Potential Problem Areas

It is important to consider the wider implications of using flex for your benefit structure.  Whilst employee choice sounds attractive, you will need to revisit your employee documentation to make sure the new plan is reflected in your terms and conditions of employment.

Also, be careful about the effect on State Benefits.  An employee electing to spend all of their flex allowance and a large part of their salary on benefits might well drop below important earnings thresholds for a range of statutory entitlements.  This can normally be dealt with by limiting the amount of salary that an employee can give up in exchange for benefits and a signed disclaimer from the employee confirming they are aware of the implications of their choices.

On the subject of statutory benefits, there are some more subtle risks that Flexible Benefits can expose.  The main issue surrounds maternity benefits – this is not the place to consider the issue in detail but it can be a risk to an employer who allows a member of staff to exchange their allowance and salary for benefits and then departs on maternity leave.  The rules require all benefits to be maintained in full, with only salary being reduced.  This means that the employer might be left with high benefit costs to pay each month. 

However, it is worth noting that some earnings related and means tested State benefits can be enhanced by salary adjustment.  Again, this is a complex area that needs to be considered separately.

Another area where caution is required is where benefits are being replaced by the new plan.  For example, closing a medical plan might have a detrimental impact on those employees that are mid-claim.  Also, it is likely that there will be fewer providers willing to offer their products under a flexible plan and some insurances may cost more.  An experienced benefits consultant such as Atkinson Bolton Consulting Ltd, with flexible benefit experience, is important at this stage as more and more providers are now viewing  Flexible Benefits as an area for them to become involved in. 

The impact on employer and employee tax should also be looked at.  Benefits in the UK provided by employers will normally be subject to employer’s National Insurance and create an income tax liability for employees.  Not all benefits are treated the same in terms of tax or NI.  Some are exempt from income tax (for example, Private Medical Insurance) and some are exempt from both National Insurance and income tax (for example pension payments).  The key issue with Flexible Benefits is to consider the financial impact on the employer based on assumptions about which benefit might be chosen and secondly, make sure the benefits payments can be accurately tracked and reported at the year-end. 

As you can see, the main complexities and risks revolve around the issue of employees sacrificing salary for benefits.  These risks can be removed with a good administration platform in place and clear rules and guidance.  In our view, this is best done by using a bespoke benefit management system such as Real Benefits^TM, rather than trying to do it manually.

Examples of benefits and their tax treatment (assuming payment is made by the employer and any employee “cost” is obtained through salary adjustment (also called salary sacrifice)