SERVICES TO EMPLOYEES

No-Additional-Cost Services

Employers in many service industries provide their employees with free or discounted services. Examples include telephone service to employees of phone companies and airline tickets to employees of airlines. As long as the following rules are satisfied, the cost of these services is not includable in an employee's gross income for tax purposes:

• The services cannot be provided on a basis that discriminates in favor of highly compensated employees.

• The employer must not incur any significant additional cost or lost revenue in providing the services. For example, giving a standby ticket to an airline employee if there were unsold seats on a flight would satisfy this requirement, but giving an airline ticket to an employee when potential paying customers were denied seats would not.

• The services must be those that are provided in the employer's line of business in which the employee actually works. Therefore, if a business owns both an airline and a chain of hotels, an employee of the hotels can be given a room as a tax-free benefit but not an airline ticket. However, unrelated employers in the same line of business, such as airlines, may enter into reciprocal arrangements under which employees of any party to the arrangement may obtain services from the other parties.

Employee Discounts

Just as no-additional-cost services are an important employee benefit in certain service industries, discounts on the merchandise sold by manufacturers and retailers are an important benefit to employees in these industries. Discounts may also be provided on services sold by other types of businesses; for example, there may be a reduction in the commission charged by a brokerage house or insurance company.

Rules similar to those discussed for no-additional-cost services apply to discounts. Employees have no taxable income as long as the discounts are made available on a nondiscriminatory basis and are provided on goods or services ordinarily sold to nonemployees in the employer's line of business in which the employee works. However, there are some additional rules. Discounts received on real estate or on personal property normally held as an investment (for example, gold coins or securities) are not received tax free. Furthermore, there is a limit on the size of a discount that can be received tax free. For merchandise, the discount cannot exceed the gross profit percentage of the price at which the merchandise is offered for sale to customers. For example, if an employer had a gross profit margin of 40 percent on a particular product and an employee purchased the merchandise at a 50 percent discount, the extra 10 percent would be taxable income to the employee. In the case of services, including insurance policies, the tax-free discount cannot exceed 20 percent of the price at which the service is offered to nonemployee customers in the normal course of the employer's business. The type of service that cannot be received tax free involves loans that financial institutions give to employees at a discounted rate of interest.

Dependent-Care Assistance

Changes in society and in the work force often create changing needs for both employers and employees. When the work force was largely male and most families had two parents, caring for children and older parents frequently was the female spouse's responsibility. As the number of families headed by two wage earners or by single parents has increased, so has the need for dependent care. This change in demographics has also created problems for employers. Caring for family members can lead to increased absenteeism, tardiness, turnover, and time taken as family leave. Workplace morale can also suffer if the employer is viewed as insensitive to employee responsibilities.

The nature of employee benefit plans has changed as employers have increasingly responded to the need for dependent care. Child-care benefits are increasingly common, and a small but growing number of firms also make eldercare benefits available. Firms that have dependent-care assistance plans generally feel that such plans alleviate the problems cited in the previous paragraph. Furthermore, the availability of such benefits at a firm often makes it easier for the firm to attract new employees.

In addition to a formal dependent-care assistance plan, there are other ways in which employers can respond to employee needs to care for family members. These include flexible work schedules, part-time employment, job sharing, salary reduction options under cafeteria plans, and family-leave policies that are more liberal than those required by federal and state laws.

Child-Care Plans

Several alternative types of benefits can be provided under child-care plans. A few employers maintain on-site day care centers, and the number is growing. On the other hand, some employers have closed down on-site centers and provide alternative forms of assistance because of the following problems encountered with on-site centers:

• Difficulty in obtaining qualified child-care providers.

• Difficulty in obtaining liability insurance.

• Difficulty, time, and expense associated with obtaining necessary zoning variances and child-care licenses.

• Distractions caused by parents and children being in close proximity to each other.

• Underutilization. While this type of facility would be expected to be popular, many employees prefer other alternatives. A site close to home is often more appealing than a location that may involve a long commute for parent and child. An on-site location may be less convenient if both parents share in child-care activities. Employees may also prefer a different type of child-care arrangement.

