What exactly are fringe benefits, and how can they be used to help keep your best staff around?
One of the most effective ways of attracting and retaining high-quality employees is to offer excellent fringe benefits. Major companies like Apple, Microsoft, and Amazon use competitive fringe benefits to recruit the best talent and boost their public perception.
What exactly are fringe benefits, and how can they be used to help keep your best staff around?
Here's what is covered in this guide:
Fringe benefits are perks offered by an employer to an employee in addition to their salary. These benefits are usually non-monetary and come in the form of services like insurance, paid vacations, paid meal plans, and much more. Fringe benefits can vary widely from employer to employer and industry to industry. Some fringe benefits are mandatory while most are completely optional.
While there’s no federal law requiring all benefits plans to extend coverage to all employees, there are some fringe benefits required by state law.
These benefits protect the well-being of employees should they get hurt on the job or suddenly suffer a life-altering condition.
Most fringe benefits are not required by law but there are some benefits considered standard. Benefits like health insurance, paid vacations, and retirement planning are offered by nearly 80% of all employers nationwide.
80 % of employers offer health insurance, paid vacations, and retirement planning.
Employers not offering these benefits put themselves at a severe disadvantage in the talent market. Candidates feel as if they need more than an attractive salary if they’re going to be committing to a role long term. Benefits that prioritize their health and well-being go a long way in letting them know they are cared for.
As mentioned above, fringe benefits packages vary from one company to another. Besides fringe benefits required by law, employers can choose which benefits they provide to employees during given periods. Virtually all companies offer benefits packages to their employees, but not every package is offered to every employee.
For example, a senior project manager for a large construction company might be offered a benefits package that includes access to a company car for both personal and professional use. A junior project manager working for the same company is likely to have a similar package but without access to company resources.
A basic package of benefits companies often offer all of their employees includes insurance (health, disability, life, etc.), PTO (paid time off), a retirement plan, and paid parental leave. Let’s take a look at each to understand their importance.
One of the most important benefits employees look for when considering a job is insurance. Health, life, and dental insurance are all very valuable because premiums are expensive. Employer-provided insurance provides coverage at a fraction of how much it would cost otherwise. Insurance coverage often extends beyond just the employee recipient. Spouses, dependents (like children and wards), and sometimes even pets are covered under employer-provided plans. Health-related insurance plans are tax-exempt.
In addition to health-related coverage, some companies also offer flexible healthcare spending accounts (HSA). HSAs help employees defer a portion of their paycheck toward medical expenses, such as child or dependent care. These accounts typically have set spending limits, but money can be taken out anytime without penalty, as long as it is used for qualifying medical expenses. Just like health insurance plans, healthcare spending accounts are tax-exempt.
Another staple part of any benefits package is PTO. Even if it’s only a week or two a year, employees benefit greatly from taking a break from punching the clock. There’s evidence to suggest time away from work has physical and mental benefits like stress reduction and can even improve mindfulness.
Increasingly, workers are prioritizing their mental health. Sometimes this means needing to take personal days to take care of issues outside of the workplace. A PTO package that includes personal days will give them the safety of being able to take some necessary days off without being penalized.
Retirement is something every employee needs to consider, even if they’ve only just begun their professional career. The average age of retirement has grown in the last 30 years, and trends seem to suggest the gap will grow wider. The most common way to plan for a successful retirement is to pay into a retirement account that grows and compounds over decades. Employers help with this by offering retirement planning packages.
Most companies offer 401(k) plans with options on how much they want to match contributions to the account. Companies looking to attract top talent will often match contributions dollar for dollar. 401(k) retirement plans are a non-mandatory benefit; however, the money paid into a 401(k) account is tax-free until it’s withdrawn.
One of the most sought-after fringe benefits employees look for is paid parental leave. There are many people looking to start families but are hesitant to do so at the expense of their job. For example, working women looking to start a family want to have the assurance that their job will be waiting for them when they’re able to return to work. If a woman’s job has no sort of paid parental benefit then she might have to delay her plans or find a new job altogether. Companies that offer a parental paid leave package show they are willing to support them even when they make the personal decision to start a family.
Paid leave is typically 12–16 weeks, and some paid leave packages allow new parents to take extra time off if necessary. Parents can even work up until the birth of their child if they so choose. As far as compensation goes, companies often offer an employee about two-thirds of their original pay while they are on leave. In the spirit of offering the most attractive package, some companies offer full compensation during paid leave.
Why offer fringe benefits when it’s not necessary to do so? Because attractive perks help companies stand out above the rest when competing for talent. When the salary offer for two jobs is the same or very similar, the decision may come down to the benefits being offered. Having a worthwhile benefits package can be the difference between a candidate coming on board or choosing another offer.
During recruitment, companies will often give prospective employees the chance to select the fringe benefits they are most interested in. This is an excellent way to garner a sense of buy-in, especially because useful perks and benefits options make employees look forward to going to work every day.
Some employers offer fringe benefits exclusive to their brand. For example, tech giant Apple hosts a yearly Beer Bash event exclusively for their employees. These events offer free food, drinks, and performances from celebrity entertainers. Apple, like many other companies, also offers employees substantial discounts on their products. Offers like these help companies stand out when bidding for top talent, because these perks can’t be found anywhere else.
