Employee Fringe Benefits

Employee fringe benefits are a form of payment 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, where an employer-provided vehicle is given to an employee's spouse for services performed by the employee, the vehicle 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:

• Non-discriminatory
• Made available to everyone, not just highly compensated employees

Form W-2

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 an employee's fringe benefits may also be added in Box 12. The value of an employee's fringe benefits may be:

• Added to other compensation on Form W-2, or
• An employee may receive a separate Form W-2 showing just the value of fringe benefits received as follows:
  • Taxable portion in Box 1 and 16, and
  • Full value noted in Box 12

Federal Law

In general, federal gross income of employees doesn't include:

Payments Received Under Accident and Health Plans:
Pursuant to Code § 105, employer-provided reimbursements made to employees for their:

• Medical care, or
• A spouse's or dependent's medical care

Contributions by Employer to Employee Accident and Health Plans:

Pursuant to Code § 106, employer contributions to accident or health plans as compensation (through insurance or otherwise), to their employees for personal injuries or sickness incurred by them, their spouses, or their dependents, as defined in Code § 152.

Imputed Income

Non-cash fringe benefits that don’t qualify above are:

• Included in gross income; and
• Are referred to as “imputed income”

Dependent Definition under Code § 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
• Who receives over one-half of his or her support from the taxpayer

An individual cannot be claimed as a dependent if the individual files a joint return for the year.

Employer-Provided Health Insurance Coverage for Dependents

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 non-dependent 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.

Pursuant to Code §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
• Employee’s dependents

Code § 105 also excludes from an employee's gross income any employer-paid expenses incurred for the medical care of an employee's child who hasn’t reached age 27 as of the end of the tax year.

Pursuant to Code § 106, in general, gross income of employees doesn’t include contributions their employers make to an accident or health plan as compensation (through insurance or otherwise) to:

• Their employees for personal injuries or sickness incurred by them
• Their spouse; or
• Their dependents, as defined in Code § 152

Note the exclusion extends to coverage for an employee's child who hasn’t reached age 27 as of the end of the tax year.

Massachusetts Rules

Massachusetts Follows Federal Treatment
Massachusetts follows the federal treatment of Code §§ 105 and 106 for exclusions from gross income for employer-provided health care benefits.

Thus, to the extent employer-provided health care benefits are excluded from federal gross income, such amounts are likewise excluded from Massachusetts gross income.

COBRA Coverage of Unemployed Workers

Massachusetts conforms to the current Code with regard to the federal exclusion from gross income of the COBRA subsidy under Code § 139C.

This subsidy also applies to health care continuation coverage if required by states for small employers.

Gross income of an employee doesn’t include amounts paid or expenses incurred 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.

Gross income of an employee doesn’t include the value of the free or low-cost use of an:

• Employer-owned gym
• Other athletic club located on the business premises

The gym must be used primarily by:

• Employees
• Their spouses
• Their dependent children

The value of a fitness program is included in gross income if an employer pays for the program provided to an employee at an:

• Off-site resort hotel
• 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
• The plan discriminates in favor of highly compensated participants as to contributions and benefits
• 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 Code provision.

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 Code § 129(d). The amount which may be excluded may not exceed:

• $5,000
• $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
• $5,000 ($2,500 if married filing separately)

Also see Child and dependent related credits.

Form W-2:

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.

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
• 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

Eating Facilities:

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

Holiday Gifts:

The value of holiday gifts of nominal value such as a turkey, ham, etc. isn’t included in gross income. However, employer gifts of cash, gift certificates or similar items that can easily be exchanged for cash are includible in gross income.

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 calendar year. Educational assistance means either qualified undergraduate and graduate education expenses, or beginning with the 2022 tax year, payments made by an employer before January 1, 2026 of an employee's student loan principal or interest.

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 bonds.

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*

* Note: Applies to tax years prior to 2018.

If a company vehicle is considered to be of limited personal value, determined by the IRS, such as an ambulance, hearse, school bus, police or fire vehicles, the personal use would not be subject to tax.

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.

Massachusetts adopts the following federal exclusions:

• Dependent care assistance under a dependent care assistance program
• Travel benefits received under the Operation Hero Miles program
• Death benefit gratuities
• Payments made under the United States Department of Defense Homeowners Assistance Plan. Beginning with the 2022 tax year, this also applies to payments made to wounded members of the Armed Forces and their families.

The Operation Hero Miles program provides, through public air, surface carriers and domestic travel for military personnel and their families through donated :

• Frequent flyer miles
• Tickets
• Ticket vouchers

Massachusetts adopts the federal exclusion for reimbursements of qualified moving expenses provided by the Code in effect on January 1, 2022, including the temporary exclusion thereof. The exclusion is suspended through the 2025 tax year. Any future federal tax law changes to this exclusion won’t be automatically adopted in Massachusetts.

Generally, qualifying expenses are amounts paid by an employer as payment for or reimbursement of expenses that would be deductible as moving expenses if directly paid or incurred by the employee.

Gross income of an employee doesn't 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 business of the employer in which the employee is performing services; and
• The employer doesn't 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.

Massachusetts adopts the federal exclusion from an employee’s wages for the value of any 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, accounting legal, or brokerage services provided by employee’s employer may not be excluded.

Qualified employer plans include:

• Pension, profit-sharing, and stock bonus plans qualified under Code § 401(a)
• Annuity plans under Code § 403(a)
• Government plans, state or federal
• Code § 403(b) annuity contracts
• SEPs within the meaning of Code § 408(k)
• SIMPLE accounts within the meaning of Code § 408(p)
• Certain trusts described in Code § 501(c)(18)

A federal and Massachusetts exclusion, subject to monthly maximums, is allowed for

• Employer-provided parking
• Transit pass, and
• Commuter highway vehicle transportation benefits

The monthly maximums in 2022 are:

• $280 per month for employer-provided parking, and
• $280 per month for combined transit pass and commuter highway vehicle transportation benefits

The monthly maximums in 2023 are:

• $300 per month for employer-provided parking, and
• $300 per month for combined transit pass and commuter highway vehicle transportation benefits

Massachusetts adopts the federal exclusion under the Code, as amended and in effect on January 1, 2022. Any future federal tax law changes to the exclusion won’t be automatically adopted in Massachusetts.

Also see the Commuter deduction page. 

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 Code § 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 the engineer had paid for the subscription.

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)

Also see Amend your tax return or request an abatement of tax.

Massachusetts References

• 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
• TIR 23-5: Chapter 62 Conformity to Select Provisions of the 2022 Internal Revenue Code
• TIR 22-13: Update to Massachusetts Exclusion Amounts for Employer-Provided Parking, Transit Pass and Commuter Highway Vehicle Benefits for Taxable Years Beginning in 2022
• 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

Federal References

• Code §§ 105; 106; 119; 125; 127; 129; 132(b), (c), (e), (f)(2), (4) and (6), (g), (m); 134; 137; 139c