Fringe benefits

Non-wage compensation provided by employers to employees in addition to regular salaries or wages. Fringe benefits are intended to enhance job satisfaction, attract top talent, and increase employee retention.

Examples: Health insurance, paid time off, tuition reimbursement, and company cars.

Fringe Benefits Tax (FBT)

• Definition: A tax levied on certain fringe benefits provided to employees. The tax is generally the responsibility of the employer. The specific rules and rates vary by jurisdiction (e.g., the U.S. vs. Australia).
• Purpose: Ensures that non-cash compensation is fairly taxed where applicable.

Fringe Benefits for Employees

Definition: The comprehensive package of non-cash perks and services that employers offer to employees, often tailored to improve overall work-life balance and organizational loyalty.

Fringe Benefits Examples

Definition: An illustrative list of common and uncommon benefits provided by employers.

Common Examples

• Health and dental insurance
• Life insurance
• Paid vacation and sick leave
• Employer-sponsored retirement plans
• Tuition assistance
• Use of a company vehicle

Uncommon Examples:

• Pet-friendly workplaces
• On-site childcare
• Free catered meals
• Sabbatical leave
• Gym memberships

De Minimis Benefits

• Definition: Small-value benefits provided occasionally and irregularly, which are considered too minor to merit tax reporting.
• Examples: Holiday gifts (excluding cash), occasional snacks, and birthday treats.
• Tax Treatment: Generally non-taxable.

Cafeteria Plan (Section 125 Plan)

• Definition: A flexible benefit plan that allows employees to choose from a menu of pre-tax benefit options, including insurance and savings plans.
• Purpose: Empowers employees to customize benefits according to their needs.

Fair Market Value (FMV)

• Definition: The price an employee would pay for a benefit in an open market. Used to determine the taxable value of fringe benefits.
• Example: If a gym membership has a retail value of $100/month, the FMV is $100

Working Condition Benefit

• Definition: A benefit provided by an employer that allows an employee to perform their job duties more effectively.
• Examples: Work-related training, business travel expenses, employer-provided laptops.
• Tax Treatment: Non-taxable if used primarily for business.

Qualified Plan Award

• Definition: An employee achievement award that complies with IRS criteria and is made available to all employees on a non-discriminatory basis.
• Tax Exclusion Limit: Up to $1,600 for tangible property awards.

Non-Qualified Plan Award

• Definition: An award that does not meet IRS qualification standards (e.g., only offered to executives).
• Tax Exclusion Limit: Limited to $400.

Group-Term Life Insurance

• Definition: Employer-sponsored life insurance coverage for employees.
• Tax Rule: Coverage up to $50,000 is tax-free; coverage exceeding that may be taxable to the employee.

Health Savings Account (HSA)

• Definition: A tax-advantaged account for employees with high-deductible health plans (HDHPs) to save for eligible medical expenses.
• Tax Benefits: Contributions are pre-tax; withdrawals for qualified expenses are tax-free.

Commuting Benefits

• Definition: Transportation-related benefits such as transit passes, parking reimbursements, or employer shuttles.
• Tax Treatment: Limited exclusions apply (e.g., IRS-set monthly caps for transportation and parking).

Educational Assistance Program

• Definition: An employer program that provides financial assistance for employee education and development.
• IRS Exclusion: Up to $5,250 per employee per year is exempt from income tax.

Lodging on Business Premises

• Definition: Employer-provided housing located on business premises, which is offered for the employer’s convenience and required as a condition of employment.
• Tax Treatment: May be excluded from income if all IRS conditions are met.

Dependent Care Assistance Program (DCAP)

• Definition: Benefits that assist employees in paying for childcare or dependent care expenses.
• IRS Exclusion Limit: Up to $5,000 annually (subject to conditions and discrimination testing).

Employee Stock Options

Definition: Rights granted to employees to purchase company stock at a predetermined price, typically as part of a long-term incentive plan.

Types:

• Incentive Stock Options (ISOs)
• Non-Qualified Stock Options (NSOs)

Tax Treatment: Varies based on the type and timing of the transaction.

No-Additional-Cost Services

• Definition: Services provided by employers that do not result in substantial additional cost to the business.
• Example: Free standby flights for airline employees.
• Tax Treatment: Generally excluded from income.

Achievement Awards

• Definition: Awards given to employees in recognition of safety or length-of-service milestones.
• Tax-Free If: Provided under a qualified plan and not in the form of cash or equivalents.

Retirement Planning Services

• Definition: Services provided by an employer to help employees prepare for retirement (e.g., financial counseling, seminars).
• Tax Treatment: Generally excluded from gross income if offered as part of a qualified retirement plan.

Athletic Facilities

• Definition: Use of on-site athletic or fitness facilities owned by the employer.
• Tax Exclusion: Available when used predominantly by employees, their spouses, and dependents.

Adoption Assistance

• Definition: Reimbursement or direct payment by the employer for expenses related to adopting a child.
• IRS Exclusion: Up to $16,810 (2024 limit) per adoption, subject to income limits.

Taxable Fringe Benefit

• Definition: A fringe benefit that does not qualify for exclusion under IRS rules and must be reported as part of an employee’s taxable wages.
• Examples: Country club dues, personal use of a company car, non-qualified gifts.

Personal Use Allocation

• Definition: A method to determine the taxable portion of a fringe benefit based on the percentage of personal versus business use.
• Example: If 60% of a company vehicle’s use is personal, 60% of its value is taxable.

Highly Compensated Employee (HCE)

• Definition: An employee earning over a specified threshold or owning a significant share of the business.
• 2024 Threshold: $155,000 in compensation.
• Tax Impact: Some fringe benefit exclusions may not apply if programs are discriminatory in favor of HCEs.

Employer-Provided Cell Phones

• Definition: Mobile devices provided by the employer for business communication.
• Tax Treatment: Non-taxable if use is primarily for business purposes.

Flexible Spending Account (FSA)

• Definition: An account funded by employee salary reductions to pay for eligible out-of-pocket healthcare or dependent care costs.
• Tax Feature: Contributions are pre-tax; however, most FSAs have a “use-it-or-lose-it” rule.

Voluntary Benefits

• Definition: Elective benefits offered by the employer but paid for partially or fully by the employee at a group-discounted rate.
• Examples: Vision insurance, pet insurance, identity theft protection.

Sabbatical Leave

• Definition: An extended period of leave granted to employees after several years of service, typically for personal development or rest.
• Usage: Most commonly found in academia and progressive corporate workplaces.

Pet-Friendly Workplace

• Definition: A workplace that allows employees to bring pets to work.
• Benefit: Often used to promote a relaxed, inclusive company culture and enhance employee morale.

Conclusion

This glossary provides a detailed reference for understanding fringe benefits in a professional and regulatory context. Employers should be mindful of both the strategic value and tax implications of fringe benefits, ensuring compliance with relevant IRS guidelines and fair application across employee groups.