What Are Fringe Benefits? (2024)

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Fringe benefits are perks or extra compensation over and above regular salary. Some fringe benefits are for all the employees, whereas others are offered only to certain categories of employees. For instance, the amount of paid time off an employee receives is typically directly proportional with length of employment.

Most fringe benefits are taxable at fair market value but some benefits, such as health and life insurance, are nontaxable. As an employer you can choose to estimate total annual taxes payable by the employee and distribute it over every paycheck. Or, you can choose to deduct, collect and pay taxes once a year.

If you do not have enough HCM capabilities in-house, a Professional Employer Organization (PEO) can help manage fringe benefits for your employees.

There are some fringe benefits that are almost mandatory because the employees expect them. If you don’t provide these benefits, you will find it difficult to hire and retain good employees.

In addition, you may choose to provide unique fringe benefits to attract good employees. You must choose benefits that are used by the employees and do not end up draining your resources in the long run.

Required Fringe Benefits

These are some fringe benefits you generally must provide to your employees:

• Health Insurance: If you employ less than 50 full time employees, it is not mandatory to provide health insurance under the ACA. However, this is a fringe benefit that you should consider providing to all your employees because individual medical coverage can be expensive and employees expect to have this covered by their employer.
• Workers’ Compensation: Workers’ compensation is insurance that covers lost wages, medical expenses and rehabilitation costs for employees that have fallen sick or gotten injured on the job. It also includes death benefits to the next of kin of employees killed on the job. Most businesses with employees are required to have workers’ compensation insurance.
• Family and Medical Leave: The Family and Medical Leave Act (FMLA) requires employers to provide employees up to 12 weeks of unpaid leave of absence for a serious medical condition, or to care for a newborn or family member. Group health benefits continue during this period. The FMLA applies to companies that employ more than 50 employees within a 75-mile radius.

Optional Fringe Benefits

These are some additional fringe benefits you can choose to provide:

• Retirement Plans: You can set up a 401k plan that allows your employees to start investing into their retirement plan through payroll deductions. This has benefits for your business as well because any matching contributions you make are tax deductible.
• Paid Vacation: You can allow your employees to take paid time off (PTO) work to deal with health emergencies or go on vacation to recharge themselves. Since this is not mandatory under the FLSA, paid time off depends only upon the agreement between you and your employee.
• Gym memberships: Providing gym memberships to employees is an easy way to demonstrate that you care about the health and well being of your employees.
• Meal subsidy: If you have cost-effective numbers, you can have an in-house cafeteria. Otherwise, you can provide coupons or vouchers redeemable at local restaurants.
• Commuter Benefits: Under the IRS rules, employers may provide tax-free transportation benefits to their employees. The transportation that qualifies for benefits includes public transit, vanpooling, bicycling and parking.
• Employee Stock Ownership Plan (ESOP): Distributing stock ownership to employees according to their payscale, grade and range of responsibilities can help you attract capable employees. You must consult your legal as well as finance and accounting teams for framing the rules and regulations for distributing ESOPs.

Employees feel valued if they are provided excellent benefits packages. These are some of the benefits of offering fringe benefits to your employees:

• Attract top talent. Generous fringe benefits can help you attract talented and competent job candidates.
• Keep employees motivated. Offering fringe benefits makes employees feel valued, which can keep them motivated and highly productive.
• Improve loyalty and employee satisfaction. Fringe benefits demonstrate to the employees that you care for them, improving employee satisfaction and loyalty.
• Ensure good health of employees. If employees are unable to work due to ill-health or injuries, business suffers. So it makes sense to offer benefits that ensure excellent employee health.
• Reduce employee turnover. When employees feel motivated and valued, get appropriate remuneration for all the hard work they put in, and are satisfied with their work as well as compensation, they have no reason to leave the organization.

By default all fringe benefits are taxable unless they are explicitly exempted from taxation as per the Employer’s Tax Guide to Fringe Benefits. The employee must include the fair price value of the benefits in their taxable income for the corresponding year. The fair price value of a fringe benefit is its market price in the open market.

The IRS maintains a list of fringe benefits that are exempt from taxation. These are:

These are not fully exempted; many rules and regulations govern the exemption. You should take legal counsel from a competent lawyer before committing to anything.

Bottom Line

If you operate in a highly competitive industry where a skilled workforce is in high demand, offering an innovative and useful fringe benefits package can be the key to attracting strong talent.