Some employers provide benefits by supporting a limited number of off-site child-care centers. The employer may make arrangements to reserve spaces for employees' children at these centers and/or arrange for corporate discounts for employees.

Probably the most common approach is to provide reimbursements to employees who make their own arrangements for child care, either at child-care centers or in their own home or the home of a care provider. Reimbursement is sometimes tied to pay levels, with lower-paid workers receiving higher reimbursements.

When employees are required to make their own arrangements under a child-care plan, employers may provide information and referral services—often through a contract with community or private referral services. In addition to providing assistance in locating a quality child-care center, these services can provide help in finding drop-in facilities when the usual child-care arrangement has fallen through or when school is closed for a day. They may also maintain a list of persons who will care for temporarily ill children at home or for children after school hours. Such services may also be a source of information about facilities that can be used during summer and other school vacations.

Eldercare Benefits

While benefits to care for elderly dependents are much less prevalent than benefits for child care, the need for these benefits continues to grow as parents live longer. In addition, because many couples have delayed having children until later in life, they have become part of what is often referred to as the "sandwich generation"; they must care for elderly parents at the same time that they are raising their own children.

Although eldercare benefits may take a variety of forms, frequently they are much like those provided under child-care plans. Within limits, the employer may pay for costs associated with home care for elderly dependents or care at day care facilities for the elderly. One interesting development in this area is the establishment of centers that care for both children and the elderly, with the elderly assisting in such activities as the feeding and teaching of the children. Studies have shown that the two groups are very compatible. Children, particularly those without grandparents nearby, benefit from the attention and knowledge they receive from the elderly, while the elderly achieve a feeling of usefulness.

Other employer activities with respect to eldercare may include the following:

• Providing seminars on issues affecting the elderly

• Providing information on available eldercare services and how to use these services

• Sponsoring support groups where employees can share experiences and learn from others

• Expanding employee-assistance plans to include eldercare

• Making long-term care insurance available to employees and including parents as an eligible group for coverage

Taxation of Benefits

Under the Internal Revenue Code, dependent care is a tax-free benefit to employees up to statutory limits as long as certain requirements are met. The amount of benefits that can be received tax free is limited to $5,000 for single parents and married persons who file jointly and to $2,500 for married persons who file separately. The benefits must be for care to a qualifying individual—a child under age 13 for whom the employee is allowed a dependency deduction on his or her income tax return or a taxpayer's spouse or other dependent who is mentally or physically incapable of caring for himself or herself. Although benefits must generally be for dependent care only, educational expenses at the kindergarten or preschool level can also be paid.

Dependent-care benefits are subject to a series of rules. If the rules are not met, highly compensated employees are taxed on the amount of benefits received. However, the benefits for other employees still retain their tax-free status. The following are the rules that must be met:

• Eligibility, contributions, and benefits under the plan cannot discriminate in favor of highly compensated employees or their dependents.

• No more than 25 percent of the benefits may be provided to the class composed of persons who own more than a 5 percent interest in the firm.

• Reasonable notification of the availability of benefits and the terms of the plan must be provided to eligible employees.

• By January 31 of the following year, each employee must receive an annual statement that indicates the amounts paid or expenses incurred by the employer to provide benefits.

• The average benefit provided to non-highly compensated employees must be at least 55 percent of the average benefit provided to highly compensated employees.

In meeting the 55-percent-of-benefit test, an employer can exclude employees earning under $25,000 if benefits are provided through a salary reduction agreement. For both the 55-percent-of-benefit test and the nondiscrimination rule for eligibility, an employer can exclude employees who (1) are under age 21, (2) have not completed one year of service, or (3) are covered under a collective-bargaining unit that has bargained for dependent-care benefits.

Even if an employer does not provide assistance for dependent care, other tax-saving options may be available to employees. Under the Code, a tax credit (subject to limits) is available for child-care expenses. In addition, the employer may have the opportunity to make before-tax contributions to a cafeteria plan that includes dependent care as an option.

