To attract and retain skilled workers, your small business needs to offer more than competitive pay. Your benefits package matters, too — and benefits with favorable tax treatment can be even more valuable to prospective and existing employees. Open enrollment is right around the corner for many businesses. As you review your benefits package for 2027, here are some benefits worth considering.
Although the IRS won’t announce the inflation-adjusted amounts for 2027 until later this year, the 2026 figures provide a starting point for planning. In addition, the One Big Beautiful Bill Act (OBBBA) changed certain tax rules for fringe benefits that you should be aware of.
Insurance
Businesses can provide several types of insurance benefits that may be fully or partially tax-free to employees. The rules vary by benefit:
Health insurance. If you maintain a health care plan for employees, employer payments for coverage generally are excluded from taxable wages. This includes coverage for an employee’s spouse and dependents. Employee contributions can also be excluded from wages when made on a pretax basis through a cafeteria plan. Otherwise, such amounts are included in their wages but may be deductible by employees as an itemized deduction, subject to the applicable limits.
Disability insurance. Employer-paid premiums for disability coverage generally aren’t taxable to employees when the coverage is provided under a qualifying plan. Employee-paid premiums generally aren’t deductible by the employee or excludable from income, except for pretax contributions through a cafeteria plan.
The tax treatment of disability benefits received later depends in part on who paid the premiums and whether they were paid on a pretax basis. Consider the tax treatment of benefits when deciding how to structure employer and employee contributions under your plan.
Long-term care insurance. Employer-provided long-term care insurance can generally be excluded from an employee’s wages. Long-term care coverage provided through a flexible spending arrangement or similar arrangement is treated differently and can’t be excluded from an employee’s wages for federal income tax purposes. However, employer contributions aren’t subject to Social Security, Medicare or federal unemployment taxes.
Life insurance. Employees generally can exclude the cost of up to $50,000 of employer-provided group-term life insurance coverage from income. The cost of coverage above $50,000 is generally taxable to the employee based on IRS rates, reduced by amounts the employee paid toward the coverage.
Other tax-advantaged benefits
Insurance isn’t the only way to provide tax-favored compensation. Other benefits to consider include:
Dependent care assistance. Starting in 2026, the OBBBA increased the annual exclusion for employer-provided dependent care assistance from $5,000 to $7,500 ($3,750 for married filing separately). The exclusion is subject to other limitations, including the employee’s and spouse’s earned income and the requirements that apply to dependent care assistance programs.
Adoption assistance. Employer-provided benefits under a qualified adoption assistance program may be excluded from income, subject to the applicable rules and limits. For 2026, the maximum exclusion is $17,670 per child. The exclusion begins to phase out at modified adjusted gross income of $265,080 and is fully phased out at $305,080. Employer-provided adoption benefits generally remain subject to Social Security, Medicare and federal unemployment taxes even though they’re excluded from federal income tax. Both the exclusion amount and applicable income thresholds are adjusted annually for inflation.
Educational assistance. Employers can provide up to $5,250 of tax-free educational assistance per employee each year under a qualifying written educational assistance program. The OBBBA made this exclusion permanent and provided that the $5,250 limit will be adjusted for inflation for tax years beginning after 2026. The benefit can cover qualifying education expenses, including graduate-level tuition, and can also be used for principal or interest payments on an employee’s qualified education loans.
Transportation benefits. You can provide qualified transportation benefits tax-free within federal limits. For 2026, the monthly exclusion is $340 for qualified transportation in a commuter highway vehicle and transit passes, and $340 for qualified parking. These amounts are adjusted annually for inflation. However, businesses generally can’t deduct qualified transportation fringe benefits they provide to employees.
De minimis fringe benefits. You can generally provide employees with certain low-value benefits tax-free when the value is so small — and the benefit is provided with such infrequency — that accounting for it would be unreasonable or administratively impracticable. Examples include occasional personal use of an employer’s copier, tickets to entertainment or sporting events, noncash holiday or birthday gifts, and certain meals. Cash and cash-equivalent benefits, such as gift cards and gift certificates, generally don’t qualify for this exclusion.
No-additional-cost services. You may be able to provide employees with certain services tax-free when doing so doesn’t impose a substantial additional cost on your business. This benefit generally applies to excess-capacity services that you ordinarily provide to customers in the same line of business in which the employee works. For example, a hotel may allow employees to use vacant rooms, or an airline may allow employees to fly in otherwise-empty seats. Additional eligibility and nondiscrimination requirements apply.
The OBBBA also made some unfavorable changes to the tax rules for fringe benefits. For example, it permanently eliminated the exclusion for qualified bicycle commuting reimbursements. It also permanently eliminated the exclusion for qualified moving expense reimbursements for most employees. (Exceptions may apply to certain members of the U.S. Armed Forces and the intelligence community.)
Beware: Some fringe-benefit exclusions are subject to nondiscrimination rules. A benefit that’s tax-free for rank-and-file employees may not receive the same treatment for certain highly compensated employees or owners. Special rules also apply to certain business owners, including more-than-2% S corporation shareholders and partners.
Enhance the value of your benefits package
Fringe benefits can add significant value to your compensation package. By understanding how different benefits are taxed, you can offer employees benefits that may improve their after-tax compensation while making the most of your business’s compensation budget. Contact us for help evaluating your current benefits and fine-tuning them as needed before open enrollment begins.
