Fringe Benefit Overview: Employee Fringe Benefits (2026 IRS Guide)

This guide covers “Fringe Benefit Overview” within employee fringe benefits. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.

Adapted from Publication 15-B (2026), Employer’s Tax Guide to Fringe Benefits, published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.

Fringe Benefit Overview

A fringe benefit is a form of pay for the performance of services. For example, you provide an employee with a fringe benefit when you allow the employee to use a business vehicle to commute to and from work.

Performance of services.

A person who performs services for you doesn’t have to be your employee. A person may perform services for you as an independent contractor, partner, or director. Also, for fringe benefit purposes, treat a person who agrees not to perform services (such as under a covenant not to compete) as performing services.

Provider of benefit.

You’re the provider of a fringe benefit if it is provided for services performed for you. You’re considered the provider of a fringe benefit even if a third party, such as your client or customer, provides the benefit to your employee for services the employee performs for you. For example, if, in exchange for goods or services, your customer provides daycare services as a fringe benefit to your employees for services they provide for you as their employer, then you’re the provider of this fringe benefit even though the customer is actually providing the daycare.

Recipient of benefit.

The person who performs services for you is considered the recipient of a fringe benefit provided for those services. That person may be considered the recipient even if the benefit is provided to someone who didn’t perform services for you. For example, your employee may be the recipient of a fringe benefit you provide to a member of the employee’s family.

Are Fringe Benefits Taxable?

Any fringe benefit you provide is taxable and must be included in the recipient’s pay unless the law specifically excludes it. Section 2 discusses the exclusions that apply to certain fringe benefits. Any benefit not excluded under the rules discussed in section 2 is taxable.

Including taxable benefits in pay.

You must include in a recipient’s pay the amount by which the value of a fringe benefit is more than the sum of the following amounts.

• Any amount the law excludes from pay.

• Any amount the recipient paid for the benefit.

The rules used to determine the value of a fringe benefit are discussed in section 3.

If the recipient of a taxable fringe benefit is your employee, the benefit is generally subject to employment taxes and must be reported on Form W-2, Wage and Tax Statement. However, you can use special rules to withhold, deposit, and report the employment taxes. These rules are discussed in section 4.

If the recipient of a taxable fringe benefit isn’t your employee, the benefit isn’t subject to employment taxes. However, you may have to report the benefit on one of the following information returns.

For more information, see the instructions for the forms listed above.

Cafeteria Plans

A cafeteria plan, including an FSA, provides participants an opportunity to receive qualified benefits on a pre-tax basis. It is a written plan that allows your employees to choose between receiving cash or taxable benefits, instead of certain qualified benefits for which the law provides an exclusion from wages. If an employee chooses to receive a qualified benefit under the plan, the fact that the employee could have received cash or a taxable benefit instead won’t make the qualified benefit taxable.

Generally, a cafeteria plan doesn’t include any plan that offers a benefit that defers pay. However, a cafeteria plan can include a qualified 401(k) plan as a benefit. Also, certain life insurance plans maintained by educational institutions can be offered as a benefit even though they defer pay.

Qualified benefits.

A cafeteria plan can include the following benefits discussed in section 2.

• Accident and health benefits (but not Archer medical savings accounts (Archer MSAs) or long-term care insurance).

• Adoption assistance.

• Dependent care assistance.

• Group-term life insurance coverage (including costs that can’t be excluded from wages).

• HSAs. Distributions from an HSA may be used to pay eligible long-term care insurance premiums or to pay for qualified long-term care services.

Benefits not allowed.

A cafeteria plan can’t include the following benefits discussed in section 2.

• Archer MSAs. See Accident and Health Benefits in section 2.

• Athletic facilities.

• De minimis (minimal) benefits.

• Educational assistance.

• Employee discounts.

• Employer-provided cell phones.

• Lodging on your business premises.

• Meals.

• No-additional-cost services.

• Retirement planning services.

• Transportation (commuting) benefits.

• Tuition reduction.

• Working condition benefits.

It also can’t include scholarships or fellowships (discussed in Pub. 970).

Contribution limit on a health FSA.

For plan years beginning in 2026, a cafeteria plan may not allow an employee to request salary reduction contributions for a health FSA in excess of $3,400.

A cafeteria plan that doesn’t limit health FSA contributions to the dollar limit isn’t a cafeteria plan and all benefits offered under the plan are includible in the employee’s gross income.

