Fringe Benefit

A fringe benefit is something given in exchange for the performance of a service. Unlike wages earned by employees, however, fringe benefits are often not in the form of money but in other value bearing forms. Some examples of fringe benefits are health care benefits, contributions to an individual’s retirement plan, the use of a company car, an allowance for housing or the provision of a low or no interest loan to assist with the purchase of a home, and additional vacation time. The main idea of fringe benefits is that they are intended to make a job more attractive to those looking for work, so that job applicants will gravitate toward firms that offer the most enticing combination of benefits. They are also intended as a retention device, meaning that employers try to offer benefit packages that will prevent current employees from resigning and seeking jobs elsewhere.

Brief History

For much of the history of employment as it is understood in the modern world, employers simply paid their workers wages, whether as an annual salary or on an hourly basis, and that was the extent of the benefits one could expect to receive from one’s employer. In times when jobs were scarce and many people were in competition for the same position, employers could afford to keep wages lower, since those with jobs felt lucky to be working at all, and were unlikely to take their chances by looking for better paying work elsewhere. Conversely, in sectors of the economy where employees with specialized skills were in high demand, employers were often forced to pay higher and higher salaries in order to attract and retain talented people.

To some extent, this situation changed during the twentieth century, in part because of World War II. As the United States entered the war, it was forced to concentrate all of its human and natural resources upon the war effort. This caused many changes in people’s everyday lives. Young men were drafted into the military by the thousands, because the army needed greater numbers to accomplish its military objectives. The country also needed to feed and equip this new army with supplies and weaponry, as well as transportation, so the industrial sector of the US economy was thrown into overdrive to provide all that was needed. Commodities that were needed for the war effort were rationed, and there were even recycling initiatives to gather metals and other materials that might be required to fuel the war effort. In order to make sure that the nation stayed on track rather than falling victim to price gouging or war profiteering, the government put in place controls on prices and on wages, to prevent the chaos and disruption that could arise if manufacturers began adjusting prices and salaries in order to compete with each other for government contracts. The wage and price controls inadvertently triggered the development of fringe benefits, because employers wanted ways to attract and keep workers, but they were prevented from using salary increases to accomplish this. As a result, employers began offering benefits outside of traditional salary increases as a means of attracting high quality employees—employers might not be able to offer higher salaries, but they could offer the same salary as their competitors and some additional benefits, like paid vacations and a company car.

Overview

A point of controversy related to fringe benefits has always been whether or not they are subject to income taxes. Some types of fringe benefits are treated by the tax code as income, meaning that the person receiving the benefit must list it on his or her tax return and pay taxes on it. Other benefits are excluded from taxation, although employers who offer them may still be eligible for a tax deduction. Another consideration for employers is that while most fringe benefits are by their very nature optional, meaning that employers may offer them to their employees but are under no obligation to do so, other types of fringe benefits are mandatory, allowing employers no choice about whether or not to offer them. Unemployment insurance is an example of a mandatory benefit. Other examples of mandatory fringe benefits include Social Security, Medicare, Medicaid, worker’s compensation and Supplemental Security Income.

There has long been a spirited political debate about what types of fringe benefits should be mandatory and what types should be optional. On one side of the issue, people argue that fringe benefits should essentially be treated as a free market, without government regulations requiring particular benefits. Advocates say the law of supply and demand would force employers to offer benefits to attract workers, without the government having to get involved. They further state that mandatory fringe benefits are actually harmful to workers because employers simply lower the actual wages that they pay to their employees to offset the value of the undesired fringe benefit. For example, if an employer planned to pay a chef $40,000 per year but was required to pay $10,000 in health and retirement benefits, the employer would simply change the salary to $30,000 to avoid spending what it considered "extra" money on the employee. Critics of this view believe that instead of supply and demand pushing the quality of benefits offered upward, there would instead be a "race to the bottom," in which workers desperate to earn a living would accept any benefits or no benefits at all, pointing out that the whole concept of fringe benefits did not emerge until government regulation (in the form of price and wage controls) forced it to.

In the twenty-first century, the confluence of the economic downturn in 2008, the ongoing influence of globalization toward decreasing wages and benefits for many types of workers, and the rise of independent contractors due to remote work have called into question the future role of fringe benefits for employees.

Bibliography

Accounting Trends & Techniques, Employee Benefit Plans: Financial Statement Reporting and Disclosure Practices. New York: American Institute of Certified Public Accountants, 2012.

Biswas, Bashker. Compensation and Benefit Design: Applying Finance and Accounting Principles to Global Human Resource Management Systems. FT P, 2013.

Gaines, Andrew L, and Andrew L. Oringer. Erisa: The Evolving World, 2013. Practising Law Inst., 2013.

Health and Welfare Benefit Plans. American Bar Association, Joint Committee on Employee Benefits, 2012.

Kagan, Julia. “What Are Fringe Benefits? How They Work and Types.” Investopedia, 25 Feb. 2024, www.investopedia.com/terms/f/fringe-benefits.asp. Accessed 6 December 2024.

Kennedy, Kathryn J., and Paul T. Shultz. Employee Benefits Law: Qualification and Erisa Requirements. LexisNexis, 2012.

Kohn, Arthur H., and Howard Pianko. Pension Plan Investments, 2014: Current Perspectives. Practising Law Inst., 2014.

Leimberg, Stephan R., and John J. McFadden. The Tools & Techniques of Employee Benefit and Retirement Planning. National Underwriter, 2013.

Maayan, Gilad. “The Rise and Impact of Independent Contractors in 2023.” Entrepreneur, 18 Sept. 2023, www.entrepreneur.com/starting-a-business/the-rise-and-impact-of-independent-contractors-in-2023/459213. Accessed 6 Dec 2024.

Pratt, David A. Pension and Employee Benefit Statutes and Regulations, Selected Sections. Foundation P, 2012.

“Publication 15-B (2024), Employer's Tax Guide to Fringe Benefits.” Internal Revenue Service, 2024, www.irs.gov/publications/. Accessed 6 Dec. 2024.