Over the last few months, Engage2Excel, along with several top recognition companies had serious concern. Why? It was over the repeal of Section 274(j) of the Internal Revenue Code, which has been in place for 31 years and contains rules on the tax treatment of “employee achievement awards.” A change that could bring devastating results to the reward and recognition industry.
While the passing and now signing of the 2017 tax act, formerly known as the Tax Cuts and Jobs Act, will bring significant changes for employers and employee compensation and benefits, the reward and recognition industry can breathe a little easier. And, we appreciate all of the support and outreach from our own leadership, the Incentive Research Foundation, and many of our competitors in the reward and recognition field, who came together and worked tirelessly sending letters to their senators and representatives weighing in on the negative impact that the proposed changes could have on our industry.
So, what is changing and what is not? First, let’s define what “employee achievement awards” means today. In SHRM’s latest article, IRS regulations define employee achievement awards to include length-of-service awards, safety awards and awards given during “meaningful presentations, and should not create a significant likelihood of the payment of disguised compensation." The IRS also describes “Federal income, social security or Medicare taxes on the fair market value of an employee achievement award are not deducted if it is excludable from the employee's gross income. To be excludable from an employee's gross income, the award must be tangible personal property (not cash, gift certificates, or securities) given to an employee for length of service or safety achievement, awarded as part of a meaningful presentation, and awarded under circumstances that don't indicate that the payment is disguised compensation. Excludable employee achievement awards also aren't subject to FUTA tax.”
Coming in 2018, here’s what you can expect according to a recent WorldatWork article outlining the changes around Employee Achievement awards. “The exclusion for the employee and the deduction for the employer will not apply to cash, gift coupons, gift certificates, vacations, meals, lodging, tickets to sporting or theater events, securities and "other similar items." 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.” The key takeaway is that HR and Accounting/Finance professionals will need to partner together to discern which awards will be taxable and deduct payroll taxes accordingly.
As the new year arrives, along with the changes, we are sure to see an increased discussion over the new legislation. However, SHRM remains positive. Their takeaway? “The change may not have a huge impact on whether to bestow these awards but it's a further complication that employers need to take into account.” And, they interviewed Kim Buckey, vice president of client services at Birmingham, Ala.-based DirectPath, an employee engagement, health care transparency and compliance company who states, “This could be a boon to companies that provide service or other awards such as pins, jewelry or other items selected from a catalog" that won't be taxable. "In my experience, these can serve as a more tangible reminder of an employer's appreciation than a gift card or cash that's spent on something and soon forgotten."