No Such Thing as a Free Lunch

Posted by BAS - 04 April, 2019

header-picture

A recent Technical Advice Memorandum (TAM) from the IRS suggests that employer-provided meals may be excluded from an employee’s income in only very limited circumstances. This is a departure from the position most employers take when providing food for employees. The TAM addressed a question raised to the IRS of whether the value of meals provided to employees in the office headquarters were included in the employees’ income and subject to employment taxes. The TAM found that the answer to this question could be “yes” if the employer’s business policies and practices with respect to meals and snacks did not meet Internal Revenue Code requirements.

The Internal Revenue Code provides that gross income includes income from “whatever source derived,” including compensation for services. Employer-provided meals are considered compensation to an employee unless the meals are provided on an employer’s business premises for the convenience of the employer. Whether meals are for the convenience of the employer is determined by the facts and circumstances of each case and must be for a substantial noncompensatory business reason of the employer.

Meals are considered to be furnished for a substantial noncompensatory business reason if

  • The employee must be available for emergencies during the meal period
  • An employer’s business is such that the employee cannot be expected to eat elsewhere in a short lunch period
  • An employee could not otherwise secure proper meals within a reasonable meal period because there are insufficient eating facilities near the business.

The employer who was the subject of the TAM provided free meals and snacks to all employees, contractors and visitors without consideration of the employee’s job duties. The employer cited many reasons for the meals including shortened meal periods, ability to have confidential discussions over meals, unsafe conditions around the employer location and improvement of employee wellness. The IRS held that the employer had to clearly demonstrate that it had policies and procedures in place that supported these items and that a general goal of improving employee health was not a substantial noncompensatory reason for furnishing meals.

The IRS in its long memorandum addressed past case law and changes in society to support its position. It posited that the proliferation of meal delivery services and online food ordering should be taken into account when analyzing if it is necessary for employers to provide meals on-site.

The TAM is a departure from how some employers treat the provision of food to employees. Employers should make sure they have substantiation including written policies of the substantial noncompensatory business reason for providing meals. A TAM may only be relied on by the taxpayer seeking the opinion, but it does provide some insight into the IRS’ changing position. The Service did find that snacks could continue to get tax-free treatment as a de minimis fringe if the value of the snacks is so small that the portions would be difficult to quantify.

A copy of the TAM may be accessed by clicking here.

Topics: HR & Benefits Compliance


Recent Posts

Question of the Week - Allergy Medicine

read more

New Guidance on Tracking Technologies and HIPAA

read more

Enhancing Benefits Administration Efficiency: MyEnroll360's New Hire Waiting Period Management

read more