HR compliance is a process of defining policies and procedures to ensure your employment and work... View more
HR compliance is a process of defining policies and procedures to ensure your employment and work practices demonstrate a thorough understanding of applicable laws and regulations, while also being aware of the company’s larger human capital resources objectives.
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What Are Fringe Benefits & How Do They Work?
What Are Fringe Benefits & How Do They Work?
What Are Fringe Benefits?
Fringe benefits are additions to compensation that companies give their employees. Some fringe benefits are given universally to all employees of a company while others may be offered only to those at executive levels. Some benefits are awarded to compensate employees for costs related to their work while others are geared to general job satisfaction. In any case, employers use fringe benefits to help them recruit, motivate, and keep high-quality people.
Understanding Fringe Benefits
Common fringe benefits include health insurance, life insurance, tuition assistance, childcare reimbursement, cafeteria subsidies, below-market loans, employee discounts, employee stock options, and personal use of a company-owned vehicle.
The companies that compete for the best talent in highly competitive fields may offer the most extraordinary fringe benefits. Alphabet, the parent company of Google, is known for benefits that include free commuter bus service and a free gourmet cafeteria. Microsoft gives 20 weeks of paid time off to new birth mothers and 12 weeks for other new parents.
What Are Some Examples of Common Fringe Benefits?
The IRS actually defines nineteen different types of fringe benefits. Catered lunches, an employer-paid cell phone, a company car etc.
For now, let’s break down a few of the most common types:
Accident and health benefits
Accident and health benefits are generally exempt from income tax withholding, Social Security and Medicare. These benefits are part of a Cafeteria Plan. Two-percent shareholders in an S-corp are not generally ineligible to participate or are taxed on the value of the benefits.
The most common fringe benefits offered to employees include combinations of insurance coverage. Typically, employers offer up to $50,000 of group term life insurance, short- and long-term disability coverage, and health insurance options. Employers commonly share the cost of premiums with employees in an effort to offset the total cost to the employee.
De minimis (minimal) benefits
A benefit is considered “de minimis” if the value of the benefit is so little that it would be unreasonable to account for it administratively. This certainly leaves some room for interpretation. However, the IRS clearly states that all cash (or cash equivalent) benefits cannot be classified as “de minimis” fringe benefits. So that $50 gift card for a holiday turkey is likely to be included in the value of your compensation.
However, the occasional company-paid meals, parties, tickets, small gifts (such as flowers), will generally fall under the de minimis benefit.
Educational assistance generally includes amounts an employer pays towards an employee’s education. This can include tuition, fees, supplies, books and equipment. The expenses should have a reasonable relationship to the business or be part of a degree program. Up to $5,250 is exempt each year. Any amounts in excess needs to be included in an employee’s income.
For larger employers with ample space, access to an on-site fitness center is a common fringe benefit to employees. Smaller employers may also offer gym memberships at a discount or a fitness equipment reimbursement up to a certain limit each year.
Health Savings Accounts (HSAs)
HSAs are a little bit of a trick. An HSA by itself is not necessarily a fringe benefit. However, pre-tax employer and employee HSA contributions through a Cafeteria Plan are considered a fringe benefit. Contributions to an HSA cannot exceed the annual limit. Contributions made through a Cafeteria Plan are exempt from income tax withholding, Social Security and Medicare. By contrast, contributions made outside of the Cafeteria Plan receive a tax deduction but will lose out on the Social Security and Medicare tax savings.
Meals and Cafeteria Plans
Meals or discounted cafeteria plans may also be offered to employees as fringe benefits. Employers recognize that the cost of lunch or dinner when employees work late can add up quickly and, as such, meals are provided by some employers at no cost to the employee.
Qualified Transportation Fringe Benefits
Employees can opt to defer salary in exchange for a qualified transportation fringe benefit (or commuter benefit plan). For 2019, employees can elect up to $265 per month for mass transit and $265 per month for parking on a tax-advantaged basis.
Child Care assistance is another benefit offered through some employers, as working full-time with children can present scheduling conflicts and prohibitive daycare costs. Some larger employers offer employees dependent care on-site, either at a discount or for no cost. Smaller companies may provide a monthly bonus to employees for the specific purpose of paying for dependent care.
Fringe Benefits and Taxable Income
Fringe benefits are often taxable income and the IRS publishes an annual Taxable Fringe Benefit Guide that helps address routine and special treatment of fringe benefits in individual tax preparation. The IRS defines various benefits as either nontaxable, partially taxable or tax-deferred, meaning you pay taxes later when you file your return.
The Internal Revenue Service (IRS) Tax Guide to Fringe Benefits as of 2019, the list of fringe benefits excluded from income taxes includes:
- Accident and health benefits
- Achievement awards
- Adoption assistance
- Athletic facilities
- Commuting benefits
- De minimis (minimal) benefits
- Dependent care assistance
- Educational assistance
- Employee discounts
- Employee stock options
- Employer-provided cell phones
- Group-term life insurance coverage
- Health savings accounts (HSA)
- Lodgings on business premises
- No-additional-cost services
- Retirement planning services
- Tuition reduction
- Working conditions benefits
Annual Benefits Statement
Employers usually provide all employees with annual personalized benefits statement. This lists regular income and the value of the benefits you provide. A common format lists employer paid benefits on one side and any employee paid expenses on the other. Some employers pay partial premiums on certain insurances and offer optional coverage as well. This statement gives your employees a better since of the investment you make in them. This is useful for generating employee loyalty and demonstrating to employees that you genuinely value them.
Talent Acquisition and Retention
Some employers offer unique fringe benefits as a way to create an employee-friendly atmosphere and to attract certain types of employees. High-tech companies, for instance, may provide employees with iPads, cell phones and other technology routinely used for work. Others offer coffee bars and free snacks to create a more homelike office feel.
Generally, the more competitive the industry, the more fringe benefits you have to offer to attract top talent. If the employee pool is large, you have more flexibility in offering what you believe are motivating benefits.
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