Airlines might not want to hear this, but at least one company that sends thousands of employees on business trips is encouraging them successfully to fly coach instead of business class. How? By paying them half the savings in airfare. The New York Times reported in a June 21, 2010, article that Energizer Battery Co., based in St. Louis, offers employees monetary incentives to fly in coach instead of business class.
The flagging economy might be a reason for some employers' novel approaches to cutting travel costs, but Energizer began its program well before the recession began. Air transportation and lodging are common working condition fringe benefits. Such new twists in these traditional benefits deserve a closer look, especially in light of their tax implications.
Incentives to Forgo Business Class
Doris Lee Middleton, HR and travel services manager at Energizer, told the Times that if an employee who would otherwise be eligible to fly business class chooses coach instead, the company will split the savings in airfare up to $2,000 for all parts of the globe except Asia. For flights to the Asia-Pacific region, she said, the reward cap is $3,000.
Middleton confirmed to Thompson Publishing Group editors that the company has reaped "substantial" savings on travel expenses from the incentive, which it calls the "rebate" program. She said that it is popular with the employees who travel, which comprise about two-thirds of Energizer's 5,000 to 6,000 employees. "During 2009," she said, "nearly 60 percent of Energizer's international trips were booked in economy class, resulting in rebates to its colleagues and savings to the company."
One could safely assume—given that company travel policy generally allows for business class bookings on overseas flights—that virtually none of those seats would have been booked in economy class absent the rebate program, so Middleton's statistic reflects a rather high success rate. She added that the numbers are going up, too.
Feedback, Middleton said, "has all been favorable from the colleagues. It's really been a huge win."
Travel and entertainment expenses, including airfare, generally are deductible by employers subject to the limitations primarily contained in Internal Revenue Code section 274.
The tax code bars favorable treatment for travel expenses that are "lavish or extravagant," although it refers to meals and entertainment expenses, not transportation.
Employers generally limit reimbursement for premium transportation accommodations through their corporate travel policies. A common limitation, like the one General Motors disclosed to the public amid the flap about perquisites and executive compensation when the company received a financial rescue from the federal government, is to allow employees to fly in business class only on international flights of eight hours or longer and otherwise require that they fly in coach.
Middleton said Energizer's policy is region-specific. For example, employees flying between regions (say, North America and Europe, or North America and Latin America) are eligible to fly in business class at the company's expense.
While legitimate business travel expenses generally are excludable from the income of employees as working condition fringes, a cash reward for not flying in business class—when an employee otherwise would be entitled to do so under company policy—is not. Nor is it deductible to the employer as a travel expense. Cash and cash-equivalent awards (think gift cards) are taxable income and should be reported as taxable earnings on an employee's W-2 form.
Frequent Flier Miles
Middleton said Energizer's rebate program does not preclude employees from using their frequent flier miles—including those accumulated on past trips for the company—to get upgrades from the airlines. Thus, employees could reap the benefits of the rebate program, collecting half the difference between a coach and business class ticket, and if they're fortunate they still could wind up in business class. Of course, there is never a guarantee that an upgrade will be available. Even "confirmed" upgrades—those that are guaranteed on purchase—come at a steeper price in terms of miles.
Employees who earn "free" flights or upgrades as a result of business travel paid for by their employers are not taxed on the benefits when they are used for business travel. The IRS will not tax employees on personal use of frequent flier miles they earn on business trips.
Daniel J. Macy is the editor of Thompson Publishing Group's Employer's Guide to Fringe Benefit Rules, where this article was originally published.
Contributed by Thompson Publishing Group Inc. Republished with permission. © 2010 Thompson Publishing Group. All Rights Reserved. For more analysis, see Employer's Guide to Fringe Benefit Rules.
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