Steve Parrish of BenefitsPro, recently attended some graduate-level presentations at the personal financial planning department of Texas Tech University. These bright young financial planning candidates really knew their stuff. They worked through the arcane issues of split-dollar life insurance and executive bonus plans, and they quoted all the right code sections and financial tables.
His only criticism is they had trouble putting these fringe benefits into context: why employers would be interested, why the benefits would motivate employees. So, in less than 1,000 words, here is Steve’s overview of fringe benefits: What They Are, Why They Are Used.
Kinds of Fringe Benefits
I think of fringe benefits as any employer-provided or -sponsored benefits that are in addition to the regular wages provided employees. The list could go on forever, but below are some common categories.
- Incentives – These fringe benefits are paid out only upon accomplishment of a stated goal. They can come in many forms, from cash bonuses to additional Personal Time Off.
- Event-based – Many traditional fringe benefits are aimed at providing help for uncontrollable events. This is why favorite fringe benefits include health, disability, long-term care and life insurance benefits. The employee has little control over these events, and having the employer provide for – or participate in – the cost of insurance for these risks is a major incentive.
- Qualified Plans – With students I sometimes refer to these benefits as “legislative.” The simple fact is Congress wants to encourage employers to help employees build for retirement. This prevents having a government-provided retirement plan grow to a larger size than it already is, and it provides a social safety net for the elderly. Benefits with arcane names like 401(k), 403(b) and 457 have a real meaning to employees because they are sections of the code with a tangible value from a tax and financial standpoint.
- Nonqualified Plans – To the layman, this name is nonsensical. All it really means is this: it’s a benefit that falls outside of the qualified plan rules. Executive fringe benefits such as deferred compensation are “nonqualified” because they are not part of the ERISA-driven qualified plan rules that apply to the bulk of employees.
- Equity- based Plans – These incentives are measured primarily by how the company’s stock is performing. Anywhere from stock grants and stock options for executives to employee stock purchase plans for the entire workforce, the idea is to motivate employees to pull for the common cause of the company’s success.
- Special circumstances – During the boom period before the Recession, a company I know had an employee raffle for a Harley Davidson motorcycle. And during the dark days of the Great Recession, that same company supported employee morale by allowing “jean days” for several months. People liked wearing jeans, and it was a no-cost benefit the employer could offer.
- Recurring events – Many companies build positive anticipation by having, for example, a BBQ event tied into the United Way campaign or providing each employee with a free turkey every Christmas. Who can forget Clark Griswold’s excitement of being enrolled in the Jelly of the Month Club in “Christmas Vacation”?
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