Employee achievement awards.

• Author: Pridnia, John P.

Generally, the fair market value (FMV) of an award received by an employee is includible in the employee's gross income, with the employer receiving a corresponding compensation deduction. However, under Sec. 74(c)(1), an employee achievement award up to specified limits will not be income to the employee, even though it will still be deductible by the employer as an award expense under Sec. 274(j)(2).

To qualify, the achievement award must meet these requirements.

* The award must consist of tangible personal property to recognize length of service or safety achievement. It cannot be disguised compensation (such as a bonus or commission). Length of service awards will not qualify if received during an employee's first five years of employment (Sec. 274(j)(4)(B)). Safety awards will not qualify if given to managerial, administrative, clerical or other professional employees; they are not eligible because they usually do not engage in work involving safety considerations (Sec. 274(j)(4)(C)(ii)). also, not more than 10% of an employer's eligible employees can receive safety awards (except awards excludible as de minimis fringe benefits) during any tax year (Sec. 274(j)(4)(C)(i).

* If the award is made under a "qualified plan," the deduction is limited to $1,600 for the employer's cost of all such awards (including nonqualified plan awards) to the same employee during the tax year (Sec. 274(j)(2)(B)). If the award is not a qualified plan award, the deduction is limited to $400 for the employer's cost of all such awards to the same employee during the tax year (Sec. 274(j)(2)(A)).

A "qualified plan" award is one that is awarded as part of an employer's permanent written plan or program that does not discriminate in favor of highly compensated employees (as defined in Sec. 414(q)) as to eligibility or benefits. An item is not a qualified plan award for a tax year if the average cost per recipient of all the employer's qualified plan awards during the tax year...