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Achievement Awards Still Deductible—Within Limits—Under Tax Act

Despite constraints, employers can find ways to recognize workers and boost retention

A man and woman shaking hands in front of an audience.

Despite the restrictions on employee achievement awards that were sustained by the Tax Cuts and Jobs Act enacted last December, employers can still give these awards, which can play a vital role in attracting talent, fostering engagement and promoting retention.

Tangible Property Gifts

The tax act clarified that tangible personal property awards for employee achievement are still deductible by an employer (or would be deductible but for the fact that the employer is a tax-exempt organization) and can be excluded from an employee's taxable gross income. IRS regulations in place before the tax law restrict these tax advantages to length-of-service awards or safety awards given during "meaningful presentations." The award should "not create a significant likelihood of the payment of disguised compensation."

In addition, the IRS requires that:

  • The award is a tangible item like a plaque, watch, ring or pen, or similar items, including those an employee selects from a catalog.
  • The maximum excludable annual award amount per employee is $1,600, or $400 for awards that are not "qualified plan awards."
  • A qualified plan award is an achievement award that is given as part of an established, written awards program and doesn't favor highly compensated employees.
  • Length-of-service awards can't be received during the employee's first five years of employment or more often than every five years.
  • Safety awards can't be given to more than 10 percent of eligible employees during the same year.

[SHRM members-only toolkit: Managing Employee Recognition Programs]

What's New?

The Tax Cuts and Jobs Act makes clear to any doubters that tangible personal property excludes:

  • Cash, cash equivalents or gift cards.
  • Vacations, meals, lodging, theater tickets, sports tickets, stocks, bonds or similar items.

Attorneys in the New York City and Washington, D.C., offices of law firm Morgan Lewis commented that the tax law "maintains, with only a minimal change, the current exclusion for employee achievement awards, essentially codifying the proposed regulations that have been applicable since 1987," namely, that the exclusion is limited to tangible personal property.

Mary Hevener and Jonathan Zimmerman, partners at the firm, and associate Anna Pomykala noted that the conference report by the joint congressional committee responsible for finalizing the bill stated that "no inference is intended that this is a change from present law and guidance."

Recognition Fosters Engagement

Effective ways of Using Recognition and Other Workplace Efforts to Engage Employees are highlighted in a new report from the Society for Human Resource Management (SHRM), based on a survey last fall of SHRM members. The report recommends that employers:

  • Leverage employee recognition to improve recruitment and retention. Most HR professionals agreed that recognition can help create a positive workplace culture and employee experience, and more than one-half said their program positively affects retention (68 percent) and recruitment (56 percent).
  • Align employee recognition programs with organizational values and talent strategy for greater impact. Employee recognition programs were rated higher by HR when they were aligned with organizational values and talent strategy.
  • Consider a variety of workplace programs to help with culture management. 60 percent of HR professionals said their organizations helped employees celebrate life events like having a child, birthdays or retirement. Organizations may provide a card, gift, budget, supplies, food or have a place to share photos/news.

HR professionals are more likely to rate their employee recognition program as "good" at organizations where any employee is able to nominate or recognize a peer, compared with those who had supervisors/managers, senior-level executives or HR give recognition, the survey found.

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