The pros and cons of flexible benefits

Learn what flexible benefits are and how they can help you attract and retain top talent.

  • Employers can offer a variety of benefit options for employees to create customized flexible benefits plans.
  • Flexible benefits allow employees to choose the benefits they value most, which is great for employee recruitment and retention.
  • The disadvantages of offering a flex benefits package pertain to time, resources, communication and cost. 

Small businesses should offer competitive employee benefits packages not only to attract and retain top talent, but also to enhance company culture and boost productivity. However, with five generations in the workplace, the best benefits for each employee can vary greatly. Offering a flexible benefits package is the best way to ensure that your employees are receiving the benefits that are the most important to them. 

What are flexible benefits?

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

Examples of flexible benefits

There are several types of employee benefits that you can offer, depending on the flexible benefit plan you set up. One of the most common flexible benefit plans is known as a cafeteria plan. A cafeteria plan 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, vison, and dental to a health savings account (HSA) and 401(k),” Zane Dalal, executive vice president at Benefit Programs Administration, told business.com. “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 differs from state to state and region to region.” 

Although flexible benefits can take many forms, Carla Yudhishthu, vice president of people operations at ThinkHR and Mammoth HR, 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, cell phone or incidentals)
  • Flexible scheduling (e.g., flex time, compressed workweeks, shift flexibility 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)
  • 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 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)

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 benefit packages if they want 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. If you want to attract and retain top talent, you should expect to compensate them accordingly. In a recent study by MetLife, 72% 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 is going to want different benefits than a young, healthy, single employee laden with student debt. Flexible benefit plans allow your employees to choose only those benefits that are relevant to them. 

“Flexible benefits empower employees to ensure their organization is meeting their professional and personal needs,” said Yudhishthu. “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 your employees are getting the right benefits to accommodate their health, budgets, and personal and professional happiness.  

What are the cons of offering flexible benefits?

Just as there are several advantages to offering flexible benefit 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 benefit plans intersect with employee salary and are funded by pretax dollar contributions, Dalal said they come under the governance of the Employee Retirement Income Security Act of 1974 (ERISA) and are policed by the Department of Labor and the IRS. The more flexible benefits you provide, the more time and resources you will need to maintain them and ensure they are compliant with the various benefit and tax laws.

“A small business that attempts to offer too many options may find that the burden of communication and administration is a disadvantage,” said Yudhishthu. “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. Since flexible benefits and employee contributions can often be modified, it is important that your human resources department has an open line of communication with your employees, or that you have an easy-to-access platform that your employees can use to modify their benefits. You should always be up to date with what benefits your employees are selecting so you can stay in compliance with the associated payroll deduction, laws and regulations. If you want to make a change to 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), you may also need to purchase new technology to implement and maintain the plan. If you currently offer traditional benefits, speak with your employees about their benefit needs before adopting a flexible plan. 

What types of flexible benefits should you offer? 

Since flexible benefits are just that – flexible – they should be customized to fit your employees’ needs. You can start by analyzing your competitors and the benefits they offer. 

When you conduct a comparison analysis with another business, Yudhishthu said to 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 benefit offerings? 

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 they could do without. It is important to understand what employee benefits are providing your team with the most value – and what benefits 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 wellbeing of those upon whom he relies to make it,” said Dalal. “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.” 

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This article was authored by Skye Schooley and originally published on May 21, 2020 by Business.com.

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