IRS Addresses Tax Treatment of Work-life Referral Services

The IRS has issued frequently asked questions (FAQs) addressing the tax treatment of work-life referral (WLR) services employers provide to their employees. These FAQs provide that WLR services qualify as a de minimis fringe benefit for tax purposes and are thus excluded from income and exempt from employment taxes.

Because the FAQs are not official IRS guidance, the IRS cannot rely on them to resolve a specific taxpayer’s case, and established tax laws control a taxpayer’s liability if the FAQs are inconsistent with such laws. However, the FAQs provide helpful insight into the IRS’ view on the tax treatment of WLR services.

WLR Services

A WLR program is an employer-funded fringe benefit that helps employees locate resources for solutions to personal, work or family challenges through informational and referral consultations. For example, WLR programs may provide employees with support, information or referrals in connection with identifying health care or child care, using paid leave programs, navigating the health care system, and connecting with financial planning professionals.

WLR programs are often incorporated into an employee assistance program or may otherwise be bundled with other types of services or programs offered by an employer. WLR 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 challenges the programs are designed to address. WLR 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 WLR services.

Tax Treatment

Federal tax law provides that all employee compensation is taxable unless a specific exemption applies. When compensation is taxable, it must be included in gross income on the employee’s Form W-2 and is subject to federal employment taxes.

De minimis (or minimal) benefits are one type of nontaxable employee fringe benefit. A de minimis fringe benefit is one that, considering its value and the frequency in which it is provided, is so small that accounting for it would be unreasonable or administratively impracticable. The law does not specify a specific value or frequency threshold for benefits to qualify as de minimis. The determination will depend on facts and circumstances.

The IRS’ FAQs provide that the use of employer-provided WLR services qualifies as a de minimis fringe benefit that is excluded from an employee’s gross income and is not subject to employment taxes (such as FICA, FUTA and income tax withholding).