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.
- Fringe benefits help companies recruit, motivate, and keep high-quality employees.
- 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 but others are taxed at fair market value.
- Adoption assistance is exempt from income tax.
Understanding Fringe Benefits
Common fringe benefits are basic items often included in hiring packages. These 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.
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 its 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.
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. 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.
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. The list of fringe benefits excluded from income taxes includes:
- Accident and health benefits
- Achievement awards (up to $1,600 for qualified 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 and often complex conditions. 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.
The companies that compete for the best talent in highly competitive fields may offer the most extraordinary fringe benefits.
Are Fringe Benefits Taxable?
Any fringe benefit you provide is taxable and must be included in the recipient's pay unless the law specifically excludes it (see above).
What Is a Cafeteria Plan?
A cafeteria plan refers to a suite of fringe benefits offered by a company that allows employees to choose among them. Often these benefits will come out of pre-tax dollars and can include insurance plans, retirement benefits, and so on. The name cafeteria is used because it is akin to a menu of benefits that can be selected or passed over, such as at a cafeteria buffet.
Is a Lifetime Achievement Award Given to an Employee Taxable?
An achievement award may be excluded from taxation as a fringe benefit if it meets certain criteria. For example, it must be worth less than $1,600 and cannot come in the form of cash or cash equivalents such as a gift certificate or gift card. It also cannot come in the form of stocks, bonds, or other securities. The exclusion also doesn't apply to vacations, meals, lodging, and tickets to theater or sporting events. A wristwatch would, however, fall under the tax exclusion.