Employee benefit
Encyclopedia
Employee benefits and (especially in British English
) benefits in kind (also called fringe benefits, perquisites, perqs or perks) are various non-wage compensations provided to employees in addition to their normal wage
s or salaries
. In instances where an employee exchanges (cash) wages for some other form of benefit is generally referred to as a 'salary sacrifice' or 'salary exchange' arrangement. In most countries, most kinds of employee benefits are taxable to at least some degree.
Examples of these benefits include: housing (employer-provided or employer-paid), group insurance (health
, dental
, life
etc.), disability income
protection, retirement benefits, daycare, tuition
reimbursement, sick leave
, vacation
(paid and non-paid), social security
, profit sharing
, funding of education, and other specialized benefits.
The purpose of the benefits is to increase the economic security of employees.
The term perqs (also perks) is often used colloquially to refer to those benefits of a more discretionary nature. Often, perks are given to employees who are doing notably well and/or have seniority. Common perks are take-home vehicle
s, hotel
stays, free refreshments, leisure activities on work time (golf
, etc.), stationery
, allowance
s for lunch, and—when multiple choices exist—first choice of such things as job assignments and vacation scheduling. They may also be given first chance at job promotions when vacancies exist.
might include additional health coverage that is not included in the provincial plan (such as (medical, prescription, vision and dental plans); Group Disability (STD/LTD), Employee Assistance Plans (EAP), Group Term Life & Accidental Death & Dismemberment, health and dependent care; retirement
benefit plans (addition to Canada Pension Plan (CPP)
; and long term care insurance
plans; legal assistance plans; transportation benefits; and possibly other miscellaneous employee discounts wellness programs
, discounted shopping, hotel
s and resort
s, and so on.
might include relocation assistance
; medical, prescription, vision and dental plans
; health and dependent care flexible spending account
s; retirement
benefit plans (pension, 401(k)
, 403(b)
); group-term life and long term care insurance
plans; legal assistance plans; adoption
assistance; child care benefits; transportation
benefits; and possibly other miscellaneous employee discounts (e.g., movies and theme park tickets, wellness programs
, discounted shopping, hotel
s and resort
s, and so on). Companies who offer these types of work-life perks seek to raise employee satisfaction, corporate loyalty, and worker retention by providing valuable benefits that go beyond a base salary figure.
Some fringe benefits (for example, accident and health plans, and group-term life insurance coverage up to US$50,000) may be excluded from the employee's gross income
and, therefore, are not subject to federal income tax
in the United States
. Some function as tax shelters (for example, flexible spending accounts, 401(k)'s, 403(b)'s). Fringe benefits are also thought of as the costs of keeping employees other than salary. These benefit rates are typically calculated using fixed percentages that vary depending on the employee’s classification and often change from year to year.
Normally, employer-provided benefits are tax-deductible to the employer and non-taxable to the employee. The exception to the general rule includes certain executive benefits (e.g. golden handshake
and golden parachute
plans).
American
corporations may also offer cafeteria plan
s to their employees. These plans would offer a menu
and level of benefits for employees to choose from. In most instances, these plans are funded by both the employees and by the employer(s). The portion paid by the employees is deducted from their gross pay before federal and state taxes are applied. Some benefits would still be subject to the Federal Insurance Contributions Act tax
(FICA), such as 401(k) and 403(b) contributions; however, health premiums, some life premiums, and contributions to flexible spending accounts are exempt from FICA.
If certain conditions are met, employer provided meals and lodging may be excluded from an employee's gross income. If meals are furnished (1) by the employer; (2) for the employer's convenience; and (3) provided on the business premises of the employer they may be excluded from the employee's gross income per Section 119(a). In addition, lodging furnished by the employer for its convenience on the business premise of the employer (which the employee is required to accept as a condition of employment) is also excluded from gross income. Importantly, section 119(a) only applies to meals or lodging furnished "in kind." Therefore, cash allowances for meals or lodging received by an employee are included in gross income .
The term "fringe benefits" was coined by the War Labor Board during World War II
to describe the various indirect benefits which industry had devised to attract and retain labor when direct wage increases were prohibited.
