The Pros and Cons of Flexible Benefits

What are flexible benefits?

Employee benefits, also known as fringe benefits, are the compensation that team members receive outside of their standard wages. When you offer flexible benefit plans, you provide a set of benefits that each employee can choose from (e.g., top health insurance plans, reimbursement accounts, highly rated retirement plans) to create a custom employee benefits package that fits their lifestyle and preferences. Flexible benefits have become extremely popular with both employers and employees

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Examples of flexible benefits

There are several types of employee benefits that you can offer, depending on the flexible benefits plan you set up. A cafeteria plan, one of the most common flexible benefits plans, comprises several benefits to cover eligible expenses, as long as they meet the criteria outlined by the IRS in Section 125.

“The benefits usually offered can range from cash value, life assurance, premium conversions, medical opt-out, critical care, vision, and dental to a health savings account (HSA) and 401(k),” Zane Dalal, executive vice president at Benefit Programs Administration, told us. “It is important to remember that these flexible benefits tend to be ancillary in nature, and the rights and obligations of employees and their employers differ from state to state and region to region.” 

Although flexible benefits can take many forms, Carla Yudhishthu, chief people officer at Mineral, said they generally pertain to employee needs associated with work, home life and planning for the future. 

Yudhishthu listed the following flexible benefits that employers can offer: 

Operational benefits (work)

• Career planning (e.g., sabbaticals or personal leaves of absence)
• Commuter benefits (e.g., tax-free reimbursement of parking or mass transit costs)
• Expense coverage for remote work (e.g., Wi-Fi, cellphone or incidentals)
• Flexible scheduling (e.g., flextime, shift flexibility, compressed workweeks or job sharing)
• Paid volunteer time
• Professional development (e.g., classes or training to earn or maintain professional credentials)
• Telework options (e.g., working from home or video conferencing)
• Paid-time-off benefits (e.g., personal days, floating holidays or vacation buying) 

Health and wellness benefits (home life)

• Employee assistance programs (e.g., confidential counseling, self-help and development content, and referrals)
• Employer matching for philanthropic donations 
• Flexible spending account (tax-free reimbursement for health or dependent care expenses)
• Health coverage (medical, dental and vision benefits), including both high-deductible and traditional plans
• Health reimbursement arrangements, paid by the employer and tax-free to employees
• Income protection (e.g., short- and long-term disability insurance)
• Life and accident insurance with choice of coverage amounts
• Tuition and student loan reimbursement
• Voluntary insurance options (e.g., individual policies for specific diseases, accidents or long-term care)
• Wellness programs (e.g., health promotions and incentives) 

Retirement and savings benefits (future planning)

• 401(k) plan (tax-free savings for retirement) 
• Health savings account (tax-free savings for current or future health expenses) 

What are the pros of offering flexible benefits?

Flexible benefits are popular among employers and employees for several reasons. However, the core benefits pertain to recruitment and retention, employee flexibility, and employer confidence. 

1. It increases employee recruitment and retention.

It is essential for small businesses to offer comprehensive benefits packages to stay competitive with other employers within their industry. Employees place high importance on benefits, and for some, benefits packages can be the deciding factor between two jobs. To attract and retain top talent, you should expect to compensate employees accordingly. In a MetLife study, 72 percent of employees said having customized benefits increases their loyalty to their employer. 

2. It gives employees control over their benefits.

Every employee is unique, and benefits should reflect that. An unhealthy older employee with a large family will want different benefits than a young, healthy, single employee laden with student debt. Flexible benefits plans allow your employees to choose only the benefits that are relevant to them.

“Flexible benefits empower employees to ensure their organization is meeting their professional and personal needs,” Yudhishthu said. “Employees want to feel their employer is investing in them, and flexible plans are a great way to do exactly that.

3. It eliminates the guesswork of choosing your employee benefits.

Your employees know what type of benefits will best suit them. When you offer a flexible benefits plan, you don’t have to try to create a plan that appeases everyone. Instead, you can leave the choices up to your employees and rest assured that they are getting the right benefits to accommodate their health, budgets, and personal and professional happiness.  

What are the cons of offering flexible benefits?

Although there are several advantages to offering flexible benefits plans, there are a few disadvantages to be aware of. The primary drawbacks pertain to time, resources, communication and cost. 

1. It requires time and administrative resources.

When you offer employee benefits, you must continually make sure that each one complies with the current federal, state and local laws and regulations. Because flexible benefits plans intersect with employee salary and are funded by pretax dollar contributions, they come under the governance of the Employee Retirement Income Security Act of 1974 and are regulated by the Department of Labor and the IRS, Dalal said. The more flexible benefits you provide, the more time and resources you need to maintain them and ensure they comply with the various laws pertaining to benefits and taxes.

“A small business that attempts to offer too many options may find that the burden of communication and administration is a disadvantage,” Yudhishthu said. “Additionally, the process of creating and implementing a flexible benefits plan is time-consuming, which takes away resources from other projects.” 

2. It requires exceptional communication.

Communication is a crucial part of successfully deploying a flexible benefits program. Because flexible benefits and employee contributions can often be modified, it is important for your human resources department to have an open line of communication with your employees, or to have an easy-to-access platform that your employees can use to modify their benefits. You should always be up to date with the benefits your employees are selecting so you stay in compliance with the associated payroll deduction laws and regulations. If you want to change the benefits you offer, you should clearly communicate that to your employees.

3. It can be costly.

Offering flexible benefits can get expensive. Not only is setting up a flex plan time-consuming (and time is money), but you also may need to purchase new technology to implement and maintain the plan. If you currently offer traditional benefits, speak with your employees about their benefits needs before adopting a flexible plan. 

What types of flexible benefits should you offer? 

Because flexible benefits are, by definition, flexible, they should be customized to fit your employees’ needs. You can start by analyzing the benefits your competitors offer. Yudhishthu said that when you’re comparing your company’s benefits to those of another business, consider these three questions: 

1. Are the benefit offerings comparable?
2. Do you want to position your business at market level or above?
3. What questions are job candidates asking about flexible work options or benefits? 

Your answers to these questions will help you design a flex plan that best suits your business and employees. Additionally, survey your employees to see which benefits they want the most and which ones they could do without. It is important to understand which employee benefits provide your team with the most value and which ones are a waste of money. 

“The secret to success in small business is the fine line an employer treads between his profit margin and the well-being of those upon whom he relies to make it,” Dalal said. “Reinvestment in a small business when you expand or need new equipment is a no-brainer and, in most cases, is given tax advantages. Consider that reinvestment in your workforce is as important and brings you continual dividends, and there are considerable tax advantages to doing so.” 

Source interviews were conducted for a previous version of this article.