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taxmap/pubs/p15b-001.htm#TXMP108983de 2. Fringe Benefit Exclusion Rules(p3)

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.

The excluded benefits are not subject to federal income tax withholding. Also, in most cases, they are not subject to social security, Medicare, or federal unemployment (FUTA) tax and are not 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.
• Group-term life insurance coverage.
• Health savings accounts (HSAs).
• Lodging on your business premises.
• Meals.
• Moving expense reimbursements.
• 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.

taxmap/pubs/p15b-001.htm#TXMP7cf700c2 Accident and Health Benefits(p6)

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 Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans).

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 injuries or illnesses (such as the loss of the use of an arm or leg). The payments must be figured without regard to any period of absence from work.

taxmap/pubs/p15b-001.htm#TXMP15f9e7f7 Accident or health plan.(p6)

This is an arrangement that provides benefits for your employees, their spouses, and their dependents in the event of personal injury or sickness. The plan may be insured or noninsured and does not need to be in writing.

taxmap/pubs/p15b-001.htm#TXMP1a1c562c Employee.(p6)

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.

taxmap/pubs/p15b-001.htm#TXMP10167072 Exception for S corporation shareholders.(p6)

Do not 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 do not treat the benefit as a reduction in distributions to the 2% shareholder.

taxmap/pubs/p15b-001.htm#TXMP1b58ad98 Exclusion from wages.(p6)

You can generally exclude the value of accident or health benefits you provide to an employee from the employee's wages.

taxmap/pubs/p15b-001.htm#TXMP57a687b2 Exception for certain long-term care benefits.(p6)

You cannot 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 federal unemployment (FUTA) taxes.

taxmap/pubs/p15b-001.htm#TXMP787eb2bb S corporation shareholders.(p6)

Because you cannot 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) from the employee's wages subject to social security, Medicare, and FUTA taxes.

taxmap/pubs/p15b-001.htm#TXMP620fd0e7 Exception for highly compensated employees.(p6)

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 their wages subject to federal income tax withholding. However, you can exclude these amounts (other than payments for specific injuries or illnesses) from the employee's wages subject to 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.

taxmap/pubs/p15b-001.htm#TXMP6c65613e COBRA premiums.(p6)

The exclusion for accident and health benefits applies to amounts you pay to maintain medical coverage for a 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.

taxmap/pubs/p15b-001.htm#TXMP7d875bdf Achievement Awards(p6)

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 does not apply to awards of cash, cash equivalents, gift certificates, or other intangible property such as vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, and other securities. The award must meet the requirements for employee achievement awards discussed in chapter 2 of Publication 535, Business Expenses.

taxmap/pubs/p15b-001.htm#TXMP1743c474 Employee.(p7)

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.

taxmap/pubs/p15b-001.htm#TXMP19990638 Exception for S corporation shareholders.(p7)

Do not 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 do not treat the benefit as a reduction in distributions to the 2% shareholder.

taxmap/pubs/p15b-001.htm#TXMP128f6276 Exclusion from wages.(p7)

You can generally exclude the value of achievement awards you give to an employee from the employee's wages if their cost is not 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 are not "qualified plan awards"). See chapter 2 of Publication 535 for more information about the limit on deductions for employee achievement awards.

To determine for 2008 whether an achievement award is a "qualified plan award" under the deduction rules described in Publication 535, treat any employee who received more than $100,000 in pay for 2007 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.

taxmap/pubs/p15b-001.htm#TXMP1011c5cb Adoption Assistance(p7)

Adoption Assistance

An adoption assistance program is a separate written plan of an employer that meets all of the following requirements.

1. It benefits employees who qualify under rules set up by you, which do not favor highly compensated employees or their dependents. To determine whether your plan meets this test, do not 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.
2. It does not 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.
3. You give reasonable notice of the plan to eligible employees.
4. Employees provide reasonable substantiation that payments or reimbursements are for qualifying expenses.

For this exclusion, a highly compensated employee for 2008 is an employee who meets either of the following tests.

1. The employee was a 5% owner at any time during the year or the preceding year.
2. The employee received more than $100,000 in pay for the preceding year.

You can choose to ignore test (2) if the employee was not 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 cannot exclude these payments from wages subject to social security, Medicare, and federal unemployment (FUTA) taxes. For more information, see the Instructions for Form 8839, Qualified Adoption Expenses.

