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Fringe benefits are perks that employers offer their employees in addition to their standard wage or salary. Depending on the size of your business, there are some benefits you must offer your employees by law, such as paid vacation days, unemployment coverage, and health insurance. Employee fringe benefits include these core perks plus an ever-growing range of other rewards.
Depending on your company’s size, the industry you work in and local or state laws, you may be legally required to offer specific benefits to your staff. As a small business owner, you should follow all the relevant regulations to avoid the risk of lawsuits and resulting fines or penalties.
Keep reading to find out what fringe benefits are, how they can have a positive impact on your business, and how to administer them.
What are Fringe Benefits?
Many employees view the wage or salary you offer them as just one part of their financial compensation. As mentioned above, the fringe or company benefits you also give them, such as health insurance and paid time off, can make their lives easier, save them time and money, and boost their job satisfaction.
Types of Fringe Benefits
Fringe benefits include a variety of benefits and perks that are separate from an employee’s salary, and may include items such as:
- insurance coverage
- retirement plan contributions
- dependent assistance
- bonus compensation
- other benefits
Below, we examine each of these common types of fringe benefits in greater detail, and outline important considerations for small business owners.
Personal insurance coverage is a popular and frequently provided employee benefit; coverage may include life, health, dental, and accident policies. You might decide to pay the full premium for your employees or contribute a set amount that reduces the employees’ out of pocket cost of coverage. Often, coverage may also be extended to employees’ dependents or household members. Depending on local regulations and the number of full-time employees that your business employs, offering certain types of insurance coverage as a benefit, including health insurance, may be required.
Retirement Plan Contributions
Retirement plans are another common benefit offered to full-time employees. Retirement plans generally offer employees the option to pay into a plan with pre-tax contributions, with the goal of building savings and income to spend later in life or during retirement. As the employer, you may also choose to make additional contributions to these plans on behalf of your employees, or to match the contributions the employees make, effectively giving employees a greater incentive to participate. Qualified retirement plans, such as 401(k) and profit-sharing programs that meet IRS standards, have some tax benefits for employees—we’ll discuss these in more detail below.
Retirement plan types are generally classified as defined benefit plans, such as pensions, wherein the payout employees receive is a set benefit at a later date, or as defined contribution plans, where the up-front contribution is set but the future payout varies. Compliant administration of retirement plans can be complicated and heavily regulated, and business owners may hire investment managers or administrators.
Importantly, regardless of whether you hire external plan administrators, it remains your responsibility as the business owner to maintain the plan in a manner that is compliant. There has been an increase in litigation in recent years related to retirement plans; such proceedings can lead to large defense costs, settlements, or other losses. Management liability insurance such as fiduciary liability coverage may help reduce these risks.
Dependent assistance covers support to help pay for your employees’ childcare or expenses for relatives that rely on them for help. Some employers may offer on-site subsidized child daycare services, and others may offer vouchers or money to help their employees with the cost of childcare.
There are also services called dependent care assistance programs (DCAPs) or dependent care flexible spending accounts (FSAs), where your employees can pay for dependent care assistance with pre-tax funds. Depending on eligibility, employees may be able to contribute up to $5,000 to some plans and use it towards eligible expenses related to dependent care.
On top of their regular salaries or wages, you could also offer performance-related financial bonuses to your employees. Often a bonus is determined at the end of the quarter or year, and it may be based on hitting performance targets or other company goals.
There is a wide array of additional perks that you may offer employees to improve job satisfaction, morale, retention, or productivity. Examples of extra fringe benefits may include:
- providing more, or even unlimited, paid vacation days
- flexible work arrangements (including remote work, reduced days in the office, or consideration for extended leave of absence)
- equipment employees can use away from work (for example, cell phones, computers, or vehicles)
- vouchers for transportation
- free of subsidized meals in the office
- subsidized gym memberships or fitness equipment
- subsidized training or further education costs
Why are Fringe Benefits Important?
It’s becoming more common for businesses to offer a broader range of fringe benefits to attract and keep workers. A 2019 study in the UK showed that two-thirds of the 1,000 employees surveyed think that employee perks are equal to or more important than their salaries, and 14% of those surveyed would accept more benefits over a pay rise. Such benefits have become even more important in recent years, as the COVID-19 pandemic has drawn increased attention to benefits such as health insurance and flexible, remote work.
Employee fringe benefits help your staff feel valued and satisfied at your company. If they’re happy working for you, they’re more likely to be productive and engaged. You can use perks to entice talented employees to your business and keep them happy.
Fringe Benefits - Frequently Asked Questions
Below, we share answers to some frequently asked questions about employee fringe benefits.
Are fringe benefits taken out of salary?
Some fringe benefits are taken from your employees’ salaries and some are not. For example, free benefits (such as on-site childcare or a free cafeteria) are not generally taken out of employees’ salary, as they aren’t paying for these perks. On the other hand, retirement plan contributions or insurance premium payments made out of employees’ pre- tax gross wages generally come out of their paychecks.
How is a fringe benefit taxed?
Taxation of fringe benefits depends on the type of benefit, who pays for that benefit, and whether the payment is made using before or after-tax dollars. Benefits paid as money, such as performance bonuses, are usually taxable along with the employee’s other pay. Insurance and qualifying retirement plan contributions taken out of the employee’s gross pay, on the other hand, are not taxed. IRS Publication 15-B says, “Any fringe benefit you provide is taxable and must be included in the recipient’s pay unless the law specifically excludes it,” though there are exclusions for some subsidies, meals or low-value benefits You or your employees should consult a tax expert for a more detailed understanding of which specific benefits may lead to taxation for your employees.
Are fringe benefits subject to FICA?
The Federal Insurance Contributions Act (FICA) is a compulsory payroll tax that’s shared evenly between employers and employees. All taxable fringe benefits are subject to FICA; non-taxable benefits are not.
Counterpart’s fiduciary liability insurance product, a type of management liability coverage, helps protect employers and fiduciaries against employee claims related to the misadministration of employee benefits and retirement plans. Speak to a broker about how you can find the right coverage for your business.
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