us internal revenue service: p15b--2000

8/14/2019 US Internal Revenue Service: p15b--2000

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ContentsImportant Changes ............................................ 1

Introduction ........................................................ 1

1. Fringe Benefit Overview ................................ 2Are Fringe Benefits Taxable? .......................... 2Cafeteria Plans ................................................ 3

2. Fringe Benefit Exclusion Rules .................... 4Accident and Health Benefits .......................... 4Achievement Awards ....................................... 6Adoption Assistance ........................................ 6Athletic Facilities .............................................. 6De Minimis (Minimal) Benefits ......................... 7Dependent Care Assistance ............................ 7Educational Assistance .................................... 8Employee Discounts ........................................ 9Employee Stock Options ................................. 9Group-Term Life Insurance Coverage ............. 9Lodging on Your Business Premises .............. 11Meals ............................................................... 12Moving Expense Reimbursements .................. 14No-Additional-Cost Services ............................ 14Transportation (Commuting) Benefits .............. 15Tuition Reduction ............................................. 16Working Condition Benefits ............................. 16

3. Fringe Benefit Valuation Rules .................... 18General Valuation Rule ................................... 18Cents-Per-Mile Rule ........................................ 18Commuting Rule .............................................. 19Lease Value Rule ............................................ 20Unsafe Conditions Commuting Rule ............... 22

4. How To Get Tax Help .................................... 22Index .................................................................... 24

Important Changes

Cents-per-mile rule. The standard mileage rate youcan use under the cents-per-mile rule to value the per-sonal use of a vehicle you provide to an employee in2001 is 341/2 cents a mile. See Cents-Per-Mile Rule inchapter 3.

Photographs of missing children. The Internal Rev-enue Service is a proud partner with the National Cen-ter for Missing and Exploited Children. Photographs ofmissing children selected by the Center may appear inthis publication on pages that would otherwise be blank.You can help bring these children home by looking atthe photographs and calling 1800THELOST(18008435678) if you recognize a child.

IntroductionThis publication supplements Publication 15, CircularE, Employer's Tax Guide, and Publication 15A, Em-

Department of the TreasuryInternal Revenue Service

Publica tion 15B(November 2000)Cat. No. 29744N

Employer'sTax Guide toFringeBenefitsFor Benefits Provided

in 200 1

CAUTION

!At the time this publication was being prepared for print,Congress was considering legislation containing provisionsthat could affect the amounts of pay used in this publication

to define highly compensated employees, key employees, controlemployees, and qualified employees for 2001. See Publication 553,Highlights of 2000 Tax Changes, for information on whether the leg-islation was enacted and, if so, whether these amounts changed.Publication 553 will be available on the IRS web site at www.irs.govin January 2001.


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ployer's Supplemental Tax Guide. It contains special-ized and detailed information on the employment taxtreatment of fringe benefits.

Comments and suggestions. We welcome yourcomments about this publication and your suggestionsfor future editions.

You can e-mail us while visiting our web site atwww.irs.gov/help/email2.html.

You can write to us at the following address:

Internal Revenue ServiceTechnical Publications BranchW:CAR:MP:FP:P1111 Constitution Ave. NWWashington, DC 20224

We respond to many letters by telephone. Therefore,it would be helpful if you would include your daytimephone number, including the area code, in your corre-spondence.

Useful ItemsYou may want to see:

Publication

15 Circular E, Employer's Tax Guide

15A Employer's Supplemental Tax Guide

535 Business Expenses

Form (and Instructions)

5500 Annual Return/Report of Employee BenefitPlan

Sch F (Form 5500) Fringe Benefit Plan Annual In-formation Return

W2 Wage and Tax Statement

See chapter 4 for information about getting publica-tions and forms.

1.

Fringe BenefitOverviewA fringe benefit is a form of pay for the performance

of services given by the provider of the benefit to therecipient of the benefit. For example, you provide anemployee a fringe benefit when you allow the employeeto use a business vehicle to commute to and from work.

Performance of services. A person who performsservices for you does not have to be your employee.A person may perform services for you as an inde-

pendent contractor, partner, or director. Also, for fringebenefit purposes, treat a person who agrees not toperform services (such as under a covenant not tocompete) as performing services.

Provider of benefit. You are the provider of a fringebenefit if it is provided for services performed for you.You may be the provider of the benefit even if it wasprovided by another person. For example, you are the

provider of a fringe benefit your client or customer pro-vides to your employee for services the employee per-forms for you.

Recipient of benefit. The person who performs ser-vices for you is the recipient of a fringe benefit providedfor those services. That person may be the recipienteven if the benefit is provided to someone who did notperform services for you. For example, your employeemay be the recipient of a fringe benefit you provide toa member of the employee's family.

Are Fringe Benefits Taxable?Any fringe benefit you provide is taxable and must beincluded in the recipient's pay unless the law specificallyexcludes it. Chapter 2 discusses the exclusions thatapply to certain fringe benefits. Any benefit not ex-cluded under the rules discussed in chapter 2 is taxa-ble.

Including taxable benefits in pay. You must includein a recipient's pay the amount by which the value of afringe benefit is more than the sum of the following

amounts.

1) Any amount the law excludes from pay.

2) Any amount the recipient paid for the benefit.

The rules used to determine the value of a fringe benefitare discussed in chapter 3.

If the recipient of a taxable fringe benefit is youremployee, the benefit is subject to employment taxesand must be reported on Form W2. However, you canuse special rules to withhold, deposit, and report theemployment taxes. Publication 15 and Publication 15A

discuss these rules.If the recipient of a taxable fringe benefit is not youremployee, the benefit is not subject to employmenttaxes. However, you may have to report it on one ofthe following information returns.

For more information, see the instructions for the formslisted above.

If the recipientreceives the benefit as: Use:

An independent contractor ................. Form 1099MISCA partner ............................................ Schedule K1 (Form 1065)An S corporation shareholder ............ Schedule K1 (Form 1120S)

Page 2 Chapter 1 Fringe Benefit Overview


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Cafeteria PlansA cafeteria plan is a written plan that allows your em-ployees to choose between receiving cash or taxablebenefits instead of certain qualified benefits for whichthe law provides an exclusion from wages. If an em-ployee chooses to receive a qualified benefit under theplan, the fact that the employee could have receivedcash or a taxable benefit instead will not make the

qualified benefit taxable.Generally, a cafeteria plan does not include any plan

that offers a benefit that defers pay. However, a cafe-teria plan can include a qualified 401(k) plan as a ben-efit. Also, certain life insurance plans maintained byeducational institutions can be offered as a benefit eventhough they defer pay.

A cafeteria plan cannotinclude the following benefitsdiscussed in chapter 2.

Athletic facilities.

De minimis (minimal) benefits.

Educational assistance.

Employee discounts.

Lodging on your business premises.

Meals.

Moving expense reimbursements.

No-additional-cost services.

Transportation (commuting) benefits.

Tuition reduction.

Working condition benefits.

It also cannot include scholarships or fellowships (dis-cussed in Publication 520, Scholarships and Fellow-ships).

Qualified benefits. Qualified benefits include the fol-lowing benefits discussed in chapter 2.

Accident and health benefits (but not medicalsavings accounts or long-term care insurance).

Adoption assistance.

Dependent care assistance.

Group-term life insurance coverage (including coststhat cannot be excluded from wages).

Employee. For these plans, treat the following indi-viduals as employees.

1) A current common-law employee.

2) A full-time life insurance agent who is a currentstatutory employee.

3) A leased employee who has provided services toyou on a substantially full-time basis for at least ayear if the services are performed under your pri-mary direction or control.

Exception for S corporation shareholders. Do nottreat a 2% shareholder of an S corporation as an em-ployee of the corporation. A 2% shareholder is some-one who directly or indirectly owns (at any time duringthe year) more than 2% of the corporation's stock orstock with more than 2% of the voting power.

