15 Examples of Tax-Exempt Benefits to Maximize Your Budget

Attracting top talent in 2025 doesn’t have to come with a hefty tax bill. As People Ops leaders struggle to choose the perfect benefits offering, tax-exempt benefits offer a powerful way to retain and reward talent without overextending company budgets. 

This guide explores 15 examples of tax-exempt benefits in detail, including how they’ll help you build a smarter, more competitive benefits package this year. 

What are tax-exempt benefits?

Tax-exempt benefits, including health insurance, retirement contributions, and commuter assistance, are types of benefits that aren’t subject to federal taxes like FICA or local income taxes. 

Neither employers nor employees pay taxes on these benefits, making them a budget-friendly way to offer more value and boost total compensation.

15 examples of tax-exempt benefits

So, what kinds of benefits actually qualify for tax exemption? There are more than you might think, and many are already popular with growing teams. Below, we’ve rounded up 15 tax-friendly perks that help you offer competitive compensation without stretching your budget.

1. Health insurance 

Heath insurance remains one of the most valuable tax-free benefits to offer your team. Employer contributions toward premiums are excluded from federal employment taxes, making this a cost-effective way to provide essential coverage.

If your company offers a High-Deductible Health Plan (HDHP), pairing it with a Health Savings Account (HSA) can further enhance this benefit. For 2025, the Internal Revenue Service has set the HSA contribution limits at $4,300 for individuals and $8,550 for families. Employees aged 55 and older can contribute an additional $1,000 as a catch-up contribution. HSAs offer a triple tax advantage: contributions are deductible, growth is tax-free, and qualified withdrawals aren’t taxed either.

2. Retirement benefits 

Retirement plans like a 401(k) are a smart, tax-efficient way to invest in your team’s future. Employer contributions don’t have a federal tax liability, and in 2025, employees can contribute up to $23,500, with a $7,500 catch-up limit for those aged over 50. Thanks to the SECURE 2.0 Act, small businesses can also tap into generous tax credits:

• Up to $5,000 per year for plan startup costs (first 3 years)
• Up to $1,000 per employee for employer contributions
• An extra $500 per year for adding automatic enrollment

These credits can dramatically lower the cost of offering a plan, making it much easier to attract and retain talent without blowing your budget. 

3. Achievement awards 

Achievement awards are a small but meaningful way to recognize employees, and they come with tax advantages. If the awards are distributed for things like length of service and meet IRS guidelines, they may be tax-exempt up to $1,600 under a qualified plan or $400 without one.

The key is making sure the awards are tangible items (rather than cash or gift cards) and part of a written, structured program. For example, a custom plaque, watch, or other commemorative gift can qualify. These awards are a great way to boost morale and loyalty while giving your team something memorable and without triggering additional payroll taxes.

4. Cell phones for business 

Providing company cell phones to employees for work-related use can be a tax exempt fringe benefit, provided certain conditions are met. The IRS stipulates that the primary purpose of the cell phone must be for business reasons, such as:

• The employer’s need to contact the employee at all times for work-related emergencies.
• The employer’s requirement that the employee be available to speak with clients when away from the office.
• The employee’s need to speak with clients in other time zones outside of normal work hours.

Under these circumstances, the value of an employer-provided cell phone is excludable from the employee's income as a working condition fringe benefit. Additionally, any personal use of such a cell phone is generally considered a de minimis fringe benefit and is also excludable from income.

5. Life insurance 

Life insurance provides financial support to an employee’s chosen beneficiary in the event of their death. Employer-paid group-term life insurance is tax-exempt up to $50,000. If you extend coverage to a spouse or dependent, that's also tax-free, up to $2,000. Go above those limits, and the excess amount must be included in the employee’s gross income and taxed accordingly.

6. De minimis fringe benefits 

De minimis benefits are small perks that are minimal in value and offered so infrequently that the IRS doesn't require you to track or tax them. Think: coffee and snacks in the break room, occasional taxi rides, birthday treats, or modest holiday gifts.

These low-cost gestures might not move the needle financially, but they go a long way in creating a positive work environment. Best of all, they’re exempt from employment taxes as long as they’re occasional and not part of a formal compensation plan.

7. Dependent care assistance 

Offering a Dependent Care Assistance Program (DCAP) through a Flexible Spending Account (FSA) is a tax-efficient way to support employees with caregiving responsibilities. In 2025, employees can contribute up to $5,000 per year (or $2,500 if married and filing separately) to a dependent care FSA. These contributions are exempt from federal income tax, Social Security tax, and Medicare tax, providing significant tax savings for both employers and employees. 

Eligible expenses include costs for daycare, preschool, before- and after-school programs, and care for adult dependents who need support with self-care. 

8. Meals and lodging 

Meals and lodging can qualify as tax exempt benefits, if they’re provided for legitimate business reasons. To be exempt from employment taxes, meals must be offered on your business premises and primarily for the employer’s convenience (e.g., to keep employees available during critical work hours.) 

Lodging is also tax-free when it’s required as a condition of employment, like when on-site housing is necessary for certain roles or remote job sites. 

9. Educational assistance 

Using a formal educational assistance program, employers can provide up to $5,250 per employee per year in tax-free education benefits.