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. Use code "T" to identify this amount.

taxmap/pubs/p15b-001.htm#TXMP21b6d3ee Exception for S corporation shareholders.(p7)

For this exclusion, do not 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 including using the benefit as a reduction in distributions to the 2% shareholder.

taxmap/pubs/p15b-001.htm#TXMP04e621b4 Athletic Facilities(p7)

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, has not attained the age of 25.

taxmap/pubs/p15b-001.htm#TXMP2d343539 On-premises facility.(p7)

The athletic facility must be located on premises you own or lease. It does not have to be located on your business premises. However, the exclusion does not apply to an athletic facility for residential use, such as athletic facilities that are part of a resort.

taxmap/pubs/p15b-001.htm#TXMP7a6e450b Employee.(p8)

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.

taxmap/pubs/p15b-001.htm#TXMP1b55c3db De Minimis (Minimal) Benefits(p8)

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, use of gift card, charge card, or credit card), no matter how little, are never excludable as a de minimis benefit, except for occasional meal money or transportation fare.

Examples of de minimis benefits include the following.

• 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 gifts, other than cash, with a low fair market value.
• Group-term life insurance payable on the death of an employee's spouse or dependent if the face amount is not more than $2,000.
• Meals. See Meals, later.
• Occasional parties or picnics for employees and their guests.
• Occasional tickets for entertainment or sporting events.
• Transportation fare. See Transportation (Commuting) Benefits, later.

taxmap/pubs/p15b-001.htm#TXMP7950bc8b Employee.(p8)

For this exclusion, treat any recipient of a de minimis benefit as an employee.

taxmap/pubs/p15b-001.htm#TXMP69bbeff0 Dependent Care Assistance(p8)

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 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 Qualifying Person Test and Work-Related Expense Test in Publication 503, Child and Dependent Care Expenses.

taxmap/pubs/p15b-001.htm#TXMP00a425dc Employee.(p8)

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 are a sole proprietor).
• A partner who performs services for a partnership.

taxmap/pubs/p15b-001.htm#TXMP1076190b Exclusion from wages.(p8)

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 cannot be more than the earned income of either:

• The employee, or
• The 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 Publication 503.

taxmap/pubs/p15b-001.htm#TXMP2bf40228 Exception for highly compensated employees.(p8)

You cannot exclude dependent care assistance from the wages of a highly compensated employee unless the benefits provided under the program do not 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 2008 is an employee who meets either of the following tests.

1. The employee was a 5% owner at any time during the year or the preceding year.
2. The employee received more than $100,000 in pay for the preceding year.

You can choose to ignore test (2) if the employee was not also in the top 20% of employees when ranked by pay for the preceding year.

taxmap/pubs/p15b-001.htm#TXMP0ce98d8e Form W-2.(p8)

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 cannot exclude from the employee's wages in boxes 1, 3, and 5.

taxmap/pubs/p15b-001.htm#TXMP2e382235 Educational Assistance(p9)

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 do not 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 do not 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.

taxmap/pubs/p15b-001.htm#TXMP4b601855 Educational assistance program.(p9)

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 do not favor highly compensated employees. To determine whether your program meets this test, do not 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 does not provide more than 5% of its benefits during the year for shareholders or owners. 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 does not 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 2008 is an employee who meets either of the following tests.

1. The employee was a 5% owner at any time during the year or the preceding year.
2. The employee received more than $100,000 in pay for the preceding year.

You can choose to ignore test (2) if the employee was not also in the top 20% of employees when ranked by pay for the preceding year.

taxmap/pubs/p15b-001.htm#TXMP674eb19a Employee.(p9)

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 are a sole proprietor).
• A partner who performs services for a partnership.

taxmap/pubs/p15b-001.htm#TXMP1ee848a1 Exclusion from wages.(p9)

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.

taxmap/pubs/p15b-001.htm#TXMP667eeb4b Assistance over $5,250.(p9)

If you do not have an educational assistance plan, or you provide an employee with assistance exceeding $5,250, you can exclude the value of these benefits from wages if they are working condition benefits. 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 deductible as a business or depreciation expense. See Working Condition Benefits, later.

taxmap/pubs/p15b-001.htm#TXMP217d99fc Employee Discounts(p9)

Employee Discounts

This exclusion applies to a price reduction you give an 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. However, it does not apply to discounts on real property or discounts on personal property of a kind commonly held for investment (such as stocks or bonds).

taxmap/pubs/p15b-001.htm#TXMP0e91e563 Employee.(p9)

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.

taxmap/pubs/p15b-001.htm#TXMP4fa01958 Exclusion from wages.(p9)

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.

