As the Senate and House debated tax reform, incentive and recognition professionals naturally watched closely to see how changes would affect the industry. The question of whether employee awards count toward taxable income was of primary concern, as different versions of the bill were proposed. Repeal of Section 274(j) of the Internal Review Code, which has been in place for 31 years and includes rules on the tax treatment of employee achievement awards, would have had a devastating impact.
Now that the dust has settled, it's time to clarify how the Tax Cuts and Jobs Act (TCJA) signed into law on December 20, 2017, treats rewards. First and foremost, the incentive industry can breathe a deep sign of collective relief. While tax reform will bring significant changes for employers and employee compensation and benefits, the Senate and House came to an agreement that will have only a small effect on taxation of incentives and recognition awards.
Currently, achievement awards are excluded from employees' taxable income if certain conditions are met. Under the final bill, starting in 2018, deductions for an employer and the exclusion for the employee will not apply to the employee's receipt of "cash, gift coupons, gift certificates, vacations, meals, lodging, tickets to sporting or theater events, securities and other similar items."
Additionally, it's important to note that a deduction/exclusion for any other tangible property and gift certificates allowing the employee to select tangible property from a limited array of items pre-selected or pre-approved by the employer would still be allowed. An example of pre-selected or pre-approved tangible property would be an award catalog arrangement provided by incentive and recognition suppliers who understand the nuances of eligible achievement awards. The amount eligible for exclusion is based on the fair market value (FMV) of valid achievement awards.
Let's look at the tax code today to understand what remains in effect. For an achievement award to be eligible for the exclusion, it must be part of an IRS "qualified plan" which means the award must be presented as part of a "meaningful presentation" and not be "disguised compensation." In addition, there's a $1,600 limit per year for achievement awards given to an employee in an IRS-qualified plan ($400 for awards that aren't qualified plan awards).
However, the exclusion does not apply in these instances:
--A length-of-service award can only be tax-exempt every five years.
--A safety achievement award is not tax-exempt for a manager, administrator, clerical employee, or other professional employee.
--A safety achievement award is not tax-exempt if more than 10% of eligible employees previously received safety achievement awards during the year.
So what actually changed? Little is slated to change with the exception of tightening the definition of tangible awards effective in tax years beginning after December 31, 2017.
The further good news is tax reform presents a big opportunity for companies to spread the windfall among their employees and shareholders -- and some of this will be directed to rewards programs. According to a survey of more than 300 large- and mid-sized employers conducted by Willis Towers Watson, nearly half (49 percent) are considering bolstering at least one total rewards program after the passage of TCJA.
Beginning in 2018, corporations will enjoy a tax cut from 35 percent to 21 percent. This boon may result in continuing or raising bonuses and/or increases in wages and benefits year-over-year. However, as companies consider the best ways to leverage this new financial advantage, longer term strategies such as investing in programs that will enhance employee engagement, productivity, and organizational culture should be a priority.
Christina Zurek creates business strategies and market plans that enable ITA Group to deliver innovative organizational culture solutions. As a Solution Manager, she leverages her passion for motivating and engaging people alongside more than 10 years of solution development and marketing experience to craft compelling solutions that drive positive, measurable change for clients. Christina is accountable for market definition, competitive research, business and marketing plan vision and development, and internal training and execution.
ITA Group (www.ITAGroup.com) creates and manages recognition and incentive programs that align and motivate people. Headquartered in West Des Moines, Iowa, ITA Group has operations in every region of the United States.