What are fringe benefits?
Organizations of all sizes can offer fringe benefits to increase employee satisfaction and reduce turnover. Learn more about the types of fringe benefits you can offer to your workers.
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Are you looking to expand your employee benefits offerings?
If you’re looking to bolster your employee benefits package, you may have encountered the term “fringe benefits.” Despite the name, offering fringe benefits to employees is common for many organizations.
So, what are fringe benefits, and why should you provide them to your employees?
This guide will define fringe benefits, explain why they’re essential for organizations, and explore the tax implications of these benefits.
Topics covered in this guide include:
What is a fringe benefit?
A fringe benefit is a form of indirect compensation provided to an employee in addition to their wage or salary.
The term fringe benefit was originally an umbrella term for any benefit that isn’t considered traditional. Many businesses offer traditional employee benefits like group health insurance, dental insurance, vision insurance, life insurance, or retirement.
Organizations began to introduce additional benefits to better attract and retain employees. Now fringe benefits are synonymous with employee benefits.
It’s important to note the Internal Revenue Service (IRS) categorizes fringe benefits as a form of payment for services, even to non-employees, such as 1099 contractors. Traditional employee benefits like health insurance aren’t included on the IRS fringe benefits list.
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Why offer fringe benefits?
While some fringe benefits are required by law, offering additional fringe benefits to your employees is an excellent way to increase employee satisfaction and reduce employee turnover.
Satisfy federal and state benefits requirements
You may need to offer various required federal and state employee benefits as an employer. Let’s look at some examples.
Federal benefits requirements include:
- Health insurance: The Affordable Care Act (ACA) employer mandate requires organizations with 50 or more full-time equivalent employees (FTEs) to provide health insurance that meets minimum essential coverage (MEC). Alternatively, employers can offer a health reimbursement arrangement (HRA) such as the individual coverage HRA (ICHRA).
- Unemployment insurance: Employers across the country must pay a federal unemployment tax to support those who are unemployed at the state level.
While not technically a fringe benefit, the Family and Medical Leave Act (FMLA) requires organizations with 50 or more employees to provide unpaid family and medical leave to employees who have been employed for at least a year.
State benefits requirements may include:
|Benefit||Description||States/territories where required|
|Disability insurance||Pays employees who are unable to work due to injury or illness.||California, Hawaii, New Jersey, New York, Puerto Rico, and Rhode Island|
|Workers' compensation insurance||It covers the costs for workers who are injured on the job.||Every state except Texas|
Many states also require employers to reimburse their employees for work-related expenses.
Offering an array of fringe benefits to your employees helps your organization satisfy federal and local requirements for employee benefits.
Improve employee retention
Fringe benefits help increase employee satisfaction, making your employees more likely to stay at your organization instead of looking for new opportunities. In a job seeker’s market, employee retention is key. Offering ample fringe benefits that meet your employees’ specific needs creates company loyalty and makes employees feel cared for, improving employee satisfaction.
Attract top talent
Organizations are doing more than ever to attract qualified candidates. If your competitors offer traditional employee benefits, you can win over top talent by adding fringe benefits to your compensation package. Increased employee benefits are a top consideration for job applicants alongside salary.
According to our 2022 Employee Benefits Survey Report, 82% of employees said the benefits package an employer offers is an important factor in whether or not they accept a job.
By offering fringe benefits, you can more easily attract your ideal job candidates.
Empower your employees
Within the fringe benefits umbrella, you can offer personalized employee benefits. Personalized employee fringe benefits enable employers to set monthly allowance caps, giving them control over the benefit cost while giving employees the freedom to choose how their allowance is spent. Personalized benefits meet the individual needs of employees while ensuring that your benefit dollars are being spent on the expenses you intended.
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What are examples of fringe benefits?
Since fringe benefits can include anything from formal employee benefits to in-office perks, there are many types of fringe benefits that you might encounter.
Here are some examples of fringe benefits:
- Health benefits like health insurance and HRAs
- Wellness programs
- Paid time off (PTO) and sick leave
- Tuition assistance or reimbursement
- Retirement benefits
- Use of a company car or cell phone
- In-office perks like free meals, snacks, or coffee
- Commuter benefits
- Child care services
- Rewards and recognition programs
- Flexible work hours and remote work
In the following sections, we’ll cover some of the most popular fringe benefits and explain how you can offer them.
Flexible working arrangements and remote work
Following the COVID-19 pandemic, flexible working arrangements are becoming a popular perk for employers looking to recruit top talent. Flexible work arrangements can include remote work, hybrid work, and flexible hours or schedules.
When employees control their schedules, they’re more likely to find a good work-life balance that allows them to remain healthy and productive in the workplace.
Remote work can help your organization attract top talent. According to Pew Research Center, 60% of employees with jobs that can be done remotely say they’d like to continue working from home. As many organizations return to a physical workplace, your organization can stand out by offering remote or hybrid work.
If your employees work remotely, you can offer them a remote work employee stipend to help cover their expenses.