Adoption Assistance

While many types of benefits have long been available to natural parents because of the birth of a child, comparable benefits historically have not been available to adoptive parents. Over the last few years, this disparity has begun to change. Even before the passage of family-leave legislation, many employers had established comparable leave policies for natural parents and adoptive parents; for example, if an employer allowed maternity leave (either paid or unpaid) for a new mother, no distinction was made between natural mothers and adoptive mothers. Leave may also be available for time involved in qualifying for the adoption and taking possession of the child.

A smaller number of employers provide reimbursement for some or all of the following expenses associated with adoption:

• Legal fees

• Adoption agencies' fees

• The birth mother's medical expenses

• The adoptive parents' medical expenses for physical examinations required by the adoption source

• The child's uninsured medical expenses

• Foster care charges for the child prior to placement with the adoptive family

• Transportation expenses associated with taking custody of the child.

• Extra expenses associated with foreign adoptions.

Reimbursements are generally available only to employees who have satisfied some minimum service requirement, most commonly one year. Amounts typically range from $1,000 to $3,000 per adoption, but higher amounts may be paid for adoptions involving handicapped children or children from a foreign country. There may also be a lifetime cap, such as $6,000.

Prior to 1997, adoption assistance for costs other than medical expenses generally represented taxable income to an employee. Beginning in 1997, employer payments of up to $5,000 per child for qualified adoption expenses can be excluded from an employee's gross income if an employer has an adoption-assistance program that satisfies IRS requirements. The amount is increased to $6,000 for certain children with special needs.

The adoption-assistance program must be a separate written plan, and employees must have reasonable notification of the availability of the program and its benefits. The program cannot discriminate in favor of highly compensated employees or their dependents, and no more than 5 percent of the benefits under the plan can be paid to shareholders or owners (or their dependents) who are more-than-5-percent owners of the firm.

Qualified adoption expenses include reasonable and necessary adoption fees, court costs, attorney's fees, travel expenses, and other expenses directly related to the legal adoption of an eligible child, defined as a child who is under age 18 or who is incapable of caring for himself or herself. Expenses incurred in adopting a spouse's child or carrying out a surrogate parenting arrangement are not qualified adoption expenses, nor are expenses that are reimbursed from other sources. In addition, expenses to adopt a foreign child are not qualified adoption expenses unless the adoption becomes final.

The $5,000 (or $6,000) exclusion from gross income is available to employees with an adjusted gross income of $75,000 or less, and married couples must file joint returns to obtain the exclusion. For employees with higher adjusted gross incomes, the exclusion is gradually phased out until it is eliminated when adjusted gross income reaches $115,000.

There is also a similar tax credit available to all taxpayers for adoption expenses, but the credit is not available for expenses that were paid by employer-provided adoption assistance, regardless of whether the employer paid the expenses through an adoption-assistance program. However, the credit can be used for expenses not reimbursed by an employer's plan.

Wellness Programs

Traditional benefit programs have been designed to provide benefits (1) to employees for their medical expenses and disabilities or (2) to their dependents if the employee should die prematurely. In the last few years, there has been an increasing trend among employers, particularly large corporations, to initiate programs that are designed to promote the well-being of employees (and possibly their dependents). Some of these programs have been aimed at the discovery and treatment of medical conditions before they become severe and result in large medical expenses, disabilities, or death. Other programs have focused on changing employees' lifestyles to eliminate the possible causes of future medical problems. A few programs, such as those that make flu shots available to employees, actually provide medical treatment. Recent studies have shown that the costs of establishing and maintaining many of these programs are more than offset by the lower amounts paid for medical expense, disability, and death benefits. In addition, if long-term disabilities and premature deaths can be eliminated, the expenses associated with training new employees can be minimized. Many firms also feel that these programs increase productivity by improving the employees' sense of well-being, their work attitudes and their family relationships.

