This guide is not designed to address all questions which may arise nor to address complex issues in detail. Nothing contained herein supersedes, alters or otherwise changes any provision of the Massachusetts General Laws, Massachusetts Department of Revenue Regulations, Department rulings or any other sources of the law.
Guide Employee Fringe Benefits
Employee fringe benefits are forms of pay for the performance of services.
For example, an employer provides an employee with a fringe benefit when:
- The employer allows the employee to use a business vehicle to commute to and from work.
Fringe benefits received by an employee in connection with his or her performance of services are included in income as compensation unless:
- The employee pays fair market value for them; or
- They’re specifically excluded by law.
Recipient of Fringe Benefits
Employees are generally the recipients of fringe benefits if they perform the services for which the fringe benefits are provided. Employees are considered recipients even if fringe benefits are given to another person, such as members of the employees' families.
For example, an employer-provided a vehicle to an employee's spouse for services performed by the employee:
- The car is considered to have been provided to the employee, not the spouse.
Non-Taxable Fringe Benefits
Massachusetts follows the Internal Revenue Code (Code) for both:
- The definition of non-taxable fringe benefits and
- The exclusion of certain benefits from gross income.
In general, non-taxable fringe benefits must be:
- Made available to everyone, not just highly compensated employees.
Fringe benefits are reported on Form W-2 as follows:
- For federal purposes, the employer reports taxable fringe benefits in box 1, Wages, Tips, Other Compensation;
- For Massachusetts purposes, the employer reports taxable fringe benefits in box 16, State Wages, tips, Etc.
The total value of employee fringe benefits may also be noted in Box 12. The value of employee fringe benefits may be:
- Added to other compensation on one Form W-2, or
- An employee may receive a separate Form W-2 showing just the value of fringe benefits,
- Taxable portion in Box 1 and 16,
- Full value noted in Box 12.
Accident and Health Plans
In general, federal gross income of employees doesn't include:
Amounts Received Under Accident and Health Plans:
Per I.R.C § 105, employer-provided reimbursements made to employees for:
- Their medical care
- Their spouses or
- Their dependents.
Contributions by Employer to Accident and Health Plans:
Per I.R.C. § 106, contributions employers make to accident or health plans for compensation (through insurance or otherwise) to their employees for personal injuries or sickness incurred by:
Their spouses or
- Their dependents,
as defined in I.R.C. § 152.
Noncash fringe benefits that don’t qualify per above are :
- Included in gross income and
- Sometimes referred to as “imputed income.”
Dependent Definition under I.R.C. § 152:
An individual must be either a “qualifying child” dependent or a “qualifying relative” dependent. In general:
A “qualifying child” is a child who lives with an employee for more than half a year, who is:
- Either under age 19 or
- A full-time student under age 24, and
- Who doesn’t provide over half of his or her own support for the calendar year.
A “qualifying relative” is an individual who bears a relationship to the taxpayer (including any child of the taxpayer who:
- Is not a “qualifying child”, regardless of the child’s age,
- Whose gross income is less than the exemption amount, and
- Receives over one-half of his or her support from the taxpayer.
Internal Revenue Service Notice 2004-79 - Expansion of the Definition of Dependent to Eliminate Gross Income Limit:
Effective for taxable years beginning after December 31, 2004, for federal purposes, this notice expands the definition of dependent at I.R.C. § 152 to eliminate the gross income limit for a qualifying relative.
An employee may exclude from gross income the value of employer-provided health insurance coverage for a child who, while not a “qualifying child,” meets the definition of a “qualifying relative” determined without regard to the child’s gross income.
For purposes of the exclusion from gross income for employer-provided health insurance coverage, a child of an employee who exceeds the age to be a “qualifying child” is:
- A "qualifying relative” if:
- The taxpayer provides over half of the child’s support for the calendar year.
In such a case, the child is considered a dependent and there is no federal imputed income charged to the employee.
