What is an achievement award? It is an item of tangible personal property awarded to an employee for either length of service or for promoting safety. This includes such gifts as watches, necklaces and other jewelry, televisions, golf clubs, etc. However, cash, vacations, meals, lodging, tickets to theater and sporting events, stocks, bonds and equivalent items do not qualify. And a gift certificate can only qualify under certain circumstances (e.g., it must be nonnegotiable).

There are several other requirements that must be met to obtain favorable tax treatment.

*The item must be given as part of a “meaningful presentation.” This doesn’t mean your company has to throw a lavish affair, but the occasion should be marked by a ceremony befitting the occasion.

*The award cannot be an attempt to “disguise” taxable compensation. For example, awards that are handed out at the same time as annual salary adjustments are due may be suspect. Similarly, an award program cannot be substituted for a cash bonus plan that had previously existed.

*An employee must have worked for the company a minimum of five years to receive a length‑of‑service award. Note: You are not eligible for this type of award if you received a length of service award any time during the current year or the previous four years.

*Any employee may receive a length-of-service award, but safety awards cannot be made to managers, administrators, clerical workers and other professional employees. Furthermore, the award does not qualify if the company granted safety awards to more than 10% of eligible employees during the same year.

There are dollar limits on the total value of awards that may be excluded from income in one year. The limits depend on whether the awards are “qualified” or “nonqualified.” Awards from nonqualified plans are limited to $400; total awards from both qualified and nonqualified plans are limited to $1,600. Any amounts over these limits cannot be deducted by the company and are taxable to the employees.

A qualified plan award must meet two requirements: (1) It must be paid under an established written plan that does not discriminate in favor of highly compensated employees and (2) the average cost of all employee achievement awards must not exceed $400. In determining the average cost, awards of nominal value are not taken into account.

Employees are usually more productive and safer in their work habits when they have something to strive for. Your company might consider such an award plan to motivate its workforce.