What Are Fringe Benefits?
Fringe benefits are additions to compensation that companies give their employees. Some fringe benefits are given universally to all employees of a company while others may be offered only to those at executive levels. Some benefits are awarded to compensate employees for costs related to their work while others are geared to general job satisfaction.
In any case, employers use fringe benefits to help them recruit, motivate, and keep high-quality people.
Understanding Fringe Benefits
Common fringe benefits include health insurance, life insurance, tuition assistance, childcare reimbursement, cafeteria subsidies, below-market loans, employee discounts, employee stock options, and personal use of a company-owned vehicle.
[Important: The companies that compete for the best talent in highly competitive fields may offer the most extraordinary fringe benefits.]
Uncommon fringe benefits may fit the company profile. PetSmart And Dogtopia both operate pet-friendly workplaces. Ben&Jerry's rewards its workers with free ice cream. Patagonia's headquarters features extensive volleyball courts and yoga classes.
The companies that compete for the best talent in highly competitive fields may offer the most extraordinary fringe benefits. Alphabet, the parent company of Google, is known for benefits that include free commuter bus service and a free gourmet cafeteria. Microsoft gives 20 weeks of paid time off to new birth mothers and 12 weeks for other new parents.
By default, fringe benefits are taxable unless they are specifically exempted. Recipients of taxable fringe benefits are required to include the fair market value of the benefit in their taxable income for the year.
The Internal Revenue Service (IRS) maintains a list called the Tax Guide to Fringe Benefits. As of 2019, the list of fringe benefits excluded from income taxes includes:
- Accident and health benefits
- Achievement awards
- Adoption assistance
- Athletic facilities
- Commuting benefits
- De minimis (minimal) benefits
- Dependent care assistance
- Educational assistance
- Employee discounts
- Employee stock options
- Employer-provided cell phones
- Group-term life insurance coverage
- Health savings accounts (HSA)
- Lodgings on business premises
- No-additional-cost services
- Retirement planning services
- Tuition reduction
- Working conditions benefits
All of these exemptions are subject to certain conditions, many of them complex. For example, achievement awards are only exempt up to a value of $1,600 for qualified plan awards and a value of $400 for non-qualified plan awards. Qualified plan awards are open to all employees, not just highly-paid employees.
Other exemptions are not available to highly compensated employees if the benefits are given to them but not rank-and-file employees. These include employee discounts, adoption assistance, and dependent care assistance.
Most but not all fringe benefits that are income tax-exempt are also exempt from Social Security, Medicare, and federal unemployment taxes. Adoption assistance is exempt from income tax only.
Valuing Fringe Benefits
Any fringe benefit not named above, or any of the benefits named above which does not conform to IRS rules for exemption, is taxable. Those rules are complex too.
For example, working condition benefits are taxable to the extent that they are for personal use. For example, if an employee is given a laptop, the taxable income would be the percentage of the laptop's fair market value that is devoted to personal use. If 80% of its use is personal, the taxable income is 80% of the value of the computer.
In general, fringe benefits are valued at fair market value. This is the amount the employee would pay for the same benefit at retail.
- Fringe benefits help companies recruit, motivate, and keep high-quality people.
- Companies competing for the most in-demand skills tend to offer the most lavish benefits.
- Some of the most common fringe benefits like health and life insurance are not taxable.
- Others are taxed at fair market value.