Qualified plan rules & limits
The dollar limitations applicable for income exclusion (and deduction) purposes vary, depending on whether the awards are made under a qualified plan. An employee achievement award plan must be in writing to be considered a qualified plan. It may not separate in favor of highly compensated employees regarding the plan or its actual results.
The annual dollar limit awarded to an individual employee on a qualified plan is $1,600 per year. This limit applies to the combined value of length–of–service and safety awards, as well as the value of any employee achievement awards made under plans that are not qualified. Additionally, the average cost of an award may not exceed $400. The average cost is determined by dividing the total cost of all achievement awards for the year by the number of awards presented, disregarding any awards of nominal cost.
A lower limit of $400 per year applies to awards made under a not qualified program. For nonqualified plan awards, the income exclusion and deduction limit are $400 per employee per year. The $1,600 and $400 deduction limits also apply in an employee achievement award made by a partnership. These limits apply to the partnership and each member.
To be excluded from income under the employee achievement award rules, a length-of-service award may not be granted for fewer than five years of service. Moreover, excludable awards may not be presented more than every five years. However, after the first five years, length-of-service awards given more often than at five-year intervals may qualify for exclusion under the Internal Revenue Code Section 132(e)(1) exclusion for de minimis fringe benefits.
Retirement gifts constitute length-of-service awards. They are subject to the same requirements for income exclusion as other employee achievement awards.
An award given to a worker for safety accomplishments is entitled to treatment as an employee achievement award if the following conditions are met:
- No more than 10% of eligible employees receive a safety award during the year, not counting awards that are excludable as de minimis fringe benefits, and
- Managers, administrators, clericals, and professional employees are ineligible for safety awards
Only full-time employees with a minimum of one year of service would be eligible for safety achievement awards. Additionally, if more than 10% of eligible employees receive safety awards within a year, only the first 10% would be entitled to the income exclusion. If all safety awards were presented simultaneously, thus making it difficult or impossible to determine who fell within the first 10 percent, no employee would be permitted to exclude the cost of the award from income. In such situations, the maximum deduction the employer could take would be the cost of the award multiplied by 10% of the eligible employees.