Fringe Benefits

Definition of Fringe Benefits

Fringe benefits are advantages that are provided by the employer to an employee over and above the normal salary and wages, which may be in the form of cash support or assistance in daily needs of life or financial support for retirement age or any other form with the objective to retain the high-quality people within the organization.

Explanation

• Every being on this planet loves it when he gets something extra over and above what is asked for. Like oregano and chilli flakes together with Domino’s Pizza. That “extra” principle applies a lot in the employment field.
• Fringe Benefits is “that extra” component. You are getting a salary for your service, no doubt. But won’t you like to get appreciated for your performance? Won’t you like to get pampered in your time of need? Some of the things are valued, beyond salary. That’s what a fringe benefit is all about.
• The examples, types, advantages, importance, and all sort of stuff will be followed in the later part of the article. But what’s very important to understand is that these benefits may be temporary or may be permanent. You may get the benefits under your current employment but may not get changed employment. Getting the most out of the facilities is of the utmost essential.

Objectives of Fringe Benefits

• In earlier days of businesses, the only way to retain employees was to hike the current salary. Days moved ahead and only those employees retained who were honest on their job profiles. In the modern world today, the retention of employees is served by giving them extra benefits for their long service with the organization.
• Since many companies provide fringe benefits, it is also a kind of compulsion for the remaining companies if they want to stay competitive in the environment.
• With the objective to attract talented employees, organizations give ample amounts of salary together with different fringe benefits because if they don’t give them, others (i.e. competitors) will grab them in no time.
• It has been observed in the past that many talented employees leave the organization if they don’t get enough benefits for staying for long.

How does it Work?

• The fringe benefits differ from employer to employer. Employees are at the discretion to choose the fringe benefits.
• Employees choose those options at which they are at maximum benefit.
• Employees with retail businesses (such as traders of electronic items) are given benefits in the form of discounts, sales at cost benefits, rewards for increasing the number of customers, etc.
• Fringe benefits are dual-sided swords. On one side, it gives happiness and a feeling of satisfaction to the employees; on the other side it gives confidence i retention to the employer at a minimal cost.
• Uniqueness is always appreciated. The same is the case with the benefits. Employees like to continue with those employers who offer unique benefits.

Examples of Fringe Benefits

Examples of fringe benefits are explained below:

Types of Fringe Benefits

The benefits are explained below:

Category I: Fringe benefits which are required by law

• These benefits are mandated by the federal government, considering the importance and need of these benefits to the employees.
• Such benefits are medical support, financial support, retirement benefits, insurance benefit, unemployment insurance, etc.
• The basic intent behind such benefits is that these are life-saving & life-supporting benefits.
• Due to the provision in labor laws, these benefits are required to be provided by each business entity.

Category II: Voluntary benefits

• These benefits are not mandated by law but are given out of courtesy by the employer at his discretion.
• The moral intent behind such benefits is giving personal space to employees, letting them grow within the organization, helping them generate finance for the future, etc.
• Since these benefits are voluntary, many are taxable with certain exemptions.
• Examples of voluntary benefits include employee stock options, educational support, leave salary, rent-free accommodation, investment advisory, free laptop, etc.

Fringe Benefit Tax

•  Coming from the tax perspective, there is no free lunch. The IRS considers fringe benefits as part & parcel of employee compensation & thus, these benefits are taxable in nature.
• Not all benefits are taxable. IRS specifies three categories of benefits viz., non-taxable benefits, partially taxable benefits & tax deferred benefits.
• For paying tax, we need to know the value of the benefit multiplied by the tax rate. Tax rate is specified by the IRS but the real task lies in valuing the benefits.
• The valuation is majorly based on the fair value principle.
• In a few instances, the IRS allows the value to taxes as fair value less than the amount recovered from employees.
• A few of the non-taxable benefits are listed below:

1. Retirement contributions
2. Employee stock options
3. Education assistance up to the certain limit
4. Discounts from retail-employer
5. Meals
6. Conveyance expense
7. Amenities provided by the employer

Reasons for Fringe Benefits

Employers who provide additional benefits over and above the salary are always concentrated with a huge number of employees. Once the organization is known for its good approach to the employees, the reputation of the employer in the market increases. The health of an employee is related to the revenue earned by the organization.

If the employee falls ill or is injured, he is unable to work for the organization. Thus, fringe benefits in the form of personal health care help employees to stay fit & active during working hours. So, some organizations around the globe, also arrange for the mini-dance program at intervals of 3 hours during the day. In this case, all the employees dance at their respective bays.

Satisfied employees are retained in the long term. Satisfaction is not necessarily in the terms of money but in terms of personal life. Thus, many employers offer paid leaves, leave encashment, travel with family benefits, etc.

Advantages and Disadvantages

Below listed are some advantages and disadvantages:

Advantages

• Fringe benefits motivate the employee. Motivation leads to more work in a lower time frame, saving the cost of an organization.
• The health of the employees is assured. Health employees are productive in their work.
• Fringe benefits show the caring approach of the employer towards the employees. It increases the self-image of the organization.
• It reduces employee turnover and increases loyalty to work.
• Due to education support, the knowledge base of the employee increases. The employer can give the employees the task related to newer skills acquired by them. This, lets the employer earn from no additional cost of hiring new people.

Disadvantages

• Some employees need a larger cash salary than the combination of salary + benefits. Such employees do not stay for long with the organization.
• For managing the equal flow of benefits within the organization, administrative costs increase to that extent.
• Few benefits are compulsion by law & thus any non-compliance leads to paying of fines and penalties to the government. Thus, for the sake of compliance with labor-laws, the cost of a professional expert is also to be borne by the employer.
• Fringe benefits are standardized in nature. Customization is difficult given the big mob of the organization and thus, you cannot keep each employee satisfied.
• For a few organizations, the cost of providing fringe benefits is also high. The employer needs to cover up the cost through an increase in revenue or selling price of his products.

Conclusion

When talking about benefits who does not like the same? As said earlier, there is no free lunch. In some or other way, your employer recovers 5 to 10 times the cost of extra benefits given to you, using use own skill set for the job. Employee retention is a big task in the modern-moving world. Every organization intends to continue with the same people who have great potential to serve the company. Companies want to retain good employees at all possible costs. Even for employees, it shows courtesy of the employer towards them.

Recommended Articles

This is a guide to Fringe Benefits. Here we discuss the introduction and objectives of fringe benefits along with advantages and disadvantages. you may also have a look at the following articles to learn more –

1. Gross Salary vs Net Salary
2. Tax Shelter
3. Income Tax vs Payroll Tax
4. Benefits of Performance Appraisal