In those instances where benefits provided to an employee include health insurance for nondependent children, e.g.,
- Child that is over the age to be a “qualifying child” and
- Isn't a “qualifying relative”
because the child provides at least half of his or her own support, an amount may be considered imputed income that is included in gross income.
The Affordable Care Act - Amounts Received Under Accident and Health Plans:
The Act generally requires group health plans and health insurance issuers to provide coverage for dependent children up to age 26.
In addition, it broadens the exclusion from gross income for employer-provided health care benefits for an employee's child to the end of the year in which the child attains age 26.
Per I.R.C. §105, in general, gross income of employees doesn’t include employer-provided reimbursements made to an employee for the:
- Medical care of the employee
- Employee’s spouse or
- Employee’s dependents.
Effective March 30, 2010, the Act amended I.R.C. § 105 to exclude from an employee's gross income any employer-paid expenses incurred for the medical care of an employee's child who hasn’t attained age 27 as of the end of the tax year.
Internal Revenue Service Notice 2010-38 - Contributions by Employer to Accident and Health Plans:
Per I.R.C. § 106, in general, gross income of employees doesn’t include contributions their employers make to an accident or health plan for compensation (through insurance or otherwise) to:
- Their employees for personal injuries or sickness incurred by them
- Their spouse, or
- Their dependents, as defined in I.R.C. § 152.
Effective March 30, 2010, the exclusion extends to coverage for an employee's child who hasn’t attained age 27 as of the end of the tax year.
Massachusetts Follows Federal Treatment, Effective January 1, 2010:
Effective for tax years beginning on or after January 1, 2010, Massachusetts follows the federal treatment of I.R.C. §§ 105 and 106 for exclusions from gross income for employer-provided health care benefits.
The general effect of the Massachusetts change is to conform to the federal income exclusion rules for
- Health care benefits that are in effect for each year,
- Notwithstanding the general Massachusetts tie-in to federal income and exclusion rules as of January 1, 2005.
Thus, to the extent employer-provided health care benefits are excluded from federal gross income, such amounts are likewise excluded from Massachusetts gross income.
The Massachusetts change affects only a small class of taxpayers:
- Employees with a child age 26 during 2010 or 2011 and
- Haven't reached the age of 27 by end of the year.
There was previously a discrepancy between federal and Massachusetts gross income exclusions for this class of taxpayers. The Massachusetts exclusion has now been broadened to match the federal exclusion.
COBRA Coverage of Unemployed Workers
An Act Making Appropriations for the Fiscal Year 2010 (St. 2009, c. 27):
Effective for tax years ending on or after January 1, 2009, Massachusetts conforms to the current Code with regard to the federal exclusion from gross income of the COBRA subsidy under I.R.C. § 139C.
The American Recovery and Reinvestment Act of 2009 (P.L. 111-5 or "ARRA") added new I.R.C. § 139C which provides an exclusion from federal gross income for a 65% subsidy for COBRA continuation premiums for up to 9 months for certain workers who have been involuntarily terminated and for their families.
To qualify for premium assistance, a worker must be involuntarily terminated between:
- September 1, 2008 and
- December 31, 2009.
This subsidy also applies to health care continuation coverage if required by states for small employers.
Adoption Assistance Programs
Gross income of an employee doesn’t include the value of amounts paid by the employer for qualified adoption expenses in connection with the adoption of an eligible child. In the case of an adoption of a child with special needs, the exclusion applies regardless of whether the employee has qualified adoption expenses.
As a result of Code Update, Massachusetts adopts this federal exclusion under:
- The Internal Revenue Code, as
- Amended and in effect on January 1, 2005.
Any federal tax law changes to these exclusions won't be automatically adopted. Massachusetts will continue to follow the Code of January 1, 2005.
Gross income of an employee doesn’t include the value of the free or low-cost use of an:
- Employer-owned gym or
- Other athletic club located on the business premises.
