IRS smiles on employee benefit for victims of data breaches

The IRS is offering some relief to employers that fall victim to a data breach.  

Whether it’s personal information or confidential medical records, you probably have a number of safeguards in place to ensure a data breach never happens at your firm.

But with new breaches occurring with alarming regularity across all industries, nobody is one hundred percent safe.

Tax-free benefit

According to IRS Announcement 2015-22, if an organization experiences a data breach and provides identity protection services to employees whose info may have been comprised, the IRS won’t require those workers to count those services as taxable income.

Plus, regardless of whether the breach was due to an employer’s recordkeeping systems or those of its agent or service provider, the company won’t have to include the value of the protection services it provides in employees’ gross income and wages.

The services also won’t have to be reported on W-2s or 1099s.
An example of how companies use identity protection services to soften the blow of a breach: Covering the cost of credit monitoring for affected workers for up to a specific number of years following the event.

What’s included

So what type of services will receive this favorable tax treatment?

The IRS says the tax-free treatment of “identity protection services” applies to:

• credit reporting and monitoring services
• identity theft insurance policies, and
• identity restoration services and other similar services (but only when it’s provided in connection with a data breach that occurs as a result of “hacking”).

What’s not

Not all benefits related to identity theft protection can be offered tax-free, however.

The IRS clarified that the tax relief does not apply when employers provide the services as part of their regular benefits and compensation package. In addition, it doesn’t apply when cash is offered in lieu of the identity protection services.

Finally, even though the value of an identity theft insurance policy is listed in the feds’ tax relief, the relief doesn’t apply to the proceeds an employee receives under such a policy.

Reason: The tax treatment of insurance proceeds is determined under laws that apply specifically to insurance payouts.