What are Fringe Benefits?

What are fringe benefits?

Fringe benefits are a form of employee compensation beyond salary.

These benefits can take many forms, including cash earmarked for a specific purpose (reimbursement for expenses), non-cash assets with monetary value (insurance), or other perks (an employee parking spot).

Fringe benefits are intended to indirectly compensate employees in order to encourage their loyalty and improve job satisfaction.

A good package of benefits can make one job more appealing than another even if the salaries are similar.

Common Benefits

Fringe benefits vary widely from company to company, but some are more typical.

The most common and generally most important benefits relate to employer-sponsored health care.

In the United States, most employers will sponsor and often subsidize a health insurance plan for full-time employees.

Employer-sponsored health care can be really valuable, worth thousands of dollars per employee; many people even take a lower salary to have access to a better health insurance plan.

Other common and important benefits include life/accident insurance and retirement plans. These plans provide financial security for employees when they retire or if they become injured.

Many companies sponsor 401(k) retirement plans that allow employees to save for retirement tax-efficiently.

Some companies also provide life insurance that can benefit the family of an employee in case of an accident.

Fringe benefits can vary widely for employees within the same organization. For example, corporate executives often have access to a company car for daily use.

Lately, the trend is for companies to offer more benefits to improve job satisfaction. Many businesses now allow employees to work from home sometimes, or even to bring their dog to work.

Large technology companies have become famous for their willingness to pay for extravagant corporate offices with free meals and on-site activities.

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Taxable vs. Nontaxable Fringe Benefits

For tax purposes, the IRS maintains that fringe benefits are a form of compensation and must be taxed.

However, the IRS provides a list of fringe benefits excluded from taxation. Common fringe benefits excluded from income taxes include health benefits, corporate meals (on-premises), retirement plans, business phones, some commuter benefit programs, and tuition reimbursement.

There are some nuances to the tax rules. For example, if an employee is given a business phone and uses it for personal use 60 percent of the time, then 60 percent of the benefit is taxable and the remaining 40 percent is tax-exempt.

Fringe benefits that are taxed should be valued and treated as income.

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