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.

taxmap/pubs/p15b-001.htm#TXMP314867be Exception for highly compensated employees.(p10)

You cannot exclude from the wages of a highly compensated employee any part of the value of a discount that is not 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 does not favor highly compensated employees.

For this exclusion, a highly compensated employee for 2008 is an employee who meets either of the following tests.

1. The employee was a 5% owner at any time during the year or the preceding year.
2. The employee received more than $100,000 in pay for the preceding year.

You can choose to ignore test (2) if the employee was not also in the top 20% of employees when ranked by pay for the preceding year.

taxmap/pubs/p15b-001.htm#TXMP420bb2e4 Employee Stock Options(p10)

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 federal unemployment taxes (FUTA) do not include remuneration resulting from the exercise after October 22, 2004, of an incentive stock option or under an employee stock purchase plan option, or from any disposition of stock acquired by exercising such an option. The IRS will not apply these taxes to an exercise before October 23, 2004, of an incentive stock option or an employee stock purchase plan option or to a disposition of stock acquired by such exercise.

Additionally, federal income tax withholding is not required on the income resulting from a disqualifying disposition of stock acquired by the exercise after October 22, 2004, of an incentive stock option or under an employee stock purchase plan option, or on income equal to the discount portion of stock acquired by the exercise, after October 22, 2004, of an employee stock purchase plan option resulting from any disposition of the stock. The IRS will not apply federal income tax withholding upon the disposition of stock acquired by the exercise, before October 23, 2004, of an incentive stock option or an employee stock purchase plan option. However, 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 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 is not 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 Rev. Rul. 2002-22 on page 849 of Internal Revenue Bulletin 2002-19 at www.irs.gov/pub/irs-irbs/irb02-19.pdf. You can find Rev. Rul. 2004-60 on page 1051 of Internal Revenue Bulletin 2004-24 at www.irs.gov/pub/irs-irbs/irb04-24.pdf.

For more information about employee stock options, see sections 421, 422, and 423 of the Internal Revenue Code and the related regulations.

taxmap/pubs/p15b-001.htm#TXMP0e7979dd Group-Term Life Insurance Coverage(p10)

Group-Term Life Insurance

This exclusion applies to life insurance coverage that meets all the following conditions.

• It provides a general death benefit that is not included in income.
• You provide it to a group of employees. See The 10-employee rule below.
• 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 do not pay any of the policy's cost, you are 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 does not include the following insurance.

• Insurance that does not 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.
• 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.

taxmap/pubs/p15b-001.htm#TXMP6b6a6b7e Employee.(p11)

For this exclusion, treat the following individuals as employees.

1. A current common-law employee.
2. A full-time life insurance agent who is a current statutory employee.
3. An individual who was formerly your employee under (1) or (2), above.
4. 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.

taxmap/pubs/p15b-001.htm#TXMP116e2c3a Exception for S corporation shareholders.(p11)

Do not 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 do not treat the benefit as a reduction in distributions to the 2% shareholder.

taxmap/pubs/p15b-001.htm#TXMP3546f221 The 10-employee rule.(p11)

Generally, life insurance is not group-term life insurance unless you provide it to at least 10 full-time employees at some time during the year.

For this rule, count employees who choose not to receive the 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, do not count an employee who must pay part or all of the cost of permanent benefits to get insurance, unless that employee chooses to receive it.

taxmap/pubs/p15b-001.htm#TXMP723d3ed7 Exceptions.(p11)

Even if you do not meet the 10-employee rule, two exceptions allow you to treat insurance as group-term life insurance.

Under the first exception, you do not have to meet the 10-employee rule if all the following conditions are met.

1. If evidence that the employee is insurable is required, it is limited to a medical questionnaire (completed by the employee) that does not require a physical.
2. 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.
3. 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 do not 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 is not 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 does not affect an employee's eligibility for insurance or the amount of insurance that employee gets.