Plans that favor highly compensated employees.If your plan favors highly compensated employees asto eligibility to participate, contributions, or benefits, you

must include in their wages the value of taxable benefitsthey could have selected. A plan you maintain under acollective bargaining agreement does not favor highlycompensated employees.

A highly compensated employee for this purpose isany of the following employees.

1) An officer.

2) A shareholder who owns more than 5% of the vot-ing power or value of all classes of the employer'sstock.

3) An employee who is highly compensated based onthe facts and circumstances.

4) A spouse or dependent of a person described in (1),(2), or (3).

Plans that favor key employees. If your plan favorskey employees, you must include in their wages thevalue of taxable benefits they could have selected. Aplan favors key employees if more than 25% of the totalof the nontaxable benefits you provide for all employeesunder the plan go to key employees. However, a planyou maintain under a collective bargaining agreementdoes not favor key employees.

A key employee during 2001 is generally an em-ployee who is either of the following.

1) An officer having, for any year listed below, annualpay of more than the listed amount.

a) 1997 $62,500

b) 1998 $65,000

c) 1999 $65,000

d) 2000 $67,500

e) 2001 $70,000

2) An employee who, for 2001 or any of the 4 pre-ceding years, was any of the following.

a) One of the 10 employees having annual payof more than $35,000 and owning the largestinterests in your business.

b) A 5% owner of your business.

c) A 1% owner of your business whose annual paywas more than $150,000.

Form 5500. If you maintain a cafeteria plan, you mustreport information about the plan each year by the lastday of the 7th month after the plan year ends. Use Form5500 and Schedule F (Form 5500). See the form in-structions for information on extensions of time to file.

Chapter 1 Fringe Benefit Overview Page 3


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More information. For more information about cafe-teria plans, see section 125 of the Internal RevenueCode and the related regulations.

2.

Fringe BenefitExc lusion Rules

This chapter discusses the exclusion rules that applyto fringe benefits. These rules exclude all or part of thevalue of certain benefits from the recipient's pay.

The excluded benefits are not subject to federal in-come tax withholding. Also, in most cases, they are notsubject to social security, Medicare, or federal unem-ployment tax and are not reported on Form W2.

This chapter discusses the exclusion rules for thefollowing fringe benefits.

Accident and health benefits

Achievement awards

Adoption assistance

Athletic facilities

De minimis (minimal) benefits

Dependent care assistance

Educational assistance

Employee discounts

Employee stock options

Group-term life insurance coverage

Lodging on your business premises

Meals

Moving expense reimbursements

No-additional-cost services

Transportation (commuting) benefits

Tuition reduction

Working condition benefits

See Table 21 for an overview of the employment

tax treatment of these benefits.

Accident andHealth BenefitsThis exclusion applies to contributions you make to anaccident or health plan for an employee, including thefollowing.

Contributions to the cost of accident or health in-surance.

Contributions to a separate trust or fund that pro-vides accident or health benefits directly or throughinsurance.

Contributions to medical savings accounts (dis-cussed in Publication 969, Medical Savings Ac-counts (MSAs)).

This exclusion also applies to payments you make(directly or indirectly) to an employee, under an acci-dent or health plan for employees, that are either of thefollowing.

Payments or reimbursements of medical expenses.

Payments for specific injuries or illnesses (such asthe loss of the use of an arm or leg). The paymentsmust be figured without regard to any period of ab-sence from work.

Accident or health plan. This is an arrangement thatprovides benefits for your employees, their spouses,and their dependents in the event of personal injury,or sickness. The plan may be insured or noninsuredand does not need to be in writing.

Employee. For this exclusion, treat the following indi-viduals as employees.



3) A retired employee.

4) A widow or widower of an individual who died whilean employee.

5) A widow or widower of a retired employee.

6) For the exclusion of contributions to an accident or

health plan, a leased employee who has providedservices to you on a substantially full-time basis forat least a year if the services are performed underyour primary direction or control.


Exclusion from wages. You can generally exclude thevalue of accident or health benefits you provide to an

employee from the employee's wages.Exception for certain long-term care benefits.

You cannot exclude contributions to the cost of long-term care insurance from an employee's wages subjectto federal income tax withholding if the coverage isprovided through a flexible spending or similar ar-rangement. This is a benefit program that reimbursesspecified expenses up to a maximum amount that isreasonably available to the employee and is less than5 times the total cost of the insurance. However, youcan exclude these contributions from the employee'swages subject to social security, Medicare, and federalunemployment taxes.

Page 4 Chapter 2 Fringe Benefit Exclusion Rules


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Table 21. Overview of Employment Tax Treatment of Fringe Benefits(For more information, see the full discussions in this chapter.)

Type of Fringe Benefit

Treatment Under Employment Taxes

Income Tax WithholdingSocial Security and

Medicare Federal Unemployment

Accident and health benefits

Achievement awards

Adoption assistance

Athletic facilities

Dependent care assistance

Educational assistance

Employee discounts

Employee stock options

Group-term life insurancecoverage

Lodging on your businesspremises

Meals

Moving expensereimbursements

No-additional cost services

Transportation (commuting)benefits

Working condition benefits

Exempt1,2

, except forcertain long-term care

benefits.

Exempt Exempt

Exempt1

Taxable Taxable

Exempt1up to certain limits.

Exempt if substantially all use during the calendar year is by employees,their spouses, and their dependent children.

De minimis (minimal) benefits Exempt Exempt Exempt


Exempt up to $5,250 of benefits each year.


See Employee Stock Optionsin this chapter.

Exempt Exempt1,5

up to cost of$50,000 of coverage.(Special rules apply toformer employees.)

Exempt

Exempt1if furnished for your convenience as a condition of employment.

Exempt1if furnished on your business premises for your convenience.

Exempt1 if expenses would be deductible if the employee had paid them.

Exempt4

Exempt4

Exempt4

Exempt1up to certain limits if for rides in a commuter highway vehicle,

transit passes, or qualified parking.

Exempt Exempt Exempt

Exempt if de minimis.

Exempt if de minimis.

Tuition reduction Exempt4if for undergraduate education (or graduate education if the

employee performs teaching or research activities).

1

Exemption does not apply to S corporation employees who are 2% shareholders.2Exemption does not apply to certain highly compensated employees under a self-insured plan that favors those employees.

3Exemption does not apply to certain highly compensated employees under a program that favors those employees.

4Exemption does not apply to certain highly compensated employees.

5Exemption does not apply to certain key employees under a plan that favors those employees.

Chapter 2 Fringe Benefit Exclusion Rules Page 5


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S corporation shareholders. Because you cannottreat a 2% shareholder of an S corporation as an em-ployee for this exclusion, you must include the valueof accident or health benefits you provide the employeein the employee's wages subject to federal income taxwithholding. However, you can exclude the value ofthese benefits, other than payments for specific injuriesor illnesses, from the employee's wages subject to so-cial security, Medicare, and federal unemploymenttaxes.

Exception for highly compensated employees.If your plan is a self-insured medical reimbursementplan that favors highly compensated employees, youmust include all or part of the amounts you pay to theseemployees in their wages subject to federal income taxwithholding. However, you can exclude these amounts,other than payments for specific injuries or illnesses,from the employee's wages subject to social security,Medicare, and federal unemployment taxes.

A self-insured plan is a plan that reimburses youremployees for medical expenses not covered by anaccident or health insurance policy.

A highly compensated employee for this exceptionis any of the following individuals.

1) One of the five highest paid officers.

2) An employee who owns (directly or indirectly) morethan 10% in value of the employer's stock.

3) An employee who is among the highest paid 25%of all employees, other than those who can be ex-cluded from the plan.

For more information on this exception, see section105(h) of the Internal Revenue Code and the relatedregulations.

Achievement AwardsThis exclusion applies to the value of any tangible per-sonal property you give to an employee as an awardfor either length of service or safety achievement.The award must meet the requirements for employeeachievement awards discussed in chapter 2 of Publi-cation 535.


