What are Fringe Benefits?
Fringe benefits are the additional benefits offered to an employee, above the stated salary for the performance of a specific service. Some fringe benefits such as social security and health insurance are required by law, while others are voluntarily provided by the employer.
Examples of optional fringe benefits include free breakfast and lunch, gym membership, employee stock options, transportation benefits, retirement planning services, childcare, education assistance, etc.
One of the advantages of fringe benefits is that they are tax-exempt for the employer, provided that the set conditions are met. On the contrary, the recipients of fringe benefits are required to include the fair value of the benefits in their annual taxable income.
Generally, fringe benefits are provided by the employer, even if the actual provider is a third party. It is because the employer is the party that pays for the benefit that is provided to the employee. Similarly, the employee is usually the recipient of the benefit, even if its use is extended to other family members.
How Fringe Benefits Work
The various fringe benefits that are provided to employees vary from one company to another, since the employer can choose the benefits that will be provided to employees during a certain period. Employees are given the chance to select the fringe benefits that they are interested in during recruitment.
Whether they are interested in a company car, taking an employer-paid gym membership or education financial assistance, the employee is at liberty to take the options that provide maximum comfort at their current position in the company. For retail employers, employers may also be provided with employee discounts, gifts, and no-additional-cost services.
Although the goal of providing fringe benefits to employees is to ensure their comfort at the workplace, it also helps the company stand out from potential employees. In highly competitive markets, employers may find it challenging to retain top employees on salary alone, and fringe benefits serve as additional compensation.
Providing unique fringe benefits to employees helps the company stand out from its competitors, and it provides a greater opportunity for the company to attract high value and talented employees from graduate school, as well as from competing companies.
Types of Fringe Benefits
Fringe benefits can be categorized into two, i.e., the benefits that employers are required to provide to employees by the law and those that are provided at the employer’s discretion.
1. Fringe benefits required by law
The mandatory fringe benefits are intended to provide employees with medical care, mitigate them from economic hardships in the event they lose employment, as well as provide them with retirement income to sustain them during retirement. The following are some of the mandatory fringe benefits that employers are required to provide:
This fringe benefit is contained in the Patient Protection and Affordable Care Act. It requires businesses that employ more than 50 people to provide healthcare plans, and employees are required to have health insurance coverage. The health care plans cover visits to primary care physicians, specialist doctors, and emergency care.
The Federal Unemployment Tax Act (FUTA) requires employers to pay a federal and state unemployment tax to the Department of Labor, which provides wages, training and career guidance to employees who become unemployed due to no fault of their own. Such benefits are meant to provide brief monetary assistance to unemployed citizens who meet the requirements of the act.
Businesses that employ over 50 employees are required by law to provide family and medical leave to an employee who has worked for over one year in the company. The medical leave is unpaid, protected, and can last up to 12 weeks.
The worker’s compensation benefit is administered by the Department of Labor to federal workers who are injured at their workstation or acquire an occupational disease. Employees are provided with medical treatment, wage replacement benefits, rehabilitation, and other benefits. The compensation requirements vary by state, and injured employees should contact their state worker’s compensation board.
2. Fringe benefits not required by law
The following benefits are provided at the employer’s discretion. On the side of the employer, most of these benefits are taxable, but with certain exceptions. Examples of these fringe benefits include:
- Stock options
- Disability insurance
- Paid holidays
- Education reduction
- Retirement planning services
- Life insurance
- Paid time off
- Commuter benefits
- Achievement awards
- Fitness training
- Employee discounts
- Meal plans
Why Employers Offer Fringe Benefits
The following are some of the reasons why employers invest in fringe benefit programs:
Companies that offer additional benefits above the salary often stand out from its competitors, and it makes the company attractive to different stakeholders. For example, customers are likely to buy from companies that are recognized in the public arena for treating their employees right and creating a safe place to work. The company will also attract talented workers who are looking to join organizations that value their employees.
Companies lose billions of money when employees are unable to work due to work-related illnesses and injuries. It is because the employees will spend time seeking treatment when they would have been offering their skills and experience to the company. Creating a safe working environment and providing fringe benefits such as gym membership, health insurance, and dental care coverage can improve their health and reduce sick leaves.
Employees often work harder when they feel that the employer appreciates their contribution to the company. One way to increase employee satisfaction is by providing additional benefits like a gym membership, paid holidays, health care insurance, employer-provided car, stock options, etc. It will help reduce incidences of a disgruntled workforce and keep the employees engaged.
CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful: