If you’ve been in the benefits industry for any amount of time, you’ve probably come across the term “fringe benefits”. However, what counts as a fringe benefit is sometimes unclear. Let’s take a look at what fringe benefits are and how they can help your company.
What are fringe benefits?
At a basic level, fringe benefits are generally any extra benefit an employee (or contractor) receives in addition to or instead of a salary for services provided. Fringe benefits take many forms. The IRS provides Publication 15-B which outlines the key types of fringe benefits and the rules that apply to them.
Types of fringe benefits offered
There are more types of fringe benefits than you might expect. The IRS actually defines nineteen different types of fringe benefits. Catered lunches, an employer-paid cell phone, a company car—these just scratch the surface. Publication 15-B provides a full description of each type of benefit.
In most cases, fringe benefits are taxable (except when they aren’t). To avoid surprises down the road, it’s important to understand the tax consequences of any fringe benefits you offer.
For now, let’s break down a few of the most common types.
Accident and health benefits
Accident and health benefits are generally exempt from income tax withholding, Social Security and Medicare. These benefits are part of a Cafeteria Plan. Two-percent shareholders in an S-corp are not generally ineligible to participate or are taxed on the value of the benefits.
De minimus (minimal) benefits
A benefit is considered “de minimus” if the value of the benefit is so little that it would be unreasonable to account for it administratively. This certainly leaves some room for interpretation. However, the IRS clearly states that all cash (or cash equivalent) benefits cannot be classified as “de minimus” fringe benefits. So that $50 gift card for a holiday turkey is likely to be included in the value of your compensation.
However, the occasional company-paid meals, parties, tickets, small gifts (such as flowers), will generally fall under the de minimus benefit.
Educational assistance generally includes amounts an employer pays towards an employee’s education. This can include tuition, fees, supplies, books and equipment. The expenses should have a reasonable relationship to the business or be part of a degree program. Up to $5,250 is exempt each year. Any amounts in excess needs to be included in an employee’s income.
Health Savings Accounts (HSAs)
HSAs are a little bit of a trick. An HSA by itself is not necessarily a fringe benefit. However, pre-tax employer and employee HSA contributions through a Cafeteria Plan are considered a fringe benefit. Contributions to an HSA cannot exceed the annual limit. Contributions made through the Cafeteria Plan are exempt from income tax withholding, Social Security and Medicare. By contrast, contributions made outside of the Cafeteria Plan receive a tax deduction but will lose out on the Social Security and Medicare tax savings.
Qualified Transportation Fringe Benefits
Employees can opt to defer salary in exchange for a qualified transportation fringe benefit (or commuter benefit plan). For 2019, employees can elect up to $265 per month for mass transit and $265 per month for parking on a tax-advantaged basis.
Key factors regarding a qualified transportation fringe benefit
- Employees can enroll in both a mass transit and parking benefit at the same time.
- Employers can opt to directly provide transportation benefits or provide a bona fide reimbursement arrangement which ensure expenses are incurred and substantiated.
- Cash reimbursement for transit passes is generally not permitted.
So what is it worth?
All taxable fringe benefits must have a value assigned. The IRS provides different guidance to help employers determine the value of any benefit. Generally the value of a fringe benefit is its fair market value or the price an employee would have to pay a third party for a similar benefit. There are special circumstances and calculations for employer-provided vehicles.
Choosing the right fringe benefits
Fringe benefits are a great tool for companies to save money and have more creativity with how to compensate employees. Now that you know a bit more about fringe benefits, you can decide which one(s) is best for your company. If you want to get started with an HSA or qualified transportation fringe benefits, contact Benefit Resource today.