Fringe Benefits

What are Fringe Benefits?

Fringe benefits mean extra perks that employees receive, that are not included in regular wages or salaries and can qualify as imputed income for tax purposes.

Fringe benefits became more prominent in the United States during and after World War II. During the war, wage controls prevented employers from raising salaries to attract scarce labor. Employers started offering benefits like health insurance and paid vacations to attract and keep workers during World War II wage controls. After the war, these benefits became popular because they were a tax-efficient way to pay employees.

Overview and Type of Fringe Benefits

Fringe benefits encompass various forms of compensation provided to employees beyond their normal wages. Below, we categorize these benefits into tax-exempt, mandatory, and discretionary types, detailing their characteristics and tax implications.

Tax-Free Fringe Benefits:

According to IRS Publication 15-B, several fringe benefits are exempt from tax, provided specific conditions are met:

• Accident and Health Benefits: Coverage provided to employees.
• Achievement Awards: Recognitions for length of service or safety achievements, up to certain limits.
• Adoption Assistance: Support for adoption-related expenses, under certain conditions.
• Athletic Facilities: On-premises facilities available to employees.
• De Minimis Benefits: Minor perks like free coffee or snacks.
• Dependent Care Assistance: Up to $5,000 per year.
• Educational Assistance: Up to $5,250 annually for tuition, fees, books.
• Employee Discounts: On goods, services, and stock options, within limits.
• Employer-provided Cell Phones: Primarily for non-compensatory business purposes.
• Group-term Life Insurance: Coverage up to $50,000.
• Health Savings Accounts (HSAs).
• Lodging on Business Premises: For the employer's convenience.
• Meals: Primarily for the employer's convenience.
• No-additional-cost Services: Services not incurring any substantial additional cost to the employer.
• Retirement Planning Services: Consulting and advice.
• Transportation (Commuting Benefits): Certain limits apply.
• Tuition Reimbursement: For job-related education.
• Working Condition Benefits: Items that would be deductible as a business or depreciation expense.

Mandatory Fringe Benefits:

• Health Insurance: Required under the Patient Protection and Affordable Care Act for businesses with more than 50 employees.
• Unemployment Insurance: Under the Federal Unemployment Tax Act (FUTA), supporting employees who lose their jobs.
• Medical Leave: Up to 12 weeks of unpaid leave for medical/family reasons, under the Family and Medical Leave Act (FMLA) for businesses with over 50 employees.
• Worker’s Compensation: Benefits for workers injured on the job, covering medical care and compensation for economic loss.

Discretionary Fringe Benefits:

• Paid Time Off (PTO): Offered in various amounts and at different times by employer discretion.
• Gym Membership: To support employee health and wellness.
• Free Meals: Offered by some employers as part of a wellness program.
• Discounts: On products or services, often as part of an employee rewards program.
• A Company Car Allowance: For personal use, typically taxable.
• Tuition Reimbursement: Beyond job-related education, under certain conditions.
• 401(k) Matching Contributions: To encourage retirement savings.
• Childcare Assistance: Support for working parents to cover childcare costs.
• Employee Discounts: On various services and products.

Benefits of Fringe Benefit for Employers

Fringe benefits offer several advantages to employers that go beyond just the basic compensation of salaries or wages. Here are some key benefits that employers gain by offering fringe benefits:

1. Attract and Retain Talent: Offering a comprehensive package of fringe benefits helps attract high-quality candidates and retain current employees by enhancing job satisfaction and loyalty.
2. Enhance Employee Productivity: By providing benefits such as health insurance, gym memberships, or childcare assistance, employers can help ensure that their workforce is healthy, satisfied, and less stressed, which can lead to increased productivity.
3. Tax Advantages: Many fringe benefits are tax-deductible for the employer and are tax-exempt for the employee, providing a cost-effective way to increase the overall compensation package.
4. Reduce Turnover Rates: Benefits that improve employee satisfaction and engagement, such as flexible working hours or professional development opportunities, can reduce turnover rates and lower the costs associated with hiring and training new staff.
5. Improve Company Culture: Offering benefits that support work-life balance, like PTO and family leave, can foster a positive company culture that values the well-being of employees.
6. Competitive Edge in Job Market: A strong benefits package can distinguish a company from its competitors, making it more attractive to potential employees in a competitive job market.

By investing in fringe benefits, employers not only enhance their appeal as a place to work but also invest in the long-term success of their employees and their business.