Medical Screening Programs

The use of a medical screening program to discover existing medical conditions is not new, but it has often covered the costs (frequently up to some dollar limit) of routine physical examinations for only selected groups of management employees. Although this benefit may be highly valued by these employees and its use as an executive benefit has been increasing somewhat, there are doubts—even among the medical profession—as to its cost-effectiveness, particularly when it is provided on an annual basis. Certain medical conditions will undoubtedly be discovered during a complete physical, but most of them could also be diagnosed by less frequent and less costly forms of medical examinations.

In recent years, there has been a significant increase in the number of employers that sponsor periodic medical screening programs that detect specific medical problems, such as hypertension (high blood pressure), high cholesterol levels, breast cancer, prostate cancer, and colorectal cancer. Generally, such screenings are conducted at the employment site during regular working hours. Sometimes, a screening is conducted by a physician, but it is usually performed by lower-paid medical professionals. In addition, screenings can sometimes be obtained at little or no cost through such organizations as the American Red Cross, the American Heart Association, or the American Cancer Association.

Lifestyle Management Programs

Lifestyle management programs are primarily designed to encourage employees and often their dependents to modify their behavior so that they will lead healthier lives. Most of these programs strive to discover and eliminate conditions that increase the likelihood of cardiovascular problems (the source of a significant percentage of medical expenses and premature deaths). Some of these conditions (such as obesity and smoking) are obvious, but medical screening can also detect less obvious conditions like hypertension, high cholesterol levels, and the degree of an employee's physical fitness. The types of programs often instituted to promote cardiovascular health include the following:

• Smoking-cessation programs.

• Fitness programs. These may consist of formal exercise programs or only exercise facilities (such as swimming pools, exercise rooms, or jogging tracks). Some employee benefit consultants question whether facilities for competitive sports (such as racquetball courts) can be cost justified because their availability is limited and they are often a source of injuries.

• Weight-reduction programs.

• Nutrition programs. These are often established in conjunction with weight-reduction programs, but they can also teach methods of cholesterol reduction even if there is no weight problem.

• Stress-management programs.

These programs may be available to any employees who express an interest in them, or they may be limited to those employees who have been evaluated and found to be in a high-risk category for cardiovascular disease. This evaluation may consist of questionnaires regarding health history, blood pressure reading, blood chemistry analyses, and fitness tests. Generally, these evaluations and meetings to describe the programs and their value are conducted during regular working hours. However, the programs themselves are usually conducted during non-working hours, possibly at lunchtime or just after work.

Many wellness programs are designed to include employees, their spouses, and, sometimes, other family members. In many instances, it will not be possible to change an employee's lifestyle unless the lifestyle of his or her entire family also changes. For example, it is not very probable that an employee will stop smoking if his or her spouse also smokes and is making no attempt to stop. Similarly, a weight-reduction or nutrition program will probably be more effective if all family members alter their eating habits.

Programs designed to eliminate alcohol or drug abuse are another example of lifestyle management. Participation may be voluntary, or it can be mandatory for employees who are known to have alcohol or drug problems and who want to keep their jobs. When these programs have been successful, many employers have found a decrease in employee absenteeism.

Some employers have also instituted programs that seek to minimize back problems—the reason for a large percentage of employee absenteeism and disability claims. These programs are generally intended for employees who have a history of back trouble, and they consist of exercises as well as education in how to modify or avoid activities that can aggravate existing back conditions.

More recently, many employers have become concerned with the spread of AIDS and its effect on the cost of benefit plans. As a result, they have instituted educational programs aimed at encouraging employees to avoid activities that may result in the transmission of AIDS.

The employer may either conduct these wellness activities on the premises or use the resources of other organizations. For example, overweight employees might be sent to Weight Watchers, employees with alcohol problems might be encouraged to attend Alcoholics Anonymous, and employees with back problems might be enrolled in programs at a local YMCA.

Employers in increasing numbers are subscribing to wellness newsletters and are distributing them to employees. To encourage wellness for the entire family, these newsletters are often mailed to employees' homes.

