The IRS allows employers to exclude the value of certain employee achievement awards from an employee’s taxable income if the awards meet specific criteria. The award must be tangible personal property (not cash, gift cards, or vacations) and must be given for length of service or safety achievement. For awards given under a " nonqualified plan " (one that is not in writing or discriminates in favor of highly compensated employees), the maximum annual exclusion is $400.00 per employee (Option B). If the award is given under a " qualified plan, " the limit increases to $1,600.00 per year. Any amount exceeding these limits, or any award given in a form other than tangible property, is considered taxable compensation and must be included in the employee’s gross income and reported on Form W-2. This ensures that achievement awards are used for employee recognition rather than as a method of tax-free compensation.