Employee benefits provided through ERISA are not subject to state-level insurance regulation like most insurance contracts, but employee benefit products provided through insurance contracts are regulated at the state level. However, ERISA does not generally apply to plans by governmental entities, churches for their employees, and some other situations.
Flexible Benefits, usually called a "Flex Scheme", is where employees are allowed to choose how a proportion of their remuneration
is paid. Currently around a quarter of UK employers operate such a scheme.
This is normally delivered by allowing employees to sacrifice part of their pre-tax pay in exchange for a car, additional holiday, a shorter working week or other similar benefits, or give up benefits for additional cash remuneration. A number of external consultancies exist that enable organizations to manage Flex packages and they centre around the provision of an Intranet
or Extranet
website where employees can view their current flexible benefit status and make changes to their package. Adoption of flexible benefits has grown considerably over the five years to 2008, with The Chartered Institute of Personnel and Development
additionally anticipating a further 12% rise in adoption within 2008/9. This has coincided with increased employee access to the internet and studies suggesting that employee engagement
can be boosted by their successful adoption.
Voluntary Benefits is the name given to a collection of benefits that employees choose to opt-in for and pay for personally. These tend to be schemes such as the government-backed (and therefore tax-efficient) Bike2Work and Childcare Vouchers (Accor Services, Busybees, Sodexho, Fideliti, KiddiVouchers, Imagine, Early Years Vouchers Ltd) and also specially arranged discount schemes for employees such as group ISAs. Employee Discount schemes are often set up by employers as a perk of working at the organization. They can be run in-house or arranged by an external employee benefits consultant.
Core Benefits is the term given to benefits which all staff enjoy, such as holiday, sick pay and sometimes flexible hours.
In recent years many UK companies have used the tax and national insurance savings gained through the implementation of salary sacrifice benefits to fund the implementation of flexible benefits. In a salary sacrifice arrangement an employee gives up the right to part of the cash remuneration due under their contract of employment. Usually the sacrifice is made in return for the employer's agreement to provide them with some form of non-cash benefit. The most popular types of salary sacrifice benefits include childcare vouchers and pensions.
, New Zealand
and Pakistan
) the 'fringe benefits' are subject to the Fringe Benefits Tax
(FBT), which applies to most, although not all, fringe benefits. In India
, the fringe benefits tax was abolished in 2009.
In the United States, employer-sponsored health insurance was considered taxable income until 1954.
The UK system of state pension provision is dependant upon the payment of National Insurance Contributions (NIC). Salary exchange schemes will result in reduced NIC payments and so are also liable to reduce the state benefits, most notably the state second pension
.
British English
British English, or English , is the broad term used to distinguish the forms of the English language used in the United Kingdom from forms used elsewhere...
) benefits in kind (also called fringe benefits, perquisites, perqs or perks) are various non-wage compensations provided to employees in addition to their normal wage
Wage
A wage is a compensation, usually financial, received by workers in exchange for their labor.Compensation in terms of wages is given to workers and compensation in terms of salary is given to employees...
s or salaries
Salary
A salary is a form of periodic payment from an employer to an employee, which may be specified in an employment contract. It is contrasted with piece wages, where each job, hour or other unit is paid separately, rather than on a periodic basis....
. In instances where an employee exchanges (cash) wages for some other form of benefit is generally referred to as a 'salary sacrifice' or 'salary exchange' arrangement. In most countries, most kinds of employee benefits are taxable to at least some degree.
Examples of these benefits include: housing (employer-provided or employer-paid), group insurance (health
Health insurance
Health insurance is insurance against the risk of incurring medical expenses among individuals. By estimating the overall risk of health care expenses among a targeted group, an insurer can develop a routine finance structure, such as a monthly premium or payroll tax, to ensure that money is...
, dental
Dental insurance
Dental insurance is a type of health insurance designed to pay a portion of the costs associated with dental care. There are several different types of individual, family, or group dental insurance plans grouped into three primary categories: Indemnity which allows you to see any dentist you want...
