Summary: Fringe benefits are non-cash products or services of value offered to employees as part of their compensation package. Often, fringe benefits have a special tax treatment.
Every employer wants to attract the highest-quality employees that they can. While employees can be motivated by the challenges of their tasks and workplace cultures, every employee wants to find the most comfortable role with the best compensation, all else being equal.
So, how can you attract and retain employees in a highly competitive market? Providing excellent salaries is one way, but offering fringe benefits to your employees to enhance their overall compensation packages is a common practice as well.
Let’s take a look at what fringe benefits are and how they’re used to incentivize employees.
What are Fringe Benefits?
Fringe benefits are forms of payment provided to employees outside of their salaries for performing services.
These are non-cash, supplementary or additional forms of compensation that employers give to their employees or their family members on behalf of the employees. They can also be provided for any person who performs services for you, including non-employees.
While many fringe benefits have monetary value, such as the use of company cars and hotel stays, others are used to reward them in other ways, such as extra breaks, flexible hours, or remote and hybrid working arrangements.
Fringe benefits can be considered to include all employee benefits, though some employers use this term to mean non-standard benefits, considering them separate from health insurance and retirement savings plans. Fringe benefits are generally considered to be additional rewards that employers are not required by law to provide for their employees.
In some countries, health insurance, meal breaks, and paid public holidays are mandatory and therefore aren’t considered fringe benefits but instead are employee entitlements. However, in other jurisdictions, these same things can be offered as fringe benefits if they are not compulsory.
What is the Purpose of Fringe Benefits?
Employers provide fringe benefits to their employees for several reasons. While they could simply provide them with increased salaries instead, employers choose benefits because:
- They help to attract and retain top talent. When an employee is offered two similar jobs with equal salaries, highly likely that they’ll choose the employer that provides the better benefits package. Additional benefits also keep employees satisfied and reduce turnover in many organizations.
- They can provide motivation. Not all benefits are offered upon hiring. Instead, some employers add fringe benefits to reward employees for reaching certain goals or for high levels of performance. For example, the highest-performing member of a sales team each month can be rewarded with the use of the best company car for the following month. These rewards can motivate employees to keep up their productivity, which pays off well for employers.
- They promote physical and mental well-being. Some fringe benefits like gym memberships, breaks, free childcare, and remote or hybrid working arrangements can help employees relax, reduce stress, and improve both their physical and mental health. Happier, healthier workers take fewer sick days and tend to work more productively, and that also benefits their employers with greater rates of productivity per worker.
- They can be provided below market rates. An employer may have a partnership with a hotel which provides accommodation for its employees at reduced rates. This means that the employer can save money by providing a benefit for less than its market value.
- They can be free. There’s no cost involved in the provision of many types of benefits, like breaks and flexible hours. Rather than paying higher salaries, which they may not be able to afford, employers can provide many fringe benefits as free or very low-cost rewards.
- They can be provided tax-free. According to the IRS, all income is taxable unless an exclusion applies. While many kinds of fringe benefits are taxable, several aren’t, or aren’t under certain circumstances. For example, education expenses up to $5,250 can be excluded from an employee’s taxable income. Therefore, these tax-free benefits are actually worth more than if they were simply paid in cash, which would be taxed.