The gym must be used primarily by:
- Their spouses and
- Their dependent children.
The value of the program is included in gross income if an employer pays for a fitness program provided to an employee at an:
- Off-site resort hotel or
- Athletic club.
No amount is included in the gross income of a participant in a cafeteria plan solely because, under the plan, the participant may choose among the benefits of the plan:
- Cash and
- Qualified benefits.
Exception for Highly Compensated Participants and Key Employees:
The gross income exclusion does not apply to any benefit attributable to a plan where:
- The plan discriminates in favor of highly compensated individuals as to eligibility to participate or
- The plan discriminates in favor of highly compensated participants as to contributions and benefits or
- The statutory nontaxable benefits provided to key employees exceed 25 percent of the aggregate of such benefits provided for all employees under the plan.
Cafeteria Plan Defined:
The term cafeteria plan means a written plan under which:
- All participants are employees; and
- The participants may choose among 2 or more benefits consisting of cash and qualified benefits.
The term "qualified benefit" means any benefit which is not includible in the gross income of the employee by reason of a specific I.R.C. provision.
Child or Dependent Care Assistance Programs
Gross income of an employee doesn’t include amounts paid or incurred by the employer for dependent care assistance provided to such employee if the assistance is furnished pursuant to a "qualified dependent care assistance program" as defined in I.R.C. § 129(d). The amount which may be excluded may not exceed:
- $5,000, or
- $2,500 in the case of a separate return by a married individual.
Any excess amount is included in gross income in the taxable year in which the dependent care services were provided.
Dependent care benefits include:
- Amounts an employer pays directly to either the employee or to the employee's care provider for the care of qualifying persons while employee works; and
- The fair market value of care in a day-care facility provided or sponsored by employee's employer.
The amount excluded is limited to the lesser of:
- The total amount of dependent care benefit is received during the year;
- The total amount of qualified expenses incurred during the year;
- Employee's earned income;
- Spouse's earned income; or
- $5,000 ($2,500 if married filing separately.)
Employer reports dependent care benefits in box 10 of Form W-2. The employer will include any dependent care benefits over $5,000 in wages shown in box 1 and 16 of Form W-2.
De Minimis (Minimal) Benefits
Gross income of an employee does not include the value of de minimis fringe benefits. De minimis fringe benefits are defined as any property or services the value of which is so small as to make accounting for it:
- Unreasonable or
- Administratively impracticable.
Some Examples of Items Considered De Minimis:
- Cab fares home when working overtime
- Company parties, picnics, etc.
- Discount transit passes for commuting by public transportation
- Discounts at company cafeterias
- Occasional personal use of the employer's copying machine
- Occasional tickets to sporting events
- Occasional typing of personal letters by a company secretary.
The operation by an employer of an eating facility for employees is considered as a de minimis fringe if:
- The facility is located on or near the business premises of the employer; and
- The revenue derived from such facility normally equals or exceeds the direct operating costs of such facility.
The value of holiday gifts of nominal value such as a turkey, ham, etc. isn’t included in gross income. However, employer gifts of:
- Gift certificates or
- Similar items
that can easily be exchanged for cash are includible in gross income.
Educational Assistance Programs
Gross income of an employee does not include amounts paid by an employer for educational assistance on behalf of an employee up to a maximum of $5,250 per the calendar year. Educational assistance means:
- Qualified undergraduate and
- Graduate education expenses.
As a result of Code Update, Massachusetts adopts this federal exclusion under:
- The Internal Revenue Code, as
- Amended and in effect on January 1, 2005.
Any federal tax law changes to these exclusions won’t be automatically adopted.
Massachusetts will continue to follow the Code of January 1, 2005.
Also see Education related deduction.
