What Are Fringe Benefits?
There are so many things to consider when you're offered a new job. Salary is usually the first thing that comes to mind. In fact, it probably tops the list of priorities for many individuals. But it may only be one part of your compensation package, which means you need to take into account all the other perks your employer offers that can sweeten the pot.
- Fringe benefits are perks that employers give to their employees above and beyond any financial compensation.
- A wide range of fringe benefits and employee perks exist from one employer to another.
- The most common benefits include life, disability, and health insurance, tuition reimbursement, and education assistance, as well as retirement benefits.
- Other perks include fitness centers (or fitness center discounts), employee meals, cafeteria plans, dependent care assistance, and retirement plan contributions.
- Salary shouldn't be the only consideration when you are looking for a job since fringe benefits can save you a lot of money in the long run.
Most employers in the private and public sectors offer a variety of benefits in addition to their salaries. These on-the-job perks, typically referred to as fringe benefits, are viewed as compensation by an employer but are generally not included in an employee’s taxable income. Keep reading to learn more about these perks as well as some of the more common fringe benefits employers offer.
Understanding Fringe Benefits
Most employers offer their employees competitive wages and salaries. But in order to hire and retain the best talent, they usually include other perks in their contracts. While these benefits won't increase your bank account balance, they can make your compensation package much more attractive.
The idea of offering fringe benefits goes back to the late 1800s. One of the first was an employee pension plan developed and offered by the American Express railroad company in 1875. The company paid out a percentage of employee salaries for those who worked anywhere between 10 and 20 years and were over the age of 60.
As time went on, companies explored other ways to attract new hires in the post-war era. Employers offered their workers other benefits on top of their salaries at a time when wages remained low—mainly because of inflation. In earlier days, these noncash perks amounted to about 5% of an employee's compensation. That figure grew over time. According to a survey by the Bureau of Labor Statistics (BLS), about 30% of a person's compensation in the private sector accounted for benefits.
Most employers offer some variation of fringe benefits to employees to make the overall work environment pleasant to current workers and more attractive to prospective employees. The combination of any of the nontaxable compensation can be a valuable bonus to employees and a retention planning tool for employers.
Benefits that are offered today include:
- Life, disability, and health insurance bundles
- Tuition reimbursement or education assistance
- Fitness center access or discounts
- Employee meals and cafeteria plans
- Dependent care assistance
- Retirement plan contributions
- Health savings plans (HSAs) or flexible savings accounts (FSAs)
- Profit-sharing or stock options
- Remote work or work-from-home arrangements
The most common fringe benefits offered to employees include combinations of insurance coverage. Typically, employers offer up to $50,000 of group term life insurance, short- and long-term disability coverage, and health insurance options. Employers commonly share the cost of premiums with employees in an effort to offset the total cost to the employee.
Most employers provide their employees with some form of health insurance coverage. While some pay a portion of the monthly premiums, others may provide full coverage, making it free for their employees. Employer-sponsored health insurance is one of the most common ways for people to get coverage. This benefit has a definite tangible value, the cost of which is reported annually on employee W-2s. While enrollment is optional, it is normally the best way for employees to be covered for medical expenses.
Paying for dental work—even if it's just routine cleanings—can be very costly. Enrolling in a group dental insurance plan through work can have a big impact on an employee's bottom line. These plans normally cover a certain dollar amount of work, which is divided up into three different categories, including preventative, basic, and major dental work.
Both health and dental benefits are deducted on a pretax basis. This means they're deducted from an employee's gross income, so it reduces the amount of tax that's taken off your paycheck.
Group Term Life Insurance
Life insurance can be costly. If you want to get an insurance policy when you get older, you'll end up paying more in premiums. Taking the option of a group term life policy through work eliminates that cost. That's because the risk to the insurance company is spread across many different people. Most employers actually offer this type of insurance for free. Although term life only covers you up to a certain age, you may be able to extend coverage terms and get more for your beneficiaries for a few extra dollars a month. Just like health and dental insurance, this is pretax.
Retirement Plan Contributions
One of the most important fringe benefits an employer can offer is contributions to an employee’s retirement plan. Some companies offer matches on employee 401(k) paycheck deferrals, while others make qualified contributions to retirement plans without requiring employees to make contributions themselves. These plans can be powerful tools in saving for the long-term and provide compensation to employees above and beyond their salaries.
Defined Benefit Plans
These plans are commonly known as pension plans. These plans pay employees a specific benefit amount after they retire based on their years of service and annual salary. Plans are administered by investment managers hired by the employer. Unlike individual plans, it's the employer who takes on the risk with a group-defined benefit or pension plan.
Defined Contribution Plans
Employees can contribute a specific amount of their salary on a pretax basis to this type of plan. Since it is optional, employees are responsible to administer and monitor the plan, which means they must evaluate the risks associated with their investment decisions. Some employers may also match employee contributions to the plan. As with the other plan, deductions are pretax. But the payout is based on how much was contributed over the term of employment, in addition to any gains or losses.
Employees must allow certain contributions to be vested before they can make any withdrawals from employer-sponsored retirement plans. Vesting gives employees full access to specific assets after a certain period of time. This vesting period normally applies to employer contributions. Companies do this to keep their workers from leaving to pursue opportunities elsewhere.
