Flexible Benefits

Flexible Benefits Explained

Flexible benefits schemes (also known as 'cafeteria benefits' or 'flex plans') are formalised systems that allow employees to vary their pay and benefits package in order to satisfy their personal requirements.

They are not the same as voluntary benefits schemes (where employers arrange bulk discounts with external providers) or net pay schemes (where employees pay for extra benefits), both of which have been used for several years.  Under true flexible benefits schemes, the dividing line between pay and benefits becomes less rigid than in standard reward packages.

Many organisations have allowed a limited form of flexibility for just one or two benefits, but it is only within the last few years that comprehensive flexible benefits schemes have started to become more common in the UK.  Although generally welcomed by employers and employees, flexible benefits schemes have often been avoided because of the time and money of introducing and administering them.

With most schemes, employees are able either to retain their existing salary and simply vary the levels of benefits within their allowance, or else to adjust their salary up or down by taking fewer or more benefits respectively.

Why introduce flexible benefits?

Companies generally decide to introduce flexible benefit schemes as part of a wider move towards a more flexible working environment.  Such a scheme will also increase the perceived value of the reward package offered to employees, at no additional cost to the organisation.

Defining the parameters

Before drawing up a flexible benefits plan, it is important to fully consider the reasons for adopting this approach.  If, because of the nature of the organisation, only a limited amount of flexibility is possible, then it may be better to save the time and expense of introducing a full flexible benefits scheme and instead consider a more limited approach.  This might include allowing cash alternatives to company cars, or giving employees the ability to buy or sell holiday.  Alternatively, it may consider total reward benefit statements or voluntary benefits.

Any new scheme should be considered within the context of the existing reward strategy and should assess the motivational as well as the financial value of both current and future benefits.

Structuring the scheme

Most flexible benefits schemes are initially based on the existing benefits provision which is used to construct a new package.  Certain benefits, such as sick pay and maternity benefit, ought to remain outside the scheme.  Some employers also prefer to exclude pensions from flexible benefits.

The employee is given a benefit allowance and a list of available benefits. Employees are advised of the current level of their benefits and 'cost' of buying or selling these as they wish to suit their individual needs. There is typically a limit set on how much of the salary can be used to buy extra benefits and equally there is a baseline of benefits that must be kept and therefore to the extra salary that can be obtained by “selling” benefits.

Choosing and changing benefits

Once the scheme has been agreed, the choice of benefits is presented to the employees.  To ensure a positive reception, it is important that the choices (and the implications of those choices) are clear.

If the options are too complicated, or the method of making the choices is perceived as being difficult, then employees will simply default to their existing benefits package and much of the time and money spent in introducing the scheme will have been wasted.

Although reviews will generally take place annually, most organisations will allow changes to be made to the selection outside the normal renewal dates in exceptional circumstances. These typically include:

Who should be included in the scheme?

Many companies with flexible benefits schemes now offer them to all permanent employees. (If the wider workforce is to be included in the scheme, it is important that any pilot should be based on a representative sample of the final spread).

Tax and National Insurance implications

The tax situation for benefits is complex and collection methods vary between organisations.  Some benefits (such as life assurance) attract no tax whereas others are regarded as a “benefit in kind” and are taxed accordingly.  Depending on the arrangements that an employer has made with the Inland Revenue, these benefits may be taxed at source, through an amended tax code or through the end-of-year P11D.  It is important that the tax implications of any selections are made clear to employees.

Contents of flexible benefits schemes

Although there is no such thing as a typical flexible benefits scheme, there are certain benefits that appear in most.  Many schemes differentiate between core benefits, some parts of which are financed by the employer, and voluntary benefits, which are paid for by the employee.  The core benefits are those that an employer might be expected to provide and which, though the employee might adjust them, may not be entirely removed from the package.

The contents of any scheme vary but as an indication the following examples appear in many schemes:

Other benefits that may be included

The number and type of benefits in a scheme is a compromise between offering employees a wide choice and keeping the administration manageable. Other than pensions the most common benefits that tend to appear in existing schemes include:

Advantages of flexible benefits schemes

Disadvantages of flexible benefits schemes

Deciding on the amount of flexibility

When schemes are being introduced, it is important to estimate the likely take-up of specific benefits. This will enable employers to obtain the most accurate possible quotations for the provision of each benefit.  One problem associated with the introduction of flexible benefits is that the process of making selections actually changes the profile of the group requiring a particular benefit.

All schemes are costed on the basis of predicted selections; where employees make significantly different choices, these are regarded as 'adverse selections'. For the success of the scheme, the relative values of the benefits should be set so as to avoid too many adverse selections. They should also be arranged such that employees are not encouraged to make imprudent selections that will jeopardise their own security provision. The inclusion of core benefits guarantees a minimum level of protection. There must be a compromise between excessive flexibility that encourages inappropriate choices and too narrow a choice that does not meet the employees' expectations.

Before implementing a flexible benefits scheme we recommend that organisations survey their employees as to the type of benefits they favour and value. This would also assist in maximising the value of the package to both employer and employee.

Flexible benefits and anti-age discrimination legislation

There is currently no exemption for employers that allows them to make distinctions between employees of different age groups in providing insurance related benefits, such as private medical cover, income protection and life cover.

There may be scope for a challenge if the availability and cost to employees of such benefits under a flexible benefit scheme is dependent on their age.

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