Taxation of Benefits

Because medical screening programs are treated as medical benefits for tax purposes, employees have no taxable income as a result of participating in these programs. Unless the cost of providing lifestyle management programs is de minimis, participation will probably result in taxation to employees. The costs of programs that promote general health, such as programs for smoking cessation or weight control, are not considered medical expenses. While the cost of providing these programs to employees is deductible by the employer, an employee will incur taxable income unless the purpose of the program is to alleviate a specific medical problem. There is one exception to this general rule: Employees incur no taxable income as a result of being provided with or using athletic facilities that are located on the employer's premises.

Employee-Assistance Programs

As the trend toward fostering wellness in the workplace continues, an increasing number of employers are establishing employee-assistance programs. These programs are designed to help employees with certain personal problems through a plan that provides the following:

• Treatment for alcohol or drug abuse

• Counseling for mental problems and stress

• Counseling for family and marital problems

• Financial, legal, and tax advice

• Referrals for child care or eldercare

• Crisis intervention

Numerous studies have shown that proper treatment of these problems is very cost-effective and leads to a reduction in hospital costs, disability claims, the number of sick days, and absenteeism. It is also argued that employee morale and productivity are increased as a result of the concern shown for employees' personal problems.

Traditionally, employee-assistance programs have used job performance as the basis for employer concern. Essentially, an employee was told that his or her work was substandard and asked if a problem existed that he or she would like to discuss with someone. If the employee said yes, referral was made to an appropriate counselor or agency. No attempt was made by the employee's supervisor to diagnose the specific problem. Newer employee-assistance programs go beyond this approach by allowing employees who have problems to go directly to the program and seek help. Dependents can usually use the employee-assistance program and can often seek help without the employee's knowledge.

Another recent trend in employee-assistance programs is to coordinate them more closely with the employer's medical expense plan. For example, several employee-assistance programs act as the gatekeeper for mental health and substance abuse services. An employee must go through the employee-assistance program before benefits can be received under his or her medical expense coverage. The objective of this approach is to establish a course of treatment that will have maximum effectiveness for the costs incurred.

Access to an employee-assistance program is through a counselor; this counselor may be a company employee, but most often he or she is employed by a professional organization that specializes in providing such programs. Information disclosed to the counselor by the employee is kept confidential. Many problems can be solved by discussion between the counselor and the employee, and most plans have 24-hour counseling available, through either a telephone hotline or on-duty personnel. If the counselor cannot solve an employee's problem, it is the counselor's responsibility to make a preliminary determination about the type of professional help that the employee should receive. In many cases, this treatment can be provided under existing medical expense or legal expense plans or through community agencies. The costs of other types of treatment are usually paid totally or in part by the employer.

As long as the treatment is for the purpose of alleviating medical conditions, including mental illness, an employee has no taxable income. If the treatment is for a nonmedical condition, the employee will have taxable income as the result of employer payments.

Financial Planning Programs for Executives

Employers are increasingly providing financial planning as a benefit to employees. Although, traditionally, this benefit was limited to a small number of top executives, many firms are now expanding their programs to include middle management employees in the $50,000 to $100,000 annual salary range. In addition, financial planning education and advice are now offered to many employees as part of a broader preretirement-counseling program. Any program in overall financial planning must take into consideration the benefits that are provided or that are potentially available under group insurance plans, under social insurance programs, and through the individual efforts of employees.

The concept of providing financial planning for top executives has been widely practiced for many years, particularly in large corporations. Businesses have deemed this financial planning benefit as necessary for such executives (who have limited time for their own financial affairs), so that they can be free to devote their full talents to important business decisions. A company may also find it easier to attract and retain executives who look on the financial planning program as a way to make existing compensation more valuable (for example, by providing a larger spendable income through tax planning or a greater accumulation of wealth through investment planning).

Although group meetings are sometimes used (for example, to explain certain types of investments or changes in the tax laws), most financial planning programs provide for individual counseling of employees to suit their own particular circumstances and needs.

