A de minimis fringe benefit is any property or service an employer provides whose value, after taking into account the frequency with which similar fringes are provided by the employer to the employer’s employees, is so small as to make accounting for it unreasonable or administratively impracticable (26 U.S.C. 132(e)(1)). An employee’s gross income does not include the value of a fringe benefit that qualifies as one (26 U.S.C. 132(a)(4), 26 CFR 1.132-6(a)). Value and frequency are read together, so this is a facts and circumstances test, not a dollar allowance.
Frequency Is Measured One Employee at a Time
The default measure is the individual, and it settles borderline items: frequency is generally determined by reference to the frequency with which the employer provides the fringes to each individual employee (26 CFR 1.132-6(b)(1)). An employer that gives a free meal in kind to one employee daily, and to no other employee, cannot treat those meals as de minimis for that employee, even though the workforce as a whole receives meals infrequently.
Where it would be administratively difficult to determine frequency for individual employees, frequency is measured against the workforce as a whole instead, except when the special rules for occasional meal money and local transportation fare in paragraph (d)(2) of the same regulation are being applied (26 CFR 1.132-6(b)(2)). That is how controlled personal use of a company copier stays excludable, once the employer restricts the machine so that at least 85 percent of its use is for business.
Cash and Cash Equivalents Fail, With One Narrow Exception
Cash fails on administrability rather than on size, because accounting for it is neither unreasonable nor impracticable. Except for the occasional overtime meal money and local transportation fare in paragraph (d)(2), the provision of any cash fringe benefit is never excludable under section 132(a), and a cash equivalent such as a benefit delivered through a gift certificate or a credit card is generally not excludable either, so cash handed to an employee to buy a theater ticket is taxable although the ticket itself could have been excluded (26 CFR 1.132-6(c)).
Gift certificates split on that line. One redeemable for general merchandise, or carrying a cash equivalent value, is taxable, while a certificate for a specific item of personal property that is minimal in value, provided infrequently and administratively impractical to account for, may be excludable on the facts (IRS, De Minimis Fringe Benefits).
Meals, meal money and local transportation fare are the narrow exception, excluded only where the benefit is reasonable, provided on an occasional basis, and provided because overtime extends the employee’s normal schedule, with meal money also having to be provided to let the employee work that overtime (26 CFR 1.132-6(d)(2)(i)). Meal money or local transportation fare calculated on the basis of the number of hours worked never qualifies.
What Qualifies, and What Never Can
What qualifies is small, in kind and occasional, running to traditional birthday or holiday gifts of property, not cash, with a low fair market value, occasional theater tickets, and coffee, doughnuts and soft drinks (26 CFR 1.132-6(e)(1)).
What never qualifies marks the outer edge. Season tickets sit outside the exclusion, so does the commuting use of an employer-provided vehicle more than one day a month, and so does membership in a private country club regardless of how often the employee uses it (26 CFR 1.132-6(e)(2)).
There Is No General Dollar Threshold
The regulation sets no general dollar limit, and it forbids manufacturing one from its own contents: the special rules in paragraph (d) and the examples in paragraph (e) may not be used to establish any general rule permitting exclusion (26 CFR 1.132-6(d)(3)). The IRS says it has ruled previously, in a particular case, that items with a value exceeding $100 could not be considered de minimis, even under unusual circumstances, and that a benefit too large to qualify is taxable in full rather than only to the extent of the excess (IRS, De Minimis Fringe Benefits). One ruling on one set of facts is not a ceiling a policy can be written against.
When the Test Fails
A benefit that fails the test belongs in wages on Form W-2 and is subject to income tax withholding, and to Social Security and Medicare withholding where the employee is covered for those taxes (IRS, De Minimis Fringe Benefits). Where that value lands among the taxable wage boxes is worked through in gross wages.
What It Is Not
It is not a gift, because the gift exclusion does not apply to any amount transferred by or for an employer to, or for the benefit of, an employee (26 U.S.C. 102(c)), which leaves the annual gift tax exclusion with no bearing on it. It is also not something a firm can route through a section 125 plan, whose qualified benefits exclude anything kept out of gross income by reason of section 132 (26 U.S.C. 125(f)(1)), a carve-out set out in cafeteria plan.
Common Questions
A fringe benefit provided in connection with the performance of services is compensation for those services and is included in gross income under section 61(a)(1), unless another section of the Code excludes it (26 CFR 1.61-21(a)(1), (a)(2) and (a)(3)). A de minimis fringe is one of the categories section 132(a) keeps out of gross income, alongside the no-additional-cost service and the qualified employee discount (26 U.S.C. 132(a)). Unlike those two, the section 132 nondiscrimination rules do not apply in determining the amount of a de minimis fringe, except to the extent provided for employer-operated eating facilities, so a benefit stays excludable even where the employer provides it exclusively to highly compensated employees (26 U.S.C. 132(j)(1), 26 CFR 1.132-6(f)). A highly compensated employee for this purpose is an employee who was a 5-percent owner at any time during the year or the preceding year, or whose compensation from the employer for the preceding year exceeded an indexed threshold and who, where the employer elects that test, was in the top-paid group (26 U.S.C. 132(j)(6), 26 U.S.C. 414(q)(1)).
Any scenario the regulation names as not excludable fails, and so does one built to sit just inside that naming. Because the special rules and the examples may not be used to establish a general rule permitting exclusion, the commuting use of an employer-provided vehicle up to 12 times per year is still not excludable from gross income, even though the stated non-example is commuting use more than one day a month (26 CFR 1.132-6(d)(3)).
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