Dispelling Taxation Myths

There are certain rules that must be followed when developing safety incentive programs, particularly when it comes to tax benefits. An incentive award may not qualify for favorable tax treatment if it is given at the same time that annual salary adjustments are made or if it is used as a substitute for a program of awarding cash bonuses. If certain other conditions are met, however, an employer may deduct the cost of employee achievement awards given to the same employee, up to $400 during the course of a year.

If the employee achievement awards are given under an employer’s qualified plan (such as via a written plan or program approved by the IRS that does not discriminate in favor of highly compensated employees), the $400 deduction limitation is increased to $1,600 per employee. The average cost per employee of all employee achievement awards (including all of the employer’s established written plans during any given year) cannot exceed $400, although the employer may deduct the cost of employee achievement awards.

If a presented award is of “nominal value,” then its cost is excluded from the calculation of the total amount of incentive awards given under established written plans or programs in any year. The IRS doesn’t define nominal value for these purposes, but most experts agree that it is $50 or less.

Safety achievement awards can be excluded from employee income as long as the worker is a full-time employee (not a manager, administrator, clerical worker, or other professional employee), and if during the taxable year all other employee awards for safety achievement have previously been made to 10 percent or fewer of the eligible full-time employees of the employer.

When structuring safety incentives, companies should consider creating both a taxable and a tax-advantaged program. The former ensures that every employee “gets something,” while the latter (which would be limited to 10 percent of the workforce) would provide the tax benefits.

By covering both bases, companies will be best equipped to cultivate safe workplaces while also taking advantage of the IRS’ rules regarding taxation of such programs. d

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