Types of Planning

Financial planning is composed of many separate but interrelated activities:

• Compensation planning, including the explanation of employee benefits and an analysis of any available compensation options

• Preparation of tax returns

• Estate planning, including the preparation of wills and planning to both minimize estate taxes and maintain proper estate liquidity

• Investment planning, including both investment advice and investment management

• Insurance planning, including information on how to meet life insurance, medical expense, disability, property, and liability needs

A financial planning program may be designed to provide either selected services from the list above or a comprehensive array of services. Comprehensive financial planning can be thought of as a series of interrelated and continuing activities that begin with the collection and analysis of personal and financial information, including the risk attitudes of an employee. This information is used (1) to establish the priorities and time horizons for attaining personal objectives and (2) to develop the financial plan that will meet these objectives. Once the plan is formulated, the next critical step is the actual implementation of the plan. A proper financial planning program should also include a process for measuring the performance of any plan so that, if unacceptable, either the plan can be changed or the employee's objectives revised.

Sources of Financial Planning

A few firms provide financial planning services using the organization's own employees. Most firms purchase the services either from outside specialists (such as lawyers, accountants, insurance agents, or stockbrokers) or from companies or individuals that do comprehensive financial planning.

Significant differences exist among financial planning firms. Some operate solely on a fee basis and give only advice and counseling, in which case it is the employee's responsibility to have his or her own attorney, insurance agent, or other financial professional implement any decisions. These financial planning firms often work closely with the other professionals in handling the employee's affairs. The cost of using a fee-only financial planning firm varies, depending upon what services it provides, but initial fees of $5,000 per employee and annual charges of $1,000 to $2,000 are not uncommon.

Other financial planning firms operate on a product-oriented basis and sell products (usually insurance or investments) in addition to other financial planning services. The fact that these firms receive commissions from the products they sell may eliminate or reduce any fees paid by the employer. Unfortunately, the insurance or investment advice of these firms may be slanted in favor of the products they sell. Therefore, employers must make sure that the advice of outside specialists will be unbiased and will be presented in a professional manner.

Taxation

Fees paid for financial planning are tax deductible by the employer as long as the total compensation paid to an employee is reasonable. The amount of any fees paid to a financial planning firm or other professional on behalf of an individual employee becomes taxable income to the employee. However, an employee may be able to take miscellaneous itemized deductions for certain services relating to tax matters and investment advice. Services that the employer provides to executives on an individual basis also result in taxable income.

Preretirement Counseling Programs

Businesses, aware of the pitfalls that await unprepared retired employees, have increasingly begun to offer preretirement counseling. It has been estimated that this benefit is offered by approximately 75 percent of companies with 20,000 or more employees. For companies with fewer than 1,000 employees, the figure is closer to 15 percent or 20 percent. Most of these companies have made this benefit available to all employees over a specific age (such as 50 or 55), but an increasing number of organizations allow employees of any age to participate. Retired employees may also be invited to take advantage of any program benefits that are of interest to them.

Preretirement counseling programs differ from financial planning programs for executives in that there is very little individual counseling. Rather, employees meet in groups to listen to media presentations and speakers, and they are given the opportunity to ask questions and discuss their concerns. This counseling may take place during non-working hours, but there is an increasing tendency to have it provided during working hours, often in a concentrated, one-day or two-day period. Most companies encourage spouses to participate. Often, one program is developed for all employees, although some organizations vary their programs for different classifications of employees (such as management employees and blue-collar workers).

When these programs are successful, the fears that many employees have about retirement are alleviated. They learn that, with proper planning, retirement can be not only financially comfortable but also a meaningful period in their lives.

Financial Planning

Some preretirement counseling programs devote at least half their time to the financial aspects of retirement. Because proper financial planning for retirement must begin many years prior to actual retirement, the amount of time devoted to this subject will be greatest in programs that encourage employees to begin participation at younger ages.