Remote work stipends allow you to reimburse your employees for their home office setup costs, monthly internet access expenses, and personal cell phone bills if their phones are used for work, among other expenses like coworking space memberships. This can help ensure that your employees have access to high-speed internet and the tools they’ll need to do their jobs effectively.
Paid time off (PTO)
While many organizations offer vacation time and sick leave, the amount varies significantly.
The United States is one of the only countries without a federal minimum annual leave, the others being Kiribati, Marshall Islands, Micronesia, Nauru, Palau, and Tonga. Even with no federal requirements, the U.S. Bureau of Labor Statistics found that 79% of private industry employees had vacation time.
PTO combines vacation, sick time, and personal time into a single system employees can use for taking time off from work. Some organizations use an accrual system based on how many hours an employee works per year and how long they’ve been at the organization, while others provide unlimited PTO on day one.
With unlimited PTO, employees can take as many days off from work as they need as long as it doesn’t heavily impact their work.
Offering PTO to your employees has many benefits. If employees know they can take time off, they’re more likely to see it as an incentive to get work done beforehand. Taking time off also allows your employees to relax and de-stress. They’ll feel refreshed and work more efficiently when they return to work.
Providing ample PTO and sick leave also ensures that employees won’t come to work when they feel ill, preventing the spread of viruses that could threaten your entire workforce.
Tuition and education assistance
With student debt rising, more organizations provide fringe benefits for tuition and education assistance. These benefits are desirable to recent college graduates looking for work and those looking to earn a degree.
Some of the most common education benefits are:
- Tuition assistance and reimbursement
- Continuing education courses
- Student loan repayment programs
- Training programs and seminars
Most organizations that offer tuition assistance reimburse employees for their tuition upon completion of their courses to encourage employees to continue their education.
Other organizations contribute a certain amount toward their employees’ existing student loans through a student loan repayment program.
Tuition and education assistance are great fringe benefits to offer to your employees. However, you need to be prepared for the complexity of these programs.
Another option for providing education and professional development opportunities to your employees is by offering an employee stipend. A professional development stipend allows you to reimburse your employees for their various education-related expenses up to their available allowance. This makes it simple to provide a standout education benefit to your employees.
Health benefits remain one of the most sought-after employee fringe benefits. There are many benefits options to choose from, including traditional group health insurance, health savings accounts (HSAs), HRAs, and health stipends.
Due to rising group health insurance costs and healthcare consumerism, many organizations are turning away from offering traditional group health insurance policies. Instead, they are choosing to provide HRAs or health stipends.
HRAs and health stipends allow organizations to reimburse their employees for their qualifying medical expenses, including individual health insurance premiums and out-of-pocket healthcare costs. But, there are some significant differences between the two personalized health benefits.
An HRA provides tax-free reimbursements for both the employer and the employee, while health stipends are a taxable fringe benefit and must be reported as income on your employees’ W-2s.
Health stipends are an excellent option for organizations with employees who receive advance premium tax credits (APTC) for their individual health insurance premiums. They can also be offered to international employees and independent contractors. However, the taxable nature of stipends makes HRAs a better choice for many organizations. A stipend also doesn’t satisfy the ACA’s employer mandate, while an HRA can.
Some of the most common HRAs are:
- Qualified small employer HRA (QSEHRA) - Designed for organizations with fewer than 50 full-time equivalent employees (FTEs)
- Individual coverage HRA (ICHRA) - Great for organizations of all sizes that want to create custom employee classes and monthly allowances
- Group coverage HRA (GCHRA) - Also known as an integrated HRA, a GCHRA supplements your group health insurance plan, such as a high deductible health plan (HDHP)
A wellness benefit is another popular type of fringe benefit that has been increasingly popular following the COVID-19 pandemic. There are many different wellness benefits available for your employees, which you can include in your holistic workplace wellbeing program.
Common workplace wellness benefits include:
- Smoking cessation programs
- Employee health screenings
- Nutrition education classes
- Vaccination clinics
- Weight loss programs
- Stress management classes
- Gym memberships or fitness classes
- Wellness stipends
One of the best ways to empower your employees to participate in your wellness program is to offer personalized wellness benefits such as wellness stipends.
You can reimburse your employees for their wellness expenses with a wellness stipend, such as gym memberships, fitness classes, exercise equipment, and meditation apps, to give a few examples. Just like with a health stipend, wellness stipends are taxable.
Offering a wellness stipend is a simple way to ensure that you include all of your employees in your wellness benefit.
Another popular type of fringe benefit is a commuter or transportation benefit. This allows you to alleviate some of your employees’ financial burdens when it comes to securing transportation to and from the workplace.
There are various commuter benefits, including mileage reimbursement, gas and fleet cards, providing transit or parking passes, and more.
You can also offer a commuter and transportation stipend to reimburse your employees for any transit or commuter-related expenses.
Find out which benefits are best for your organization
What is a fringe benefit rate?