1) A current employee.



Exclusion from wages. You can generally exclude thevalue of achievement awards you give to an employeefrom the employee's wages if their cost is not more thanthe amount you can deduct as a business expense forthe year. That amount is $1,600 ($400 for awards thatare not qualified plan awards). See chapter 2 of Pub-lication 535 for more information on the limit on de-ductions for employee achievement awards.

CAUTION!

To determine for 2001 whether an achievement

award is aqualified plan awardunder the de-duction rules described in Publication 535, treatany employee who received more than $85,000 in payfor 2000 as a highly compensated employee.

If the cost of awards given to an employee is morethan your allowable deduction, include in the employ-ee's wages the largerof the following amounts.

The part of the cost that is more than your allowablededuction (up to the value of the awards).

The amount by which the value of the awards ex-ceeds your allowable deduction.

You exclude the remaining value of the awards from theemployee's wages.

Adoption AssistanceYou can exclude payments or reimbursements youmake under an adoption assistance program for anemployee's qualified adoption expenses from the em-ployee's wages subject to federal income tax withhold-ing. However, you cannot exclude these payments fromwages subject to social security, Medicare, and federalunemployment taxes. For more information, see Publi-cation 968, Tax Benefits for Adoption.

CAUTION

!This exclusion does not apply to adoption as-sistance paid or adoption expenses incurredafter 2001.

Employee. For this exclusion, do not treat a 2%shareholder of an S corporation as an employee of thecorporation. A 2% shareholder is someone who directlyor indirectly owns (at any time during the year) morethan 2% of the corporation's stock or stock with morethan 2% of the voting power.

Athletic FacilitiesYou can exclude the value of an employee's use of anon-premises gym or other athletic facility you operatefrom the employee's wages if substantially all use of thefacility during the calendar year is by your employees,their spouses, and their dependent children. For thispurpose, an employee's dependent child is a child orstepchild who is the employee's dependent or who, ifboth parents are deceased, is age 24 or younger.

On-premises facility. The athletic facility must be lo-cated on premises you own or lease. It does not haveto be located on your business premises. However, the



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exclusion does not apply to an athletic facility for resi-dential use, such as athletic facilities that are part of aresort.



2) A former employee who retired or left on disability.


4) A widow or widower of a former employee who re-tired or left on disability.


6) A partner who performs services for a partnership.

De Minimis (Minimal) BenefitsYou can exclude the value of a de minimis benefit youprovide to an employee from the employee's wages. Ade minimis benefit is any property or service you pro-vide to an employee that has so little value (taking intoaccount how frequently you provide similar benefits toyour employees) that accounting for it would be unrea-sonable or administratively impracticable. Cash, nomatter how little, is never excludable as a de minimisbenefit, except for occasional meal money or transpor-tation fare.

Examples of de minimis benefits include the follow-ing.

Copying machine use. Occasional personal useof a company copying machine, if you sufficientlycontrol its use so that at least 85% of its use is forbusiness purposes, is a de minimis benefit.

Holiday gifts. Holiday gifts, other than cash, witha low fair market value are de minimis benefits.

Life insurance on spouse or dependent.Group-term life insurance payable on the death ofan employee's spouse or dependent is a de minimisbenefit if the face amount is not more than $2,000.

Meals. De minimis meals are discussed underMeals, later.

Parties and picnics. Occasional parties or picnicsfor employees and their guests are de minimisbenefits.

Tickets for entertainment or sporting events.Occasional tickets for entertainment or sportingevents are de minimis benefits.

Transportation fare. De minimis transportation fareis discussed under Transportation (Commuting)Benefits, later.

Typing. Occasional typing of personal letters by acompany secretary is a de minimis benefit.

Employee. For this exclusion, treat any recipient of ade minimis benefit as an employee.

Dependent CareAssistanceThis exclusion applies to household and dependentcare services you pay for (directly or indirectly) or pro-

vide to an employee under a dependent care assist-ance program that covers only your employees. Theservices must be for a qualifying person's care andmust allow the employee to work. These requirementsare basically the same as the tests the employee wouldhave to meet to claim the dependent care credit if theemployee paid for the services. For more information,see Qualifying Person Testand Work-Related ExpenseTest in Publication 503, Child and Dependent CareExpenses.




3) Yourself (if you are a sole proprietor).


Exclusion from wages. You can exclude the valueof benefits you provide to an employee under a de-pendent care assistance program from the employee's

wages if you reasonably believe that the employee canexclude the benefits from gross income.An employee can generally exclude from gross in-

come up to $5,000 of benefits received under a de-pendent care assistance program each year. This limitis reduced to $2,500 for married employees filing sep-arate returns.

However, the exclusion cannot be more than theearned income of either:

1) The employee, or

2) The employee's spouse.

Special rules apply to determine the earned income of

a spouse who is either a student or not able to care forhimself or herself. For more information on the earnedincome limit, see Publication 503.

Exception for highly compensated employees.You cannot exclude dependent care assistance fromthe wages of a highly compensated employee unlessthe benefits provided under the program do not favorhighly compensated employees and the program meetsthe requirements described in section 129(d) of theInternal Revenue Code.

For this exclusion, a highly compensated employeefor 2001 is an employee who meets either of the fol-lowing tests.



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1) The employee was a 5% owner at any time duringthe year or the preceding year.

2) The employee received more than $85,000 in payfor the preceding year.

You can choose to ignore test (2) if the employee wasnot also in the top 20% of employees when ranked bypay for the preceding year.

Form W2. Report the value of all dependent careassistance you provide to an employee under a de-pendent care assistance program in box 10 of the em-ployee's Form W2. Include any amounts you cannotexclude from the employee's wages in boxes 1, 3, and5.

Educational AssistanceThis exclusion applies to educational assistance youprovide to employees under an educational assistanceprogram.

Educational assistance means amounts you pay orincur for your employees' education expenses. Theseexpenses generally include the cost of books, equip-ment, fees, supplies, and tuition. However, these ex-penses do not include the cost of graduate-levelcourses of a kind normally taken by a person pursuinga program leading to an advanced academic or pro-fessional degree. Also, these expenses do not includethe cost of a course or other education involving sports,games, or hobbies, unless the education:

1) Has a reasonable relationship to your business, or

2) Is required as part of a degree program.

Education expenses do not include the cost of toolsor supplies (other than textbooks) that your employeeis allowed to keep at the end of the course. Nor do theyinclude the cost of lodging, meals, or transportation.

Educational assistance program. An educationalassistance program is a separate written plan that pro-vides educational assistance only to your employees.The program qualifies only if all of the following testsare met.

1) The program benefits employees who qualify underrules set up by you that do not favor highly com-pensated employees. To determine whether yourprogram meets this test, do not consider employeesexcluded from your program who are covered by acollective bargaining agreement if there is evidencethat educational assistance was a subject of good-faith bargaining.

2) The program does not provide more than 5% of itsbenefits during the year for shareholders or owners.A shareholder or owner is someone who owns (onany day of the year) more than 5% of the stock orof the capital or profits interest of your business.

3) The program does not allow employees to chooseto receive cash or other benefits that must be in-cluded in gross income instead of educational as-sistance.

4) You give reasonable notice of the program to eligi-ble employees.

Your program can cover former employees if their em-ployment is the reason for the coverage.







2) A former employee who retired, left on disability,or was laid off.


4) Yourself (if you are a sole proprietor).


Exclusion from wages. You can exclude up to $5,250of educational assistance you provide to an employeeunder an educational assistance program from theemployee's wages each year.

Assistance over $5,250. If you provide an em-ployee with more than $5,250 of educational assistanceduring the year, you may be able to exclude part or allof the excess as a working condition benefit. SeeWorking Condition Benefits, later.

CAUTION! Expiration date. This exclusion will not applyto expenses paid for courses beginning after

December 31, 2001.