Some financial planning meetings help employees identify and determine what their financial needs will be after retirement and what resources will be available to meet those needs from the company's benefit plans and from Social Security. If retirement needs will not be met by these sources, employees are informed about how their individual efforts can supplement retirement income through savings or investments. They are also told about the specific advantages and risks associated with each method of saving or investment. In addition, issues such as the need for wills and estate planning may be discussed. Such preretirement financial planning is unlikely to provide investment advice on an individual basis or through an investment management service, as described in the previous section on financial planning programs for executives. However, some employers do give employees financial planning reports that are prepared through a computerized financial planning system. These reports, which may vary in length from 20 to 60 pages, are generated from the data on a questionnaire completed by the employee. They may provide advice on such topics as the additional amount of money that should be saved for retirement or compare the cost of working with the cost of retiring.

Many employers now make available computer software that employees can use to derive varying scenarios related to retirement, education funding, and the like by entering basic personal and financial data. The major advantage of these computer programs is that an employee can quickly evaluate alternative assumptions about factors such as retirement dates and savings rates. One potential drawback to the use of computer programs is the lack of employee understanding about the assumptions and reasoning that lie behind the input into the program and the output that results. Therefore, it is important that the introduction of such computer programs be accompanied by proper training in their purpose, use, and interpretation.

Other Aspects of Preretirement Counseling

Preretirement counseling also focuses on other aspects of retirement besides financial needs. The following are some of the questions that must be faced by most retired workers and that are often addressed in preretirement counseling programs:

• Living arrangements. What are the pros and cons of selling a house and moving into an apartment or condominium? Is relocation to the Sunbelt, away from family members and friends, advisable?

• Health. Can changes in lifestyle lead to healthier retirement years?

• Free time. How can the time that was previously devoted to work be used? What opportunities are available for volunteer work, part-time employment, or continuing education? What leisure activities or community activities can be adopted that will continue into retirement? (Studies have shown that alcoholism, divorce, and suicide tend to increase among the retired. Much of this increase has been attributed to the lack of activities to fill free time and to the problems encountered by husbands and wives, who are constantly together for the first time in their lives.)

Sources of Preretirement Counseling

An employer may establish and maintain its own program of preretirement counseling. However, many organizations (such as benefit-counseling firms and the American Association of Retired Persons) have developed packaged programs that are sold to other organizations. These programs typically consist of media presentations and information regarding the types of speakers that should be used in counseling sessions. Generally, these packaged programs are flexible enough to be used with almost any type of employee group. Most firms actually conduct preretirement counseling programs with a combination of their own employees and outside speakers or organizations. It is becoming common to see the use of an employer's own retirees in the counseling process.

Taxation

As long as no specific services are provided to employees on an individual basis, they do not have taxable income to report as a result of participating in preretirement counseling programs.

Transportation/Free Parking

Some employers have long provided transportation benefits to employees as a fringe benefit. These benefits have been in the form of various types of reimbursement for commuting expenses, the use of company-owned vehicles for vanpooling, and free parking. However, except for free parking, employees have usually had taxable income as a result of these benefits. To increase the use of public transportation and decrease the reliance on the use of private passenger automobiles, the Comprehensive National Energy Policy Act of 1992 changed the tax rules governing transportation benefits. As a result of the act, the Internal Revenue Code provides favorable taxation for transportation benefits that meet the definition of a qualified transportation fringe, which includes the following:

• Transportation in a commuter highway vehicle if such transportation is in connection with travel between the employee's residence and place of employment. The commuter vehicle must have a capacity of at least six adults other than the driver. In addition, at least 80 percent of the mileage use of the vehicle must reasonably be expected to be for transporting employees to and from work and must occur when at least one-half of the seating capacity of the vehicle is filled. Traditional vanpools, in which one employee usually has possession of an employer-provided vehicle to drive other employees to work, come under this definition as long as these criteria are satisfied.

• Transit passes. These include any pass, token, fare card, voucher, or similar item entitling a person to transportation as long as such transportation is on a mass-transit facility or in a commuter highway vehicle as previously described.

• Qualified parking. This includes parking provided on or near the business premises of the employer or near a location from which the employee commutes to work by using a mass-transit facility or a commuter highway vehicle. Qualified parking does not include any parking on or near a premises used by the employee for residential purposes.

