Fringe benefits are any form of compensation an employer offers their employees in addition to their stated salary. Examples of these benefits include health insurance, paid time off, discounted gym memberships, education reimbursement, retirement planning services, and more.

Fringe benefits have never played a more important role in the workplace. Defined as benefits given to an employee beyond an agreed-upon wage or salary, these perks are a key indicator of employee satisfaction, production, and retention. Some small businesses might have a harder time offering such small business human resources benefits, but anything you can offer could be beneficial. A recent survey by Zenefits, an HR software company, revealed that 70% of employees agree that fringe benefits would be a major consideration in evaluating future job opportunities. 

Today, employees receive around 30% of their compensation via fringe benefits. The array of these benefits is extremely comprehensive, including everything from health insurance and equity sharing to free meals and gym memberships. Large tech companies like Google are famous for their fringe benefits, including perks like free speaking events and on-site massages.

Let’s take a closer look at fringe benefits: what they are, how they work, and the most common types. We’ll also investigate whether offering these benefits would be a good idea for your small business, and how to go about getting them.

What Are Fringe Benefits?

The IRS defines fringe benefits as “a form of pay (including property, services, cash, or cash equivalent) in addition to stated pay for the performance of services.” While the term “fringe” might imply that these benefits are uncommon or atypical, many fringe benefits are things most workers take for granted, such as health insurance and paid vacation.

Fringe benefits are provided by an employer, even if a third party is the one providing the actual benefit. For example, an employee may have a membership at a gym that is paid for by their employer. In addition, the employee is the receiver of the fringe benefit, even if it is utilized by others, such as in the case of a family health care plan.

Some of these benefits are required by law, such as social security and workers’ compensation. Many others, including health care, are not required but are offered to employees tax-free. Certain fringe benefits are taxable to the employee, such as job-related moving expenses. Still others are tax-deferred, such as a 401(k) plan. The IRS provides a comprehensive tax guide to fringe benefits.

How Do Fringe Benefits Work?

With that fringe benefits definition in mind, you may be wondering how they work. Most fringe perks are provided entirely at the employer’s discretion and can vary widely from company to company. Employees typically select their benefits during the onboarding process or during open-enrollment periods, as is the case with health care and some retirement plans. Other fringe benefits are provided as perks and can be redeemed by the employee at any time. These can be things like discounts on company merchandise.

Some fringe benefits are milestones meant to incentivize the employee in some way, such as performance or referral bonuses. The cost of providing these benefits varies widely and depends on a myriad of factors. According to the U.S. Bureau of Labor Statistics, on average, benefits cost American employers $11.50 per employee per hour worked in June of 2018.

Common Fringe Benefits Examples

We have already mentioned several different types of fringe benefits, but let’s dive deeper to see the wide array of perks employers provide to their workers.

Fringe Benefits Required by Law

According to the Bureau of Labor Statistics, “legally required benefits provide workers and their families with retirement income and medical care, mitigate economic hardship resulting from loss of work and disability, and cover liabilities resulting from workplace injuries and illnesses.”

Required fringe benefits include:

• Social security tax: This is a tax on employers to fund the social security program, which provides millions of Americans with retirement, disability, and survivorship benefits.
• Medicare tax: Similar to social security tax, this is another required payroll tax that funds the federal health insurance program for people 65 and over in the U.S.
• Workers’ compensation: This is insurance paid for by an employer that provides employees who are injured in the course of doing their job with wage replacement and medical benefits. Note that workers’ compensation requirements vary by state, industry, size, and structure of your business. Check to see what the laws are in your state.
  
• Unemployment insurance: Employers pay taxes to the Department of Labor, which in turn provide wages, job training, and career guidance to workers who become unemployed through no fault of their own.
  
• Health insurance: Under the employer mandate, businesses that employ more than 50 full-time employees are required to provide health insurance to their workers. Note that this mandate doesn’t apply to many small businesses, as they don’t meet the employee threshold.
  
