Everything You Need to Know About Fringe Benefits

Not too long ago, extra benefits, or fringe benefits, were seen as nice-to-haves in a compensation package—good to offer, but not essential. After all, most employees prioritized a strong salary, and they rarely expected things like child care assistance or tuition reimbursement. 

Over time, however, basic fringe benefits like health insurance and retirement plans became must-haves for companies looking to stay competitive in the search for top talent. Today, these offerings are just the beginning. For companies striving to attract and retain skilled employees, a comprehensive, flexible fringe benefits package is as vital as a competitive salary.

In this guide, we’ll cover everything you need to know about fringe benefits, from essentials like health insurance and retirement plans to innovative perks like flexible work options and wellness programs. If you’re an HR leader shaping your company’s benefits, this guide will help you design a package that adds real value to your employee experience.

What are Fringe Benefits?

Fringe benefits are any non-wage payment or benefit … granted to employees by employers.¹ These benefits go beyond just a paycheck and aim to support employee wellbeing, enhance job satisfaction, and make organizations more attractive in a competitive job market.

Types of Fringe Benefits

Fringe benefits generally fall into two broad categories: mandatory and optional.

Mandatory Benefits (Legally Required Benefits)

Some benefits are required by law, meaning employers must provide them to comply with federal or state regulations. These mandatory benefits—like Social Security, Medicare, and workers' compensation insurance—are designed to give your employees a baseline of financial security. Think of these benefits as a foundation that ensures every employee has access to vital protections.

Some fringe benefits required by law include: 

• Health insurance — Part of the Patient Protection and Affordable Care Act 
• Medical leave — Companies with more than 50 employees are obligated to provide this 
• Unemployment insurance — Part of the Federal Unemployment Tax Act 
• Workers’ compensation — The Department of Labor requires companies to compensate workers who have been injured or gotten sick at work 
• Social Security (except in certain cases that allow organizations to opt out, such as public school systems that offer another form of retirement plan)

In addition to federal requirements, some states may require additional benefits. There may also be eligibility parameters based on the size of your organization. Be sure to review the laws in your jurisdiction to ensure you are meeting the legal obligations for your organization.

Optional Benefits (Not Required by Law) 

Other benefits, such as gym memberships, wellness programs, flexible work arrangements, or child care assistance, are offered voluntarily by employers. These are the “extra mile” perks that set employers apart and showcase a deep commitment to work-life wellness and a supportive company culture. When organizations choose to invest in these fringe benefits, they’re saying, “We’re here to support your wellbeing—inside and outside of work.” Although these perks may be subject to taxes for employees (we’ll cover that next), they’re often key to building a workplace that attracts top talent and encourages long-term loyalty.

Some optional fringe benefits include: 

• Health and Wellness Benefits: Dental and vision coverage, wellness programs, and mental health support.
• Work-Life Balance Benefits: Paid time off, flexible work arrangements, parental leave, and sabbaticals.
• Financial and Retirement Security: Retirement plans (401(k)), life insurance, stock options, and tuition reimbursement.
• Professional Development: On-the-job training, tuition reimbursement, and conference stipends.
• Unique Perks and Amenities: Gym memberships, on-site amenities, company car, free meals, transportation allowances.

How Fringe Benefits Work

Fringe benefits programs are designed to offer employees flexibility to meet their unique needs—whether they’re new to the team or a seasoned veteran. New hires typically get their first taste of these perks during onboarding, while current team members can re-evaluate and adjust their selections each year during open enrollment.

Many organizations are moving toward flexible, customizable benefits programs which allow employees to personalize their options. Instead of a standard one-size-fits-all package, customizable benefits programs provide a suite of options so employees can choose what best fits their lifestyle. For example, an employee might select a health plan that matches their deductible preference or add lifestyle perks like commuter benefits, mental wellness resources, or a wellness stipend. Some companies even offer a points system, where employees can allocate points toward the benefits they value most.

This kind of customization doesn’t just support diverse needs—it shows employees that their company is invested in helping them thrive, both at work and in life. Employees feel more valued, engaged, and satisfied when their benefits match their lifestyle. And that’s where some of that workplace magic happens…you get a motivated, resilient workforce that’s excited to grow with your organization.

Are Fringe Benefits Taxable? Yes, Sometimes.

In general, fringe benefits fall into two categories: taxable benefits and non-taxable benefits. 

• Taxable Fringe Benefits: The IRS considers these benefits as additional income subject to standard income and payroll taxes. These fringe benefits should be included in an employee’s gross income and will appear on their W-2 form. Examples of taxable fringe benefits include:
  • Company vehicles used for personal driving
  • Cash bonuses
  • Off-site gym reimbursements
• Non-Taxable Fringe Benefits: Non-taxable benefits are the gifts that keep on giving—they are exempt from income tax and can be excluded from an employee’s gross income. These fringe benefits typically focus on supporting employee health, wellbeing, or covering business-related expenses. Some common examples of non-taxable benefits include:
  • Health insurance premiums paid by the employer
  • Employer contributions to retirement plans
  • Educational assistance (up to IRS-specified limits)

IRS Publication 15-B — better known as the Employer Tax Guide to Fringe Benefits — has everything you need to know about taxable fringe benefits, how they affect taxable income and payroll tax, exclusion rules, and everything else to keep you compliant with tax rules and codes. 

