Baylor University
Tax & Compliance Department
Financial Services

No-Additional Cost Services

A no-additional cost service is defined as any service provided for use by the employee if the service is offered for sale primarily to customers (whether students or third parties) and the employer incurs no substantial additional cost in providing the service to the employee. Such substantial additional costs include foregone revenue and the cost of labor. The service is a no-additional cost service regardless of whether it is offered at no charge or at a reduced rate.

Additionally, this exclusion contains a “line of business” requirement. The service or product that the employer is providing free or at a discount must be a service or product that the employer provides during its ordinary activities. Educational services such as tuition remission do not apply here as other Code sections specifically cover these services.

Reciprocal agreements between the university and an unrelated employer can also be considered no-additional cost services if both the university and the unrelated employer have a written reciprocal agreement under which a group of employees of each employer who perform services in the same line of business receive no-additional cost services from the other employer. In addition, the service provided by the unrelated employer must be the same type usually provided to customers by both the employee’s line of work and the line of service provided to the employee. As a final requirement, neither employer can incur any substantial additional cost, including foregone revenue.

The following are categorized as no-additional cost services:

  • Athletic/Recreational Facilities

Recreational facilities provided by the university can include athletic facilities, the Student Life Center, golf courses, the marina, etc. There are typically a few different options for the exclusion of such use from the employee’s gross income: 1) as a special athletic facility fringe exclusion; 2) as a no-additional cost service fringe benefit or; 3) as a qualified employee discount. A no-additional cost service (as discussed above) is any service provided for use by an employee if the service is offered for sale primarily to customers in the ordinary course of the line of business under which the employee is performing services and the employer incurs no substantial additional cost, including foregone revenue, in providing the service to the employee. The service is such whether offered at a reduced rate or free of charge, and such services usually include excess capacity services. The line of business requirement as to educational organizations has been interpreted by other groups as including all areas of the educational organization, and there is no definitive ruling on such by the IRS. Since students are the customers in question and the use of the athletic/recreational facility is offered to each student as part of attending the University, use by the employee is also a no-additional cost benefit to employees.
  • Complimentary and Discounted Tickets to Athletic and Entertainment Events
Such tickets may be considered an excludable fringe benefit under one of four methods, depending on the facts and circumstances involved. One of these methods is as no-additional cost benefits. For such exclusion to be applicable, the University must show it did not incur any substantial additional cost because the event would have occurred regardless of the number of attendees. In addition, the university must show that any services provided to employees were incidental and the university did not lose any substantial revenue. The other methods are as a working condition fringe, as a qualified employee discount, or as a de minimis fringe benefit.
  • Communication Services
University provided free electronic mail services, internet access, and local and long-distance telephone service, are considered no-additional cost services fringe benefits, as the university is using excess capacity that it has already purchased. In addition, the university is not incurring any substantial additional cost in providing the service because the university does not spend a substantial amount of time in providing the service to employees, over that time spent in providing the service to its main customers, students.