For instance, a company may require contributions to a defined contribution plan to vest for five years before an employee can access them. If you decide to leave before that period, you forfeit the right to any unvested contributions.
You may be able to negotiate certain fringe benefits with your employer even if they're not offered. It's always a good idea to ask, especially if it helps the company.
Childcare assistance is another benefit offered through some employers, as working full-time with children can present scheduling conflicts and prohibitive daycare costs. Some larger employers offer employees dependent care on-site, either at a discount or for no cost. Smaller companies may provide a monthly bonus to employees for the specific purpose of paying for dependent care.
Other companies can offer dependent benefits to employees by allowing them to contribute to a plan on a pretax basis. The Internal Revenue Service (IRS) allows individuals or married couples who file tax returns separately to contribute up to $2,500 per year, while married couples who file jointly can contribute a maximum of $5,000 per year. You can use this benefit to pay for certain dependent expenses, including childcare, as well as for elderly relatives who can't take care of themselves.
Along with nonfinancial perks and your salary, you may be entitled to bonus compensation. This is a financial award that is above and beyond anything else that your employer provides. Most companies pay bonuses at the end of the year and some may even provide new hires with a signing bonus when they're first recruited.
Bonuses are commonly paid if you meet certain targets. For instance, if you work in a sales department and your team meets your monthly quota, your company may pay each member a bonus. If you meet your individual target, you may be paid an even bigger bonus at the end of the term. Keep in mind, though, that bonuses are considered taxable income, so income taxes are deducted and you have to report the amount on your annual tax return.
Other Fringe Benefits
Another common fringe benefit is education assistance or tuition reimbursement for college courses or the completion of an advanced degree program. Employers offering education assistance may allow employees to work flexible schedules so they can balance their education and work obligations. Employees may also be provided tuition reimbursement for all or part of the expenses.
For larger employers with ample space, access to an on-site fitness center is a common fringe benefit to employees. Smaller employers may also offer gym memberships at a discount or a fitness equipment reimbursement up to a certain limit each year.
Meals and Cafeteria Plans
Meals or discounted cafeteria plans may also be offered to employees as fringe benefits. Employers recognize that the cost of lunch or dinners when employees work late can add up quickly and, as such, meals are provided by some employers at no cost to the employee.
Paid Time Off
Having downtime away from work is crucial for every employee. That's why employers almost always include paid time off in employee contracts. This allows workers to get some much-needed time away from work, whether that's to take a vacation or to just rest at home, and still receive pay. The more time you spend working for your employer, the more off you'll likely receive with pay.
Your employer may also provide you with paid time off for other circumstances such as family emergencies, funerals, childcare, maternity, and paternity leave.
Jared Hoole, CFP®
Lakeside Financial Planning, Burlington, MA
Some fringe benefits come in the form of reduced prices on goods and services. Often, workers can get employee discounts on products that their company or one of its subsidiaries makes. Some employers provide staffers with cell phones, and cell phone providers offer corporate discounts on their plans to certain large companies. Museums and cultural institutions might offer free admission to employees whose firms are major donors or event sponsors, too.
In terms of lifestyle, some firms reimburse employees for commuting or moving expenses. They might provide daycare services or assistance with care for dependents. Financially, employee stock options are a key fringe benefit. Firms give workers shares in corporate stock outright or the chance to buy at a discounted price.
Are Fringe Benefits Taken Out of Salary?
Fringe benefits may or may not be taken out of an employee's salary—it all depends on the type of benefit. For instance, benefits like health insurance, contributions to a retirement plan, or dependent care are deducted from your gross salary. Other perks may be offered to employees for free, such as access to a gym at the office or discounts for things like car and homeowners insurance or vehicle rentals.
How Is a Fringe Benefit Taxed?
Fringe benefits that are considered taxable income, such as bonuses, are taxed as regular income. Taxes are deducted from your paycheck and the income must be reported on your annual tax return. But other fringe benefits may be deemed nontaxable because they're deducted on a pretax basis. Certain contributions made to a retirement plan aren't taxed until you choose to withdraw them from the plan. You may have to pay for reimbursements such as tuition and memberships for off-site gyms. It's always a good idea to check with your human resources department or the IRS.
What Does Fringe Mean on My Paycheck?
If you see this on your paycheck, it normally indicates how much your employer paid in dollar value for fringe benefits. Most employers will list which benefits it paid for and by how much.
Are Payroll Taxes a Fringe Benefit?
Payroll taxes are not considered a fringe benefit. These are deductions that employers withhold from your paycheck to pay to the government for income taxes, Social Security, and Medicare. These taxes are based on how much you make, including any wages, salaries, and tips.
The Bottom Line
Getting hired for a new job can be very exciting. But remember not to be blindsided by how much you'll get paid. While your take-home pay is a very important consideration, you should also keep in mind any other perks that your employer offers you. Although you may not get a high salary—which may put you in a higher tax bracket—additional fringe benefits like health care, bonuses, vacation time, and a great retirement plan may actually balance it out.