Why Are Fringe Benefits Important?

Fringe benefits are a powerful tool for companies looking to attract, support, and retain a skilled workforce. Beyond supplementing wages, they create a holistic work environment where employees feel valued, supported, and connected to their workplace. According to Benify’s Employee Happiness Index, there is a clear correlation between fringe benefits and employee engagement. The study showed that employees who were satisfied with their benefits package were 25% more engaged than the least satisfied. 

Offering fringe benefits can help companies: 

• Attract and retain top talent: In high-turnover industries, fringe benefits are more than just perks—they’re a game-changer for your recruitment strategy. Today’s candidates are looking for employers who support their whole wellbeing, and benefits like robust health coverage, flexible work options, and professional development opportunities can be the deciding factors in a job offer. In fact, SHRM’s 2024 Annual Employee Benefits Survey found that 70% of HR Leaders consider flexible work arrangements to be a high priority benefit for their employees. Fringe benefits also help retain employees. When employees feel valued beyond their paychecks, they’re far more likely to stay, reducing costly turnover and helping you build a resilient, loyal team.
• Boost employee morale and satisfaction: Fringe benefits that support wellbeing and work-life balance directly impact employee happiness and engagement. Wellness stipends, mental health resources, or flexible schedules empower employees with the tools they need to manage stress and balance their personal and professional lives. When employees feel genuinely supported, they’re more energized, less susceptible to burnout, and ready to bring their best every day. In fact, Wellhub's 2024 Return on Wellbeing report found that 89% of HR leaders see employees take fewer sick days as a result of their wellbeing program.
• Gain tax advantages: Offering fringe benefits isn’t just about supporting your team—it can also come with tax advantages that lighten your business’s financial load. Many perks, like health insurance premiums, retirement contributions, and educational assistance, are tax-deductible which helps to lower your taxable income. These tax savings create an opportunity to reinvest in your team, making fringe benefits a win-win for both your employees and your bottom line.
• Build a positive company culture: A well-rounded benefits package does more than support individual needs—it’s the cornerstone of a workplace culture rooted in respect and care. Perks that bring people together, like social events, volunteer days, or family-friendly activities, spark real connections and build a sense of community within the company. Over time, these connections strengthen your culture, creating a place where people are excited to stay, grow, and succeed together.

How to Start a Fringe Benefits Program

Okay, so you're convinced that fringe benefits are important. Now, let's get down to business and build a program that works for your company. Here are a few steps to get started: 

1. Tune into your team’s needs and preferences: Start by getting to know what truly matters to your employees. Run a survey or set up focus groups to ask what types of benefits they’d find most valuable. Are they looking for wellness perks? Child care assistance? Professional development options? Gathering this data gives you a clear picture of the benefits that will have the most impact.
2. Set your budget and goals: Fringe benefits are an investment, so you’ll want to align your offerings with your budget. Decide how much you can allocate and consider your goals—whether they’re to improve retention, boost engagement, or enhance wellness support. A clear budget and goals will help ensure the program is both impactful and financially sustainable.
3. Create a benefits menu employees can personalize: One-size-fits-all doesn’t cut it anymore! Offer a range of benefit options to let employees build a package that resonates with their lifestyle and needs. For example, provide a mix of options like health stipends, mental wellness resources, commuter benefits, or retirement savings plans. You may even want to include a few out-of-the-box ideas like travel discounts, moving assistance, and home office reimbursements.
4. Communicate clearly and often: During onboarding, make sure new employees understand all the options available, and offer refreshers during annual open enrollment. Use multiple communication channels like emails, presentations, and internal company forums to explain the benefits and make sure employees know how to access them.
5. Gather feedback and adjust: A successful fringe benefits program is adaptable. After the program has been up and running for a while, gather employee feedback through surveys or informal check-ins. Are your employees using the benefits? Are there other perks they’d like to see? Use this data to refine and expand your offerings and ensure the program remains relevant as your employees' needs evolve.

As HR leaders shape benefits packages, the growing need for comprehensive, flexible fringe benefits is clear. Today's employees value perks that support their whole life, like mental health resources, wellness stipends, and flexible work options. These benefits do more than attract talent—they drive loyalty, reduce burnout, and enhance employee satisfaction.

Incorporating a wellbeing program into your benefits package can amplify these positive impacts. Research shows that companies with wellness programs see employees take 89% fewer sick days and experience improved retention rates. By offering resources that meet your team’s diverse wellness needs, you foster a resilient, engaged workforce that’s excited to grow with your organization.

Speak with a Wellhub Wellbeing Specialist to create a benefits package that supports employee wellbeing and boosts long-term loyalty.

References: 

• Benify. (2019). The Employee Happiness Index 2019. Retrieved from https://info.benify.com/happiness-index-2019
• Britannica. (n.d.). Fringe benefit. In Encyclopedia Britannica. Retrieved October 29, 2024, from https://www.britannica.com/money/fringe-benefit
• Healthcare.gov. (n.d.). Patient Protection and Affordable Care Act. Retrieved October 29, 2024, from https://www.healthcare.gov/glossary/patient-protection-and-affordable-care-act/
• Internal Revenue Service. (n.d.). Federal Unemployment Tax. Retrieved October 29, 2024, from https://www.irs.gov/individuals/international-taxpayers/federal-unemployment-tax