Many small businesses have been struggling with morale during the COVID-19 pandemic. You might be able to boost employees’ spirits with a relatively low-cost fringe benefit: an achievement awards program.

Under such an initiative, you can hand out awards at an appointed time, such as a year-end ceremony or holiday party. And, as long as you follow the rules, the awards will be tax-deductible for your company and tax-free for recipient employees. 

To qualify for favorable tax treatment, achievement awards must be tangible items, ranging from a gold watch or a smartphone to a plaque or a trophy, which are granted to employees for either length of service or promoting safety. The award can’t be disguised compensation or a payoff for closing a big deal — such as a gift certificate, a vacation, or tickets to a sporting event or concert. 

The awards program also must meet the following three requirements:

1. Any employee may receive a length-of-service award, but safety awards can’t go to managers, administrators, clerical workers or other professional employees. And an award doesn’t qualify if the company granted safety awards to more than 10% of eligible employees in the same year.
2. The recipient employee must have worked for the business for at least five years to receive a length of service award. Also, an employee is ineligible for this if he or she received a length-of-service award within the last five years. 
3. The award must be part of a “meaningful presentation.” That doesn’t mean you have to host a gala awards dinner at the Ritz, but the award should be marked by a ceremony befitting the occasion.
   

There are limits on the award’s value depending on whether the achievement awards program is nonqualified or qualified. If you establish a nonqualified program, the annual maximum award is $400. Conversely, the maximum for a qualified program is $1,600 (including nonqualified awards). Any excess above these amounts is nondeductible to the employer and taxable to the employee.



To establish a qualified program, and therefore benefit from the higher limit, you must meet two additional requirements. First, awards must be granted under a written plan that doesn’t discriminate in favor of highly compensated employees (for 2021, the compensation threshold is $130,000). Second, the average cost of all employee achievement awards granted during the year can’t exceed $400. However, awards of nominal value, such as coffee mugs or T-shirts with the company logo, can be excluded.

Could an achievement awards program make sense for your company? Perhaps, but consult your CPA to be sure.