• COBRA insurance: Otherwise known as the Consolidated Omnibus Budget Reconciliation Act, employers pay premiums so that employees who lose their job through no fault of their own can still receive health care benefits until they find other work.
  
• Family and medical leave: Businesses with over 50 employees must provide employees who have worked at the company over a year with up to 12 weeks of job-protected, unpaid leave for family or medical reasons. Again, this might not apply to your small business, depending on its size.
  
• Time off to perform civic duties: Employers must provide job-protected, unpaid time off to allow employees to perform their civic duties, including serving on a jury and performing military service. In addition, 30 states provide employees with time off to vote during elections.

Unrequired Fringe Benefits

While none of the following fringe benefits are required, most jobs provide a combination of some of them. Note that all of these are also offered to employees tax-free. For employers, most fringe perks are taxable, with exceptions. The taxable portion of a fringe benefit may be reduced by the amount the recipient pays for the benefit, or if the benefit is a low-cost gift or achievement award. The employer can also deduct many of these expenses from their taxes as a business cost.

Here are some examples of common unrequired fringe benefits:

• Dental and vision insurance
• Stock options
• Disability insurance
• Commuter benefits (tax-free up to $260)
• Health savings account (HSA)
• Dependent care assistance
• Paid time off (PTO)
• Paid holidays
• Work from home flexibility
• Tuition reduction
• Retirement planning services (for example 401(k) plans)
• Life insurance (tax-free up to $50,000)
• Achievement awards (tax-free up to $1,600)
• Employee discounts
• Meal plans
• Fitness center
• Adoption assistance
• De minimis benefits (low-value perks such as free coffee)

Taxable Fringe Benefits

These benefits must be included on an employee’s W-2 and are subject to withholding:

• Excessive mileage reimbursements: These are payments to an employee for business-related driving in their personal vehicle that exceeds the IRS standard mileage rate of $0.54 per mile.
  
• Moving expense reimbursement: Expenses incurred from a job-related move.
  
• Clothing: Clothing given to an employee that can be used as streetwear.

Employee Retention

To hold on to employees you need to make them feel that you are as invested in them as they are in you, and good fringe benefits convey that message. A Randstad survey revealed that 55% of employees left a job because they found better benefits elsewhere. Conversely, 71% of employees with good benefits feel loyal to their employer.

Selecting Fringe Benefits for Your Business

Selecting the right benefits package for your business depends on your objectives and budget. Employers should consider their business’s size, location, industry, and collective bargaining agreements, as well as the benefits practices of their competitors. It is also advisable to conduct a needs assessment to understand what your employees value in terms of benefits selection and design.

Once you have a good understanding of what your employees want, begin to formulate fringe benefits offerings in order of priority, checking the cost of providing the prioritized benefits against the benefits budget. This can be a complicated process with many variables to consider, especially when it comes to things like selecting a small business health insurance provider.

Once you know what fringe benefits you want to offer, you should consult a benefits provider. These are services that administer benefits on behalf of the employer. There are six different types of benefits providers, each with their own rates and offerings. They are as follows:

Small Business Health Options Program (SHOP) Exchange

The SHOP Exchange was set up as part of the Affordable Care Act to create an online marketplace with information about various health insurance providers. Some states run their own SHOP Exchange, while others are run by the federal government.

Small business owners can use the SHOP Exchange to find group coverage for their employees. Businesses with under 25 employees are eligible for a 50% tax credit.

Should Your Small Business Offer Fringe Benefits?

Fringe benefits encompass a wide array of compensation outside of an employee’s salary. There are many tax implications involved with fringe perks, and acquiring them for your small business can be a fairly long-winded process. However, offering comprehensive fringe benefits could have a widespread positive impact on your business, making healthy, loyal, and productive employees, while enticing others to want to work for you.

Most importantly, offering good benefits is simply the right thing to do. Your employees work hard for you, and a good benefits package is a way to show them how much you appreciate it.