, life
Life insurance
Life insurance is a contract between an insurance policy holder and an insurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death of the insured person. Depending on the contract, other events such as terminal illness or critical illness may also trigger...
etc.), disability income
Disability insurance
Disability Insurance, often called DI or disability income insurance, is a form of insurance that insures the beneficiary's earned income against the risk that a disability will make working uncomfortable , painful , or impossible...
protection, retirement benefits, daycare, tuition
Tuition
Tuition payments, known primarily as tuition in American English and as tuition fees in British English, Canadian English, Australian English, New Zealand English and Indian English, refers to a fee charged for educational instruction during higher education.Tuition payments are charged by...
reimbursement, sick leave
Sick leave
Sick leave is time off from work that workers can use during periods of temporary illness to stay home and address their health and safety needs without losing pay. Some workplaces offer paid sick time as a matter of workplace policy, and in few jurisdictions it is codified into law...
, vacation
Annual leave
Annual leave is paid time off work granted by employers to employees to be used for whatever the employee wishes. Depending on the employer's policies, differing number of days may be offered, and the employee may be required to give a certain amount of advance notice, may have to coordinate with...
(paid and non-paid), social security
Social security
Social security is primarily a social insurance program providing social protection or protection against socially recognized conditions, including poverty, old age, disability, unemployment and others. Social security may refer to:...
, profit sharing
Profit sharing
Profit sharing, when used as a special term, refers to various incentive plans introduced by businesses that provide direct or indirect payments to employees that depend on company's profitability in addition to employees' regular salary and bonuses...
, funding of education, and other specialized benefits.
The purpose of the benefits is to increase the economic security of employees.
The term perqs (also perks) is often used colloquially to refer to those benefits of a more discretionary nature. Often, perks are given to employees who are doing notably well and/or have seniority. Common perks are take-home vehicle
Take-home vehicle
A take-home vehicle is a vehicle issued to an employee by one's employer that is intended to be used for the purpose of fulfilling one's job duties, but that the employee is also permitted to drive to their residence while off duty...
s, hotel
Hotel
A hotel is an establishment that provides paid lodging on a short-term basis. The provision of basic accommodation, in times past, consisting only of a room with a bed, a cupboard, a small table and a washstand has largely been replaced by rooms with modern facilities, including en-suite bathrooms...
stays, free refreshments, leisure activities on work time (golf
Golf
Golf is a precision club and ball sport, in which competing players use many types of clubs to hit balls into a series of holes on a golf course using the fewest number of strokes....
, etc.), stationery
Stationery
Stationery has historically meant a wide gamut of materials: paper and office supplies, writing implements, greeting cards, glue, pencil case etc.-History of stationery:...
, allowance
Allowance
Allowance may refer to:*Allowance *Allowances in accounting, see Accounts receivable*Personal allowance in the United Kingdom's taxing system* Jobseeker's Allowance, a term for unemployment benefit in the United Kingdom* EU Allowances...
s for lunch, and—when multiple choices exist—first choice of such things as job assignments and vacation scheduling. They may also be given first chance at job promotions when vacancies exist.
Canada
Employee benefits in CanadaCanada
Canada is a North American country consisting of ten provinces and three territories. Located in the northern part of the continent, it extends from the Atlantic Ocean in the east to the Pacific Ocean in the west, and northward into the Arctic Ocean...
might include additional health coverage that is not included in the provincial plan (such as (medical, prescription, vision and dental plans); Group Disability (STD/LTD), Employee Assistance Plans (EAP), Group Term Life & Accidental Death & Dismemberment, health and dependent care; retirement
Retirement
Retirement is the point where a person stops employment completely. A person may also semi-retire by reducing work hours.Many people choose to retire when they are eligible for private or public pension benefits, although some are forced to retire when physical conditions don't allow the person to...
benefit plans (addition to Canada Pension Plan (CPP)
Canada Pension Plan
The Canada Pension Plan is a contributory, earnings-related social insurance program. It forms one of the two major components of Canada's public retirement income system, the other component being Old Age Security...
