What Are Qualified Plan Awards? The $400 and $1,600 Limits

A qualified plan award is an employee achievement award (for length of service or safety) given under a written, non-discriminatory employer plan, which raises the tax deduction and income-exclusion ceiling from $400 to $1,600 per employee per year under Internal Revenue Code Section 274(j).¹ Without the qualified plan, the same award still has to meet the achievement-award rules, but the deductible amount tops out at $400.

What Makes a Plan Qualified

Two conditions sit on the face of the statute:

A written, established award program. The employer has to have the plan on paper before handing out awards under it.
No discrimination in favor of highly compensated employees, either in who is eligible or in what they receive. A highly compensated employee is defined under Section 414(q), and for the 2026 plan year generally means someone who earned over $160,000 in the prior year.¹

Meeting both conditions is what unlocks the $1,600 ceiling. Miss either one and every award from the program is treated as a non-qualified award, capped at $400 of deduction and exclusion per employee per year.

The $400 Average Cost Rule

There is a third requirement that lives inside the definition and catches employers who think they’ve done everything right. The average cost of all awards made under the plan during the year cannot exceed $400. If it does, no award given that year counts as a qualified plan award, and the $1,600 ceiling collapses back to $400 for every recipient.¹

When calculating the average, the employer counts the full cost of each award, but awards of nominal value are ignored. An example from IRS guidance: three awards costing $1,500, $800, and $600 produce an average of $967. Because that exceeds $400, none of the three qualify as qualified plan awards, and each employee’s deductible/excludable amount drops to $400.²

The practical lesson is that giving a few high-value awards without any lower-cost awards in the same program will almost always blow the average. Employers who want the $1,600 ceiling have to design the mix of awards with the $400 average in mind.

What the Award Itself Has to Be

The qualified plan status only matters if the underlying award meets the achievement-award rules in the first place. Those rules apply to every award, qualified plan or not.

The award has to be tangible personal property, presented as part of a meaningful ceremony or occasion, under circumstances that don’t suggest it’s really disguised compensation.¹ After the Tax Cuts and Jobs Act of 2017, the statute spells out what tangible personal property is not:

Cash, cash equivalents, gift cards, gift coupons, and gift certificates
Vacations, meals, lodging, tickets to sporting events or theater performances, and stocks, bonds, or other securities³

Items like a watch, jewelry, a golf set, or an engraved plaque qualify. Letting an employee pick from a limited catalog of tangible items the employer pre-selected is still fine; handing them a general-purpose gift card is not.¹

The reason for the award also has to fit one of two categories:

Length of service. The employee must have completed at least five years with the employer, and cannot have received another length-of-service award in the current year or any of the four prior years. Awards of nominal value don’t count against that five-year spacing, so small annual pins or certificates are fine.⁵
Safety achievement. Managers, administrators, clerical employees, and other professional employees cannot receive these awards. No more than 10% of eligible employees (excluding those same categories from the denominator) can receive a safety award in any tax year. Awards of nominal value don’t count against the 10% cap.4Office of the Law Revision Counsel. 26 USC 274 – Disallowance of Certain Entertainment, Etc., Expenses

No other reason for an award (performance bonuses, hitting a sales target, project completion) qualifies for this tax treatment at all.

How the $1,600 Ceiling Applies Across the Year

The $1,600 is a combined per-employee annual cap. It covers every achievement award that employee receives during the year, whether it came through the qualified plan or outside it.

An employee who gets a $300 non-qualified award and a $1,400 qualified plan award in the same year has received $1,700 in achievement awards. The employer’s total deduction stops at $1,600, and the employee has to include the excess in income.¹

What the Employee Owes Tax On

If the employer’s cost does not exceed the applicable ceiling ($1,600 for qualified plan awards, $400 otherwise), the employee excludes the entire award from gross income and pays no tax on it.⁶

If the cost exceeds the ceiling, the employee must include in gross income the greater of:

The portion of the employer’s cost that exceeds the deduction limit, capped at the award’s fair market value, or
The amount by which the award’s fair market value exceeds the deduction limit⁶

When the employer pays retail, cost and fair market value usually match, and the math is simple. A $2,000 watch given as a qualified plan award puts $400 of taxable income on the employee ($2,000 minus the $1,600 cap). The “greater of” formula bites when the employer buys at wholesale: an $1,800 cost on a $2,200 retail watch forces the employee to include $600 in income (the fair market value excess), not $200 (the cost excess).

Any taxable portion goes on the employee’s Form W-2 and runs through payroll with income tax withholding, Social Security, and Medicare. That obligation applies even if the employer decided not to claim the deduction.⁶

Nonprofits and government employers don’t lose this treatment because they don’t take deductions. The statute treats them as if they could, so their employees get the same exclusion on the same terms.⁶

When an Award Fails to Qualify at All

Missing any requirement (giving cash or a gift card, awarding service before year five, awarding a second service award within five years, exceeding the 10% safety cap) throws the award out of Section 274(j) entirely. The full fair market value becomes ordinary taxable wages to the employee, subject to income tax withholding, Social Security, and Medicare, and the employer reports it on the W-2.⁷

The employer still gets a deduction, but as regular compensation subject to the usual reasonableness standards, not under the achievement-award rules.

1
Office of the Law Revision Counsel. 26 USC 274 – Disallowance of Certain Entertainment, Etc., Expenses
2
Internal Revenue Service. Publication 535 – Business Expenses
3
Internal Revenue Service. Tax Cuts and Jobs Act: A Comparison for Businesses
4
5
Internal Revenue Service. Publication 535 – Business Expenses
Safety achievement. Managers, administrators, clerical employees, and other professional employees cannot receive these awards. No more than 10% of eligible employees (excluding those same categories from the denominator) can receive a safety award in any tax year. Awards of nominal value don’t count against the 10% cap.4Office of the Law Revision Counsel. 26 USC 274 – Disallowance of Certain Entertainment, Etc., Expenses