Hands Off 274(j)!

Encouraging companies to better engage with their employees leads directly to a positive ROI for those companies and Uncle Sam, as well.

• By Brian Galonek
• May 01, 2012

In these troubled economic times where government spending has been decried as the root of all evil and "austerity" has become the rallying call of concerned citizens everywhere, our beltway political leaders are fighting over the spending cuts needed to get our deficit under control. Commenting strictly as an average citizen, I say "go for it," because the time is long overdue. But commenting as a well-informed insider servicing the incentive and recognition industries, I must ask that they please keep their hands off of 274(j).

The Internal Revenue Code section 274(j) is actually not a spending provision but a tax preference. It is one of hundreds of corporate tax preferences that reflect the U.S. government's recognition that easing the tax burdens in targeted areas of business operations can produce beneficial net results. Specifically, 274(j) allows employers to recognize and reward their employees under certain specific conditions without those employees' having to pay taxes on the value of those awards. It also allows the employers to deduct the value of the awards given out, up to a specified percentage.

If you have no horse in this race, you may be wondering why a company and its employees would need such a tax break. The specific situations under which 274(j) can be deployed are for service award programs (where companies award a gift to their employees for every five years on the job) and, in a more limited scenario, to companies that deploy safety incentive programs that reward their employees for specific achievements in the area of safety.

For some very good reasons the use of cash as an award is not protected under 274(j) (employers can give it but do not enjoy the tax protections mentioned above). For decades now, research has shown that cash is a very poor motivator. It is a great motivator for some someone looking for a job, in which case cash is often what that person craves the most. If, however, a person is gainfully employed, cash (or a cash equivalent) does not motivate the long-term results desired by employers that wish to recognize and reward employees in a memorable way that actually affects their future performance. There are a number of well-researched reasons for this but, put simply, cash is not memorable for the employee, and therefore the award itself is not tied long term to the action that earned it. An employee who receives $200 in cash for demonstrating proactive safe behavior on the job will not be able to recall what they did with that cash only a few weeks later. An employee who is awarded instead with safety points and that then converts those points into a Callaway golf club will remember how and why they earned the club for many years to come. They can recall and attach the value of the award to the safe behavior that caused them to earn it, which continually makes them and the company they work for safer.

As a result of diligent efforts by the Incentive Federation, tax preference 274(j) was enacted into law as part of the 1986 Tax Reform Act. Shortly thereafter it began encouraging employers to use tangible rewards in service and safety programs, thereby becoming an instrumental part of incentivizing corporate America to deploy safety recognition and rewards programs to help meet their growing safety-related challenges. It is no coincidence that during the 25+ years since it was enacted, the U.S. workforce has had a dramatic drop in workplace-related accidents and injuries. These improvements have not occurred solely because of 274(j), of course, but it has been a catalyst that has helped drive this positive change.

The Lawmaker’s Perspective
Looking at this strictly from a lawmaker's perspective, the dramatic reduction in workplace accidents, injuries, and deaths alone would be worth any small reduction in tax revenues resulting from 274(j). Certainly OSHA, the Department of Labor, the Department of Health and Human Services, the Department of Justice, the National Transportation Safety Board, and many others likely would agree. But while our politicians are caring people who have great admiration for the American workers that make this nation special, they are also charged with fiscal responsibilities. The long track record of 274(j) demonstrates that their motivation to support this tax preference does not have to be based strictly on their altruistic nature; their support also can be based on the assessments of "bean counters" who see the financial lift that such programs provide.

Words such as "recognition, rewards, incentives, motivation," and many others have been used to describe what these programs are and what they do. More recently, the term "engagement programs" has caught on as a catch-all reference that encapsulates the ultimate goal of these business tools. They help employers better engage with their employees in order to affect behavioral changes that are mutually beneficial to both parties. The benefits don't stop there, though; they ripple directly through to management, owners, stakeholders, and, yes, to states and the federal government.