; and long term care insurance
Long term care insurance
Long-term care insurance , an insurance product sold in the United States, United Kingdom and Canada, helps provide for the cost of long-term care beyond a predetermined period...
plans; legal assistance plans; transportation benefits; and possibly other miscellaneous employee discounts wellness programs
Workplace wellness
Workplace wellness is a program offered by some employers as a combination of educational, organizational, and environmental activities designed to support behavior conducive to the health of employees in a business and their families...
, discounted shopping, hotel
Hotel
A hotel is an establishment that provides paid lodging on a short-term basis. The provision of basic accommodation, in times past, consisting only of a room with a bed, a cupboard, a small table and a washstand has largely been replaced by rooms with modern facilities, including en-suite bathrooms...
s and resort
Resort
A resort is a place used for relaxation or recreation, attracting visitors for holidays or vacations. Resorts are places, towns or sometimes commercial establishment operated by a single company....
s, and so on.
United States
Employee benefits in the United StatesUnited States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
might include relocation assistance
Relocation services
Relocation services or employee relocation include a range of internal business processes to transfer employees, their families, and/or entire departments of a business to a new location. Like other types of employee benefits, these processes are usually administered by human resources specialists...
; medical, prescription, vision and dental plans
Health insurance in the United States
The term health insurance is commonly used in the United States to describe any program that helps pay for medical expenses, whether through privately purchased insurance, social insurance or a non-insurance social welfare program funded by the government...
; health and dependent care flexible spending account
Flexible spending account
A flexible spending account , also known as a flexible spending arrangement, is one of a number of tax-advantaged financial accounts that can be set up through a cafeteria plan of an employer in the United States...
s; retirement
Retirement
Retirement is the point where a person stops employment completely. A person may also semi-retire by reducing work hours.Many people choose to retire when they are eligible for private or public pension benefits, although some are forced to retire when physical conditions don't allow the person to...
benefit plans (pension, 401(k)
401(k)
A 401 is a type of retirement savings account in the United States, which takes its name from subsection of the Internal Revenue Code . A contributor can begin to withdraw funds after reaching the age of 59 1/2 years...
, 403(b)
403(b)
A 403 plan, also known as a tax-sheltered annuity, is a tax-advantaged retirement savings plan available for public education organizations, some non-profit employers , cooperative hospital service organizations, and self-employed ministers in the United States...
); group-term life and long term care insurance
Long term care insurance
Long-term care insurance , an insurance product sold in the United States, United Kingdom and Canada, helps provide for the cost of long-term care beyond a predetermined period...
plans; legal assistance plans; adoption
Adoption
Adoption is a process whereby a person assumes the parenting for another and, in so doing, permanently transfers all rights and responsibilities from the original parent or parents...
assistance; child care benefits; transportation
Employer Transportation Benefits in the United States
An employer may provide transportation benefits to their employees that are tax free up to a certain limit. Under the US Internal Revenue Code section 132, the qualified transportation benefits is one of the eight types of statutory employee benefits that are excluded from gross income...
benefits; and possibly other miscellaneous employee discounts (e.g., movies and theme park tickets, wellness programs
Workplace wellness
Workplace wellness is a program offered by some employers as a combination of educational, organizational, and environmental activities designed to support behavior conducive to the health of employees in a business and their families...
, discounted shopping, hotel
Hotel
A hotel is an establishment that provides paid lodging on a short-term basis. The provision of basic accommodation, in times past, consisting only of a room with a bed, a cupboard, a small table and a washstand has largely been replaced by rooms with modern facilities, including en-suite bathrooms...
s and resort
Resort
A resort is a place used for relaxation or recreation, attracting visitors for holidays or vacations. Resorts are places, towns or sometimes commercial establishment operated by a single company....
s, and so on). Companies who offer these types of work-life perks seek to raise employee satisfaction, corporate loyalty, and worker retention by providing valuable benefits that go beyond a base salary figure.
