Understand the federal income tax treatment of work-life referral services for small businesses and the benefits of these programs for employees of small businesses.
In April 2024, the IRS provided informal guidance on the federal income tax treatment to an employee of certain work-life referral services offered as an employee benefit by small businesses.
This post explores what work-life referral programs are, how they are taxed, and the implications of the IRS guidance for small businesses.
FAQs
Q1: What is a work-life referral program?
A1: A work-life referral program assists employees with identifying, contacting, and negotiating with life-management resources for solutions to personal, work, or family challenges.
Q2: What are some examples of work-life referral services?
A2: Examples include identifying education and medical service providers, choosing child or dependent care programs, navigating eligibility for government benefits, and connecting with financial planning professionals.
Q3: How are work-life referral services taxed?
A3: Work-life referral services are excluded from gross income as a de minimis fringe benefit and are not subject to federal employment taxes, including FICA, FUTA, and federal income tax withholding.
What are Work Life Referral Services?
Small businesses often provide eligible employees with a work-life referral service program as an employee benefit.
Work-life referral services assist employees with identifying, contacting, and negotiating with life-management resources for solutions to a personal, work, or family challenge.
Work-life referral services might be offered in connection with the following:
- Choosing a child or dependent care program
- Identifying appropriate education, care, and medical service providers
- Connecting the employee with local retirement and financial planning professionals
- Evaluating and using paid leave programs offered through an employer or a state or locality
- Navigating eligibility for government benefits, including Veterans Administration benefits
- Locating home services professionals who specialize in adapting a home for a family member with special care needs
- Navigating the medical system, including private insurance and public programs, and utilizing available medical travel benefits
Work-life referral programs often rely on third-party providers that charge the employer a per-eligible-employee monthly fee, regardless of how many employees actually utilize the work-life referral services.
Work-life referral programs sometimes provide employees with access to a set number of consultations per year covering a variety of life-management issues
The use of a work-life referral service provider adds a desirable layer of anonymity so that employees who may be grappling with sensitive issues affecting their family, finances, or health have the assurance that their communications will remain confidential and not be disclosed to their employer, and employers do not need to establish systems for handling sensitive or protected information.
How Are Work-Life Referral Services Taxed?
A fringe benefit provided by an employer to an employee is presumed to be income to the employee unless specifically excluded from gross income under the Internal Revenue Code.
One exception is for de minimis fringe benefits: a fringe benefit which, considering its value and the frequency with which it is provided, is so small that accounting for it would be unreasonable or administratively impracticable.
The IRS guidance notes that work-life referral programs may be available to a significant portion of an employer’s employees, but they are used infrequently by employees and only when an employee faces one of the particular challenges the programs are designed to address.
Accordingly, the IRS concluded that work-life referral services are excluded from gross income as a de minimis fringe benefit.
Furthermore, these services are excluded from federal employment taxes, including FICA (Social Security and Medicare taxes), FUTA (federal unemployment tax), and federal income tax withholding
Work-life referral services are often included in an employee assistance program (EAP) or otherwise bundled with other types of services offered by an employer.
The IRS guidance provided here applies only to the work-life referral program itself; it does not address the tax treatment of direct or indirect payment for the life-management resources offered through an EAP or that may be bundled with a work-life referral program.
Under the general rule, those other services would be presumed to be income to the employee unless specifically excluded from gross income under the Internal Revenue Code
The IRS has clarified that work-life referral services provided by employers are considered de minimis fringe benefits and are excluded from gross income and federal employment taxes. This guidance helps employers and employees understand the tax implications of these valuable services.
Contact your tax and financial advisors to determine the best moves for your situation.