Is a Non-Qualified Plan Award Taxable?

Length-of-service awards can be tax-free even if non-qualified.

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In an uncharacteristic demonstration of generosity, the Internal Revenue Service doesn't take a cut of some awards that you receive at work. When your employer gives you a non-cash award that follows the IRS' limits, they're writing it off of their taxes. However, you don't have to report it on your taxes as income.

Qualified vs. Non-Qualified

Whether your award is qualified or non-qualified depends on whether or not your employer has a written plan. When an award is qualified, it means your employer gave it in accordance with a written plan that was generated to not discriminate in favor of highly compensated employees. To be qualified, your company's awards must have an average value of $400 or less. If your employer doesn't follow these rules when it gives you an award, the award is treated as being non-qualified.

Award Limits

If the award you receive is non-qualified, the value of it and all of the other non-qualified awards that your employer gives you over the course of the year has to be $400 or less. You can receive total awards per year of up to $1,600, but at least $1,200 of the $1,600 has to come from qualified awards. Any award over this threshold is taxable to you and your employer.

Award Rules

For a non-qualified plan award to be non-taxable, it must be an item, such as a gold watch or a plaque, instead of cash. Cash awards are always taxable. The IRS won't let you receive any award tax-free, though. Your award must be given for safety achievements or for your length of service, and it has to be presented to you at some sort of ceremony or event so that it can't be mistaken as a hidden payment of wages.

Fringe Benefits

Your non-qualified plan award or, for that matter, a qualified plan award, fits under the broader category of fringe benefits. Your employer gets to write off the cost of any fringe benefits, and you receive them tax-free. While employer-paid health insurance might be the best known fringe benefit, other non-taxable benefits include commuting assistance, free coffee and soft drinks, a free place to sleep at the office, and help paying for education.