True to their brand, outdoor goods company REI offers their employees two paid days a year just to go outside and spend time in nature. These paid days off are in addition to a benefits package that includes paid vacation and sick leave.
Fringe benefits can extend well beyond discounts or free events. Microsoft, for example, offers on-site benefits to non-remote employees. Employees are given perks like free gym memberships, free transportation on and off campus, and gourmet cafeteria food options. These perks make all the difference when trying to attract top talent because they emphasize health and convenience for workers.
Employees unable to work in person can still have opportunities for great non-compensatory benefits. With work increasingly trending toward becoming fully remote, companies are adapting by offering flexible work schedules. Dell Technologies has been a pioneer on this front for over a decade. They started their Connected Workplace program back in 2009 and had almost 70% of their workforce working remotely by 2019. When the pandemic hit in 2020, that number shot up to over 90%. This level of flexibility makes companies like Dell a prime target for talent because their scheduling needs get accommodated in a major way.
While fringe benefits may be in addition to an employee’s salary, they are still subject to taxation. In general, fringe benefits are taxable unless otherwise noted by the IRS. They must be reported on an employee’s yearly W-2 form. Taxable fringe benefits are included as an employee’s gross income, making them subject to FICA (Federal Insurance Contributions Act), income tax withholding, and employment taxes. Fringe benefits are taxed based on either an employee’s income tax rate or a flat rate based on the benefit’s fair market value.
FICA is a federal payroll tax deducted from every paycheck. The tax is split evenly between employer and employee, with both paying a 12.4% Social Security tax and a 2.9% Medicare tax total. There is no wage limit on the Medicare tax, but the Social Security tax is applied to the first $127,000 of an employee’s yearly wage. FICA also applies evenly to every employee, regardless of income.
Fair market value is the price an employee would pay for a benefit if it wasn’t being provided by an employer. FMV is not determined by the employee, nor is it determined by how much the employee pays for the benefit. FMV is derived from the amount an employee would make during an arm’s-length transaction for the benefit. For example, suppose an employee pays $75 for a benefit, but the FMV is $250. The benefit would then be taxable at the difference, $175.
The IRS keeps a list of fringe benefits that are to be excluded from taxation.
As of 2022, they are:
We’ve talked a lot about what fringe benefits are, but how much does it cost a company to offer them? The answer can be found in fringe benefit rates.
A fringe benefit rate is the yearly cost of all benefits and payroll taxes for an employee divided by the employee’s yearly wage. Fringe benefit rates can determine the total cost of a company’s labor force. Rates will differ from company to company and depend on how much employees are compensated (counting both salary and total value of benefits).
Calculating fringe benefit rates is relatively simple. The steps are as follows:
First, add up the annual cost of the employee’s fringe benefits, including payroll taxes.
Next, divide this amount by the employee’s salary or gross wage for the year.
Finally, take that number and multiply it by 100.
Suppose we have an engineer of a tech firm salaried at $95,00 per year. Their fringe benefits package is valued at $30,000. Dividing the value of the benefits package by their yearly salary and then multiplying by 100, we get a fringe benefit rate of about 31.6%. What this translates to is the firm paying just under a third of the engineer’s salary in additional compensation.
Without fringe benefit rates, it would be much harder for companies to keep track of how much they spend to keep employees in addition to their salaries. These rates allow companies to see the total cost of their labor force and exactly how much it costs to keep each employee, right down to the last cent.
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Many companies offer 401(k) retirement plans as part of their employee benefits package. 401(k) retirement plans are non-mandatory, and employers will often match contributions made to 401(k) accounts up to no more than 3%. All contributions made are untaxed until any withdrawal is made. In some cases, to make compensation packages as attractive as possible, employers will match accounts dollar for dollar.
Reportable fringe benefits are fringe benefits that can be reported as taxable income. In general, a fringe benefit is considered reportable unless the law specifically excludes it from being reportable.
There are some fringe benefits that are not subject to taxation. The IRS maintains a specific list of fringe benefits that are considered to be nontaxable. Examples of nontaxable fringe benefits include disability, health, vision, or dental insurance, employee discounts, and educational assistance (tuition, books, fees, etc.). For more information on which fringe benefits are taxable and nontaxable, read our article.
Let’s recap everything we’ve just discussed.
Fringe benefits are non-monetary forms of compensation offered to employees in addition to their salary. Some benefits are required by law but most are optional. Fringe benefits like health-related insurance, paid time off, retirement planning, and paid parental leave are considered standard, offered by over 80% of employers nationwide. Companies competing for the top talent in their industries will offer the most attractive fringe benefits package to get an edge over competitors. All fringe benefits are subject to taxation, with specific exceptions as noted by the IRS.
These days, salary alone simply isn’t enough to bring in and retain valuable employees. Prospective employees need to feel valued and taken care of, and fringe benefits are the best way to accomplish this. Compensation packages with attractive and useful fringe benefits are now what make the difference in the competitive talent market.
Find out how Compt can help you manage fringe benefits for your employees. If you are interested in learning more about how to build the perfect perks program for your distributed team, download the free benchmark report on the most common employee perks.
To read up on fringe benefits before offering them to your employees, here are some helpful resources.