This assistance can include tuition, books, supplies, and fees for job-related or degree-seeking courses. As long as the benefit is structured through a written plan and not tied to employee performance or bonuses, it’s exempt from federal employment taxes. 

10. Transportation benefits 

Helping employees get to work can be a win-win when structured as a pre-tax commuter benefit. In 2025, you can offer up to $325 per month for transit passes or commuter highway vehicle transportation, like vanpools. 

To qualify for the tax break, the benefits must be provided under a bona fide reimbursement arrangement or through direct payment. 

11. Parking expense assistance

As an extension of transportation benefits, employers can also cover employees’ parking costs on a tax-exempt basis up to $325 per month in 2025. This falls under the IRS’s qualified transportation fringe benefit rules and includes parking at or near the workplace or at a location from which the employee commutes.

12. Accident insurance 

Employer-provided accident insurance premiums are tax-exempt if the policy is for personal injury or sickness, and the benefits are paid directly to the employee or their beneficiaries.

The IRS sets no specific contribution limits for employer-provided accident insurance. However, to maintain the tax-exempt status, the insurance must be structured to qualify under the IRS’s definitions of accident and health plans. 

13. Disability insurance 

Disability insurance replaces an employee’s income in the event they cannot work due to illness or injury. Tax treatment of these employer-paid premiums depends on how the plan is structured:

• Short-term disability (STD): Premiums aren’t included in the employee's taxable income, but any benefits received by the employee during a disability period are taxable.
• Long-term disability (LTD): Similar to STD, if the employer pays the premiums, the premiums are not taxable to the employee, but the benefits received are taxable. Alternatively, if the employee pays the premiums with after-tax dollars, the benefits received are tax-free.

As a best practice, employers should document the plan details and communicate the tax implications to employees clearly.

14. Cafeteria plans 

Cafeteria plans (also known as Section 125 plans) allow employees to choose from a menu of pre-tax benefits, like health insurance, dental and vision coverage, dependent care FSAs, and more. Cafeteria plans are a flexible way to personalize benefits without increasing base salaries, and are perfect for scaling companies looking to offer choice without complexity.

15. Employee stock options 

Stock options can be a compelling part of your compensation strategy, especially for startups and growing tech companies seeking a way to tie their new hires’ enthusiasm to the business's progression. While not all stock options are tax-exempt, Incentive Stock Options (ISOs) receive favorable tax treatment if specific requirements are met, such as holding periods and grant terms. 

ISOs aren’t subject to payroll taxes when exercised, though the value may be counted for Alternative Minimum Tax (AMT) purposes. 

Which benefits are not tax-exempt?

While many perks offer payroll tax advantages, a few still trigger taxes for employers.

• Adoption assistance is tax-free to employees up to $17,280 in 2025, but employers must still pay FICA taxes on these amounts. 
• Moving reimbursements are no longer tax-deductible for most employees through 2026 unless the employee is an active-duty member of the Armed Forces moving due to a military order.
• Cash bonuses and gift cards are always taxable, regardless of the amount. The IRS considers small-value gift cards as cash equivalents and requres them to be included in the employee’s taxable income.

Tax-exempt benefits vs. fringe benefits: What’s the difference?

Confused by the different benefits of terminology? You don’t need a dictionary to unravel the difference between tax-exempt and fringe benefits. Put simply: All tax-exempt benefits are a type of fringe benefit, but not all fringe benefits are tax-exempt.

Fringe benefits are any type of non-wage compensation offered to employees, including things like health insurance, gym memberships, tuition assistance, or employee discounts. The bespoke combination of perks you choose go a long way to boosting morale and retention in your organization, but they’re considered taxable income unless specifically excluded by the IRS.

Taxable fringe benefits 

But what about the rest of the fringe benefits that are taxable? Don’t write them off just yet. Even if a perk adds to an employee’s taxable income, it can still deliver real value (and goodwill) at a lower cost than the employees footing the bill themselves.

Example: If you buy a $100 gym membership or gift card for an employee, the tax burden on that amount is minor compared to the full cost if they paid for it out of pocket.

Here are a few popular taxable fringe benefits employers can offer:

• Cash or non-cash awards (outside of specific achievement awards)
• Educational assistance over $5,250 per year
• Bicycle commuting stipends or green travel incentives
• Workwear or clothing that’s not branded and suitable for streetwear

Bottom line? If a benefit aligns with your company culture, supports your team, and makes financial sense, even if it’s taxable, it’s worth considering.

Streamline your entire employee benefits offering with Benepass

Designing a benefits package that’s both competitive and cost-effective doesn’t have to be complicated or expensive. Tax-exempt benefits give you a strategic edge, helping you offer more without paying more. And with the right tools, you can make it all easier to manage, too.

At Benepass, we help growing companies like yours offer both pre-tax and post-tax benefits through a flexible, all-in-one platform. From commuter benefits and HSAs to wellness stipends and lifestyle spending accounts, our platform makes it easy to stay compliant, track spending, and support your team in meaningful ways.

Ready to see how it works? Book a demo today and discover how Benepass can help you stretch your benefits budget and build a stronger, happier team.