Internal Revenue Code § 119 allows employers to deduct 100% of the value of meals provided to employees when they are for the convenience of the employer, and they are furnished on the business premises of the employer. Meals provided for “the convenience of the employer” are also excludable from the employee’s taxable income. However, last month, the IRS announced that it plans to change that interpretation, which will have significant implications for both tax and wage and hour liability. The IRS announced as part of its Priorities Guidance Plan that it plans to issue new guidance regarding employer-provided meals, which we can assume is not a positive development for employers. The Wall Street Journal reported that IRS auditors have already started “flagging the issue and demanding back taxes from companies amounting to 30% of the meals’ fair market value.”
Any new restrictions on the deductibility of employer-provided meals could impact Silicon Valley employers who have long relied on free meals in employee cafeterias as well as employers such as hotels and restaurants that provide free meals from their facilities. However, another, potentially larger concern for employers could be wage and hour-related. If the IRS changes its guidance to include employer-provided meals in the definition of employee compensation, employers would also arguably need to include the value of meals in their calculations of non-exempt employees’ “regular rates.”
Indeed, even without any changes in the IRS definition, plaintiffs’ attorneys have already shifted their focus to the value of these fringe benefits. Recently, employees at Anheuser-Busch sued the company because, among other claims, it allegedly failed to include the value of “various forms of non-cash compensation, such as discounted and/or free beer” in calculations of those employees’ regular rates of pay.
For employers, offering fringe benefits like meals provide extra value to employees, both by providing competitive compensation and by improving job satisfaction. The impending changes by the IRS could hurt employers not only by increasing costs, but also by impacting employee morale. Keep an eye on new IRS guidance in coming months and be prepared to consider both the tax and wage and hour implications of any changes to the treatment of fringe benefits.