A fringe benefit rate is a number that represents the proportion of benefits offered to an employee versus the wages or salary paid to that employee. You can calculate the fringe benefit rate by adding your annual benefits costs and payroll taxes together and dividing this number by your total annual wages paid.
For example, if you paid $10,000 in benefits costs and $60,000 in wages for an employee, then your fringe benefit rate would be 16.67%.
You can use this rate to find the total cost of labor at your organization. This is useful for determining your budget for additional benefits and yearly expenses. It can also help you easily compare the value of your benefits compared to your competitors.
IRS rules for fringe benefits
In general, most fringe benefits are taxable income. However, some benefits have a tax-advantaged status.
The Internal Revenue Service (IRS) provides a list of tax-free fringe benefits in Publication 15-B. All other benefits not listed are considered taxable fringe benefits for both employers and employees. We recommend that you work with an accountant or tax professional to determine the taxability of your fringe benefit program.
We’ve included a chart below for easy access to this information.
|Fringe Benefit||Income Taxability||Social Security & Medicare Taxability||Notes|
|Accident and health benefits||Tax-Free||Tax-Free||This excludes Archer medical savings accounts (MSAs) and long-term care insurance|
|Achievement awards||Tax-Free||Tax-Free||$1,600 for qualified plan awards, $400 for nonqualified awards|
|Adoption assistance||Tax-Free||Tax-Free||Capped at $15,950 in 2023.|
|If all use is by employees and their families and the facility is operated by the employer|
|Bicycle commuter reimbursement||Taxable||Tax-free benefits are suspended for income years 2017-2026.|
|Commuter benefits||Tax-Free||Tax-Free||$300 per month for transit passes or commuter highway vehicles and $300 per month for qualified parking. Not deductible from income taxes. Employers can exclude payments from wages.|
|De minimis benefits||Tax-Free||Tax-Free|
|Dependent care assistance||Tax-Free||Tax-Free||$5,000 ($2,500 for married employees who file separately)|
||Tax-Free||Tax-Free||Up to 20% of the normal price. Can’t be for real estate, investment, or items not normally sold to customers|
|Employer-provided cell phones
||Tax-Free||Tax-Free||Must be for substantial business reasons and not offered as a perk|
|Flexible spending account (FSA)
||Tax-Free||Tax-Free||Health FSAs are capped at $3,050 from salary deferrals and $610 for rollover amounts for 2023.|
|Group-term life insurance||Tax-Free||Tax-Free||Up to $50,000 of coverage|
|Health savings account (HSA)
||Tax-Free||Tax-Free||Up to contribution limit for the year (combined employee and employer contributions of $3,850 for self-only and $7,750 for family for 2023).|
||Tax-Free||Tax-Free||If it is a condition of employment|
||Tax-Free||Tax-Free||Only if it is on-premises or de minimis|
|Moving expense reimbursement
||Tax-Free||Tax-Free||Only for active-duty members of the U.S. Armed Forces|
|Retirement planning services
|Tuition reduction||Tax-Free||Tax-Free||For undergraduate students or graduate students who perform teaching or research|
|Working conditions benefits
Who can offer fringe benefits?
Any organization with employees can provide fringe benefits. However, some benefits, such as an HRA, have specific requirements that need to be met. For example, you can’t offer your employees a QSEHRA if you have more than 50 FTEs. No matter your organization’s size or location, an employee fringe benefit is available for you.
How to administer employee fringe benefits
If you’re new to providing fringe benefits to your employees, we can help. At PeopleKeep, we specialize in helping organizations of all sizes offer personalized employee benefits. Our benefits administration software for HRAs and employee stipends has helped thousands of employers reimburse employees for the expenses most important to their needs.
Our WorkPerks employee stipend administration platform allows you to design custom employee stipends for any expenses, including wellness, remote work, professional development, and transportation. With WorkPerks, you can offer a truly individualized benefits package.
With our software, you can manage your benefits in minutes each month.
Interested in offering fringe benefits with PeopleKeep?
Speak with a PeopleKeep personalized benefits advisor to get your questions answered and help with setting up a flexible and personalized benefits package.
Frequently asked questions
Are fringe benefits included in gross income?
Most fringe benefits are included in your employee’s gross income, but there are exceptions. HRAs, for example, are tax-free. You’ll want to review IRS Publication 15-B for more information on the taxability of your benefits.
What fringe benefits are excluded from income taxes?
Tax-advantaged fringe benefits can include accident and health benefits, achievement awards (up to a certain amount), adoption assistance, use of employee athletic facilities, commuter benefits (up to a certain amount), dependent care assistance, HRAs, HSAs, education assistance (up to a certain amount), and more. See IRS Publication 15-B for more information.
What is another name for fringe benefits?
Fringe benefits are also called employee benefits, lifestyle benefits, benefits in kind, benefits pay, and indirect compensation.
What can be included in my fringe benefits package?
Your fringe benefits package can consist of nearly all types of employee benefits, including health benefits, employee stipends, paid time off, sick leave, retirement, and more.