It's not tax-free. It's compensation and taxes must be paid on it. It makes no difference whether your employer buys a sandwich and gives it to you or gives you money to buy a sandwich, it all adds to your income and is taxable, as is your gym reimbursement, etc. Firms that do this increase the withholding taxes and add these benefits to your total compensation which you can review -- go take a look at your employer-provided withholding forms.

Interesting, I hadn't realized that. I always assumed that firms doing this were just reimbursing the employee and then putting the lunch/whatever expense onto their own books.