Service awards

Scope

Companies typically recognize employees who have been employed with the company for a designated number of years (e.g., 5, 10, 20, 30, or more years of service). The most common reason for implementing service award programs is to publicly demonstrate to employees how much they are appreciated — either through a gift, a certificate, or a service award dinner. Studies have shown that implementing an employee service award program can have a significant impact on employee loyalty, morale, and turnover, while at the same time promoting the company’s culture.

Regulatory citations

• None

Key definitions

• None

Summary of requirements

Awards options. There are companies with experts available to design a service award program for an employer if they choose that route. Their involvement can be very limited (e.g., supplying a catalog of items for the employer to choose from), to the more complex (e.g., online ordering available to employees for flexibility and paperless administration). These specialized companies can help an employer communicate the recognition program to employees as well.

Awards can range from the traditional merchandise (e.g., plaques, award pins, clocks, crystal, award rings) — to lifestyle gifts (e.g., DVD players, tools, fashion accessories, home and garden) — often imprinted with the company logo.

A small company may choose to administer the program in-house, keeping track of service milestones on a spreadsheet, and purchasing suitable gifts as needed. The amount of money budgeted for a customized program is all that limits the possibilities.

Considerations. The following factors should be considered when creating a service award program:

• Company culture;
• Budget;
• Number of service years to be recognized;
• Administration of program;
• Method of recognition (e.g., awards, gifts, dinner, etc.).

Taxability of awards. According to the Internal Revenue Service (IRS), in order for a length-of-service award to be excludable from wages, special requirements and dollar limitations must be met. A qualifying award:

• Must be a given for length-of-service;
• Cannot be a disguised wage;
• Must be awarded as part of a meaningful presentation;
• Must be an item of tangible personal property (cannot be cash, cash equivalent, vacations, meals, lodging, theater or sports tickets, stocks, bonds.); and
• Must meet other special requirements and limitations, discussed below. (Reg. §1.274-8(c))

An award will not qualify as a length-of-service award if either of the following applies:

1. The employee received the award during his or her first 5 years of employment.
2. The employee received another length-of-service award (other than one of very small value) during the same year or in any of the prior 4 years.

Note: A traditional retirement award is an exception to the 5-year rule. (Reg. §1.274-8(d)(2))

The maximum amount of excludable awards to a single employee during a calendar year is limited to:

• $400 for awards made under a nonqualified plan, or
• $1600 in total for awards made under both qualified and nonqualified plans.

Generally, if an award is taxable to an employee, it is valued at the fair market value (FMV). The taxable amount of an award to an employee depends on whether the award is made under a qualified or nonqualified plan, whether the cost of the award to the employer exceeds the dollar limitations, and the FMV of the award.

Awards for length of service that do not meet the specific requirements and limitations mentioned above are taxable wages to employees.