Workers are returning to the office in greater numbers, and many may soon find that certain employer-provided benefits that go along with that commute are worth a lot less, or even disappear entirely.
House Republicans recently floated a list of potential measures to help compensate for lost revenue from trillions of dollars in tax cuts championed by President Donald Trump. Taxing employees for fringe benefits such as employer-provided transportation, free food and on-site gyms is up for discussion.
Currently, employer-provided transportation benefits, like transit passes and parking, up to $315 per month, are excluded from taxable income. Employer-provided meals and lodging are also generally excluded from taxable income if they are for the employer’s convenience, and employer-provided on-site gym facilities for employees and their families are excluded from taxable income. Taxing employees for these perks could save around $157 billion over 10 years, according to Republican estimates.Â
To be sure, these proposals are still in the early stages and there’s a lot of jockeying by lawmakers to accommodate Trump’s $4 trillion extension of the 2017 tax cuts as well as make good on campaign promises for tax breaks on tips, overtime pay and Social Security benefits — in all, the tax cut promises made on the campaign trail by Trump could take the total to near $10 trillion. The situation is especially tenuous given the hefty $36 trillion federal deficit.
“I don’t think it’s going to be popular with employees, which potentially makes it hard to enact,” said Dustin Stamper, tax legislative affairs practice leader at Grant Thornton’s Washington National Tax Office. “There are some real political downsides to some of these [proposals].”
Taxing employees for fringe benefits such as free access to on-site facilities like gyms and certain employer-provided meals and lodging has been debated before, but it “has never made it very far,” said Thomas Godwin, a professor at Cornell University’s SC Johnson College of Business. “It’s something that, for Congress, your constituents really feel, even if it’s just a little bit,” he said.
This time around, however, it’s anybody’s guess how the situation will play out, given the magnitude of revenue needed to balance the cost of tax cuts.
Here’s what workers might expect if these provisions are enacted:
Employees would likely have to pay the tax
If enacted, workers would likely have to pay income tax on the fair market value of the fringe benefits they are getting from their employer, said Jeff Martin, tax principal at Grant Thornton’s Washington National Tax Office. This would make these benefits less valuable to employees when taxes are factored in.
Companies would wind up with many “potentially angry employees if they have to pay taxes on pretend income on the couple of StairMasters in the basement of their building,” Stamper said.
Employers would face hard decisions about covering costs
Some companies might decide to cover the additional tax burden for employees in part or in full, but this could be an expensive undertaking, Godwin said.
Some companies might stop offering certain or all affected fringe benefits altogether. “Administering this would be very difficult if they were to go forward with it,” Martin said. Dropping benefits that workers have grown accustomed to, however, can cause other problems for employers.
Worker morale and productivity could take a hit
Messing around with benefits employees have enjoyed for many years can be a recipe for disaster when it comes to morale and worker productivity. “If you start charging employees for parking when they’ve had free parking forever, that’s going to be a lot of unhappy employees,” Martin said. This could be especially impactful in urban areas where parking isn’t typically free. “If all of a sudden you’re being charged $250 a month for parking, that’s a huge difference,” he added.
These issues are especially tricky given that many companies are pushing workers to come into the office more often, Godwin said. Although many companies continue to operate on a hybrid basis, there’s a growing expectation that workers will be in the office for more days. Some companies, including Amazon, Goldman Sachs and JPMorgan Chase, are requiring workers to return to the office five days a week.
“The RTO culture is starting to percolate and this is going to make it that much harder for employees to want to come back to the office,” Godwin said.
Companies may pivot to other types of perks that aren’t taxable
In addition to the potential impact on RTO initiatives, companies would have to consider the utilization of the benefits in question, costs, administrative burdens and the extent to which employees value those benefits, said John Jurik, national practice leader of retirement plan consulting at Gallagher, a provider of insurance, risk management and consulting services.
Some companies might decide to drop certain benefits and pivot to other types of offerings that might make a more meaningful impact on an employee’s financial well-being such as financial education, coaching and planning, Jurik said.Â
Competition could be a factor
Employer approaches may differ based on employee demand, location, demographics and other factors. “They have to evaluate their population and what’s important to them,” Jurik said.Â
Competition for talent will also factor in, said Norman Richter, adjunct lecturer at Babson College, who teaches classes on tax policy. Companies may continue to offer the perks, either at the employee’s expense or on their own dime, depending on how their competitors approach these issues, he said.Â
Some unpopular tax measures will have to get done
To pay for tax cuts, lawmakers have to find ways to raise “big dollars,” said Chester Spatt, professor of finance at Carnegie Mellon University’s Tepper School of Business. He’s doubtful Congress will decide to tax employees’ fringe benefits because the expected savings is not that big compared to other potential options that are easier to implement. “There’s a reason they haven’t been taxed before,” he said.
Still, the money to fund expensive tax cuts has to come from somewhere. “You have to find ways to offset that if you’re going to keep all your Republican members of Congress on board,” Richter said. Tariffs may not deliver the necessary savings, so other options, even unpopular ones, may remain on the table, he added. “They may be forced to be more aggressive than politically comfortable in order to keep all the votes together that they need. Unpopular stuff is going to have to get done.”
