Fringe Benefits: What Employers Need to Know
Posted on Thu, Jan 19, 2012
Fringe benefits are benefits that employers give employees outside of their stated cash wages.
Employers should know which benefits they plan to offer will be most valuable to employees. Providing benefits that employees value will help keep employees content. Benefits also affect the wages employees are willing to work for. For example, some employees may accept lower wages from an employer who provides health and dental coverage than an employer who does not provide any benefits. Employees who travel for work will greatly appreciate transportation benefits. Sometimes, employers can save money by offering excellent benefits instead of high wages. Other times, benefits end up costing the employer a large sum of money. One drawback to providing benefits is that the cost of some benefits can rise annually, especially the cost of health insurance.
Employers should know which benefits are taxable and nontaxable, because this information is necessary to properly calculate payroll. This knowledge will also make it easier to fill out required W-2 forms. It can also help employers choose which benefits to offer employees. Employees will often be extra appreciative of benefits for which they do not have to pay taxes on.
Some examples of taxable benefits include:
- Cash bonuses
- Employer-provided vehicles
- Some graduate-level educational assistance
Examples of nontaxable benefits include:
- Most health benefits
- Employer-owned or employer-leased athletic facilities
- Retirement planning services
- Meals
- Most employee discounts
Partially-taxable benefits
Some benefits are exempt from taxes up to certain amounts. For example, up to $5,250 per year in education assistance is exempt. Similarly, dependent care assistance is usually exempt up to $5,000. Employees will have to pay taxes on benefit values greater than partially-exempt amounts.
Cafeteria Plans
A common way to ensure that employees get benefits they value is for employers to offer a Section 125 plan, commonly called a "cafeteria plan". Cafeteria plans allow employees to choose between benefits and extra pay, so they can have cash instead of benefits they do not want. Cafeteria plans allow employees to make more decisions for themselves. For example, an employee with a cafeteria plan option could either get health insurance through work or get extra wages in lieu of health insurance. With this type of plan, an employee who does not like the work-selected insurance package has the opportunity to use the extra cash to purchase his own insurance or to spend the money elsewhere.
Benefits that employers may include in a cafeteria plan include:
- Health benefits
- Accident benefits
- Adoption assistance
- Group-term life insurance
- Health savings accounts
- Dependent care assistance
Many other types of fringe benefits, such as employee discounts, meals, transportation, educational assistance and athletic facilities, cannot be part of a cafeteria plan.
For more complete descriptions of which benefits are and aren't taxable, look at the Employer's Tax Guide to Fringe Benefits published by the IRS.