What Are Fringe Benefits How They Work and Types
Amy, an ACA and the CEO and founder of OnPoint Learning, is a financial training expert with almost two decades of industry experience and instruction.
Fringe benefits are extra compensation provided by companies to employees. Some benefits are universal while others are exclusive to executives. These benefits can include a company car, paid time off, or gym memberships. Fringe benefits are used to attract, motivate, and retain high-quality employees.
Key Takeaways:
1. Fringe benefits help recruit, motivate, and retain high-quality employees.
2. Companies offering the most benefits tend to compete for in-demand skills.
3. Some benefits, like health and life insurance, are tax-exempt, but others are taxed based on fair market value.
Fringe benefits typically include standard items in hiring packages, such as health insurance, tuition assistance, and employee discounts. However, unique benefits can align with a company’s profile. PetSmart and Dogtopia have pet-friendly workplaces, while Ben & Jerry’s rewards workers with free ice cream. Highly competitive fields often offer exceptional benefits, like free commuter bus service and gourmet cafeterias.
Tax considerations are important for fringe benefits. Unless specifically exempted, fringe benefits are taxable. Tax exemptions include accident and health benefits, achievement awards (up to $1,600 for qualified awards), adoption assistance, athletic facilities, commuting benefits, de minimis 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, meals, no-additional-cost services, retirement planning services, tuition reduction, and working conditions benefits. However, these exemptions often have complex conditions.
Fringe benefits that do not conform to IRS exemption rules are taxable. Fair market value determines the value of most fringe benefits, with taxable income being the retail price the employee would pay for the same benefit.
All fringe benefits provided by employers are taxable unless expressly excluded by law.
A cafeteria plan is a selection of fringe benefits that employees can choose from. These benefits can often be paid for with pre-tax dollars and may include insurance and retirement plans. The name "cafeteria" refers to the selection process, similar to choosing from a buffet.
An achievement award may be tax-exempt if it meets certain criteria, such as a value below $1,600 and not being cash or cash equivalents. However, it does not include vacations, meals, lodging, or tickets to events.
Fringe benefits are additional incentives aimed at attracting and retaining talent. Examples include paid time off, exercise areas, and pet-friendly work environments.
