What is Flexible Benefit Plan- Advantages & Drawbacks

Flexible Benefits Plan (FBP) allows employees to choose the benefits they want or need from a package of programs offered by an employer. It’s the part of the salary that allows employees to modify the components of their CTC (Cost to the company).  FBP allows the employees to have better control over their plans and hence better control over their lives. They can decide which components of the CTC they want to opt into and how much each component. Flexible employee benefit plans may include health insurance, retirement benefits, conveyance, phone bills, etc according to the company and its employees’ requirements.

The relationship between employer and employee is always mutually beneficial. Understanding that every employee is different and hence they have different requirements is a necessity today. Catering to the needs of employees is one of the most important aspects of both small and large businesses. Hence, having a good flexible benefits plan can help a business attract and retain top talent.

What are the components of FBP?

  • HRA – House Rent Allowance is a part of most companies’ Flexible Benefits Plan. The employee can claim HRA only if they are living in a rented house. It means that the salaried component received towards rent payment is allowed as a deduction from taxable salary.
  • Conveyance – This may include vehicle lease, fuel bills, chauffeur service, and cab costs. An employee may opt-in for this if their commute to work takes up significant time and cost every day.  A lot of employees travel for client meetings or have a lot of fieldwork that requires traveling within or outside the home city. So, the conveyance component may cover different concepts according to the requirements of the company.
  • Phone bills – Nowadays, most of the work is done by phone and the internet. Most companies include postpaid mobile service bills and broadband connection bills as part of the flexible benefits plan in the salary.
  • Food Bills –  In fields where the employees need to travel a lot for work, it’s common for companies to have meal or cafeteria bills under their flexible benefits plan.
  • Medical Bills –  Health insurance are a way to cover a lot of medical bills. Different companies provide different health insurance plans for their employees and sometimes for their dependents as well. These may include life, dental, vision, and mental health insurance.

What are the benefits of the Flexible Benefits Plan for employees?

  • Less financial stress – Worrying about when the money will arrive to pay bills or purchase necessities can be stressful for employees when supporting and providing for a family, so having an FBP can help them meet their needs and alleviates a large amount of stress.
  • Tax Saving – The components of the flexible benefits plan like food bills, phone bills, HRA, and travel allowance are not taxable. Including these components can help reduce tax significantly as it is calculated on the basic salary. This means that they will be saving money from their taxes in each paycheque.
  • Control of benefits and expenses – A flexible benefits plan allows employees, not just to choose the components in the plans but also the amount spent on each component. A traditional benefits plan does not allow for this type of choice, leading to most employees paying a great amount more than they need.
  •  Effective recruitment – Every business needs to find a way to stand out to potential employees and encourage them to join the business. Offering benefits is sure to attract good talent when they are comparing incentives and salaries among the companies as it allows them to have more control over the issues that they have in their lives.
  • Employee retention – Executing a good benefits plan displays a company’s employee-friendly work culture and makes the employee feel valued, hence boosting retention. Employees are less likely to resign when they have their needs met in a practical way without much effort on their part.
  • Transparency and Productivity – By offering a flexible benefits plan, the company can offer transparency by giving the employee a complete breakdown of the perks or incentives on offer. An adequate range of choices in FBP can keep the employees satisfied and happy, leading to increased productivity.
  • Financial Control – FBP helps in planning annual budgets as it allows the employer to set a spending limit for each month or year. With the knowledge of the employee benefit plan, the company can know the expected expense for every year and make their budget accordingly. These benefits are tax-deductible and are a win-win.

Drawbacks of FBP for Employees

  • Potential to lose money – When an employee sets out a certain amount of money for a particular component, there’s always the risk of losing that money if they don’t utilize it over a period of time. Some flex plans do not allow employees to save money if they do not spend it over the year. Although this is a major disadvantage, having the ability to prepare for a worst-case scenario is still advantageous, especially considering that some plans will include life and dental, and/or vision insurance.
  • Lack of portability – Normally health plans are portable, but flexible benefit plans are not portable or transferable to a new company. This may lead to employees staying in a job simply because of their benefits, and not because they are happy there. A company should make sure that its employees are satisfied not just with their benefit plans but also with their work environment.
  • Knowledge of the plans – Employees needs to be educated about a company’s FBP. Without complete knowledge of the plans, they might not be able to make an informed choice. It may lead to choosing plans that do not suit their requirements and they might not get the benefits they otherwise can.
  • Reimbursement – Sometimes employees need to pay upfront for the services they use and get the reimbursement later. This can be a tiresome and long process if the company’s reimbursement process is slow and ineffective. A company should have a good expense policy in place to make sure reimbursement is not an obtuse process.
  • Setup costs – Setting up a new benefit plan is time taking and costly. It needs, designing and implementing according to the needs of individual employees. This does not add value to the company and can be too time-consuming. This also requires a lot of new technology to keep track of the plan.
  • Change – Moving from a traditional benefits plan to a flexible one can be a long process. It is difficult in terms of time and money, but also in terms of acceptance. The already existing employees might have a strenuous time understanding the different aspects of a flex plan. It is necessary for the company to educate them and let them know about the different components of the plan.
  • Updated Technology – The company might need to update its technology to use and track the usage of the plan to prevent any misuse or error in budgeting.
  • Misuse – Making sure that the bills uploaded or claims made are justified and not forged can be a tedious job as well. Providing employees with a great flexible benefits plan is essential, but it’s also essential to make sure that they are not misusing the benefits given to them so that the company does not face any kind of loss.

With increasing competition, companies need to stay ahead in terms of their incentives and benefits along with the compensation offered. ​​As the workplace becomes more diverse, so too do the needs of employees, and it’s important to maintain a happy work environment where the employees are excited to go to work. Having a good flexible benefits plan is mutually beneficial to the employee and employer. This being said, companies should make sure they conduct proper research on their employees and consider all the pros and cons before they implement a flexible benefits plan.

Frequently Asked Question

What is a flexible benefits plan in CTC?

Flexible Benefit Plan in India, based on the benefits like medical insurance and conveyance mentioned in the offer, helps employees to modify and structure their CTC components.

What are the advantages and disadvantages of a flexible benefits plan?

The advantages of offering flexible benefits are that it helps with employee retention and recruiting employees to give benefits and perks very high importance. It provides employees to take control over their benefits and the option to choose the right benefits for them.

There are a few disadvantages as well, like offering flexible benefits to employees requires administrative resources and time. It can be very expensive as it may be required to purchase new technology or software to implement and manage the plan. It also requires exceptional communication, as employers need to be up to date regarding the benefits and communicating it to employees.

What is a major disadvantage of flexible benefit plans?

The main disadvantage of some flex plans is that employees put in a certain amount of their savings each month, if they do not use the benefits, there are chances that they won’t be able to recoup the money.

Is FBP deducted from salary?

A Flexible Benefits Plan (FBP) is part of an employee’s salary, which gives more control over CTC components that they want to opt-in for. This way employees can significantly reduce their tax liabilities.

What is the use of a flexible benefits plan in salary?

A Flexible Benefits Plan (FBP) helps employees in modifying CTC components such as transportation and medical expenses. 

Is a Flexible Benefits Plan Taxable?

ITR specifies that certain allowances given to employees, which are attributed to business needs are exempted from income tax. These are also known as Flexi Benefit Allowances.