Oct 04, 2011

Employer Provided Cell Phone - Compensation or Not?

On Sept. 14, 2011, the IRS released Notice 2011-72 on the Tax Treatment of Employer-Provided Cell Phones. It states that the value of the business use of an employer-provided cell phone is excludable from an employee's income as a working condition fringe to the extent that, if the employee paid for the use of the cell phone themselves, such payment would be allowable as a deduction under section 162 for the employee. On the same day, the IRS issued Interim Guidance on the Reimbursement of Employee Personal Cell Phone Usage. This provides audit guidance to IRS examiners. It provides that, for tax years after Dec. 31, 2009, the IRS will treat the employee's use of employer-provided cell phones for reasons related to the employer's trade or business as a working condition fringe benefit, the value of which is excludable from the employee's income if the cell phone is issued primarily for noncompensatory business reasons.

The guidance states the cell phone coverage must be reasonably related to the needs of the employer’s business, and the reimbursement must be reasonably calculated so as not to exceed expenses the employee actually incurred in maintaining the cell phone. Additionally, the reimbursement for business use of the employee’s personal cell phone must not be a substitute for a portion of the employee’s regular wages. The guidance gives examples of substantial noncompensatory business reasons (1) the employer’s need to contact the employee at all times for work-related emergencies; and (2) the employer’s requirement that the employee be available to speak with clients at times when the employee is away from the office or at times outside the employee’s normal work schedule (i.e., clients are in different time zones).

An example of a reimbursement arrangement that does not result in additional income or wages:

John Smith works for ABC Inc. and is scheduled every day to work 9am – 5pm. John’s primary position in the company is sales related. John uses his personal cell phone to communicate with business clients of ABC after normal work hours and when he is outside of the office. John’s cell phone carrier charges a flat-rate per month for certain number of minutes for domestic calls. ABC reimburses John for the monthly basic plan expense to enable John to maintain contact with business clients throughout the United States after hours. 

If you currently reimburse an employee for cell phone usage that is not reasonably related to the your trade or business, or if your reimbursement is in excess of the expenses reasonably related to the needs of your business, the reimbursable amount or the excess being paid to your employee may be defined as compensatory. If this situation arises, please notify Atlantic Pension Services, Inc. so we can make the proper adjustments the plan compensation amounts for the affected participants, if necessary.

Miriam “Missy” G. Matrangola, Esquire, QPA, QKA is founder and president of Atlantic Pension Services, Inc., a third party administrator firm located in Chester County, Pennsylvania. Atlantic Pension Services is an independent, non-producing TPA firm excelling in retirement plan design and administration since 1992. Missy can be reached at