What is Flexible Benefit Plan (FBP) and How Does it Work?

Employees nowadays want more, and organizations are doing their best to keep up with employee needs. So, what is FBP (Flexible Benefit Plan)? How does it work?

A flexible benefit plan is one such scheme designed to allow employees to control the components of their CTC using employer-provided options.

Employee needs are ever evolving, and companies have realized that. So, they offer flexi benefit plan, that not only makes it easier for employees to structure their salary but also results in tax savings.

According to the 2022 Global Benefits Attitudes Survey, companies that offer FBP that meet employee needs have a 78% retention rate.

A flexi-benefit plan in salary not only benefits the employee in terms of tax savings, but also leads to employee satisfaction and reduces turnover. Still, there are many organizations who haven’t fully embraced the benefits of Flexible benefit package.

In this article, we are going to talk about flexible benefit plan –  its components, how it works and its benefits.

What is a Flexible Benefit Plan?

A flexible benefit plan is a plan that allows employees to design their salary structure. In FBP, employers provide employees with various components they can use in their CTC, like house rent allowance, travel allowance, conveyance, health allowance, etc.

An employee can opt for various components according to their needs. For example, there is an employee who just got married, we can call this employee, employee A.

And there is an employee who is single, we can call him employee B.

While employee A may like to opt for a flexible benefit plan in salary that focuses on child benefits and family health insurance, employee B may focus on more travel allowance.

Spending priorities vary from employee to employee, so it is convenient to give employees the flexibility to choose their own salary structure. However, companies do set an upper limit on all the allowances

What is FBP Declaration?

Every year employees who are eligible for tax returns file the ITR form. Some of the components of an employee’s CTC are exempt from taxation.

Which means an employee can submit an annual flexible benefit plan while filing the ITRs. It can help employees make some tax savings.

What Are the Components of FBP?

There are various components of FBP that employees can use to reduce their taxable income. The different types of components may include HRA (House rent allowance), Healthcare allowance, insurance, retirement, and much more. All the important components are explained below-

1. Health Care and Wellness Benefits

Many companies offer a wide variety of health-related benefits that improve employee health and wellness. Companies allot a certain part of the CTC for Health allowance to support their employees’ physical well-being.

Offering health benefits to employees can lead to a better mood and create a healthy work environment. You need to note that medical allowance does not come under the insurance component of the benefit plan.

2. Conveyance

Traveling to work every day costs a little fortune. So, many companies cover the conveyance for employees. Conveyance allowance can include

Employee vehicle: There are certain instances where employees use their personal vehicle to commute to work. Some companies cover the cost for it, and it is included in the CTC.

Fuel: Certain companies offer a complete waiver off on fuel while there are some companies that have a minimum amount for claiming the bill. In this case, the flexi-benefit plan lets employers include the fuel costs in the CTC of an employee.

Employer’s vehicle: An employer can sometimes provide a car/ vehicle to an employee for official purposes. In that case, the employer covers the cost of the vehicle and fuel. But if the employee uses it for both business and personal reasons, the costs are covered accordingly.

Chauffeur service: Most of the employees at the executive level are offered an optional chauffeur service, allowing them a driver. Availing it depends on the employee.

3. Insurance

Insurance benefits often provide insurance coverage for the employee and occasionally the family(dependents.) It also includes life insurance, health insurance (for employees & dependents). It can be availed in case of accident, sickness or death.

4. Education & Training

Companies often encourage employees to learn and develop. It increases their confidence at work and upskills them. In this case, the company may cover the tuition costs, training program costs for the employee’s education.

5. Retirement

Retirement benefits are provided by employers keeping in mind the financial security of an employee and it consists of the 401(k) plans. In India, the PF contribution can include both the employee contribution as well as the employer’s contribution. Employees can plan their investing options according to this as well.

6. House Rent allowance

HRA (house rent allowance) is also a CTC component that can be included in the FBP. If an employee is paying more rent than the upper limit set by the company on HRA, the employee can ask for tax returns on it.

How FBP Works in CTC?

Employees fail to understand how the annual flexible benefit plan can work in their CTC and help them with tax savings. In this section, let us understand how Flexible benefit plan in salary works:

Let us look at an example of an employee named Andrew, whose CTC is 800000 per annum. His company has added his conveyance cost into the CTC which is 3000X12 = 36000. But the actual expense is 50,000 per annum

The company has also provided the house rent allowance of 16000X12= 1,92,000. But the actual expense is 2,40,000 per annum.