Gross income of an employee does not include the value of property or services sold at a discount. If an employer allows an employee to buy qualified property or services at a discount, the value of the discount may be excluded from gross income if:
- The discount on the property does not exceed the gross profit percentage of the price at which the property is being offered for sale to customers; or
- The discount on services does not exceed 20% of the price at which the services are being offered for sale to customers.
Employee discounts mean the amount by which the price of qualified property or services provided to an employee for use by the employee is less than the price of such property or services that is offered to customers.
Property and services that qualify are those that are offered for sale to customers in the ordinary course of the line of business of the employer in which the employee is performing services. However, the exclusion doesn’t apply to:
- Discounts on real property and
- Property held for investment, such as:
- Stocks and
Employer Provided Vehicle
Employers who provide their employees with cars (or other highway motor vehicles) must determine the actual value of the employees' personal use of the cars. The value for personal use is considered a non-cash fringe benefit that must be included in the employees' gross income.
An employer must determine the actual value of this fringe benefit to include in employees' income.
The value may be determined by either of the following methods:
- The actual value of the personal use of the car; or
- The actual value of the car as if the employees used it entirely for personal purposes (100% income inclusion).
If an employer includes 100% of the value in employees' gross income, employees may deduct the value of the business use of the car that is computed on U.S. Form 2106.
If a company vehicle is considered to be of limited personal value, determined by the IRS, such as an
- School bus,
- Police or fire vehicles,
the personal use would not be subject to tax.
Meals or Lodging Furnished for the Convenience of the Employer
Gross income of an employee does not include the value of meals and lodging provided to employees and their families by their employers if the following conditions are met:
The meals are:
- Furnished on the business premises of the employer, and
- Furnished for the convenience of the employer.
The lodging is:
- Furnished on the business premises of the employer;
- Furnished for the convenience of the employer; and
- A condition of employment.
If taxpayer is employed by an educational institution and taxpayer (or taxpayer's spouse and dependents) are provided qualified campus lodging for use as a residence, the excess of the fair rental value over the amount of rent the taxpayer pays is included in gross income.
Military Fringe Benefits
As a result of Code Update, Massachusetts adopts the following federal exclusions as amended and in effect on January 1, 2005:
- Dependent care assistance under a dependent care assistance program;
- Travel benefits received under the Operation Hero Miles program; and
- Increased death benefit gratuity of $12,000.
The Operation Hero Miles program provides, through public and air and surface carriers, domestic travel for military personnel and their families through donated :
- Frequent flyer miles
- Tickets or
- Ticket vouchers.
Moving Expense Reimbursement
Gross income for both federal and Massachusetts purposes doesn’t include qualified moving expense reimbursements. These are amounts received from an employer as payment for or reimbursement of expenses that would be deductible as moving expenses if directly paid or incurred by the employee. Therefore, these reimbursements may not be included in the calculation of the Moving Expense - Schedule Y Deduction.
Effective January 1, 2005, Massachusetts adopts the federal treatment for the exclusion of Moving Expense Reimbursement under the Internal Revenue Code, as amended and in effect on January 1, 2005.
Any federal tax law changes to this exclusion won’t be automatically adopted. Massachusetts will continue to follow the "Code" of January 1, 2005.
Gross income of an employee does not include the value of no-additional-cost services, which means any service provided by an employer to an employee for use by such employee if:
- Such service is offered for sale to customers in the ordinary course of the line of business of the employer in which the employee is performing services; and
- The employer does not incur any substantial additional cost in providing these services to the employee.
Example: An individual is employed as a flight attendant for a company that owns both an airline and a hotel chain. The company allows the employee to take personal flights (if there is an unoccupied seat) and stay in any one of their hotels (if there is an unoccupied room) at no cost to the employee. The value of the personal flight isn’t included in employee's gross income. However, the value of the hotel room is included in the employee's gross income because the employee does not work in the hotel business.
Retirement Planning Services
As a result of Code Update, Massachusetts adopts the federal exclusion for the employee fringe benefit of retirement planning advice or information provided to an employee and his spouse by an employer maintaining a qualified employer plan.