To apply either exception, do not 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 have not been employed for the waiting period given in the policy. (This waiting period cannot be more than 6 months.)

taxmap/pubs/p15b-001.htm#TXMP47d67bd0 Exclusion from wages.(p11)

You can generally exclude the cost of up to $50,000 of group-term life insurance 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 do not have to withhold federal income tax or pay FUTA tax on any group-term life insurance you provide to an employee.

taxmap/pubs/p15b-001.htm#TXMP4c63f7ba Coverage over the limit.(p11)

You must include in your employee's wages subject to social security and Medicare taxes the cost of group-term life insurance that is more than the cost of $50,000 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."

Figure the monthly cost of the insurance to include in the employee's wages by multiplying the number of thousands of dollars of insurance coverage over $50,000 (figured to the nearest $100) by the cost shown in the following table. Use the employee's age on the last day of the tax year. You must prorate the cost from the table if less than a full month of coverage is involved.

Age	Cost
Under 25	$ .05
25 through 29	.06
30 through 34	.08
35 through 39	.09
40 through 44	.10
45 through 49	.15
50 through 54	.23
55 through 59	.43
60 through 64	.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 full months' coverage at that cost.

taxmap/pubs/p15b-001.htm#TXMP0ee2ef24
Example.(p11)

Tom's employer provides him with group-term life insurance coverage of $200,000. Tom is 45 years old, is not 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 total cost of $150,000 of coverage is $270 ($.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."

taxmap/pubs/p15b-001.htm#TXMP26b94f78 Coverage for dependents.(p12)

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 is not more than $2,000. The part of this coverage that the employee paid on an after-tax basis is also excludable from income. For this purpose, the cost is figured using the monthly cost table above.

taxmap/pubs/p15b-001.htm#TXMP1e9ca46c Former employees.(p12)

For group-term life insurance over $50,000 provided to former employees (including retirees), the former employees must pay the employee's share of social security and Medicare taxes with their federal income tax returns. You are not required to collect those taxes. Use the table above to determine the amount of social security and Medicare taxes owed by the former employee for coverage provided after separation from service. Report those uncollected amounts separately in box 12 on Form W-2 using codes "M" and "N." See the Instructions for Forms W-2 and W-3.

taxmap/pubs/p15b-001.htm#TXMP58e33f1c Exception for key employees.(p12)

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 does not 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 do not 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-6) for more information.
• The cost you figure using the Table 2-2.

For this exclusion, a key employee during 2008 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.

1. An officer having annual pay of more than $150,000.
2. An individual who for 2008 was either of the following.
   1. A 5% owner of your business.
   2. A 1% owner of your business whose annual pay was 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 does not 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 are not key employees.
• It benefits employees who qualify under a set of rules you set up that do not favor key employees.

Your plan meets this participation test if it is part of a cafeteria plan (discussed in section 1) and it meets the participation test for those plans.

When applying this test, do not 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
• Are not 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 does not favor key employees as to benefits if all benefits available to participating key employees are also available to all other participating employees. Your plan does not favor key employees just because the amount of insurance you provide to your employees is uniformly related to their pay.

taxmap/pubs/p15b-001.htm#TXMP3277c867 S corporation shareholders.(p12)

Because you cannot 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 do not have to withhold federal income tax or pay federal unemployment tax on the cost of any group-term life insurance coverage you provide to the 2% shareholder.

taxmap/pubs/p15b-001.htm#TXMP4dc64ec0 Health Savings Accounts(p12)

Health Savings Account

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 cannot 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) will not give rise to a medical expense deduction on the individual's federal income tax return. For more information about HSAs, visit the Department of Treasury's website at www.treas.gov/offices/public-affairs/hsa.

taxmap/pubs/p15b-001.htm#TXMP4f7e12a5 Eligibility.(p12)

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 2008, a qualifying HDHP must have a deductible of at least $1,100 for self-only coverage or $2,200 for family coverage and must limit annual out-of-pocket expenses of the beneficiary to $5,600 for self-only coverage and $11,200 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.

taxmap/pubs/p15b-001.htm#TXMP018b69e4 Exceptions.(p13)

An individual is not 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 flexible spending arrangement (FSA) or health reimbursement arrangement (HRA) generally disqualifies the individual (and employer) from making contributions to his or her HSA.

taxmap/pubs/p15b-001.htm#TXMP30617132 Employer contributions.(p13)

Up to specified dollar limits, you can generally exclude your contributions (must be in cash) to the Health Savings Account (HSA) of a qualified individual (determined monthly) from federal income tax withholding, social security tax, Medicare tax, and FUTA tax. For calendar year 2008, you can contribute up to $2,900 for self-only coverage or $5,800 for family coverage to a qualified individual's HSA.

