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