A detailed, three-year study conducted by Towers Watson confirmed that companies with engaged employees grew at 19 percent while companies with disengaged employees declined by 30 percent during that same period. Organizations with higher-than-average employee engagement realized 38 percent higher productivity, 27 percent higher profits, and 57 percent higher shareholder returns. With stats like these, it's easy to see why encouraging companies to better engage with their employees leads directly to a positive ROI for those companies and Uncle Sam, as well. Engagement solutions have proven time and time again to be the glue that binds together so many of corporate America’s objectives.

Very Similar to R&D Tax Credits
A very similar argument for a related concept was posited in a joint report issued by the White House and the Department of the Treasury in February 2012. The report called "The President's Framework for Business Tax Reform" makes the case that research and development expenses borne by companies have a corresponding positive impact and therefore should be tax deductible.

The section titled "Strengthen American Manufacturing and Innovation" outlines the immense value the manufacturing sector provides to the U.S. economy and the ripple effect it has on a broad range of other industries. It speaks to the challenges of the antiquated, on-again/off-again laws governing the tax incentives afforded to companies that spend on R&D. Ironically, this section of the report repeatedly uses the word "incentives" to describe the desired impact of those tax credits. In short, it makes the argument that providing favorable tax treatment for R&D produces a favorable ROI not just for the company that spends on R&D, but also for other related sectors and the United States as a whole, and that such tax credits should be simplified and made permanent.

This section caught my eye because engagement solutions produce a very similar measurable ROI for all interested parties, and they specifically impact many of the same areas essential for a healthy company -– namely employee retention, safety, innovation, productivity, and economic growth. The report went on to relate the need for targeted tax incentives for U.S. manufacturers to enable them to better compete in a global economy where other countries have seen the light and invested more heavily in these initiatives. Companies have become fond of referring to their employees as their "number one asset." HR and safety departments are heavily burdened with the unenviable tasks of deploying a myriad of government regulations. Encouraging them with favorable tax laws that facilitate higher levels of employee engagement is a small price to pay for the returns it provides.

So why write an article defending a small portion of the tax code that has lasted for more than 25 years and clearly proven its worth? Regardless of who is the White House and which party controls Congress in the years to come, the pressure will continue to build to right our fiscal ship. To be sure, there are plenty of legitimate areas where cuts should occur, particularly in industries that have long since outgrown their need for public tax support. Pick up any newspaper and you'll read examples where public money is spent on wasteful projects that produce no corresponding financial lift for society. For decades now, politicians have railed against the pork-barrel spending of their rivals and then bragged about some earmark they attached to the last spending bill. The dollars (our dollars) that flow to these projects are often so specifically targeted to some "bridge to nowhere" that they affect a small group of people, and only in a very limited way. Yet collectively, all of these pet projects add up to huge amounts of government spending and increase the national debt. 274(j) is the opposite; it affects every company and institution that awards its employees for their years of service and/or for safe work practices and has had a positive impact on the vast majority of employers and employees in the country.

To ensure the future of tax provision 274(j), the Incentive Federation has mounted a lobbying effort to help educate our politicians and those that influence them about its low-cost/high-return impact. Lawmakers and administrations have access to data from well-known and nonpartisan institutions such as the Congressional Budget Office, but they often rely on summary reports and the static scoring system of the CBO, which often does not take into account the corresponding positive financial impact of a tax provision (otherwise known as the "lift"). The lift for engagement programs as highlighted above is the crucial part of understating why they are so beneficial. When compared with the relatively small loss of tax revenue, the lift far outstrips the costs. CBO has commented in the past that it does account for what is known as "feedback effects" when scoring a tax preference, but the degree to which it does is a mystery to the outside world.

So the industry has decided not to rely solely on government data derived in ways that are not fully transparent and instead to spearhead an information-gathering effort of its own. The Incentive Federation is reaching out to the companies that deploy these solutions in an effort to build a case file of real-life examples detailing the positive impact derived through the use of service- and safety-related programs and the impact 274(j) has had encouraging those deployments. To participate in the effort, please contact your incentive solution provider and ask to be included in this effort or send an email to the author of this article (brian@incentiveusa.com) with "274(j) Help" in the subject line.

This article originally appeared in the May 2012 issue of Occupational Health & Safety.