Blog posts

Flexible benefits plans: what are they and how do they work?

Discover everything you need to know about flexible benefit plans and how they could benefit your organization and employees here.

 Min Read 

Flexible benefits are one of the most requested workplace perks. However, employers often don’t offer them.

Failing to meet the demand for flexible benefits is a huge missed opportunity. It could leave your organization devoid of top talent, and lead your competitors to recruit and retain the best candidates out there. 

So what are flexible benefit plans, and why are they important for the modern workforce? In this article we take a deep dive into the topic, exploring what flexible benefits plans are, how they work, and why they benefit employers and employees.

What is a flexible benefit plan?

A flexible benefits plan is an employee benefit program that allows individuals to customize their compensation package by choosing from a wealth of options, including health insurance, retirement plans, or employee wellness programs.

Employees can tailor benefits to better suit their individual needs and preferences, fostering greater satisfaction and flexibility within the workplace.

How do flexible benefits plans work?

With flexible benefits plans, employees can allocate a certain portion of their total compensation toward the benefits that best suit their lifestyles.

The allocation process involves employees making choices during an open enrollment period, and adjustments can be made during qualifying life events.

Employees have the flexibility to choose from a variety of benefits. For example, an employee with young children may prioritize child care assistance or additional parental leave, while another employee may opt for a higher contribution to a retirement savings plan.

The flexibility extends beyond traditional benefits, with options like Flexible Spending Accounts (FSAs) for healthcare expenses or dependent care, allowing employees to set aside pre-tax dollars for specific needs.

Want to learn more about Flexible Spending Accounts? Get all the details with our easy-to-understand guide on FSA explained.

Examples of flexible benefits

1. Flexible healthcare benefits

Flexible healthcare benefits allow employees to choose healthcare options that align with their specific medical needs and preferences. Options include, but are not limited to:

  • Health Savings Account (HSA) – A tax-advantaged savings account that allows employees to contribute pre-tax dollars for medical expenses. Contributions roll over yearly, providing long-term savings for healthcare costs.
  • Healthcare Flexible Spending Account (Healthcare FSA) –  An account where employees can set aside pre-tax funds to cover qualified medical expenses. Unlike HSAs, FSAs may have a use-it-or-lose-it rule, requiring employees to spend the funds within the plan year.
  • Health Reimbursement Arrangement (HRA) – An HRA is an employer-funded account used for reimbursing employees for qualified medical expenses, offering flexibility in plan design and contribution levels.
  • Preferred Provider Organization (PPO) – A health insurance plan that provides more flexibility in choosing healthcare providers, both in-network and out-of-network, without requiring referrals.
  • Health Maintenance Organization (HMO) – A health insurance plan that typically requires members to choose a primary care physician and obtain referrals to see specialists.
  • High Deductible Health Plan (HDHP) – A health insurance plan with a higher deductible and lower premiums. Often paired with HSAs, it allows employees to save on premiums while having the option to contribute to an HSA for qualified medical expenses.

2. Lifestyle Spending Accounts (LSAs)

Lifestyle Spending Accounts or LSAs allocate a predetermined amount of money to employees, allowing them to choose how to spend it on a range of lifestyle-oriented benefits. This approach grants employees the autonomy to address personal needs, promoting work-life balance and job satisfaction.

LSAs cover diverse lifestyle expenditures beyond typical healthcare and insurance options. Employees can allocate funds towards areas such as fitness classes, wellness apps, home office equipment, or even educational courses.

For employers, LSAs contribute to a comprehensive and competitive benefits package that attracts and retains top talent. LSAs are cost-effective, as employers can control the allocated amounts, and the unused funds may not carry over, ensuring budget predictability.

If you want to offer LSAs as part of your compensation package, <span class="text-style-link text-color-blue" fs-mirrorclick-element="trigger" role="button">schedule a consultation</span> with one of our experts.

3. Commuter benefits

Commuter benefits give employees a pre-tax way to manage commuting costs, providing financial relief for expenses related to public transportation or parking. Employees can allocate pre-tax dollars to cover commuting expenses, reducing their taxable income and making daily travel more affordable.

This benefit aligns with the evolving nature of work and supports employees in adopting sustainable commuting options. By providing a pre-tax structure, employers contribute to the financial well-being of employees while promoting environmentally friendly transportation choices.

4. Retirement savings options

Pre-tax retirement savings options, such as 401(k) plans and Roth IRAs, play a crucial role in helping employees plan for their future while enjoying potential tax benefits. Similar to the structure of HSAs, employees contribute a portion of their pre-tax income to these retirement accounts. This allows for tax-deferred or tax-free growth, depending on the specific retirement plan.

Highlighting the dual purpose of HSAs is essential here, emphasizing that they serve not only as healthcare savings tools but also as a tax-advantaged way to save for retirement. This strategic use of pre-tax contributions provides employees with a comprehensive approach to financial planning.

5. Childcare benefits

Childcare benefits within a flexible benefits package are designed to assist employees in managing the costs associated with childcare. This employee benefit operates on a pre-tax basis, allowing employees to set aside a portion of their income before taxes to cover eligible childcare expenses. Similar to FSAs, this approach provides a tax-efficient way for employees to address their childcare needs, making it more financially manageable.

