Use this checklist of 39 tax-advantaged options to identify employee benefit programs that may provide tax advantages to both an employer and employees. Each program has its own eligibility, documentation, plan-design, payroll, and nondiscrimination requirements. Any or all can be included in a benefit plan with Freedom Benefits.
Health and welfare benefits
- Employer-paid health insurance — IRC §§ 105 and 106
Employer-paid accident and health coverage is generally excluded from employee taxable income.
- Health reimbursement arrangement (HRA) — IRC §§ 105 and 106
Employer reimbursement of qualifying medical expenses may be tax-free when the arrangement is properly designed.
- Qualified Small Employer HRA (QSEHRA) — IRC §§ 9831(d), 105 and 106
A potential option for eligible small employers that do not offer a group health plan.
- Individual Coverage HRA (ICHRA) — IRC §§ 105 and 106
An employer-funded arrangement that can reimburse employees for individual health-insurance coverage and qualified medical expenses, subject to applicable rules.
- Health Savings Account (HSA) contributions — IRC § 223
Employer contributions may be excluded from wages for employees enrolled in qualifying high-deductible health plans.
- Health flexible spending account (Health FSA) — IRC §§ 125 and 105
Employees use pre-tax payroll contributions for qualified medical expenses.
- Group-term life insurance — IRC § 79
Up to $50,000 of employer-provided coverage is generally tax-free to the employee.
- Long-term-care insurance — IRC §§ 106 and 7702B
Employer-paid qualifying coverage may receive favorable tax treatment, but it cannot generally be funded through employee salary reduction under a cafeteria plan.
Family, education and caregiving
- Dependent-care assistance program — IRC §§ 129 and 125
Employees may pay qualifying child-care or dependent-care expenses with pre-tax dollars through a properly structured plan.
- Adoption-assistance program — IRC § 137
Employer reimbursement of qualifying adoption expenses may be excluded from federal income tax, subject to annual limits and income phaseouts.
- Educational-assistance program — IRC § 127
Employers may provide up to $5,250 annually for qualifying education expenses, including eligible student-loan payments, without federal income-tax inclusion.
- Qualified tuition reduction — IRC § 117(d)
Educational institutions may offer qualifying tuition reductions to eligible employees and, in some cases, their families.
- Employer-supported child care — IRC § 45F
Employers may qualify for a federal tax credit for certain workplace child-care facilities or child-care resource and referral services.
Retirement and ownership
- 401(k) plan — IRC §§ 401(a), 401(k) and 401(m)
Employee deferrals and employer contributions can receive tax-favored treatment.
- Profit-sharing plan — IRC §§ 401(a) and 404
Employer contributions may be deductible and accumulate tax-deferred for employees.
- Defined-benefit pension plan — IRC §§ 401(a) and 404
Employers may make deductible contributions to provide a defined retirement benefit.
- SEP IRA — IRC § 408(k)
A relatively simple employer-funded retirement arrangement, often suitable for small businesses.
- SIMPLE IRA — IRC § 408(p)
A small-employer retirement plan with employee salary reductions and required employer contributions.
- Employee stock-purchase plan — IRC § 423
Qualified plans can provide favorable tax treatment for employees who purchase employer stock.
- Incentive stock options — IRC § 422
Qualified stock options may defer regular income-tax consequences until a later sale of stock, subject to holding-period and alternative-minimum-tax rules.
- Employee stock ownership plan (ESOP) — IRC §§ 401(a), 409 and 4975(e)(7)
A qualified retirement plan that invests primarily in employer stock and may offer special tax advantages to the business, employees, and selling owners.
Transportation and workplace benefits
- Qualified transportation benefits — IRC § 132(f)
Pre-tax or employer-paid transit, commuter-van, and qualified parking benefits may be available within annual IRS limits.
- Accountable-plan business expense reimbursements — IRC §§ 62(a)(2)(A) and 62(c)
Properly substantiated reimbursements for employee business expenses can be excluded from taxable wages.
- Working-condition fringe benefits — IRC § 132(d)
Job-related equipment, technology, training, professional dues, subscriptions, and similar business-use expenses may be tax-free when employees could otherwise deduct them.
- Employer-provided cell phones — IRC § 132(d)
A cell phone provided primarily for business reasons may be excluded from taxable income.
- Employer-provided meals — IRC § 119 or § 132(e)
Certain meals may be tax-free when provided for the employer’s convenience or when they qualify as occasional de minimis benefits.
- Employer-provided lodging — IRC § 119
Lodging may be tax-free when it is on the employer’s business premises, provided for the employer’s convenience, and required as a condition of employment.
Other fringe benefits
- Employee discounts — IRC § 132(c)
Discounts on the employer’s goods or services may be tax-free within statutory limits.
- No-additional-cost services — IRC § 132(b)
Employees may receive certain employer services tax-free when providing them creates no substantial additional cost.
- De minimis fringe benefits — IRC § 132(e)
Occasional, low-value benefits may be excluded when tracking them would be unreasonable or impractical. Cash and gift cards generally do not qualify.
- Employee achievement awards — IRC §§ 74(c) and 274(j)
Certain tangible awards for length of service or safety achievements may be tax-free within applicable limits. Cash, gift cards, meals, vacations, and entertainment do not qualify.
- On-premises athletic facility — IRC § 132(j)(4)
An employer-operated facility may be tax-free when it meets employee-use and location requirements.
- Retirement-planning services — IRC § 132(m)
Employer-provided retirement information and planning services can be tax-free. This exclusion does not generally include tax preparation, legal, accounting, or brokerage services.
- Qualified disaster-relief payments — IRC § 139
Payments for qualifying disaster-related expenses may be excluded from employee income.
Options in plan administration
- Cafeteria plan — IRC § 125
A cafeteria plan allows employees to elect certain qualified benefits through pre-tax salary reduction rather than receiving taxable cash compensation.
- Health-plan premium contributions — IRC §§ 125 and 106
Employee premiums for qualifying group health coverage may be paid pre-tax.
- Health FSA elections — IRC §§ 125 and 105
Employees may contribute pre-tax payroll amounts for qualifying medical expenses.
- Dependent-care FSA elections — IRC §§ 125 and 129
Employees may contribute pre-tax payroll amounts for qualifying dependent-care expenses.
- HSA payroll contributions — IRC §§ 125 and 223
Employee HSA contributions made through a cafeteria plan may also avoid Social Security and Medicare taxes.