Qualified services include retirement planning advice, information about employer's retirement plan, and information about how the plan may fit into employee’s overall individual retirement income plan. Value of any
- Tax preparation
- Legal, or
- Brokerage services
provided by employee’s employer may not be excluded.
Qualified employer plans include:
- I.R.C. § 401(a) plans
- Annuity plans
- Government plans
- I.R.C. § 403(b) annuity contracts
- SEPs and
- SIMPLE accounts.
This exclusion was due to expire for tax or plan years beginning after December 31, 2010.
Transportation Fringe Benefits
A federal and Massachusetts exclusion is allowed for
- Employer-provided parking
- Transit pass and
- Commuter highway vehicle transportation benefits,
subject to monthly maximums.
Combined transit pass and commuter highway vehicle transportation benefits were formerly referred to as:
- Employer-provided vanpool benefits and
- Transit passes.
Based on IRS' Revenue Procedure/inflation adjustment formula, the Massachusetts exclusion amounts for tax years 2014 and 2015 are:
- $250 per month for employer-provided parking and
- $130 per month for combined transit pass and commuter highway vehicle transportation benefits, that are a reduction in salary.
The federal monthly exclusion amount for tax year 2014 (tax year 2015 is undetermined) for combined transit pass and commuter highway vehicle transportation benefits was increased to $250 by the Tax Increase Prevention Act of 2014 (P.L. 113-295.)
Massachusetts doesn’t adopt this exclusion amount increase to the transit pass and commuter highway vehicle transportation benefits, given that it was enacted subsequent to January 1, 2005.
Massachusetts adopts this federal exclusion under the Internal Revenue Code, as amended and in effect on January 1, 2005. Any federal tax law changes to these exclusions won’t be automatically adopted. Massachusetts will continue to follow the Code of January 1, 2005. Massachusetts does, however, adopt the IRS's Revenue Procedure/inflation adjustment formula used in determining annual exclusion amounts.
Also see the Commuter deduction page.
Working Condition Benefits
The value of property or service provided to employees by an employer is excluded from gross income if the employees would have been allowed to deduct such expenses under I.R.C. § 162 or 167 if they had paid for them.
For example, the cost of a subscription to an engineering trade magazine provided by an employer isn’t included in gross income since the cost would have been deductible to the engineer if he had paid for the subscription himself.
Submitting an Abatement or Amended Return
To submit an abatement or amended return, you will need the following:
- Copy of U.S. W-2C - Statement of Corrected Wage and Tax Amounts, or letter from employer verifying excluded employer provided reimbursement amount.
- Copy of U.S. Form 3903 - Moving Expenses (if applicable).
- M.G.L. Chapter 62, Sections 1(c); 2(a)
- M.G.L. c. 62, § 2(a)(2)(Q) as added by St. 2007, c. 205
- Notice – Update to 2014 Personal Income Tax Instructions
- TIR 14-15: Massachusetts Tax Year 2015 Exclusion Amounts for Employer-Provided Parking, Transit Pass and Commuter Highway Vehicle Benefits
- TIR 11-5: Employer-Provided Health Care Benefits Update
- TIR 09-21: Certain Personal Income Tax and Corporate Excise Changes in the Fiscal Year 2010 Budget Legislation
- TIR 07-16: Personal Income Tax Treatment of Employer-Provided Health Insurance Coverage for an Employee's Child
- TIR 05-16: The Effect of the Adoption of the Updated Internal Revenue Code on the Massachusetts Personal Income Tax (Code Update)
- TIR 98-15: The Effect of the Adoption of the Updated Internal Revenue Code on the Massachusetts Personal Income Tax
- I.R.C. §§ 105; 106; 119; 125; 127; 129; 132(b), (c), (e), (f)(2), (4) and (6), (g), (m); 134; 137; 139c
- Revenue Procedure 2004-71