So, eventually the CTC will be revised and reduced. Here is how you do it –

HRA1,92,0002,40,0001,92,00048,000

According to the numbers mentioned above, the revised CTC of Andrew will be 7,38,000, which is lower than his actual CTC. But he will be taxed on the revised CTC.

How Do You Declare FBP in Salary?

Employees can declare FBP and get exempted from taxes. There are certain components in a CTC that are eligible for tax exemptions. Here is how you can declare FBP in salary and enjoy tax savings.

1. Choose Components You Want Added to Your FBP:

You need to start by selecting the CTC benefits you want to include in your flexi-benefit plan. Try selected components for which you can easily provide documents like the HRA (house rent allowance), Conveyance allowance, telephone bills, etc.

2. Decide the Amount You Want to Allot to Each Component:

As described in the example above, Laia decided the components he wanted to include in his FBP. You need to do that math and include components in your FBP that will help you with tax exemption.

3. Submit the Necessary Documents:

Once you have chosen the allowances you want included, add the necessary bills to support your claims. For example, if you have added telephone allowances, submit the telephone bill or if you have chosen HRA submit the rent bill. For every available flexi benefit element, you need to provide the necessary supporting documentation.

4. Update Payroll:

After choosing the flexible benefit package’s components and submitting the documents, the employer will update the payroll. HRs can ask employees to declare FBP by using HRMS platform or even filling a Google form.

Benefits of FBP for Employees & Employers

Flexi benefit plans may be a bit complex to execute but it has many benefits that both employers and employees enjoy.

1. Employees

Employees enjoy multiple benefits from FBP, starting from tax exemption to saving more.

• Tax Exemptions

After declaring FBP during filing the yearly ITR, employees can gain a certain amount of tax relaxation. Choosing the right FBP components like HRA, conveyance, telephone allowance, an employee can reduce their CTC to some extent. An employee’s basic salary is taxable, so using the flexi benefit plan elements to claim expenses can lead to tax savings.

• Better Financial Planning

Employers offer a variety of allowances under the CTC which employees can benefit from. Using the flexible benefit package in the salary structure can help employees to better plan their finances. It gives them the room to invest more, save money and plan better.

2. Employers

Not only employees, but employers also enjoy some benefits from FBP:

• Increased Retention

As mentioned earlier, offering flexible benefit plans for employees can increase employee retention. Employees appreciate companies who help them manage their salary better and save on tax. FBP is also a defining element that affects the candidate’s decision to accept an offer.

• Better Employee Productivity

Offering FBP takes a huge load off from the employees’ shoulders to make them stress-free. It allows them to have the time to focus on work and complete their tasks, thus leading to increased productivity.

• Quality Hiring

A company that takes time to offer FBP to employees attracts better quality candidates who want to take care of their finances better. There are certain factors that affect a candidate’s decision to accept a job offer – and benefits play a huge role in it.

Major Challenges of Implementing FBP

Flexible benefit plans make it easier for employees to structure their CTC in such a way that they can reduce their taxable income. It also helps them align the components to their needs. However, implementing FBP isn’t a walk in the park and has some major drawbacks.

1. Complex Implementation Process

While the benefits of FBP may be many, creating a FBP for a company can be daunting. The vast amount of data collection and planning needed to implement the flexi benefit plan can be exhausting.

Moreover, a company needs a robust infrastructure like an effective payroll system to handle payroll challenges, especially the complex FBP process.

2. Educating Employees about FBP

FBP is about employees’ salary structure. So, any organization that wants to implement it needs to educate its employees.

Designing flexi-benefit plan can be hard, but teaching employees about it can be harder. Employees need to understand about the FBP components and which ones to choose, to help with tax savings.

Knowing about the intricacies of the entire process can be stressful. However, using efficient HCM software can streamline the entire FBP process for a company and make things easier for employees and employer.

Conclusion

FBP empowers employees to manage their salary structure better. It gives them the flexibility to allocate their allowances towards things that suit their needs better.

Flexi benefit plans can help employees with tax savings and help employers retain employees. It is a win-win for both parties!

What do you think about FBP? Does your company offer flexible benefit plan in salary to employees? Let us know in the comments below.

Try out our Payroll Management system to handle your FBP efficiently!