Form 5500. If you maintain an educational assistanceprogram, you must report information about the pro-gram each year by the last day of the 7th month afterthe program year ends. Use Form 5500 and ScheduleF (Form 5500). See the form instructions for informationon extensions of time to file.



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Employee DiscountsThis exclusion applies to a price reduction you give anemployee on property or services you offer to custom-ers in the ordinary course of the line of business inwhich the employee performs substantial services.However, it does not apply to discounts on real propertyor discounts on personal property of a kind commonlyheld for investment (such as stocks or bonds).





4) A widow or widower of an employee who retired orleft on disability.

5) A leased employee who has provided services toyou on a substantially full-time basis for at least a

year if the services are performed under your pri-mary direction or control.


Exclusion from wages. You can generally exclude thevalue of an employee discount you provide to an em-ployee from the employee's wages, up to the followinglimits.

1) For a discount on services, 20% of the price youcharge nonemployee customers for the service.

2) For a discount on merchandise or other property,your gross profit percentage times the price you

charge nonemployee customers for the property.

Determine your gross profit percentage based on allproperty you offer to customers (including employeecustomers) and your experience during the tax yearimmediately before the tax year in which the discountis available. To figure your gross profit percentage,subtract the total cost of the property from the totalsales price of the property and divide the result by thetotal sales price of the property.

Exception for highly compensated employees.You cannot exclude from the wages of a highly com-pensated employee any part of the value of a discountthat is not available on the same terms to one of the

following groups.

1) All your employees, or

2) A group of employees defined under a reasonableclassification you set up that does not favor highlycompensated employees.





Employee Stock OptionsThere are three classes of stock optionsincentivestock options, employee stock purchase plan options,and nonqualified (nonstatutory) stock options.

Generally, incentive stock options and employeestock purchase plan options are excluded from wagesboth when the options are granted and when they areexercised (unless the stock is disposed of in a dis-qualifying disposition). However, the spread (betweenthe exercise price and fair market value of the stock atthe time of exercise) on employee stock purchase planoptions is included in wages subject to social security,Medicare, and federal unemployment taxes when theoptions are exercised.

The spread on nonqualified options normally is in-cluded in wages when the options are exercised. (Seesection 1.837 of the regulations.) These wages aresubject to social security, Medicare, and federal unem-ployment taxes, and income tax withholding.

For more information about employee stock options,see sections 421, 422, and 423 of the Internal RevenueCode and the related regulations.

Group-Term LifeInsurance CoverageThis exclusion applies to life insurance coverage thatmeets all the following conditions.

1) It provides a general death benefit that is not in-cluded in income.

2) You provide it to a group of employees. See The10-employee rule, later.

3) It provides an amount of insurance to each em-ployee based on a formula that prevents individualselection. This formula must use factors such as theemployee's age, years of service, pay, or position.

4) You provide it under a policy you carry directly orindirectly. Even if you do not pay any of the policy'scost, you are considered to carry it if you arrangefor payment of its cost by your employees andcharge at least one employee less than, and atleast one other employee more than, the cost of hisor her insurance. Determine the cost of the insur-ance, for this purpose, as explained in the dis-cussion on coverage over the limit under Exclusionfrom wages, later.

Group-term life insurance does not include the fol-lowing insurance.



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Insurance that does not provide general deathbenefits, such as travel insurance or a policy pro-viding only accidental death benefits.

Life insurance on the life of your employee's spouseor dependent. However, you may be able to excludethe cost of this insurance from the employee'swages as a de minimis benefit. See De Minimis(Minimal) Benefits, earlier.

Insurance provided under a policy that provides a

permanent benefit (an economic value that extendsbeyond 1 policy year, such as paid-up or cash sur-render value), unless certain requirements are met.See section 1.791(b) of the regulations for details.




3) An individual who was formerly your employee un-der (1) or (2), above.

4) A leased employee who has provided services toyou on a substantially full-time basis for at least ayear if the services are performed under your pri-mary direction and control.


The 10-employee rule. Generally, life insurance is not

group-term life insurance unless you provide it to atleast 10 full-time employees at some time during theyear.

For this rule, count employees who choose not toreceive the insurance unless, to receive it, they mustcontribute to the cost of benefits other than the group-term life insurance. For example, count an employeewho could receive insurance by paying part of the cost,even if that employee chooses not to receive it. How-ever, do not count an employee who must pay part orall of the cost of permanent benefits to get insurance,unless that employee chooses to receive it.

Exceptions. Even if you do not meet the10-employee rule, two exceptions allow you to treat in-

surance as group-term life insurance.Under the first exception, you do not have to meetthe 10-employee rule if all the following conditions aremet.

1) If evidence that the employee is insurable is re-quired, it is limited to a medical questionnaire(completed by the employee) that does not requirea physical.

2) You provide the insurance to all your full-time em-ployees or, if the insurer requires the evidencementioned in (1), to all full-time employees whoprovide evidence the insurer accepts.

3) You figure the coverage based on either a uniformpercentage of pay or the insurer's coverage brack-ets.

Under the second exception, you do not have tomeet the 10-employee rule if all the following conditionsare met.

1) You provide the insurance under a common plancovering your employees and the employees of at

least one other employer who is not related to you.2) The insurance is restricted to, but mandatory for,

all your employees who belong to or are repre-sented by an organization (such as a union) thatcarries on substantial activities besides obtaininginsurance.

3) Evidence of whether an employee is insurable doesnot affect an employee's eligibility for insurance orthe amount of insurance that employee gets.

To apply either exception, do not consider employ-ees who were denied insurance for anyof the followingreasons.

1) They were 65 or older.

2) They customarily work 20 hours or less a week or5 months or less in a calendar year.

3) They have not been employed for the waiting periodgiven in the policy. This waiting period cannot bemore than 6 months.

Exclusion from wages. You can generally excludeall group-term life insurance coverage you provide toan employee from the employee's wages subject tofederal income tax withholding and federal unemploy-ment tax. In addition, you can exclude the cost of up to$50,000 of coverage from wages subject to social se-curity and Medicare taxes.

Exception for key employees. Generally, if yourgroup-term life insurance plan favors key employeesas to participation or benefits, you must include theentire cost of the insurance in your key employees'wages subject to social security and Medicare taxes.You must also include the entire cost of the insurancein the employees' wages shown in boxes 1, 3, and 5of Form W2. However, you can exclude the cost ofthis insurance from the employees' wages subject tofederal income tax withholding and federal unemploy-ment tax.

CAUTION!

This exception generally does not apply to

church plans.

For this purpose, the cost of the insurance is thegreater of the following amounts.

1) The premiums you pay for the employee's insur-ance.

2) The cost you figure using the table shown laterunder Coverage over the limit.

For this exclusion, a key employee during 2001 isan employee or former employee who is one of thefollowing individuals.



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1) An officer having, for any year listed below, annualpay of more than the listed amount.

a) 1997 $62,500

b) 1998 $65,000

c) 1999 $65,000

d) 2000 $67,500

e) 2001 $70,000

2) An individual who, for 2001 or any of the 4 pre-ceding years, was any of the following.

a) One of the 10 employees having annual payof more than $35,000 and owning the largestinterests in your business.

b) A 5% owner of your business.

c) A 1% owner of your business whose annual paywas more than $150,000.

A former employee who was a key employee uponretirement or separation from service is also a keyemployee.

Your plan does not favor key employees as to par-ticipationif at least one of the following is true.

1) It benefits at least 70% of your employees.

2) At least 85% of the participating employees are notkey employees.

3) It benefits employees who qualify under a set ofrules you set up that do not favor key employees.

Your plan meets this participation test if it is part ofa cafeteria plan (discussed in chapter 1) and it meetsthe participation test for those plans.

When applying this test do not consider employeeswho:

1) Have not completed 3 years of service.

2) Are part time or seasonal.

3) Are nonresident aliens who receive no U.S. sourceearned income from you.