By offering pre-tax childcare benefits, employers contribute to creating a family-friendly workplace and support employees in achieving a healthier work-life balance.

6. Employee assistance programs (EAP)

Employee Assistance Programs (EAP) are designed to support employees' mental and emotional well-being. This benefit provides access to confidential counseling services, mental health resources, and assistance for personal challenges. Similar to other pre-tax benefits, employees can utilize EAP services without the financial burden of taxable income.

By offering EAP as part of the flexible benefits package, employers prioritize the holistic well-being of their workforce. This benefit not only contributes to a positive work environment but also demonstrates a commitment to addressing employees' mental health needs through a tax-efficient structure.

7. Work-from-home support

As remote work becomes increasingly prevalent, work-from-home support addresses the unique needs of employees in creating an effective home office environment. This flexible benefit allows employees to allocate pre-tax funds for essential work-from-home purchases such as office supplies, ergonomic furniture, and internet expenses.

Leveraging pre-tax accounts for work-from-home essentials enhances the tax efficiency of these purchases, making remote work more accessible and comfortable for employees. This approach aligns with the evolving nature of work and demonstrates an employer's commitment to supporting a flexible and productive work environment.

What are the advantages of flexible benefits plans?

What are the real-world advantages of offering flexible benefits plans? Here are 7 points to consider.

1. Increased employee satisfaction

Flexible benefits plans significantly contribute to heightened employee satisfaction by recognizing and accommodating the diverse needs of individuals within the workforce. The customization allowed by these plans empowers employees to select benefits that align with their specific requirements, ranging from healthcare preferences to work-life balance initiatives.

According to “Work Flexibility and Work-Related Well-Being”, a study published in the International Journal of Environmental Research and Public Health in 2021, employees who perceive their benefits as flexible report higher levels of job satisfaction and overall well-being.

The ability to tailor benefits packages fosters a sense of appreciation and acknowledgment, enhancing the overall employee experience. Recognizing individual preferences in benefits goes beyond monetary compensation, creating a positive workplace culture where employees feel valued and supported in their unique circumstances.

2. Enhanced recruitment and retention

Flexible benefits plans play a pivotal role in attracting and retaining top talent within an organization. Companies that offer flexible benefits are better positioned to meet the diverse expectations of prospective employees, making them more competitive in the talent market.

With 89% of HR leaders stating that improving total rewards was a top priority for 2024, top applicants are likely to start expecting flexible benefit packages from companies.

Beyond attracting talent, these plans contribute to increased employee retention. The ability to customize benefits helps create a sense of loyalty and engagement among existing employees. When individuals feel that their employer understands and accommodates their unique needs, they are more likely to stay with the company in the long term.

3. Cost-efficiency for employers

Flexible benefits plans offer cost-efficiency for employers through various channels. While the initial setup may require investment, the long-term benefits often outweigh the costs.

One notable advantage is the potential reduction in turnover costs. Organizations with personalized benefits experience lower turnover rates as employees are more likely to remain engaged and loyal to a company that values their individual needs.

HR managers are already seeing the benefit in offering flexible benefits

Additionally, the productivity gains associated with a satisfied and motivated workforce can contribute to overall cost savings. Companies with engaged employees outperform their counterparts, emphasizing the financial benefits of investing in employee satisfaction and well-being.

4. Tax savings for employees

One of the tangible advantages of flexible benefits plans is the opportunity for tax savings for employees. With pre-tax contributions to accounts like HSAs and FSAs, employees can reduce their taxable income, providing a financial incentive for participation. The tax advantages associated with these plans make healthcare and other qualifying expenses more affordable for employees, contributing to their overall financial well-being.

Beyond direct contributions to healthcare-related accounts, the ability to allocate pre-tax dollars to other flexible benefits, such as commuter benefits or dependent care accounts, further enhances the tax efficiency of employees' overall compensation. This approach aligns with a broader trend in employee financial wellness, demonstrating the employer's commitment to supporting the financial health of its workforce.

5. Improved work-life balance

Flexible benefits plans that address work-life balance contribute to improved overall well-being for employees. This includes benefits like LSAs and childcare benefits.

These benefits recognize the diverse demands on employees' personal lives and provide financial support for activities that contribute to a healthier work-life balance. Whether it's allocating funds for fitness memberships, family-oriented benefits, or personal development, flexible benefits plans enhance employees' ability to manage their professional and personal lives effectively.

6. Facilitates diversity and inclusion

Flexible benefits plans are instrumental in fostering diversity and inclusion within the workplace. By acknowledging and accommodating the diverse needs of employees, these plans contribute to creating a more inclusive environment.

Inclusivity supports varied lifestyles, accommodates different abilities, demonstrates cultural sensitivity, and promotes equal opportunities for all employees. Flexible benefits recognize that individuals come from different backgrounds, life stages, and family structures. Whether it's offering family planning assistance, parental leave options, or diverse healthcare choices, these benefits cater to the varied needs of a diverse workforce.

