What is Fringe Benefits?
Fringe benefits refer to the additional compensation which is given by the companies to their employees whether for compensating against the costs in connecting with their work or for the job satisfaction and the examples of which includes health insurance, assistance for the tuition fees of the child or other reimbursements for the children, company car, etc.
In simple words, these benefits are the additional perks offered by the employer in addition to salaries and are considered significant in terms of employee satisfaction, motivation, and organization’s long-term goodwill in the market. The most common types of fringe benefits include health insurance, interest-free loan, company-provided car facility, etc.
Types of Fringe Benefits
- Accidental and health insurance coverage
- Discounted or free meals in the cafeteria
- Employee stock options
- Interest-free loans
- Contribution to retirement plans
- Higher education assistance
- Car or cab facilities
- Employer-provided car, mobile or laptops
- In house Daycare or pet care facilities
- Access to health clubs
Examples of Fringe Benefits
Fringe benefits are calculated based on the fair market value of any service or as a percentage of wages paid to an employee. In the United States, the current rate of social security contribution by the employer is 6.2% of the earnings, so the contribution by an employer depends on earnings of the employee subject to a maximum limit:
Health insurance benefits are most common of such benefits. The cost of insurance depends on the number of dependents one has. The cost goes up with more dependants and escalates further once parents are included. So here it will be the total amount charged by Insurance company to an employer.
Nowadays, Employee stock options at a discounted price are also one of the prominent benefits. In this case, an employee gets a share of the company every month or quarter as per agreement; at discounted cost. Sometimes when the company is performing very well, the bonus issuesBonus IssuesBonus shares refer to the stocks issued by the companies for free of cost to their existing shareholders in the proportion of their stock holdings. Companies issue such shares to compensate the shareholders with a higher dividend payout in the form of stocks.. If it is provided free to the employee, then the Market value of the shares on the date of transfer is considered a fringe benefit. If the employee has paid any amount, then the discount amount is considered.
Company X provides 100 shares to Mr. Tom @ $5 each. However, on the same day, shares price in the stock exchangeStock ExchangeStock exchange refers to a market that facilitates the buying and selling of listed securities such as public company stocks, exchange-traded funds, debt instruments, options, etc., as per the standard regulations and guidelines—for instance, NYSE and NASDAQ. is $8 per share.
- Fringe Benefit = 8 – 5 = $3,
- Value = 100*$3 = $300.
When the employer provides an interest-free loan to its employees, the national interest which the employee would have paid had he taken that loan from an outside lender, is considered the value of the fringe benefit. In case there is variation in rates, the rate at which the largest nationalized bank operates is considered.
The employee has taken $25000 as a loan, which is payable at the end of the year; Bank of America’s lending rate is 3% per annum. In this case, if the employee had taken a loan from Bank of America, he would pay $25000*3%= $750 interest to a bank. Here $750 interest cost borne by an employer is a fringe benefit.
When the company provides any laptop, mobile, or computer for the personal use of employees, the Fair Market Value is considered as the value of such benefit. If the organization uses it for a few years and then given to the employee, in that case, the depreciated value of the equipmentDepreciated Value Of The EquipmentDepreciation on Equipment refers to the decremented value of an equipment's cost after deducting salvage value over the life of an equipment. It lowers its resale value. is considered as the value of the benefit. In a few cases, the equipment is used for both personal and professional usage, then the value or cost of personal usage is considered a Fringe benefit.
Many companies provide free meals to their employees during office hours. This is calculated based on the cost charges by Vendor per meal per person. If the meals are provided at a discounted value, the discount amount borne by the employer forms part of fringe benefit.
Sometimes when the employer reimburses the travel expenses or any other expensesOther ExpensesOther expenses comprise all the non-operating costs incurred for the supporting business operations. Such payments like rent, insurance and taxes have no direct connection with the mainstream business activities. which are incidental to work, which employee does daily. These benefits are calculated and paid on an actual basis. Also, the dress allowance or per diem allowances given to the employee when he/she visits a different place or country is considered on an actual or standard policy of the organization.
- Employee motivation and satisfaction.
- The employer gets tax benefitsEmployer Gets Tax BenefitsTax benefits refer to the credit that a business receives on its tax liability for complying with a norm proposed by the government. The advantage is either credited back to the company after paying its regular taxation amount or deducted when paying the tax liability in the first place. on most of the fringe benefit expenses.
- Increased productivity of employees.
- The employer gets the deal in bulk, so the insurance costs are less costly compared to individual policies.
- Increases goodwillGoodwillIn accounting, goodwill is an intangible asset that is generated when one company purchases another company for a price that is greater than the sum of the company's net identifiable assets at the time of acquisition. It is determined by subtracting the fair value of the company's net identifiable assets from the total purchase price. of organization in the market;
- Forced health benefits from the employer side goes a long way in taking care of employees.
- It improves loyalty and brings employees and employers closer.
- Increases the cost per employee for an organization;
- Difficult to keep all employees happy instead of best efforts by the employer.
- Statutory obligation regarding fringe benefits and time-consuming and costly;
- Maintenance of records needs personnel.
- Difficult to maintain the budget as it keeps on increasing every year.
- Difficult to remove any benefit once provided.
- Any statutory change must be implemented by an employer.
- Books must be maintained for audit purposesAudit PurposesThe primary purpose of an audit is to conduct an independent and unbiased verification of all financial and non-financial material information to ensure that it is in line with what the management has reported..
- The details of cost should be shared with employees wherever they need for tax purposes.
- Change in fringe benefits must be informed to employees well in advance so that they are better prepared.
It helps an employee to feel more connected to an organization, which leads to a long tenure with an organization. It also depicts that an organization is ready to spend more for well being and happiness of its employee, which attracts more talent. In some cases, the government makes it a compulsion to provide fringe benefits to employees, for example -paid leaves and maternity benefits in most parts of the world. There are companies like Google that are famous for their world-class benefits – like awesome cafeterias, and you can carry your pets around. So they generate mutual respect between employee and employer, which goes a long way in building confidence, increased productivity, and longevity in services from both parties.
This article has been a guide to what is Fringe Benefits and its definition. Here we discuss types of fringe benefits along with practical examples, advantages, and disadvantages. You can learn more about accounting from following articles –