The value of the benefit under a qualified transportation fringe is excluded from gross compensation up to the following amounts, which are subject to cost-of-living adjustments:

• $100 per month in the aggregate for any transit passes and transportation in a commuter highway vehicle.

• $175 per month for qualified parking.

Amounts in excess of the above and the value of employer transportation benefits that do not meet the definition of a qualified transportation fringe are fully taxable to employees.

Three additional points should be made about qualified transportation benefits. First, they can be provided on a discriminatory basis. Second, the employer can either provide the benefits directly or give a cash reimbursement to the employee, with one exception: Cash reimbursement for a transit pass is not acceptable if such a pass is available for direct distribution by the employer to the employee. Third, when an employer does not wish to assume the cost of the benefits, they can still be provided under an arrangement that allows an employee to enter into a compensation-reduction agreement up to the applicable limits. However, such a compensation-reduction agreement is irrevocable during its specified term even if the employee is no longer eligible for the transportation benefits.

Company Cars

Employers often provide employees with company cars (or other types of vehicles). In addition to using a vehicle for business purposes, an employee may also be allowed to use the car for commuting to and from work and for other personal purposes. However, an employee who drives a company car for personal use must include the value of this use in his or her taxable income.

The method for valuing the use of a car is determined by the employer, and several choices are available. The most common method for valuing the car is for the employer to report an annual cost that is a percentage of the car's annual lease value. This value is determined by a table prepared by the Internal Revenue Service and is based on a car's fair market value, unless an employer can clearly justify a lower value. Under this table, a car with a fair market value of $20,000 to $20,999 has an annual lease value of $5,600. This figure is then multiplied by the ratio of personal-use miles to total miles. For example, if 20 percent of the miles driven are personal miles, the employer must report $1,120 of income for the employee. Additional income must also be reported if the employer pays for gas.

A second alternative is for the employer to annually report the entire lease value of the car as taxable income. If the employer uses this alternative, the employee can claim an income tax deduction for any business use of the vehicle if the employee itemizes his or her deduction. However, the deduction is subject to the 2 percent floor requirement for miscellaneous deductions. This alternative is less favorable to the employee but administratively less burdensome to the employer.

A third alternative is to report a value that is based solely on the employee's use of the vehicle. Under IRS regulations, a flat mileage rate may be used for each personal mile driven. The mileage rate ($.325 in 2000) is adjusted annually. This alternative is available only if a car's fair market value does not exceed a specified value ($15,400 in 2000) and one of the following criteria is satisfied: (1) more than 50 percent of the car's use is for business, (2) the car is used each day in an employer-sponsored commuting pool, or (3) the car is driven at least 10,000 miles per year and is used primarily by employees.

The final alternative is available if the employer has a written policy that the employee must commute in the vehicle and cannot use the vehicle for other than minimal personal use. In this case, the value of the car's use is $1.50 times the number of one-way commutes or $3.00 times the number of round-trip commutes.

Subsidized Eating Facilities

Employers often provide fully or partially subsidized eating facilities for employees. While lunch is the most commonly served meal, breakfast and dinner may also be served. Such facilities offer a place for employees to discuss common issues and may minimize the chance that employees will take prolonged lunch periods at off-site restaurants. The popularity of these facilities tends to vary with the price of meals, the convenience of alternative places to eat, and the quality of the food served.

The subsidized value of meals served to employees is excluded from taxable income as long as the meals are (1) provided on the business premises and (2) furnished for the convenience of the employer. In general, meals are considered to be furnished for the employer's convenience if there are inadequate facilities in the area for employees to obtain meals within a reasonable period of time. If the requirements regarding the business premises and/or the convenience of the employer are not satisfied, the subsidized value of any meals consumed by employees is included in taxable income.

Employees are not allowed to deduct any portion of the cost they pay for individual meals. However, if an employee is required to have a fixed periodic charge for meals deducted from wages or salary (such as $15 per week), this amount is excluded from taxable income.