Fringe Benefits

Fringe benefits are non-wage compensations employers provide to attract, motivate, and retain employees. They range from basic offerings like health insurance and paid time off to unusual perks such as on-site childcare, pet-friendly workplaces, or free meals.

Common types

• Health insurance and group-term life insurance
• Retirement planning services and health savings accounts (HSAs)
• Paid time off and tuition reduction/assistance
• Employer-paid or subsidized meals, cafeterias, and athletic facilities
• Commuting benefits and employer-provided cell phones
• Employee discounts, stock options, and use of company vehicles
• Dependent care assistance and adoption assistance
• Below-market loans, lodging on business premises, and no-additional-cost services

Companies competing for top talent may offer distinctive perks (e.g., free gourmet cafeterias, commuter buses, extended parental leave, or on-site services).

How fringe benefits work

Employers include fringe benefits as part of the overall compensation package. Some benefits are taxable income to employees; others may be excluded from taxable income if they meet specific legal criteria. Employers decide which benefits to offer based on budget, recruiting strategy, and legal/tax considerations.

Tax considerations

• By default, fringe benefits are taxable and must be included in an employee’s income unless the law specifically excludes them.
• Many common benefits are eligible for exclusion from taxable income, but exclusions are subject to detailed rules and limitations.
• Valuation is generally at fair market value: the amount an employee would pay for the same benefit at retail.

Common categories of benefits that may be excluded from income (subject to rules and limits):
– Accident and health benefits; HSAs
– Achievement awards (limits apply)
– Adoption and dependent care assistance (conditions may vary for highly compensated employees)
– Athletic facilities and workplace meals in certain circumstances
– Commuting benefits (subject to caps and rules)
– De minimis (minimal) fringe benefits
– Employee discounts and employee stock options (rules apply)
– Employer-provided cell phones and working-condition benefits
– Lodging on business premises, retirement planning services, tuition reduction, and no-additional-cost services

Note: Exclusion from income tax does not automatically mean exclusion from Social Security, Medicare, or federal unemployment taxes. Many — but not all — income-tax-exempt fringe benefits are also exempt from payroll taxes.

Valuing fringe benefits

• Most benefits are valued at fair market value.
• If a benefit is used partly for personal reasons, only the personal-use portion is taxable. Example: if an employer-provided laptop is 80% personal use, 80% of its fair market value is includible in income.
• Any benefit that does not meet the statutory exemption rules is taxable.

Special topics

• Cafeteria plan: A flexible benefits arrangement that lets employees choose among a menu of benefits (often funded with pre-tax dollars), such as health insurance and retirement contributions.
• Achievement awards: Noncash awards for employee achievement may be tax-exempt if they meet strict criteria. Limits apply (e.g., certain qualified awards are exempt up to a specified dollar limit), and cash or cash equivalents generally do not qualify.

Key takeaways

• Fringe benefits broaden total compensation and help employers recruit and retain employees.
• Many common benefits may be excluded from taxable income, but exclusions depend on specific IRS rules and limitations.
• Unexempt benefits are taxable at fair market value, and personal-use portions of employer-provided items are includible in income.
• Employers and employees should consult tax guidance or a tax professional to confirm how particular fringe benefits are treated.