4) Are not included in the plan but are in a unit ofemployees covered by a collective bargainingagreement, if the benefits provided under the planwere the subject of good-faith bargaining betweenyou and employee representatives.

Your plan does not favor key employees as to ben-efits if all benefits available to participating key em-ployees are also available to all other participating em-ployees. Your plan does not favor key employees justbecause the amount of insurance you provide to youremployees is uniformly related to their pay.

S corporation shareholders. Because you cannottreat a 2% shareholder of an S corporation as an em-ployee for this exclusion, you must include the valueof all group-term life insurance coverage you providethe employee in the employee's wages subject to socialsecurity and Medicare taxes. You must also include thevalue of this coverage in the employee's wages shown

in boxes 1, 3, and 5 of Form W2. However, you canexclude the value of this coverage from the employee'swages subject to federal income tax withholding andfederal unemployment tax.

Coverage over the limit. You must include in youremployee's wages subject to social security and Medi-care taxes the cost of group-term life insurance that ismore than the cost of $50,000 of coverage, reducedby the amount the employee paid toward the insurance.Report it as wages in boxes 1, 3, and 5 of the employ-

ee's 2001 Form W2. Also, show it in box 12 with codeC.

Former employees must pay the employee's part ofsocial security and Medicare taxes on the cost of theexcess coverage with their Form 1040. You are notrequired to collect these taxes. Report the uncollectedsocial security tax with code M and the uncollectedMedicare tax with code N in box 12 of their 2001 FormW2.

Figure the monthly cost of the insurance to includein the employee's wages by multiplying the number ofthousands of dollars of insurance coverage over$50,000 (figured to the nearest 10th) by the cost shownin the following table. Use the employee's age on the

last day of the tax year. You must prorate the cost fromthe table if less than a full month of coverage is in-volved.

You figure the total cost to include in the employee'swages by multiplying the monthly cost by the numberof full months coverage at that cost.

Lodging on YourBusiness PremisesYou can exclude the value of lodging you furnish to anemployee from the employee's wages if it meets thefollowing tests.

1) It is furnished on your business premises.

2) It is furnished for your convenience.

3) The employee must accept it as a condition of em-ployment.

Different tests may apply to lodging furnished by edu-cational institutions. For information, see section 119(d)of the Internal Revenue Code.

This exclusion does not apply if you allow your em-ployee to choose to receive additional pay instead oflodging.

COST PER $1,000 OF PROTECTIONFOR ONE MONTH

Age CostUnder 25 .................................................................................... $ .0525 through 29 ............................................................................. .0630 through 34 ............................................................................. .0835 through 39 ............................................................................. .0940 through 44 ............................................................................. .1045 through 49 ............................................................................. .1550 through 54 ............................................................................. .2355 through 59 ............................................................................. .4360 through 64 ............................................................................. .66

65 through 69 ............................................................................. 1.2770 and older ............................................................................... 2.06



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On your business premises. For this exclusion, yourbusiness premises is generally your employee's placeof work. (For special rules that apply to lodging fur-nished in a camp located in a foreign country, seesection 119(c) of the Internal Revenue Code and therelated regulations.)

For your convenience. Whether you furnish lodgingfor your convenience as an employer depends on all thefacts and circumstances. You furnish the lodging toyour employee for your convenience if you do this fora substantial business reason other than to provide theemployee with additional pay. This is true even if a lawor an employment contract provides that the lodging isfurnished as pay. However, a written statement that thelodging is furnished for your convenience is not suffi-cient.

Condition of employment. Lodging meets this test ifyou require your employees to accept it because theyneed to live on your business premises to be able toproperly perform their duties. Examples include em-ployees who must be available at all times and em-

ployees who could not perform their required dutieswithout being furnished the lodging.It does not matter whether you must furnish the

lodging as pay under the terms of an employmentcontract or a law fixing the terms of employment.

Example. A hospital gives Joan, an employee of thehospital, the choice of living at the hospital free ofcharge or living elsewhere and receiving a cash allow-ance in addition to her regular salary. If Joan choosesto live at the hospital, the hospital cannot exclude thevalue of the lodging from her wages because she is notrequired to live at the hospital to properly perform theduties of her employment.

S corporation shareholder-employee. For this ex-clusion, do not treat a 2% shareholder of an S corpo-ration as an employee of the corporation. A 2% share-holder is someone who directly or indirectly owns (atany time during the year) more than 2% of the corpo-ration's stock or stock with more than 2% of the votingpower.

MealsThis section discusses the exclusion rules that apply to

the following meals.

De minimis (minimal) meals

Meals on your business premises

De Minimis MealsThis exclusion applies to any meal or meal money youprovide to an employee that has so little value (takinginto account how frequently you provide meals to youremployees) that accounting for it would be unreason-able or administratively impracticable. The exclusionapplies, for example, to the following items.

Coffee, doughnuts, or soft drinks.

Occasional meals or meal money provided to ena-ble an employee to work overtime. (However, theexclusion does not apply to meal money figured onthe basis of hours worked.)

Occasional parties or picnics for employees andtheir guests.

This exclusion also applies to meals you provide at

an employer-operated eating facility for employeesif the annual revenue from the facility equals or exceedsthe direct costs of the facility. For this purpose, yourrevenue from providing a meal is considered equal tothe facility's direct operating costs to provide that mealif its value can be excluded from an employee's wagesunder the rules explained under Meals on Your Busi-ness Premises, later.

TIPIf food or beverages you furnish employeesqualify as a de minimis benefit, you can deducttheir full cost. The 50% limit on deductions for

the cost of meals does not apply. The deduction limiton meals is discussed in chapter 2 of Publication 535.

Employee. For this exclusion, treat any recipient of ade minimis meal as an employee.

Employer-operated eating facility for employees.This is an eating facility that meets all the followingconditions.

1) You own or lease the facility.

2) You operate the facility. You are considered to op-erate the eating facility if you have a contract withanother to operate it.

3) The facility is on or near your business premises.

4) You provide meals (food, drinks, and related ser-vices) at the facility during, or immediately beforeor after, the employee's workday.

Exclusion from wages. You can generally exclude thevalue of de minimis meals you provide to an employeefrom the employee's wages.

Exception for highly compensated employees.You cannot exclude from the wages of a highly com-pensated employee the value of a meal provided at anemployer-operated eating facility that is not availableon the same terms to one of the following groups.

1) All your employees.







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Meals on Your Business PremisesYou can exclude the value of meals you furnish to anemployee from the employee's wages if they meet thefollowing tests.

They are furnished on your business premises.

They are furnished for your convenience.

This exclusion does not apply if you allow your em-ployee to choose to receive additional pay instead ofmeals.

On your business premises. For this exclusion, yourbusiness premises is generally your employee's placeof work.

For your convenience. Whether you furnish meals foryour convenience as an employer depends on all thefacts and circumstances. You furnish the meals to your

employee for your convenience if you do this for asubstantial business reason other than to provide theemployee with additional pay. This is true even if a lawor an employment contract provides that the meals arefurnished as pay. However, a written statement that themeals are furnished for your convenience is not suffi-cient.

Meals excluded for all employees if excluded formore than half. If more than half of your employeeswho are furnished meals on your business premisesare furnished the meals for your convenience, you cantreat all meals you furnish to employees on your busi-ness premises as furnished for your convenience.

Food service employees. Meals you furnish to a

restaurant or other food service employee during, orimmediately before or after, the employee's workinghours are furnished for your convenience. For example,if a waitress works through the breakfast and lunchperiods, you can exclude the value of the breakfast andlunch you furnish in your restaurant for each day sheworks from her wages.

Example. You operate a restaurant business. Youfurnish your employee, Carol, who is a waitress working7 a.m. to 4 p.m., two meals during each workday. Youencourage but do not require Carol to have her break-fast on the business premises before starting work. Shemust have her lunch on the premises. Since Carol is a

food service employee and works during the normalbreakfast and lunch periods, you can exclude the valueof her breakfast and lunch from her wages.

