Flexible benefits are fast becoming a popular part of employees’ overall compensation package. The types of flexible benefits companies offer vary and can be anything from flexibility in where employees work to reimbursement accounts that fill gaps in their traditional benefits and healthcare coverage. But the advantage they give companies is universal. Flexible benefits can improve recruiting and retention efforts, increase employee engagement and support Diversity, Equity and Inclusion (DEI) efforts, all while keeping your budget in check.

What are flexible benefits?

Flexible benefits are supplemental plans or perks that are customizable for the employer and optional for the employee to participate in. Their flexibility is multidimensional. The plans can be designed to best fit the company’s culture, values and budget and employees can choose which plans to participate in and how best to use their allowance so that it makes the biggest positive impact.

How do flexible benefits work?

Accounts such as Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs), and Healthcare Reimbursement Arrangements (HRAs) can bring both flexibility and tax-savings for both companies and their employees. These accounts are designed to complement health plans and enable tax-free spending on qualified medical expenses.

If the flexible benefit is not traditionally covered by health insurance and designed to meet a range of employee needs related to lifestyle and wellness needs, these accounts tend to be set up as reimbursement accounts. For accounts like Lifestyle Spending Accounts (LSAs) and Medical Travel Accounts (MTAs), work as a reimbursement vehicle. The employer chooses the type of account they’re offering, how much they will allow employees to reimburse through the account, and the specific expenses that can be reimbursed for.

Then the employee chooses which of the covered expenses will be most impactful to their lives. Most reimbursement types of flexible benefits are given to employees on an after-tax basis which means employees must pay income taxes on the amounts for which they reimburse.

Post-tax benefits typically aren’t as tightly regulated as pre tax benefits. So if the flexible benefit is given on a pretax basis (like a commuter benefit or an HSA) then the employer will have to follow IRS guidelines on how that benefit is administered.

If the flexible benefit is in the form of PTO or work schedule and location, it should be a written company policy that applies to all employees equally.

Should I offer them to my employees?

There are many advantages to bolstering your compensation package with flexible benefits. Here are some of the ways offering these perks can help your business:

• Improve recruitment and retention efforts. You can use the flexible benefits you offer to solve real problems in employees’ lives, thus showing current and prospective employees that you care about their wellbeing. This makes current employees want to keep working for you and attracts new talent to your company.

• Support DEI efforts. Increasing diversity, equity and inclusion in a company often requires structural change. One structural change that is easy for a company to make is to offer flexible benefits that help marginalized communities with costs they are more likely to incur like: adoption costs, gender affirmation treatment, multi-generational care, medical travel costs, and more.

• Increase employee engagement. Companies that have a higher rate of employee engagement do better than their counterparts with lower employee engagement. They’re more productive, more innovative and suffer less turnover. One step to increasing employee engagement is to invest in your employees’ well-being. Not just their physical health, but their mental health and financial health as well. Flexible benefits can help you target the specific challenges your team members are facing so they can be more focused and engaged at work.

Common examples of flexible benefits

Flexible benefits can be many types of benefits that supplement the benefits that most states require by law, such as insurance or retirement plans. They include supplemental health accounts like HSAs, transportation benefits, child and elder care reimbursement accounts, fitness and wellness benefits, family expansion and caretaking support, retirement savings accounts (that aren’t required by law), and various forms of PTO.

Health, wellness, and lifestyle benefits

Here are the different types of health-related flexible benefits that can support employees’ physical health needs.

HSAs: Both employees and employers can contribute to these accounts on a tax-free basis. Employees can use their contributions to pay for qualified medical expenses tax-free or they can choose to save their money for a medical rainy day or even retirement. Since employees’ contributions are made pre tax, they lower their taxable income and thus lower the employer's FICA responsibility. Employer’s contributions can be written off as a business expense.

Employees own the contributions they and their employers make to their HSA so they can never lose them, even if they leave the company. This gives employees a tax-advantaged way to save money and improve their financial and physical well being.

HSAs are flexible in that employers can choose whether or not they want to contribute to this account or if it will be 100% employee funded, but they don’t have control over which expenses employees can use their contributions for. Since it’s a pre tax account, the qualified medical expenses are determined and governed by the IRS, as is the annual contribution limit. HSAs must also be paired with a High Deductible Health Plan (HDHP).

Flexible Spending Accounts (FSAs): Both employees and employers can contribute these accounts and contributions are tax-free to the employee and can be written off as a business expense by the employer (just like with the HSA). The difference with FSAs is that they are funded on a use-it-or-lose-it policy and employers absorb whatever money is left in employees’ FSAs at the end of the plan year. In 2024, employers can choose to allow employees to roll over up to $640 of unused money or give employees a 2 ½ month grace period in which to use whatever remains (but not both).

Since employees’ FSA contributions are made on a pre tax basis, they also lower employers’ FICA responsibilities, and the expenses that can be paid for out of the account are governed by the IRS. The IRS also sets the annual contribution limit for these accounts. But FSAs can be paired with any type of health plan.

