No one is ever upset when the HR team at their new company mentions any kind of benefits but unfamiliar terms are always unnerving. So what are some fringe benefits then? What does “fringe benefit” mean?
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Definition of Fringe Benefits
In simple words, the meaning of fringe benefits is exactly what it sounds like—external, outlying benefits. These refer to additional perks that a company might offer, apart from the wages that are promised to every employee. Some benefits might be legal requirements that a company has to offer, according to the laws set in their area of operation. Other benefits are offered as a result of employee negotiations or even union agreements that might have been settled earlier.
Some benefits a company might offer entirely on the basis of what it is willing to provide its employees in order to attract and retain top-level talent. Many employees stay with a company, not for extravagant wages, but due to the fringe benefits that fall in line with their own preferences. A MetLife report indicated that employees were 26 percent more likely to accept a role due to its health and wellness programs, indicating the importance of fringe benefits today.
What Are Some Examples of Fringe Benefits?
Fringe benefits can take on many forms and its definition can vary according to the company. Some companies can offer mental health support for all their employees. Others might offer free meals or coupons to neighboring restaurants. Something as serious as retirement planning assistance could just as soon be a benefit as providing a gym membership for employees who want to work out. Paid time off (PTO), travel reimbursement, tuition reimbursement, menstrual leave, and childcare assistance are some common types of fringe benefits. A report by The Conference Board indicated that 86 percent of organizations maintain policies such as parental leave and well-being support.
Employee Stock Options (ESO) are an increasingly common way for publicly traded companies to compensate their employees. Not only does it hold economic value but it also creates a sense of ownership within the workspace.
Industry leader PwC offers up to $1,200 a year towards an eligible employee’s student loans. Ice cream company Ben & Jerry’s defines its fringe benefits in its own unique way, by offering its employees three pints of ice cream every day. Not every company can afford such generous or quirky fringe benefits but making the most of their funds and providing more feasible ones does wonders for the mood at the workplace.
401(k) as a Fringe Benefit
The very popular 401(k) is also a fringe benefit as employers can choose to assist employees with their retirement planning. The plan’s popularity is also aided by the fact that the employers matching contributions to the plan are tax deductible, allowing both parties to make a useful contribution to the employee’s future. According to an interview by the SHRM, industry members indicated that average employee participation rates in such 401(k) plans have gone up to 82 percent when offered by a company.
Do Fringe Benefits Count as Income?
While fringe benefits are an additional offering made by a company, entirely separate from their wages, they do add to the individual’s category of “income” generated during that year.
According to the Social Security Handbook by the U.S. Government, “Any fringe benefit that is not specifically exempt from Social Security taxes counts as wages. The amount of wages is the difference between the discount price you pay for the benefit and its fair market value.” As of 1 January 1985, the five categories exempt from being considered as wages are as follows:
- Minimum fringe: Any property or service that has been provided and is too small in its value to practically be calculated
- Gyms and athletic facilities: On-site athletic facilities that are offered by an employer
- No additional cost service: Any services that the employer allows you to avail of without additional costs
- Qualified employee discount: Any discounted property or service that is provided to an employee
- Working condition fringe: Service or property provided by the employer for employee convenience, usually necessary for their job
Are Fringe Benefits Taxable to Employees?
Fringe benefit taxes are applicable and do need to be reported accordingly. There are some categories for exceptions but largely, benefits are included in the employee’s W-2 forms that are sent to the IRS by the employer. The IRS maintains certain guidelines and limits, exceeding which makes the benefit taxable.
The IRS website states that “the amount the employer must include is the amount by which the fair market value of the benefits is more than the sum of what the employee paid for it plus any amount that the law excludes.” The fair market value refers to the actual price of an object or service on the market i.e. the true market price under the prevailing market conditions.
The IRS has very clear guidelines available on its website on how to determine the value of a benefit. Other than the general valuation rule to calculate the fair market value of any benefit provided to the employee, the guidelines include:
- Cents-Per-Mile Rule: To determine the value of a vehicle provided to an employee that is employed for personal use outside of the company’s needs
- Commuting Rule: To determine the value of a vehicle provided to an employee for commuting between their work and home
- Lease Value Rule: To determine the value of a vehicle by using its annual lease value
What Fringe Benefits Are Not Taxable to the Employee?
The IRS also defines fringe benefits that are not taxable for employees or have limitations beyond which the benefit becomes taxable. Employers and employees must both be aware of these categories and their exclusion guidelines, so there is no confusion at a later date on what to include in the W-2 form. The list includes:
- Accident and health benefits
- Achievement awards
- Adoption assistance
- Athletic facilities
- De minimis (minimal) benefits
- Dependent care assistance
- Educational assistance
- Employee discounts
- Employee stock options
- Employer-provided cell phones
- Group-term life insurance coverage
- HSAs
- Lodging on your business premises
- Meals
- No-additional-cost services
- Retirement planning services
- Transportation (commuting) benefits
- Tuition reduction
- Working condition benefits
Who Is Entitled to Fringe Benefits?
Certain fringe benefits are required by the law and are applicable to all employees who are employed by the company. Social Security, health insurance, unemployment insurance, medical leave, and worker’s compensation are examples of legally required benefits that companies are expected to provide.
Apart from these, companies often have the option to decide which employees are eligible to receive other fringe benefits they can provide, based on internally determined guidelines. Of the many examples of fringe benefits, some are often applicable to all employees, such as access to meals, working conditions benefits, access to on-premise facilities, etc. Others might be determined by the length of the employee’s association with the company. Some businesses offer sabbatical options to long-term employees, or flexible schedules and education assistance, just to name a few.
Can Employers Deduct Fringe Benefits?
By citing the fringe benefit as a business expense, employers can sometimes deduct fringe benefit costs from their taxable income for lower tax expenses. Again, whether a benefit is fully deductible or not depends on the IRS and the limitations that have been set.
It is essential to note that the deductibility of fringe benefits can vary depending on the specific benefit and applicable tax laws. Some fringe benefits may be fully deductible, while others may have limitations or specific rules governing their deductibility. Educational assistance and health insurance expenses up to a certain amount are deductible from the employer’s taxable income. Referring to the IRS guidelines is an important step in determining what benefits an employer is going to be able to offer its employees.