at a reduced rate, on one of the following. On mass transit.

In a vehicle that seats at least 6 adults (not including the driver) if a person in the business of transporting persons for pay or hire operates it. Mass transit may be publicly or privately operated and includes bus, rail, or ferry. For guidance on the use of smart cards and debit cards to provide qualified transportation fringes, see Revenue Ruling 2014-32, 2014-50 I.R.B. 917, available at IRS.gov/irb/2014-50_IRB#RR-2014-32. Qualified parking. Qualified parking is parking you provide to your employees on or near your business premises. It includes parking on or near the location from which your employees commute to work using mass transit, commuter highway vehicles, or carpools. It doesn't include parking at or near your employee's home. Qualified bicycle commuting reimbursement suspended. Section 11047 of P.L. 115-97 suspends the exclusion of qualified bicycle commuting reimbursements from your employee's income for any tax year beginning after 2017 and before 2026. Employee. For this exclusion, treat the following individuals as employees. A current employee.

A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control. A self-employed individual isn't an employee for qualified transportation benefit purposes. Exception for S corporation shareholders. Don't treat a 2% shareholder of an S corporation as an employee of the corporation for this purpose. A 2% shareholder is someone who directly or indirectly owns (at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power. Treat a 2% shareholder as you would a partner in a partnership for fringe benefit purposes, but don't treat the benefit as a reduction in distributions to the 2% shareholder. For more information, see Revenue Ruling 91-26, 1991-1 C.B. 184. Relation to other fringe benefits. You can't exclude a qualified transportation benefit you provide to an employee under the de minimis or working condition benefit rules. However, if you provide a local transportation benefit other than by transit pass or commuter highway vehicle, or to a person other than an employee, you may be able to exclude all or part of the benefit under other fringe benefit rules (de minimis, working condition, etc.). Exclusion from wages. You can generally exclude the value of transportation benefits that you provide to an employee during 2020 from the employee's wages up to the following limits. $270 per month for combined commuter highway vehicle transportation and transit passes.

$270 per month for qualified parking. Benefits more than the limit. If the value of a benefit for any month is more than its limit, include in the employee's wages the amount over the limit minus any amount the employee paid for the benefit. You can't exclude the excess from the employee's wages as a de minimis transportation benefit. Qualified transportation benefits aren’t deductible. Section 13304 of P.L. 115-97 provides that no deduction is allowed for qualified transportation benefits (whether provided directly by you, through a bona fide reimbursement arrangement, or through a compensation reduction agreement) incurred or paid after 2017. Also, no deduction is allowed for any expense incurred for providing any transportation, or any payment or reimbursement to your employee, in connection with travel between your employee's residence and place of employment, except as necessary for ensuring the safety of your employee or for qualified bicycle commuting reimbursements as described in section 132(f)(5)(F) (even though the exclusion for qualified bicycle commuting reimbursements is suspended, as discussed earlier). While you may no longer deduct payments for qualified transportation benefits, the fringe benefit exclusion rules still apply and the payments may be excluded from your employee's wages as discussed earlier. Although the value of a qualified transportation fringe benefit is relevant in determining the fringe benefit exclusion and whether the section 274(e)(2) exception for expenses treated as compensation applies, the deduction that is disallowed relates to the expense of providing a qualified transportation fringe, not its value. More information. For more information on qualified transportation benefits, including van pools, and how to determine the value of parking, see Regulations section 1.132-9.

Tuition Reduction An educational organization can exclude the value of a qualified tuition reduction it provides to an employee from the employee's wages. A tuition reduction for undergraduate education generally qualifies for this exclusion if it is for the education of one of the following individuals. A current employee. A former employee who retired or left on disability. A widow or widower of an individual who died while an employee. A widow or widower of a former employee who retired or left on disability. A dependent child or spouse of any individual listed in (1) through (4) above. A tuition reduction for graduate education qualifies for this exclusion only if it is for the education of a graduate student who performs teaching or research activities for the educational organization. For more information on this exclusion, see Qualified Tuition Reduction under Other Types of Educational Assistance in chapter 1 of Pub. 970.