News headlines reinforce what every business knows – that there are business reasons for providing security to C-suite executives. Those executives are seen as the face of the company and often bear the brunt of the public’s gripes against a company. Prominent business leaders, such as business executives, are often the targets of threats due to their affiliation with the company and are in need of protection as a result. Ensuring their safety is often front-of-mind for companies. Making sure the added security is not taxable is not always as front-of-mind. Many employers are not aware that if they provide an “overall security program” that meets certain requirements the security is not taxable to the employee and is deductible to the company.
Taxation of Fringe Benefits
The Internal Revenue Code (“Code”) generally provides that fringe benefits provided to employees by employers are taxable as wages, subject to employment taxes and reportable on Form W-2, unless a specific exception applies. Most companies are familiar with exceptions for business use of company vehicles, business travel, health insurance, and similar common workforce-wide benefits. What is less well known is that there is also an exclusion from wage income for an “overall security program” that meets certain requirements. If an “overall security program” meeting the relevant requirements is provided to an employee, the security, including items such as bulletproof glass and other protective design features on company vehicles, bodyguards, and specially-trained drivers, is not taxable to the employee and is deductible to the company. Notably, the deduction extends to commuting expenses given the exception for commuting provided for security concerns.
Specifically, under the working condition fringe benefit regulations, there is an exclusion for security provided to an employee so long as there is a business-oriented security concern and an “overall security program” is established. The security exclusion can also extend to the employee’s spouse and children.
Business-oriented security concerns include threats of kidnapping or harm to the individual as a result of their status as an employee of the company and concerns in the geographic area in which the employee is located, such as terrorist activity or similar threats. The facts surrounding any security concerns for the employee should be reviewed periodically to determine whether a threat continues to exist and/or whether any security should be modified.
Overall Security Program
Once a security concern is determined, a non-taxable “overall security program” can be established either by providing security 24 hours a day for the employee or by implementing the recommendations of an independent security study.
Under the former basis for tax exemption, an employer would need to provide security on a 24-hour basis (for the duration of the threat), both at the employee’s home and at work, and while the employee is traveling, whether for business or personal reasons. The program must include a bodyguard/chauffeur trained in evasive driving techniques, a vehicle specifically outfitted for security, guards, metal detectors, alarms and similar methods of limiting access to the employee’s work and residence, and if appropriate, flights on company aircraft for personal and business use. This option is sometimes more than is necessary for certain executives and is therefore infrequently used by companies, except for threats of shorter durations (e.g., travel to a location with known violent terrorist activity).
Alternatively, a non-taxable overall security program can be established if a security study is performed by an independent security consultant, the security study is based on an objective assessment of all the relevant facts and circumstances, the study reasonably recommends that a 24-hour security program is not necessary, and the business consistently applies the recommendations contained in the study to the employee. It is important to note that any security provided that is not recommended in the study is not excludable. Given that this option is specifically tailored to the facts and needs of the individual executive being protected it is the method most frequently used by companies. There are a number of security firms, generally comprised of former law enforcement personnel, that perform these studies and provide security or consult with internal security teams to ensure the employee’s security at the level and to the extent required.
Regardless of whether a 24-hour security program or one based on an independent security study is established, the security provided is excludable from the employee’s wages, and extends to security provided to the employee’s spouse and children when traveling with the employee. Moreover, the company may deduct the expense for the security and if security is provided while the employee is commuting, the company may also deduct the commuting expenses under the exception to the section 274(l) disallowance for safety concerns.
Key Takeaways
Employee security continues to be a concern for businesses and has been exacerbated by the public’s constant access to these individuals through the internet, social media, and traditional media, where an individual’s habits, home address, and family members can all be known with the click of a button. As a result, the need to protect C-suite executives and other high profile employees continues to increase. Employers who want to ensure their employee’s safety should explore the exclusion for an overall security program in order to take advantage of the tax benefits such a program offers, while providing necessary protection to the business’ most important assets—its employees.
