How Fringe Benefits Work


Without fringe benefits, you wouldn't get paid vacations.
Without fringe benefits, you wouldn't get paid vacations.
Emmanuel Aguirre/Photographer's Choice RF/Getty Images

You just can't measure your compensation just by salary. While that paycheck constitutes the majority of the reward for your efforts, you need to consider the fringe benefits offered by your employer. Most of the time, the worth of those extras will equal about 50 percent of the salary.

Fringe benefits, sometimes called "perks" (or perquisites, if you're British) are a form of non-monetary compensation offered by most employers. Some benefits are mandatory, such as unemployment insurance, Social Security and Medicare payments. But others, like health insurance and automobile allowances, are provided purely at the employer's discretion. Some forms of fringe benefits, such as use of an employer-owned condo at a resort, must be counted as income and taxes paid.

Advertisement

The term fringe benefits first came into common usage in the late 1940s as the world returned to regular work after World War II [source: Merriam-Webster]. But the concept actually goes back centuries. During the Middle Ages, servants were given trenchers, or plates made of bread, used by their master's family and guests after banquets. The servants sold these gravy-soaked loaves to the starving poor for a few coins that they could keep. The first modern fringe benefits came about in the latter part of the 19th century, when railroad and mining companies began to provide the services of company doctors to their employees. In 1910, Montgomery Ward & Co. entered into one of the first health insurance programs for employees. During World War II, more employers began to offer health insurance programs as a means of keeping and retaining workers. After the war, the variety of fringe benefits offered by employers grew. As the world entered into recession in the early 21st century, employers have seen their benefit offerings affected, with more than 70 percent of workers reporting that they've had to reduce benefits to some extent [source: Society for Human Resource Management].

But recession or boom, fringe benefits have been and will remain one of the most cost-effective ways for employers to keep their workers satisfied. Keep reading to discover why the employees of a Michigan finance company had better be fans of the Cleveland Cavaliers, and why another firm is willing to pay its employees to work a week for someone else.

What are fringe benefits?

Remember: You don't have to work during your paid vacation!
Remember: You don't have to work during your paid vacation!
David Perez Shadi/Taxi/Getty Images

The Internal Revenue Service (IRS) defines fringe benefits as "a form of pay (including property, services, cash or cash equivalent) in addition to stated play for the performance of services" [source: IRS]. Some fringe benefits, such as health care plans, aren't taxed, while others, such as subsidies to pay for the use of public transportation, are excludable up to a certain limit. Other fringe benefits might not be taxed at the time you receive them, but they could be taxed later. For example, you won't pay income taxes on your employer's contributions to a tax-deferred retirement account such as a 401k at the time of the contribution, but you will have to pay taxes when you withdraw the money in the future.

Why offer fringe benefits? Employers have learned that these extras are a relatively cost-effective means of retaining valuable workers and attracting new talent. Some benefits, such as health insurance, are expensive, but others, such as employee discounts on the company's own merchandise, amounts to very little cost to the employer and means a great deal to the workforce.

Advertisement

As we mentioned before, a 2010 survey of human resource professionals show that the value of fringe benefits amount to about 50 percent of the percentage of payroll in American companies [source: Society for Human Resource Management]. An amount equal to about 19 percent of a firm's payroll goes to fund government-mandated benefits such as Social Security and Unemployment Compensation, but companies spent a nearly equal amount on voluntary benefits such as health and life insurance. Pay for time not worked -- vacation, sick and personal leave days -- accounts for an amount equal to about 11 percent of the total payroll at most companies in America.

Fringe benefits differ from profession to profession, depending on what would be most prized. A teenager working at a pizza restaurant might appreciate free meals and tokens to play games during breaks. A nurse or a teacher, however, would probably value tuition assistance, which would enable them to obtain ongoing training or work toward an advanced degree.

Important Fringe Benefits

Health insurance has become a standard offering of American employers, with nearly 98 percent offering some sort of plan; while most companies only offer it to full-time workers, 37 percent of employers offer health insurance to part-time employees. Other benefits that have become fairly common in the American workplace are life and disability insurance and retirement plans, sometimes with an employer contribution. Payment of moving expenses for a work-related transfer is a very common benefit, as is an automobile allowance for business travel. Cell phones plans have also become common fringe benefits [source: Society for Human Rersource Management]. Many companies reimburse employees for gym memberships, or they go a step further and provide their own workout facilities for employees. Flexible work schedules and telecommuting -- a word that didn't even exist a decade ago -- are becoming commonplace.

Some fringe benefits were formerly common, but are becoming less so as the recession changes spending practices. Fringe benefits that seem to be on the way out include executive signing bonuses and bonuses for recommending a successful job applicant.

Advertisement

Some companies are nearly legendary for their fringe benefits. Google, for instance, provides free meals in the company cafeterias, free doctor's visits, and in-house washers and dryers, so employees can do a load of laundry while they work. Dan Gilbert, owner of Quicken Loans, hires buses to take employees to Cleveland Cavaliers games. The employees probably end up cheering for the Cavs -- Gilbert owns the team.

Here are some other unique fringe benefits, as reported in the Industry Market Trends newsletter:

  • giving employees 2 weeks paid time off to work at a non-profit organization
  • delivering locally grown organic treats to workers' desks
  • encouraging employees to spend up to 10 percent of their work time on projects of their own devising
  • providing laundry pickup and return
  • offering interest-free loans to employees to purchase computers

Related Articles

Sources

  • Employee Benefit Research Institute. "History of Health Insurance Benefits." March, 2002. (08/03/2010). http://www.ebri.org/publications/facts/index.cfm?fa=0302fact
  • Fortune. "Unusual Perks." January 22, 2007. (08/03/2010). http://money.cnn.com/magazines/fortune/bestcompanies/2007/benefits/unusual.html
  • H&R Block. "Tax Tips & Calculators." 2010. (08/03/2010). http://www.hrblock.com/taxes/tax_tips/deductions_credits/fringebenefits/
  • Internal Revenue Service. "Taxable Fringe Benefit Guide." January, 2010. (08/03/2010). http://www.irs.gov/pub/irs-tege/fringe_benefit_fslg.pdf
  • Leybovich, Ilya. "Fringe Benefits: Unique Employee Perks." Industry Market Trends. July 6, 2010. (08/03/2010). http://news.thomasnet.com/IMT/archives/2010/07/fringe-benefits-uncommon-employee-perks.html
  • Maling, Brittany. "Building Company Loyalty With Unusual Benefits." HR World. (08/03/2010). http://www.hrworld.com/features/build-loyalty-unusual-benefits/
  • Society for Human Resource Management. "2010 Employee Benefits ." February, 2010. (08/03/2010).http://shrm.org/Research/SurveyFindings/Articles/Documents/10-0280%20Employee%20Benefits%20Survey%20Report-FNL.pdf