If you work full-time, you receive payment in cash - and also in benefits. The law requires that your employer provide certain benefits, but many companies also offer non-cash benefits such as paid vacation time and health insurance.
Employee benefits are designed to provide security to you and your family, and to improve your quality of life. The Internal Revenue Service offers tax breaks to you and your employer for many of these benefits.
Some Employee Benefits Are Required by Law
Employers are required to make payments on employees' behalf into funds for Social Security and Medicare. You are also required to make payments into these funds. These payments are deducted from your paychecks. In most years, the contribution amounts are equal, but in some years employers pay more into the fund than employees.
Employers must also pay for unemployment benefits on employees' behalf. As an employee, you do not pay anything for federal or state unemployment benefits. You can use these benefits if you lose your job.
Employee Benefits Are a Form of Payment
The IRS defines employee benefits, also called fringe benefits, as a type of payment for services. However, many benefits, including health care benefits, are not included in your income for tax purposes. They are not subject to Social Security or Medicare withholding.
Some benefits, like educational assistance, are tax exempt up to a certain amount each year. Other benefits, like vacation pay, are fully taxable.
Retirement Benefits Are Tax Deferred
In the past, many employers offered pension plans. These plans guaranteed a certain retirement benefit after a certain number of years. Now employers are more likely to offer 401(k) plans, where employees contribute their own money to the plan. Employers may match contributions up to a certain amount.
Generally, employees don't pay taxes on the contributions they make to their retirement plans. Nor do they pay taxes on employer matching contributions or investment growth within the plan. When they retire, however, distributions from the plans are taxed as regular income.
ERISA Sets Standards for Certain Benefit Plans
The Employee Retirement Income Security Act of 1974 (ERISA) sets rules and regulations for employer-provided retirement and health plans. ERISA requires that employers provide certain easily understood information about the plans and how they work. Employers must also inform employees about retirement and health plan standards for participation and eligibility for benefits.
Over the years, ERISA has been expanded. For example, the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) requires that employees or their family members who lose health coverage due to job loss must be allowed to continue "COBRA" coverage at their own cost for a limited time.
An Employment Lawyer Can Help
The law surrounding employee benefit plans is complicated. Plus, the facts of each case are unique. This article provides a brief, general introduction to the topic. For more detailed, specific information, please contact an employment law lawyer.