Page 10 - Employers Tax Guide to Fringe Benefits

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The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
also doesn't apply to vacations, meals, lodging, tickets to 1. It benefits employees who qualify under rules set up
theater or sporting events, stocks, bonds, other securities, by you, which don't favor highly compensated em-
and other similar items. The award must meet the require- ployees or their dependents. To determine whether
ments for employee achievement awards discussed in your plan meets this test, don't consider employees
chapter 2 of Pub. 535. excluded from your plan who are covered by a collec-
tive bargaining agreement if there is evidence that
Employee. For this exclusion, treat the following individ- adoption assistance was a subject of good-faith bar-
uals as employees. gaining.

• A current employee. 2. It doesn't pay more than 5% of its payments during
• A former common-law employee you maintain cover- the year for shareholders or owners (or their spouses
age for in consideration of or based on an agreement or dependents). A shareholder or owner is someone
relating to prior service as an employee. who owns (on any day of the year) more than 5% of
• A leased employee who has provided services to you the stock or of the capital or profits interest of your
business.
on a substantially full-time basis for at least a year if
the services are performed under your primary direc- 3. You give reasonable notice of the plan to eligible em-
tion or control. ployees.
Exception for S corporation shareholders. Don't 4. Employees provide reasonable substantiation that
treat a 2% shareholder of an S corporation as an em- payments or reimbursements are for qualifying ex-
ployee of the corporation for this purpose. A 2% share- penses.
holder is someone who directly or indirectly owns (at any For this exclusion, a highly compensated employee for
time during the year) more than 2% of the corporation's 2020 is an employee who meets either of the following
stock or stock with more than 2% of the voting power. tests.
Treat a 2% shareholder as you would a partner in a part-
nership for fringe benefit purposes, but don't treat the ben- 1. The employee was a 5% owner at any time during the
efit as a reduction in distributions to the 2% shareholder. year or the preceding year.
For more information, see Revenue Ruling 91-26, 1991-1 2. The employee received more than $125,000 in pay
C.B. 184. for the preceding year.

Exclusion from wages. You can generally exclude the You can choose to ignore test (2) if the employee wasn't
value of achievement awards you give to an employee also in the top 20% of employees when ranked by pay for
from the employee's wages if their cost isn't more than the the preceding year.
amount you can deduct as a business expense for the
year. The excludable annual amount is $1,600 ($400 for You must exclude all payments or reimbursements you
awards that aren't “qualified plan awards”). See chapter 2 make under an adoption assistance program for an em-
of Pub. 535 for more information about the limit on deduc- ployee's qualified adoption expenses from the employee's
tions for employee achievement awards. wages subject to federal income tax withholding. How-
To determine for 2020 whether an achievement ever, you can't exclude these payments from wages sub-
ject to social security, Medicare, and FUTA taxes.
! award is a “qualified plan award” under the de-
CAUTION duction rules described in Pub. 535, treat any em- You must report all qualifying adoption expenses you
ployee who received more than $125,000 in pay for 2019 paid or reimbursed under your adoption assistance pro-
as a highly compensated employee. gram for each employee for the year in box 12 of the em-
If the cost of awards given to an employee is more than ployee's Form W-2. Report all amounts including those in
excess of the $14,300 exclusion for 2020. Use code “T” to
your allowable deduction, include in the employee's wa- identify this amount.
ges the larger of the following amounts.
• The part of the cost that is more than your allowable Exception for S corporation shareholders. For this
deduction (up to the value of the awards). exclusion, don't treat a 2% shareholder of an S corpora-
• The amount by which the value of the awards exceeds tion as an employee of the corporation. A 2% shareholder
is someone who directly or indirectly owns (at any time
your allowable deduction. during the year) more than 2% of the corporation's stock
Exclude the remaining value of the awards from the em- or stock with more than 2% of the voting power. Treat a
ployee's wages. 2% shareholder as you would a partner in a partnership
for fringe benefit purposes, but don't treat the benefit as a
Adoption Assistance reduction in distributions to the 2% shareholder. For more
information, see Revenue Ruling 91-26, 1991-1 C.B. 184.
An adoption assistance program is a separate written plan
of an employer that meets all of the following require- More information. For more information on adoption
ments. benefits, see Notice 97-9, which is on page 35 of Internal
Revenue Bulletin 1997-2 at IRS.gov/pub/irs-irbs/

Page 8 Publication 15-B (2020)