If you also allow Carol to have meals on your busi-ness premises without charge on her days off, youcannot exclude the value of those meals from herwages.

Employees available for emergency calls. Mealsyou furnish during working hours so an employee willbe available for emergency calls during the meal periodare furnished for your convenience. You must be ableshow that these emergency calls have occurred or canreasonably be expected to occur.

Example. A hospital maintains a cafeteria on itspremises where all of its 230 employees may get mealsat no charge during their working hours. The hospitalfurnishes meals to have 120 employees available foremergencies. Each of these employees is at timescalled upon to perform services during the meal period.Although the hospital does not require these employeesto remain on the premises, they rarely leave the hospitalduring their meal period. Since the hospital furnishesmeals on its premises to its employees to have more

than half of them available for emergency calls duringmeal periods, the hospital can exclude the value ofthese meals from the wages of all its employees.

Short meal periods. Meals you furnish duringworking hours are furnished for your convenience if thenature of your business restricts an employee to a shortmeal period (such as 30 or 45 minutes) and the em-ployee cannot be expected to eat elsewhere in such ashort time. For example, meals can qualify for thistreatment if the peak workload occurs during the normallunch hour. However, they do not qualify if the reasonfor the short meal period is to allow the employee toleave earlier in the day.

Example. Frank is a bank teller who works from 9a.m. to 5 p.m. The bank furnishes his lunch withoutcharge in a cafeteria the bank maintains on its prem-ises. The bank furnishes these meals to Frank to limithis lunch period to 30 minutes, since the bank's peakworkload occurs during the normal lunch period. IfFrank got his lunch elsewhere, it would take him muchlonger than 30 minutes and the bank strictly enforcesthe time limit. The bank can exclude the value of thesemeals from Frank's wages.

Proper meals not otherwise available. Meals youfurnish during working hours are furnished for yourconvenience if the employee could not otherwise eatproper meals within a reasonable period of time. Forexample, meals can qualify for this treatment if thereare insufficient eating facilities near the place of em-ployment.

Meals after work hours. Meals you furnish to anemployee immediately after working hours are fur-nished for your convenience if you would have fur-nished them during working hours for a substantialnonpay business reason but, because of the work du-ties, they were not eaten during working hours.

Meals you furnish to promote goodwill, boostmorale, or attract prospective employees. Meals you

furnish to promote goodwill, boost morale, or attractprospective employees are not considered furnished foryour convenience. However, you may be able to ex-clude their value under the rules discussed under DeMinimis Meals, earlier.

Meals furnished on nonworkdays or with lodging.You generally cannot exclude from an employee'swages the value of meals you furnish on a day whenthe employee is not working. However, you can excludethese meals if they are furnished with lodging that isexcluded from the employee's wages under the rulesdiscussed under Lodging on Your Business Premises,earlier.



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Meals with a charge. The fact that you charge forthe meals and that your employees may accept or de-cline the meals is not taken into account in determiningwhether meals are furnished for your convenience.

S corporation shareholder-employee. For this ex-clusion, do not treat a 2% shareholder of an S corpo-ration as an employee of the corporation. A 2% share-holder is someone who directly or indirectly owns (atany time during the year) more than 2% of the corpo-

ration's stock or stock with more than 2% of the votingpower.

Moving ExpenseReimbursementsThis exclusion applies to any amount you give an em-ployee, directly or indirectly (including services fur-nished in kind), as a payment for, or a reimbursementof, moving expenses. You must make the reimburse-ments under rules similar to those described in chapter13 of Publication 535 for reimbursements of expenses

for travel, meals, and entertainment under accountableplans.This exclusion applies only to reimbursements of

moving expenses that the employee could deduct if heor she had paid or incurred them without reimburse-ment. However, it does not apply if the employee ac-tually deducted the expenses in a previous year.

Deductible moving expenses include only the rea-sonable expenses of:

1) Moving household goods and personal effects fromthe former home to the new home, and

2) Traveling (including lodging) from the former hometo the new home.

CAUTION

!Deductible moving expenses do not include anyexpenses for meals.

For more information on deductible moving ex-penses, see Publication 521, Moving Expenses.





Exclusion from wages. You can generally excludequalifying moving expense reimbursements you provideto an employee from the employee's wages. If you paid

the reimbursements directly to the employee, reporttheir amount in box 12 of the employee's 2001 FormW2 with the code P. Do not report payments to a thirdparty for the employee's moving expenses or the valueof moving services you provide.

No-Additional-Cost ServicesThis exclusion applies to a service you provide to an

employee that does not cause you to incur any sub-stantial additional costs. The service must be offeredto customers in the ordinary course of the line of busi-ness in which the employee performs substantial ser-vices.

Generally, no-additional-cost services are excesscapacity services, such as airline, bus, or train tickets;hotel rooms; or telephone services provided free or ata reduced price to employees working in those lines ofbusiness.

Substantial additional costs. To determine whetheryou incur substantial additional costs to provide a ser-vice to an employee, count any lost revenue as a cost.

Do not reduce the costs you incur by any amount theemployee pays for the service. You are considered toincur substantial additional costs if you or your em-ployees spend a substantial amount of time in providingthe service, even if the time spent would otherwise beidle or if the services are provided outside normalbusiness hours.

Reciprocal agreements. A no-additional-cost serviceprovided to your employee by an unrelated employermay qualify as a no-additional-cost service if all thefollowing tests apply.

1) The service is the same type of service generally

provided to customers in both the line of businessin which the employee works and the line of busi-ness in which the service is provided.

2) You and the employer providing the service havea written reciprocal agreement under which a groupof employees of each employer, all of whom per-form substantial services in the same line of busi-ness, may receive no-additional-cost services fromthe other employer.

3) Neither you nor the other employer incurs anysubstantial additional cost either in providing theservice or because of the written agreement.

Employee. For this exclusion, treat the following Indi-viduals as employees.





5) A leased employee who has provided services toyou on a substantially full-time basis for at least a



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year if the services are performed under your pri-mary direction or control.


Treat services you provide to the spouse or de-pendent child of an employee as provided to the em-ployee. For this fringe benefit, dependent child meansany son, stepson, daughter, or stepdaughter who is adependent of the employee, or both of whose parents

have died and who has not reached age 25. Treat achild of divorced parents as a dependent of both par-ents.

Treat any use of air transportation by the parent ofan employee as use by the employee. This rule doesnot apply to use by the parent of a person consideredan employee because of item (3) above.

Exclusion from wages. You can generally exclude thevalue of a no-additional-cost service you provide to anemployee from the employee's wages.

Exception for highly compensated employees.You cannot exclude from the wages of a highly com-pensated employee the value of a no-additional-costservice that is not available on the same terms to oneof the following groups.

1) All your employees, or






Transportation (Commuting)BenefitsThis section discusses exclusion rules that apply tobenefits you provide your employees for their personaltransportation, such as commuting to and from work.These rules apply to the following transportation bene-fits.

De minimis (minimal) transportation benefits.

Qualified transportation benefits.

Special rules that apply to demonstrator cars andqualified nonpersonal-use vehicles are discussed underWorking Condition Benefits, later.

De Minimis Transportation BenefitsYou can exclude the value of any de minimis transpor-tation benefit you provide to an employee from theemployee's wages. A de minimus transportation benefitis any transportation benefit you provide to an em-ployee that has so little value (taking into account howfrequently you provide transportation to your employ-ees) that accounting for it would be unreasonable oradministratively impracticable. For example, it applies

to occasional transportation fare you give an employeebecause the employee is working overtime, if the ben-efit is reasonable and is not based on hours worked.

Employee. For this exclusion, treat any recipient of ade minimis transportation benefit as an employee.

Qualified Transportation BenefitsThis exclusion applies to the following benefits.