Inclusive benefits may also extend to accommodating different abilities, such as providing remote work options or ergonomic support for employees with disabilities. Cultural sensitivity can be incorporated by recognizing religious holidays, providing language assistance, or offering flexible scheduling to accommodate various cultural practices.

By promoting equal opportunities for all employees through a range of benefits that can be tailored to individual needs, flexible benefits plans contribute to a positive workplace culture where everyone feels valued and supported.

7. Agility in adapting to market trends

Flexible benefits plans provide organizations with the agility needed to adapt to evolving market trends. Adaptability is crucial for staying competitive in attracting and retaining talent. As the business landscape changes, the ability to adjust benefits offerings allows companies to remain relevant and responsive to the ever-changing demands of the market.

This agility extends to accommodating shifts in workforce dynamics, such as the rise of remote work or changes in employee preferences. By staying attuned to market trends and adjusting benefits accordingly, organizations demonstrate a commitment to staying competitive and providing a compelling employee value proposition. Strategic flexibility not only attracts top talent but also positions the organization as an industry leader attuned to the pulse of the market.

What to look for with a flexible benefit plan provider?

When selecting a flexible benefits plan provider, consider these 8 key criteria to ensure a seamless and tailored experience for both employers and employees.

1. Comprehensive plan customization

Look for a flexible benefits plan provider that offers a wide range of customizable options. The provider should understand the diverse needs of your workforce and provide flexibility in choosing benefits that align with individual preferences. A robust platform with varied benefit offerings ensures that employees can tailor their plans to their unique circumstances, enhancing overall satisfaction and engagement.

2. User-friendly technology platform

An intuitive and user-friendly technology platform is crucial for the successful implementation and administration of flexible benefits. The provider should offer a seamless digital experience that simplifies the enrollment process, allows easy tracking of benefits, and provides accessible support resources. A user-centric platform enhances employee engagement and streamlines benefits management for HR teams.

3. Compliance expertise

Ensure that the flexible benefits plan provider has a strong understanding of relevant regulations and compliance standards. Compliance expertise is crucial to avoiding legal issues and ensuring that benefit plans adhere to applicable laws. Look for a provider with a track record of staying updated on industry regulations, providing compliance support, and offering clear guidance on legal considerations related to flexible benefit plans.

4. Cost transparency and flexibility

Choose a provider that offers transparent pricing structures and clear communication regarding costs. Flexibility in pricing models, such as scalable options based on the size of your workforce, is essential. Transparent costs help organizations budget effectively and make informed decisions about the value of the flexible benefits program. Avoid providers with hidden fees or unclear pricing structures to ensure a straightforward and predictable financial arrangement.

5. Global availability and customization

Select a flexible benefits plan provider that accommodates global operations. The provider should offer customization options to meet the unique needs and regulations of different regions, especially for companies with a diverse workforce or remote employees. Global availability ensures that the benefits program can be seamlessly extended to employees in various countries.

7. Convenient payment methods

Prioritize a provider that offers convenient payment methods, such as the provision of debit cards for utilizing flexible benefits. This streamlines the reimbursement process for employees, allowing them to easily access and manage their benefits. The convenience of debit cards enhances the overall user experience and encourages higher utilization rates, contributing to the efficiency of the flexible benefits program.

8. Dedicated support

A provider should offer comprehensive assistance, handling procurement, administration, fulfillment, and compliance with the support of human experts rather than automated bots. Dedicated support ensures that employees and HR teams receive prompt and personalized assistance, fostering a positive experience throughout the implementation and ongoing management of the flexible benefits program.

What is the best flexible benefit plan?

The best flexible benefit plan recognizes the diverse needs of employees, and acknowledges that there's no one-size-fits-all solution. By providing a range of options and empowering employees to make choices based on their individual circumstances, organizations can tailor benefits to meet diverse preferences. This employee-centric approach fosters satisfaction, engagement, and a positive workplace culture, ultimately contributing to the success of the flexible benefits program.

How to get started with Forma

We’ve explored how flexible benefits plans can improve the proverbial health of your organization, offering a range of advantages to both employers and employees. But if this is the case, why aren’t flexible benefits the default? We believe that there are two main issues that prevent wider flexible benefits plan adoption.

One has to do with the lack of awareness about flexible benefits among key stakeholders. If there is no two-way communication between benefits managers and employees, there is no way for employees to express their preference for flexible benefits.

The other issue has to do with the perceived difficulty of implementing flexible benefits plans. Benefits managers don’t want to add extra complexity to their work, and they assume that introducing flexible benefits requires a lot of up-front investment, onboarding, etc.

Fortunately, both of these issues can be alleviated by utilizing a flexible benefits software solution such as Forma at your organization.

Give your employees the flexible benefits they deserve and <span class="text-style-link text-color-blue" fs-mirrorclick-element="trigger" role="button">schedule a consultation</span> with one of our experts today

This document is for informational purposes. Forma is not engaged in the practice of law. Nothing contained herein is intended as tax or legal advice nor is it intended to replace tax or legal advice from counsel. If you need tax or legal advice, please consult with counsel or a certified tax professional.