Is Your Incentive Program a Ticking Time Bomb?

By Bill Sims

USA Waste had a rude awakening when OSHA levied a $65,000 fine against them, charging their safety incentive program caused injury hiding. Large cash awards tied to working periods of time without injury caused employees to hide their injuries. OSHA cited USA Waste Management of Ohio under 1904.2(a) of the record keeping standard (the OSHA 200 Log reporting requirement). USA Waste Management has a bonus pool that rewards employees with excellent safety records. The pool also includes good attendance and good work practices. The citation suggests Waste Management coerced employees to go against medical authorities in order to falsify records.

A life insurance company in South Carolina awarded its employees with gift $5 and $10 gift certificates to local department and discount stores without taxing them. The assumption was that they shouldn't be taxed, since they weren't being awarded cash. The Internal Revenue Service took a different view. Citing numerous laws and sections of the tax code, they argued that gift certificates are merely disguised compensation. The insurance company was forced to research and document every gift certificate awarded to every employee over a 4-year period since their incentive program began. When the smoke cleared, the original $65,000 worth of gift certificates cost this company well over $180,000 in taxes, penalties, interest, and legal fees to resolve the dispute.

These two stories make it clear: What you don't know CAN hurt you.

Is your incentive program a ticking time bomb? Thousands of companies are at risk from either an OSHA or IRS audit in these areas.

Here are the basic things you need to know to stay out of hot water...

Common Myths about Taxes and Employee Awards

Here is a list of the most common inaccurate beliefs that we encounter as we talk with managers at Fortune 500 companies....

Myth Number One...
"Gift Certificates don't have to be taxed since they are not cash, right?"

WRONG. The IRS tax code section says...

"For purposes of paragraphs (b)(2)(iii) and (iv) of this section, the term "tangible personal property" does not include cash or any gift certificate...

Similarly except as otherwise provided in paragraph (d) of this section, a cash equivalent fringe benefit (such as a fringe benefit provided to an employee through the use of a gift certificate or charge or credit card) is generally not excludable under 132(a) even if the same property or service acquired (if provided in kind) would be excludable."

This is why Toyota spends $1,000,000 on Sears gift certificates per year, and pays $920,000 in income taxes so the $1,000,000 will not have to be taxed to the employees...can you believe $920,000 lost to taxes?

Myth Number Two...
"As long as you keep it under $400 per person per year, the government lets you award whatever you want tax free, correct?"

WRONG. The tax code limits these "qualified award plans" as follows....

*Awards must be tangible gift items, no cash or gift certificates or gift cards are allowed.

*Awards for safety can ONLY be awarded to 10% of your employees a year, e.g. if you have 500 people, only 50 can win something. That doesn't do you much good if you're trying to reward everyone (a fundamental ingredient in good incentive programs).

Myth Number Three...
"Aren't logo'd gifts tax free?"

Actually, the tax code is quite clear here too. Logo'd gifts UNDER $4 US in value are tax-free. Anything OVER that is taxable---whether it has a logo or not is immaterial.

Carefully structuring an award program to navigate around the legal landmines allows you to develop a program that is tax-free AND legal. Using an incentive consultant will help ensure you make sure that you avoid tax trouble.

In the same vein, proper development of incentive program rules is a critical piece. Here again, using an incentive consultant will put you on the "fast track" and help you develop rules based on the best practices of other firms without reinventing the wheel.

Employee recognition is alive and well in the year 2000. We applaud managers who vigorously question the status quo and are not afraid to shake things up as they look for other ways to improve their safety and recognition process.

As someone once said, "Sacred Cows make the best hamburgers."

Bill Sims, Jr., is President of Bill Sims Award of Excellence, a company that specializes in developing tax free incentive programs without injury-hiding. The company is located in Irmo, S.C.