1) A ride in a commuter highway vehicle between theemployee's home and work place.

2) A transit pass.

3) Qualified parking.

The exclusion applies whether you provide one or acombination of these benefits to your employees.

Qualified transportation benefits can be provided di-rectly by you or through a bona fide reimbursementarrangement. However, cash reimbursements fortransit passes qualify only if a voucher or a similar itemthat the employee can exchange only for a transit passis not readily available for direct distribution by you toyour employee.

You can exclude qualified transportation fringe ben-efits from an employee's wages even if you providethem in place of pay.

Commuter highway vehicle. A commuter highwayvehicle is any highway vehicle that seats at least 6adults (not including the driver). In addition, you mustreasonably expect that at least 80% of the vehiclemileage will be for transporting employees betweentheir homes and work place, with employees occupyingat least one-half of the vehicle's seats (not including thedriver's).

Transit pass. A transit pass is any pass, token,farecard, voucher, or similar item entitling a person toride, free of charge or at a reduced rate, one of thefollowing.

Mass transit.

In a vehicle that seats at least 6 adults (not includingthe driver) if a person in the business of transportingpersons for pay or hire operates it.

Mass transit may be publicly or privately operated andincludes bus, rail, or ferry.

Qualified parking. Qualified parking is parking youprovide to your employees on or near your businesspremises. It also includes parking on or near the lo-cation from which your employees commute to work



16/24

using mass transit, commuter highway vehicles, orcarpools. It does not include parking at or near youremployee's home.



2) A leased employee who has provided services to

you on a substantially full-time basis for at least ayear if the services are performed under your pri-mary direction or control.


Relation to other fringe benefits. You cannot excludea qualified transportation benefit you provide to anemployee under the de minimis or working conditionbenefit rules. However, if you provide a local transpor-tation benefit other than by transit pass or commuterhighway vehicle, or to a person other than an employee,you may be able to exclude all or part of the benefitunder other fringe benefit rules (de minimis, workingcondition, etc.).

Exclusion from wages. You can generally exclude thevalue of transportation benefits you provide to an em-ployee during 2001 from the employee's wages up tothe following limits.

1) $65 per month for combined commuter highway

vehicle transportation and transit passes.2) $180 per month for qualified parking.

Benefits more than the limit. If the value of abenefit for any month is more than its limit, include inthe employee's wages the amount over the limit minusany amount the employee paid for the benefit. Youcannot exclude the excess from the employee's wagesas a de minimis transportation benefit.

More information. For more information on qualifiedtransportation benefits, including van pools, and how todetermine the value of parking, see Notice 943 in

Cumulative Bulletin 19941.

Tuition ReductionAn educational organization can exclude the value ofa qualified tuition reduction it provides to an employeefrom the employee's wages.

A tuition reduction for undergraduate educationgenerally qualifies for this exclusion if it is for the edu-cation of the following individuals.





5) A dependent child or spouse of any individual listedin (1) through (4), above.

A tuition reduction for graduate education qualifiesfor this exclusion only if it is for the education of agraduate student who performs teaching or researchactivities for the educational organization.

For more information on this exclusion, see Publica-tion 520, Scholarships and Fellowships.

Working Condition BenefitsThis exclusion applies to property and services youprovide to an employee so that the employee can per-form his or her job. It applies to the extent the employeecould deduct the cost of the property or services as a

business expense or depreciation expense if he or shehad paid it. The employee must meet any substantiationrequirements that apply to the deduction. Examples ofworking condition benefits include an employee's useof a company car for business and job-related educa-tion provided to an employee.

This exclusion also applies to a cash payment youprovide for an employee's expenses for a specific orprearranged business activity to the extent the em-ployee could deduct the expenses if he or she had paidthem without reimbursement. You must require theemployee to verify that the payment is actually used forthose expenses and to return any unused part of thepayment.

For information on deductible employee businessexpenses, see Unreimbursed Employee Expenses inPublication 529, Miscellaneous Deductions.

The exclusion does notapply to the following items.

A service or property provided under a flexiblespending account in which you agree to provide theemployee, over a time period, a certain level of un-specified noncash benefits with a predeterminedcash value.

A physical examination program you provide, evenif mandatory.

Any item to the extent the employee could deductits cost as an expense for a trade or business otherthan your trade or business.




3) A director of your company.

4) An independent contractor who performs servicesfor you.



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Vehicle allocation rules. If you provide a car for anemployee's use, the amount you can exclude as aworking condition benefit is the amount that would beallowable as a deductible business expense if the em-ployee paid for its use. That is, if the employee uses thecar for both business and personal use, the value of theworking condition benefit is the part determined to befor business use of the vehicle. See Business use ofyour car under Personal Expenses in chapter 1 ofPublication 535. Also, see the special rules for certain

demonstrator cars and qualified nonpersonal-use vehi-cles, discussed next.

However, instead of excluding the value of theworking condition benefit, you can include the entireannual lease value of the car in the employee's wages.The employee can then claim any deductible businessexpense for the car as an itemized deduction on his orher personal income tax return. This option is availableonly if you use the lease value rule (discussed inchapter 3) to value the benefit.

Demonstrator cars. All of the use of a demonstratorcar by your full-time auto salesperson generally quali-fies as a working condition benefit if the use is primarily

to facilitate the services the salesperson provided foryou and there are substantial restrictions on personaluse. For more information and the definition of full-timeauto salesperson, see section 1.1325(o) of the regu-lations.

Qualified nonpersonal-use vehicles. All of an em-ployee's use of a qualified nonpersonal-use vehicle isa working condition benefit. A qualified nonpersonal-use vehicle is any vehicle the employee is not likely touse more than minimally for personal purposes be-cause of its design. Qualified nonpersonal-use vehiclesgenerally include all of the following vehicles.

1) Clearly marked police and fire vehicles.2) Unmarked vehicles used by law enforcement offi-

cers if the use is officially authorized.

3) An ambulance or hearse used for its specific pur-pose.

4) Any vehicle designed to carry cargo with a loadedgross vehicle weight over 14,000 pounds.

5) Delivery trucks with seating for the driver only, orthe driver plus a folding jump seat.

6) A passenger bus with a capacity of at least 20passengers used for its specific purpose.

7) School buses.

8) Tractors and other special purpose farm vehicles.

Pickup trucks. A pickup truck with a loaded grossvehicle weight of 14,000 pounds or less is a qualifiednonpersonal use vehicle if it has been specially modi-fied so it is not likely to be used more than minimallyfor personal purposes. For example, a pickup truckqualifies if it is clearly marked with permanently affixeddecals, special painting, or other advertising associatedwith your trade, business, or function and meets eitherof the following requirements.

1) It is equipped with at least one of the followingitems.

a) A hydraulic lift gate.

b) Permanent tanks or drums.

c) Permanent side boards or panels that materiallyraise the level of the sides of the truck bed.

d) Other heavy equipment (such as an electricgenerator, welder, boom, or crane used to tow

automobiles and other vehicles).

2) It is used primarily to transport a particular type ofload (other than over the public highways) in aconstruction, manufacturing, processing, farming,mining, drilling, timbering, or other similar operationfor which it was specially designed or significantlymodified.

Vans. A van with a loaded gross vehicle weight of14,000 pounds or less is a qualified nonpersonal usevehicle if it has been specially modified so it is not likelyto be used more than minimally for personal purposes.For example, a van qualifies if it is clearly marked with

permanently affixed decals, special painting, or otheradvertising associated with your trade, business, orfunction and has a seat for the driver only (or the driverand one other person) and either of the following items.

1) Permanent shelving that fills most of the cargo area.

2) An open cargo area and the van always carriesmerchandise, material, or equipment used in yourtrade, business, or function.

Outplacement services. An employee's use of out-placement services qualifies as a working conditionbenefit if you provide the services to the employee onthe basis of need and you get a substantial business

benefit from the services distinct from the benefit youwould get from the payment of additional wages. Sub-stantial business benefits include promoting a positivebusiness image, maintaining employee morale, andavoiding wrongful termination suits.