Some fringe benefits (for example, accident and health plans, and group-term life insurance coverage up to US$50,000) may be excluded from the employee's gross income
Income
Income is the consumption and savings opportunity gained by an entity within a specified time frame, which is generally expressed in monetary terms. However, for households and individuals, "income is the sum of all the wages, salaries, profits, interests payments, rents and other forms of earnings...
and, therefore, are not subject to federal income tax
Income tax
An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
in the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
. Some function as tax shelters (for example, flexible spending accounts, 401(k)'s, 403(b)'s). Fringe benefits are also thought of as the costs of keeping employees other than salary. These benefit rates are typically calculated using fixed percentages that vary depending on the employee’s classification and often change from year to year.
Normally, employer-provided benefits are tax-deductible to the employer and non-taxable to the employee. The exception to the general rule includes certain executive benefits (e.g. golden handshake
Golden handshake
A golden handshake is a clause in an executive employment contract that provides the executive with a significant severance package in the case that the executive loses his or her job through firing, restructuring, or even scheduled retirement...
and golden parachute
Golden parachute
A golden parachute is an agreement between a company and an employee specifying that the employee will receive certain significant benefits if employment is terminated. Sometimes, certain conditions, typically a change in company ownership, must be met, but often the cause of termination is...
plans).
American
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
corporations may also offer cafeteria plan
Cafeteria plan
A cafeteria plan is a type of employee benefit plan offered in the United States pursuant to Section 125 of the Internal Revenue Code. Its name comes from the earliest such plans that allowed employees to choose between different types of benefits, similar to the ability of a customer to choose...
s to their employees. These plans would offer a menu
Menu
In a restaurant, a menu is a presentation of food and beverage offerings. A menu may be a la carte – which guests use to choose from a list of options – or table d'hôte, in which case a pre-established sequence of courses is served....
and level of benefits for employees to choose from. In most instances, these plans are funded by both the employees and by the employer(s). The portion paid by the employees is deducted from their gross pay before federal and state taxes are applied. Some benefits would still be subject to the Federal Insurance Contributions Act tax
Federal Insurance Contributions Act tax
Federal Insurance Contributions Act tax is a United States payroll tax imposed by the federal government on both employees and employers to fund Social Security and Medicare —federal programs that provide benefits for retirees, the disabled, and children of deceased workers...
(FICA), such as 401(k) and 403(b) contributions; however, health premiums, some life premiums, and contributions to flexible spending accounts are exempt from FICA.
If certain conditions are met, employer provided meals and lodging may be excluded from an employee's gross income. If meals are furnished (1) by the employer; (2) for the employer's convenience; and (3) provided on the business premises of the employer they may be excluded from the employee's gross income per Section 119(a). In addition, lodging furnished by the employer for its convenience on the business premise of the employer (which the employee is required to accept as a condition of employment) is also excluded from gross income. Importantly, section 119(a) only applies to meals or lodging furnished "in kind." Therefore, cash allowances for meals or lodging received by an employee are included in gross income .
The term "fringe benefits" was coined by the War Labor Board during World War II
World War II
World War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...
to describe the various indirect benefits which industry had devised to attract and retain labor when direct wage increases were prohibited.
Employee benefits provided through ERISA are not subject to state-level insurance regulation like most insurance contracts, but employee benefit products provided through insurance contracts are regulated at the state level. However, ERISA does not generally apply to plans by governmental entities, churches for their employees, and some other situations.
United Kingdom
In the UK, Employee Benefits are categorised by three terms: Flexible Benefits (Flex) and Flexible Benefits Packages, Voluntary Benefits and Core Benefits.Flexible Benefits, usually called a "Flex Scheme", is where employees are allowed to choose how a proportion of their remuneration
Remuneration
Remuneration is the total compensation that an employee receives in exchange for the service they perform for their employer. Typically, this consists of monetary rewards, also referred to as wage or salary...
is paid. Currently around a quarter of UK employers operate such a scheme.