For more information, see Notice 2012-40, 2012-26 I.R.B. 1046, available at IRS.gov/irb/2012-26_IRB#NOT-2012-40.

“Use-or-lose” rule for health FSAs.

Instead of a grace period, you may, at your option, amend your cafeteria plan to allow an employee’s unused contributions to carry over to the immediately following plan year. For more information, see Notice 2013-71, 2013-47 I.R.B. 532, available at IRS.gov/irb/2013-47_IRB#NOT-2013-71; and Notice 2020-33, 2020-22 I.R.B. 868, available at IRS.gov/irb/2020-22_IRB#NOT-2020-33.

Employee.

For these plans, treat the following individuals as employees.

• A current common-law employee. See section 2 in Pub. 15.

• A full-time life insurance agent who is a current statutory employee.

• A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control.

Exception for S corporation shareholders.

Don’t treat a 2% shareholder of an S corporation as an employee of the corporation for this purpose. A 2% shareholder for this purpose is someone who directly or indirectly owns (for any day during the tax year) more than 2% of the corporation’s stock or stock with more than 2% of the voting power. Treat a 2% shareholder as you would a partner in a partnership for fringe benefit purposes, but don’t treat the benefit as a reduction in distributions to the 2% shareholder. For more information, see Revenue Ruling 91-26, 1991-1 C.B. 184.

Plans that favor highly compensated employees.

If your plan favors highly compensated employees as to eligibility to participate, contributions, or benefits, you must include in their wages the value of taxable benefits they could have selected. A plan you maintain under a collective bargaining agreement doesn’t favor highly compensated employees.

A highly compensated employee for this purpose is any of the following employees.

1. An officer.

2. A shareholder who owns more than 5% of the voting power or value of all classes of the employer’s stock.

3. An employee who is highly compensated based on the facts and circumstances.

4. A spouse or dependent of a person described in (1), (2), or (3).

Plans that favor key employees.

If your plan favors key employees, you must include in their wages the value of taxable benefits they could have selected. A plan favors key employees if more than 25% of the total of the nontaxable benefits you provide for all employees under the plan go to key employees. However, a plan you maintain under a collective bargaining agreement doesn’t favor key employees.

A key employee during 2026 is generally an employee who is either of the following.

1. An officer having annual pay of more than $235,000.

2. An employee who for 2026 is either of the following.

   1. A 5% owner of your business.

   2. A 1% owner of your business whose annual pay is more than $150,000.

Simple Cafeteria Plans for Small Businesses

Eligible employers meeting contribution requirements and eligibility and participation requirements can establish a simple cafeteria plan. Simple cafeteria plans are treated as meeting the nondiscrimination requirements of a cafeteria plan and certain benefits under a cafeteria plan.

Eligible employer.

You’re an eligible employer if you employed an average of 100 or fewer employees during either of the 2 preceding years. If your business wasn’t in existence throughout the preceding year, you’re eligible if you reasonably expect to employ an average of 100 or fewer employees in the current year. If you establish a simple cafeteria plan in a year that you employ an average of 100 or fewer employees, you’re considered an eligible employer for any subsequent year until the year after you employ an average of 200 or more employees.

Eligibility and participation requirements.

These requirements are met if all employees who had at least 1,000 hours of service for the preceding plan year are eligible to participate and each employee eligible to participate in the plan may elect any benefit available under the plan. You may elect to exclude from the plan employees who:

1. Are under age 21 before the close of the plan year,

2. Have less than 1 year of service with you as of any day during the plan year,

3. Are covered under a collective bargaining agreement if there is evidence that the benefits covered under the cafeteria plan were the subject of good-faith bargaining, or

4. Are nonresident aliens working outside the United States whose income didn’t come from a U.S. source.

Contribution requirements.

You must make a contribution to provide qualified benefits on behalf of each qualified employee in an amount equal to:

1. A uniform percentage (not less than 2%) of the employee’s compensation for the plan year; or

2. An amount that is at least 6% of the employee’s compensation for the plan year or twice the amount of the salary reduction contributions of each qualified employee, whichever is less.

If the contribution requirements are met using option (2), the rate of contribution to any salary reduction contribution of a highly compensated or key employee can’t be greater than the rate of contribution to any other employee.

More information.

For more information about cafeteria plans, see section 125 of the Internal Revenue Code and its regulations.

Using the guidance

Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.

Sources and further reading

• Publication 15-B (2026), Employer’s Tax Guide to Fringe Benefits: Fringe Benefit Overview — Internal Revenue Service; 2026 edition.

The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.