Outplacement services do not qualify as a workingcondition benefit if the employee can choose to receivecash or taxable benefits in place of the services. If youmaintain a severance plan and permit employees to getoutplacement services with reduced severance pay,include in the employee's wages the difference betweenthe unreduced severance and the reduced severancepayments.

Exclusion from wages. You can generally exclude thevalue of a working condition benefit you provide to anemployee from the employee's wages.

Exception for independent contractors. Youcannot exclude the value of parking or the use of con-sumer goods you provide in a product testing programfrom the compensation you pay to an independentcontractor who performs services for you.

Exception for company directors. You cannotexclude the value of the use of consumer goods youprovide in a product testing program from the compen-sation you pay to a director.



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3.

Fringe BenefitValuation Rules

This chapter discusses the rules you must use to

determine the value of a fringe benefit you provide toan employee. You must determine the value of anybenefit you cannot exclude under the rules in chapter2 or for which the amount you can exclude is limited.See Including taxable benefits in payunder Are FringeBenefits Taxable?in chapter 1.

In most cases, you must use the general valuationrule to value a fringe benefit. However, you may be ableto use a special valuation rule to determine the valueof certain benefits.

This chapter does not discuss the special valuationrule used to value meals provided at an employer-operated eating facility for employees. These rules arediscussed in section 1.6121(j) of the regulations. This

chapter also does not discuss the special valuationrules used to value the use of aircraft. These rules arediscussed in sections 1.6121(g) and (h) of the regu-lations.

This chapter discusses the general valuation ruleand the following special valuation rules for employeetransportation benefits.

Cents-per-mile rule

Commuting rule

Lease value rule

Unsafe conditions commuting rule

General Valuation RuleYou must use the general valuation rule to determinethe value of most fringe benefits. Under this rule, thevalue of a fringe benefit is its fair market value.

Fair market value. The fair market value of a fringebenefit is the amount an employee would have to paya third party in an arm's-length transaction to buy orlease the benefit. Determine this amount on the basis

of all the facts and circumstances.Neither the amount the employee considers to be thevalue of the fringe benefit nor the cost you incur toprovide the benefit determines its fair market value.

Employer-provided vehicles. In general, the fairmarket value of an employer-provided vehicle is theamount the employee would have to pay a third partyto lease the same or a similar vehicle on the same orcomparable terms in the geographic area where theemployee uses the vehicle. A comparable lease termwould be the amount of time the vehicle is available forthe employee's use, such as a 1-year period.

Do not determine the fair market value by multiplyinga cents-per-mile rate times the number of miles drivenunless the employee can prove the vehicle could havebeen leased on a cents-per-mile basis. (However, seeCents-Per-Mile Rule, next.)

Cents-Per-Mile RuleUnder this rule, you determine the value of a vehicle

you provide to an employee for personal use by multi-plying the standard mileage rate by the total miles theemployee drives the vehicle for personal purposes.Personal use is any use of the vehicle other than usein your trade or business. For 2001, the standardmileage rate is 341/2 cents a mile.

CAUTION

!Maximum automobile value. Youcannotusethe cents-per-mile rule for an automobile (any4-wheeled vehicle, such as a car, pickup, or

van) if its value when you first make it available to anyemployee for personal use is more than an amountdetermined by the IRS as the maximum automobilevalue for the year. For example, you cannot use the

cents-per-mile rule for an automobile you first madeavailable to an employee in 2000 if its value at that timewas more than $15,400. The maximum automobilevalue for 2001 will be published in a revenue procedurein the Internal Revenue Bulletin early in 2001. If youand the employee own or lease the automobile to-gether, see section 1.6121(e)(1)(iii) of the regulations.

You can use the cents-per-mile rule if either of thefollowing requirements is met.

1) You reasonably expect the vehicle to be regularly

used in your trade or business throughout the cal-endar year (or for a shorter period during which youown or lease it).

2) The vehicle meets the mileage test.

Vehicle. For this rule, a vehicle is any motorizedwheeled vehicle, including an automobile, manufac-tured primarily for use on public streets, roads, andhighways.

Regular use in your business. A vehicle is regularlyused in your trade or business if at least one of thefollowing conditions is met.

1) At least 50% of the vehicle's total annual mileageis for your trade or business.

2) You sponsor a commuting pool that generally usesthe vehicle each workday to drive at least 3 em-ployees to and from work.

3) The vehicle is regularly used in your trade or busi-ness on the basis of all the facts and circum-stances. Infrequent business use of the vehicle,such as for occasional trips to the airport or be-tween your multiple business premises, is not reg-ular use of the vehicle in your trade or business.

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Mileage test. A vehicle meets the mileage test for acalendar year if both of the following requirements aremet.

1) The vehicle is actually driven at least 10,000 milesduring the year. If you own or lease the vehicle onlypart of the year, reduce the 10,000 mile requirementproportionately.

2) The vehicle is used during the year primarily byemployees. Consider the vehicle used primarily byemployees if they use it consistently for commuting.Do not treat use of the vehicle by another individualwhose use would be taxed to the employee as useby the employee.

For example, if only one employee uses a vehicleduring the calendar year and that employee drives thevehicle at least 10,000 miles in that year, the vehiclemeets the mileage test even if all miles driven by theemployee are personal.

Consistency requirements. If you use the cents-per-mile rule, the following requirements apply.

1) You must begin using this rule the first day youmake the vehicle available to any employee forpersonal use. However, if you use the commutingrule when you first make the vehicle available toany employee for personal use, you can change tothe cents-per-mile rule on the first day for which youdo not use the commuting rule.

2) You must use this rule for all later years in whichyou make the vehicle available to any employeeand the vehicle qualifies, except that you can usethe commuting rule for any year during which useof the vehicle qualifies. However, if the vehicle doesnot qualify for the cents-per-mile rule during a later

year, you can use for that year and thereafter anyother rule for which the vehicle then qualifies.

3) You must continue to use this rule if you provide areplacement vehicle to the employee and your pri-mary reason for the replacement is to reduce fed-eral taxes.

Items included in cents-per-mile rate. The cents-per-mile rate includes the value of maintenance andinsurance for the vehicle. Do not reduce the rate by thevalue of any service included in the rate that you didnot provide. (You can take into account the servicesactually provided for the vehicle by using the general

valuation rule discussed earlier.)For miles driven in the United States, its territories

and possessions, Canada, and Mexico, the cents-per-mile rate includes the value of fuel you provide. If youdo not provide fuel, you can reduce the rate by no morethan 5.5 cents.

For special rules that apply to fuel you provide formiles driven outside the United States, Canada, andMexico, see section 1.6121(e)(3)(ii)(B) of the regu-lations.

The value of any other service you provide for a ve-hicle is not included in the cents-per-mile rate. Use thegeneral valuation rule to value these services.

Commuting RuleUnder this rule, you determine the value of a vehicleyou provide to an employee for commuting use bymultiplying each one-way commute (that is, from hometo work or from work to home) by $1.50. If more thanone employee commutes in the vehicle, this value ap-plies to each employee.

You can use the commuting rule if all the following

requirements are met.

1) You provide the vehicle to an employee for use inyour trade or business and, for bona fide noncom-pensatory business reasons, you require the em-ployee to commute in the vehicle. You will betreated as if you had met this requirement if thevehicle is generally used each workday to carry atleast three employees to and from work in anemployer-sponsored commuting pool.

2) You establish a written policy under which you donot allow the employee to use the vehicle for per-sonal purposes, other than for commuting or deminimis personal use (such as a stop for a personalerrand on the way between a business delivery andthe employee's home). Personal use of a vehicle isall use that is not for your trade or business.

3) The employee does not use the vehicle for personalpurposes, other than commuting and de minimispersonal use.

us internal revenue service: p15b--2000

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