This is normally delivered by allowing employees to sacrifice part of their pre-tax pay in exchange for a car, additional holiday, a shorter working week or other similar benefits, or give up benefits for additional cash remuneration. A number of external consultancies exist that enable organizations to manage Flex packages and they centre around the provision of an Intranet
Intranet
An intranet is a computer network that uses Internet Protocol technology to securely share any part of an organization's information or network operating system within that organization. The term is used in contrast to internet, a network between organizations, and instead refers to a network...
or Extranet
Extranet
An extranet is a computer network that allows controlled access from the outside, for specific business or educational purposes. An extranet can be viewed as an extension of a company's intranet that is extended to users outside the company, usually partners, vendors, and suppliers...
website where employees can view their current flexible benefit status and make changes to their package. Adoption of flexible benefits has grown considerably over the five years to 2008, with The Chartered Institute of Personnel and Development
Chartered Institute of Personnel and Development
The Chartered Institute of Personnel and Development is Europe's largest professional institute for people management and development. It is located in Wimbledon, London, England. The organisation has over 135,000 members across 120 countries, and achieved chartered status in 2000...
additionally anticipating a further 12% rise in adoption within 2008/9. This has coincided with increased employee access to the internet and studies suggesting that employee engagement
Employee engagement
Employee engagement, also called worker engagement, is a business management concept. An "engaged employee" is one who is fully involved in, and enthusiastic about their work, and thus will act in a way that furthers their organization's interests...
can be boosted by their successful adoption.
Voluntary Benefits is the name given to a collection of benefits that employees choose to opt-in for and pay for personally. These tend to be schemes such as the government-backed (and therefore tax-efficient) Bike2Work and Childcare Vouchers (Accor Services, Busybees, Sodexho, Fideliti, KiddiVouchers, Imagine, Early Years Vouchers Ltd) and also specially arranged discount schemes for employees such as group ISAs. Employee Discount schemes are often set up by employers as a perk of working at the organization. They can be run in-house or arranged by an external employee benefits consultant.
Core Benefits is the term given to benefits which all staff enjoy, such as holiday, sick pay and sometimes flexible hours.
In recent years many UK companies have used the tax and national insurance savings gained through the implementation of salary sacrifice benefits to fund the implementation of flexible benefits. In a salary sacrifice arrangement an employee gives up the right to part of the cash remuneration due under their contract of employment. Usually the sacrifice is made in return for the employer's agreement to provide them with some form of non-cash benefit. The most popular types of salary sacrifice benefits include childcare vouchers and pensions.
Fringe Benefits Tax
In a number of countries (e.g., AustraliaAustralia
Australia , officially the Commonwealth of Australia, is a country in the Southern Hemisphere comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands in the Indian and Pacific Oceans. It is the world's sixth-largest country by total area...
, New Zealand
New Zealand
New Zealand is an island country in the south-western Pacific Ocean comprising two main landmasses and numerous smaller islands. The country is situated some east of Australia across the Tasman Sea, and roughly south of the Pacific island nations of New Caledonia, Fiji, and Tonga...
and Pakistan
Pakistan
Pakistan , officially the Islamic Republic of Pakistan is a sovereign state in South Asia. It has a coastline along the Arabian Sea and the Gulf of Oman in the south and is bordered by Afghanistan and Iran in the west, India in the east and China in the far northeast. In the north, Tajikistan...
) the 'fringe benefits' are subject to the Fringe Benefits Tax
Fringe Benefits Tax
A fringe benefits tax is the taxation of most, but not all fringe benefits, which are generally non-cash employee benefits. The rationale behind FBT is that it helps restore equity and fairness to those employees who do not receive such benefits, and allows a Federal Government to more fairly...
(FBT), which applies to most, although not all, fringe benefits. In India
India
India , officially the Republic of India , is a country in South Asia. It is the seventh-largest country by geographical area, the second-most populous country with over 1.2 billion people, and the most populous democracy in the world...
, the fringe benefits tax was abolished in 2009.
In the United States, employer-sponsored health insurance was considered taxable income until 1954.
Employee disadvantage
In the UK these benefits are often taxed at the individual's normal tax rate, which can prove expensive if there is no financial advantage to the individual from the benefit.The UK system of state pension provision is dependant upon the payment of National Insurance Contributions (NIC). Salary exchange schemes will result in reduced NIC payments and so are also liable to reduce the state benefits, most notably the state second pension
State Second Pension
The State Second Pension, or S2P, was introduced in the UK by the Labour Government on 6 April 2002, to replace the SERPS...
.