The contribution amount determined above is increased $900 for 2008 for qualified individuals who are age 55 or older at any time during the year. No contributions can be made to an individual's HSA after he or she becomes enrolled in Medicare Part A or Part B.

The maximum annual contribution (including additional amount for individuals who are age 55 or older) must be reduced to reflect any portion of the year during which the individual was not a qualified individual.

taxmap/pubs/p15b-001.htm#TXMP39089a86 Nondiscrimination rules.(p13)

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.

taxmap/pubs/p15b-001.htm#TXMP51cbd1d2 Exception.(p13)

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 2008 is an employee who meets either of the following tests.

1. The employee was a 5% owner at any time during the year or the preceding year.
2. The employee received more than $100,000 in pay for the preceding year.

You can choose to ignore test (2) if the employee was not also in the 20% of employees when ranked by pay for the preceding year.

taxmap/pubs/p15b-001.htm#TXMP53bb90c9 Partnerships and S corporations.(p13)

Partners and 2% shareholders of an S corporation are not 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.

taxmap/pubs/p15b-001.htm#TXMP4325b762 Cafeteria plans.(p13)

You may contribute to an employee's HSA using a cafeteria plan and your contributions are not subject to the statutory comparability rules. However, cafeteria plan nondiscrimination rules still apply. For example, contributions under a cafeteria plan to employee HSAs cannot be greater for higher-paid employees than they are for lower-paid employees. Contributions that favor lower-paid employees are not prohibited.

taxmap/pubs/p15b-001.htm#TXMP7ccec469 Reporting requirements.(p13)

You must report your contributions to an employee's HSA on Form W-2 in box 12 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, Distributions from an HSA, Archer MSA, or Medicare Advantage MSA.

taxmap/pubs/p15b-001.htm#TXMP1bcca833 Lodging on Your Business Premises(p13)

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.

The exclusion does not apply if you allow your employee to choose to receive additional pay instead of lodging.

taxmap/pubs/p15b-001.htm#TXMP1d36c0bf On your business premises.(p13)

For this exclusion, your business premises is generally your employee's place of work. (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.)

taxmap/pubs/p15b-001.htm#TXMP09eaede5 For your convenience.(p13)

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 is not sufficient.

taxmap/pubs/p15b-001.htm#TXMP7dbe95b9 Condition of employment.(p13)

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 could not perform their required duties without being furnished the lodging.

It does not matter whether you must furnish the lodging as pay under the terms of an employment contract or a law fixing the terms of employment.

taxmap/pubs/p15b-001.htm#TXMP7d77f72d
Example.(p13)

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 cannot exclude the value of the lodging from her wages because she is not required to live at the hospital to properly perform the duties of her employment.

taxmap/pubs/p15b-001.htm#TXMP5ac2be4f S corporation shareholders.(p13)

For this exclusion, do not 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 do not treat the benefit as a reduction in distributions to the 2% shareholder.

taxmap/pubs/p15b-001.htm#TXMP4a00a772 Meals(p14)

Meals and Entertainment

This section discusses the exclusion rules that apply to de minimis meals and meals on your business premises.

taxmap/pubs/p15b-001.htm#TXMP3adb5b8d De Minimis Meals(p14)

De Minimis Meals

You can exclude any meal or meal money 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 does not apply to meal money figured on the basis of hours worked.)
• Occasional parties or picnics for employees and their guests.

This 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 costs of the facility. 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 food or beverages you furnish to employees qualify as a de minimis benefit, you can deduct their full cost. The 50% limit on deductions for the cost of meals does not apply. The deduction limit on meals is discussed in chapter 2 of Publication 535.

taxmap/pubs/p15b-001.htm#TXMP543313f4 Employee.(p14)

For this exclusion, treat any recipient of a de minimis meal as an employee.

taxmap/pubs/p15b-001.htm#TXMP4bd46eae Employer-operated eating facility for employees.(p14)

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 are 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.

taxmap/pubs/p15b-001.htm#TXMP41fb34c5 Exclusion from wages.(p14)

You can generally exclude the value of de minimis meals you provide to an employee from the employee's wages.

taxmap/pubs/p15b-001.htm#TXMP18e743b4 Exception for highly compensated employees.(p14)

You cannot exclude from