Question

Accounting Question (Employee Benefit Tax Planning)

1. Name and describe 3 fringe benefits that the employer may provide to an employee tax free and what discrimination rules, if any, apply to those benefits. Be sure to specify the code sections that provide the income tax exclusion for the benefit.

Answer 1

EXPLANATION:

Fringe benefit may be defined as perquisites paid to employees as extra compensation by the employer.
These fringe benefit are usually given to employees to increase their job satisfaction and their health security.
Example of fringe benefits are: employees discount, Life insurance, health insurance etc.

The 3 fringe benefit that employer can provide to his employee as tax free are as follows.

1. Employee stock options: the stock paid to employees as( employee stock option plan) which can be in form of incentive stock option or non qualified stock options etc. Rules of section 83, 421, 422 of IRC applies to employees stock option plans along with regulations of these related sections.
2. Achievement awards: These are the incentives given to employees at an achievement of specific number of years in service in an organisation or quality and safety achieved while doing work for the organisation.

• It does not include award given in form of (vacations, stocks, securities) as tax free. Limit of achievement award must not exceed $1500 per year as per chapter 2 of IRS publication 535.

3.Dependent care assistance : Employees are paid fringe benefit for taking care of dependent, who are family members of employee.

The IRS set a limit for dependent care assistance compensation ( limit of $2500, if employee and his wife files separate returns).
This value of compensation is to be reported by employer in box number 10 of form number w- 2
Excess payment will be taxable.