Types of Fringe Benefits for Employees
There is a great range of fringe benefits that employers can offer. Some of these are used to enhance initial compensation packages, and others are offered as rewards for great performance. Fringe benefits can include, but are not limited to, the following:
Accommodation: hotel stays, free or supplemented housing, rent assistance
Education: free courses, tuition support or reduction
Equity: employee stock options, restricted stock, performance shares, stock appreciation rights
Family care: childcare at or outside of work, lactation support, elder care support, paid family leave, adoption assistance, employee assistance programs
Food and drink: free meals at the workplace, free snacks and beverages, coffee, healthy food programs, restaurant discount cards, employee discount programs
Health: health insurance, dental insurance, vision insurance, disability insurance, accident insurance, health savings accounts (HSAs)
Memberships: social clubs, country clubs, sports clubs and fitness centers at or outside of work
Mental health: counseling and therapy, paid or unpaid mental health leave, wellness programs and resources, yoga and meditation courses
Retirement: retirement savings plans including 401(k)s and individual retirement accounts (IRAs), retirement planning assistance
Transportation: commuting reimbursements, parking expenses, personal vehicle use mileage reimbursement, private aircraft travel, free or discounted commercial flights, taxis, limousines
Technology: employer-provided phones and other devices, Internet connections for home offices
Work time and location: short breaks, meal breaks, paid vacations, flexible hours, remote and hybrid working opportunities
How Are Fringe Benefits Taxed?
As mentioned earlier, all income provided to employees is subject to federal and, potentially, state and even local income taxes unless exemptions apply.
In general, this means that the value of all employee benefits is added to their salary and other earnings to create their gross income, to which income, Social Security, and Medicare taxes then apply.
However, the IRS provides lots of exceptions for different kinds of benefits. For example, contributions to HSAs made by employers are not included in employee gross income. Cafeteria plans are a popular way of providing tax-free benefits.
In these plans, employers offer an array of pre-tax benefits and let employees choose which ones they want to partake in, much like choosing meals in a cafeteria. Pre-tax dollars can be provided for health, dental, and vision insurance; flexible savings accounts (FSAs), and some retirement contributions.
How to Select the Fringe Benefits to Provide for Employees
While it would be great to be able to provide absolutely everything for your employees, every company has a limit to what it can offer. If you want to offer benefits, start by making a plan following these steps:
1. Define your objectives
In creating a benefits plan, what do you hope to achieve? This could be to attract top talent, motivate your employees, or build a positive and caring company culture. Your choices of benefits should reflect these objectives.
2. Consult your employees
Use surveys, interviews, and other methods to find out what your current employees would like for benefits. Remember that you may also need to think about people who aren’t yet with your company but who you’d like to recruit. Find out the most desirable benefits that would attract recruits and keep people with your organization.
3. Set a budget
Figure out how much you can afford to spend on your employees’ fringe benefits as a starting point for what you can afford to provide. Perform a cost-benefit analysis to determine the value that providing these benefits could bring to your company. Finally, decide how much of your budget you’d like to use to begin your benefits program.
4. Consider free and affordable benefits
Look into the benefits you can provide for free, like flexible hours, or for cheap, like discounts with partner businesses. These benefits can help you stretch your benefits budget considerably and still be very desirable for your employees.
5. Think about taxes
Look for benefits that can be provided to your employees using pre-tax dollars. Benefits that you can give employees that aren’t subject to taxes are essentially worth more than paying them cash.
6. Structure your benefits program
Decide how you want to provide different benefits. Some can be provided for everyone, while others can be used as rewards to help motivate your employees to improve their performance. Cafeteria plans can give your employees the opportunity to choose their benefits individually instead of you dictating all of them.
Fringe Benefits Benefit Employees and Employers
Fringe benefits are non-cash forms of compensation provided to employees and other workers outside of their regular salaries and payments. They come in many types, and some can be paid in pre-cash dollars, making them extra valuable. Employers use fringe benefits to attract and retain talent, boost productivity, and reward their workers with more than just money.
FAQ
Essentially, yes, these two terms both refer to extra compensation provided by employers. However, the word “perks”, short for perquisites, can sometimes refer to lesser benefits like free coffee or short breaks at work by some employers. “Fringe benefits” is used for more significant items like health insurance and paid vacations.
Yes, fringe benefits can be used by employers everywhere, though they may differ due to legal and cultural differences. Employers in some countries may focus more on creating high-quality work environments, while in others, valuable rewards for service are preferred. If something is legally required, like a week of paid paternity leave in the Netherlands, it is considered an entitlement and not a fringe benefit that employers can offer optionally.