Health Reimbursement Arrangements (HRAs): These types of accounts are 100% employer funded and can be used to either reimburse for expenses not covered by a health insurance plan or to pay for health insurance premiums and other out of pocket costs (depending on the HRA type). There are several types of HRAs: Standard or Integrated HRAs, Qualified Small Employer HRAs (QSEHRAs), Individual Coverage HRAs (ICHRAs), Excepted Benefit HRAs (EBHRAs), and Retiree HRAs.

Standard or Integrated HRAs can be used to pay for out-of-pocket medical expenses not covered by health insurance. Both QSEHRAs and ICHRAs can be used by employees to purchase a health insurance plan, EBHRAs can be used to pay for vision and dental insurance and expenses and Retiree HRAs can be used by former employees to pay for health insurance. For more insight, consult our HRA guide.

Employer HRA contributions are tax-free to the employee and the types of expenses these accounts can be used to pay for, as well as the annual contribution limits, are regulated by the IRS.

Lifestyle Spending Accounts(LSAs): These types of accounts are post-tax, reimbursement accounts that are 100% employer-funded. Since they’re a post-tax reimbursement account, they are almost completely customizable for the employer and the employee must pay income taxes on the amounts they reimburse.

Employers can choose: the amount of the employee allowance, the types of expenses that are allowed, the cadence at which the allowance resets, what happens to any unused funds, and more. Employers can use LSAs to cover gaps in health coverage like gender affirming care, hormone treatments, or fertility treatments.

LSAs can also be used to help employees pay for everyday expenses like technology, gym memberships and wellness apps, expenses associated with a home office or remote work, pet care, financial wellness, or professional development. Employees must pay taxes on the amount they use.

To learn more about getting started with the many different types of health and wellness accounts you can offer, and how they work together to offer your team maximum flexibility, read our getting started guide.

Transportation

Transportation benefits can come in several forms: commuter benefits, a Lifestyle Spending Account, and Medical Travel Accounts (MTAs). Commuter benefits can be offered on a pre tax or post tax basis and used to pay for mass transit costs like bus or train fares, parking expenses and carpooling. Employees and employers can contribute to this type of account. If employers choose to offer commuter benefits on a pre tax basis, they will have to follow IRS guidelines for this type of benefit.

Businesses can also offer a post-tax LSA to cover expenses related to commuting to work, such as taxis, bike and scooter shares, and gas.

MTAs are post-tax, employer-funded accounts that can be used for any type of transportation an employee needs in order to receive medical treatment. The types of expenses that can be reimbursed for through this account include: bus and train fares, taxis, ride apps, airplane tickets, hotel stays necessary to receive treatment, mileage on a personal car and more. Since MTAs are post-tax, employees must pay taxes on the expenses for which they reimburse.

Child, elder, and dependent care

Employers can offer a Dependent Care FSA to support employees dependent care needs. These accounts enable employees to save pre tax money (employers can contribute too) in order to pay for child and adult day care costs that enable the employee to work. Acceptable types of care include: day care, nanny fees, day camp fees, preschool costs and adult day care for dependent adults. Since this is a pre tax benefit, employers will need to follow IRS guidelines for this type of account.

Employers can also consider creating an LSA to support caregiving expenses that fall outside of what is covered by a Dependent Care FSA.

Family expansion

One powerful way for an employer to support the family expansion efforts of all employees is to offer an LSA covering fertility benefits, adoption fees, surrogacy costs, and other expenses associated with family expansion that are not covered by your health insurance plan. This account is employer-funded and a post-tax benefit for the employee, so they will pay income taxes on the reimbursed amount. Since it’s a post tax benefit, employers have a lot of flexibility in how they structure this account.

Retirement benefits

If an employer isn’t required to offer its employees retirement benefits by law, offering this type of plan could be considered a flexible benefit. Employees don’t have to participate in the plan if they don’t want to, and employers have options in how they offer retirement benefits and how those benefits are structured.  Employers can choose to offer a 401k, an IRA like Icon Savings Plan, a state-run plan if their state of domicile offers one, or a Roth alternative. Employers can choose whether or not they will match employees’ contributions and at what level, and they can choose the structure of the investment vehicle (to a certain extent).

Retirement plans like IRAs and 401(k)s are pre tax benefits, and 401(k)s are governed by ERISA regulations. IRAs are not subject to ERISA laws. 

Paid time off

Being able to take time away from work to enjoy personal time, take care of family, recover from a medical event or to support their mental health is important for all employees. In fact, according to a recent survey by MetLife, unlimited PTO is the #1 most valued employee benefit and half of U.S. workers would prefer unlimited PTO to a salary increase. So if an employer is looking for a cost-effective way to boost employee satisfaction, switching to an unlimited PTO model might be worth considering.

Ways Lively can help

Lively is your partner in offering the most robust benefits package that makes sense for your company. We have a suite of flexible benefit accounts that can be customized and bundled with your current traditional benefits offerings so that your overall compensation package delivers maximum support and impact in a cost-effective way. 

We take care of employee onboarding and communication, we integrate with your existing systems and we even work directly with your payroll provider so that your benefits administration goes smoothly. Our plans are easy to use, understand and manage from both a participant and employer perspective.

If you’re ready to level-up your benefits, reach out to Lively today.