With the rise in popularity of Flexible Benefits (or "flex"), we are aware that this term is used loosely and can mean completely different types of scheme to different companies and individuals.
The structure of schemes varies considererably and we view Flexible Benefits as a generic term for an employee reward system that allows, at least in part, some employee choice over the elements of their pay and benefits package. This fact sheet defines some terminology that we have developed within Mazars Employee Benefits to help our customers understand and articulate their requirements.
Types of Scheme
We characterise employee benefit schemes into 4 broad types of plan design:
- Funded - these are true flexible benefit plans which operate formal arrangements where staff are provided with a range of employer funded benefits (Core Benefits) and/or a separate benefit spending allowance (a Flex Allowance). Employees can purchase benefits of their choosing from a menu of benefits and options using their Flex Fund (comprising their Flex Allowance, downgraded Core Benefits, net pay deductions and any Salary Sacrifice - see below
- Pragmatic - this structure provides no explicit flex allowance but allows the employee to modify an employer subsidised benefit set by trading (selling or downgrading) and to increase benefit funding through salary sacrifice.
- Base - This is more of a fixed structure where employee's have the option of obtaining tax efficient benefits through salary sacrifice and taxable benefits by net pay.
- Static - these plans are sometimes referred to as fixed benefit packages where the employee's salary remains static and there are no salary sacrifice options – employee options are funded through net pay.
In addition to the above, voluntary schemes offer access to discounts or special terms on a range of goods and services which are paid for directly by employees. Payments can be via payroll (as net pay deductions) or, more usually, direct from the employee's bank account to the provider.
We consider the first two as "real" flex and the others a type of incentive scheme that are mistakenly called a flex schemes. The first two involve considerably more commitment from the employer: contracts with benefit providers, scheme administration, employee communication. Having said that, a strong employer commitment can result in significant benefits to the organisation.
Salary Sacrifice
A key consideration in any flex scheme and a characteristic of most is the ability of an employee to sacrifice, or exchange, salary to spend on benefits. Employees that opt to exchange salary for benefits through the plan will obtain tax and National Insurance relief for exempt benefits that include pensions, childcare vouchers, computers, life cover, mobile phones and additional holiday days. Other exempt and partially exempt benefits are also included in flex plans.
See our Salary Sacrifice fact sheet for more information.
Summary
Modern employee benefit arrangements can be set up using a range of plans designs and most give the employee flexibility in the choice of their salary and benefits package. Often a key part of these scheme is the ability of the employee to exchange salary for further benefits realising tax and NI savings in the process. The main challenge for employers with existing arrangements will be changing the basis of the funding and this will depend on the circumstances of each organisation.
Please contact us for more information.
