A Denver law firm lures its young attorneys up the corporate ladder with the promise of any automobile, at no charge, once they make partner.
Hallmark Cards Inc., in Kansas City, offers workers interest-free loans for emergencies and low-interest loans to send the kids to college.
Employes at Northwestern Mutual Life Insurance Co. know there is such a thing as a free lunch. They eat one every workday at a company cafeteria that ranks among Milwaukee's best luncheon spots.
Wide-ranging employe perquisites have become a fact of American life in the '80s. Once the exclusive claim of corporate brass who shuttled from the executive dining room via chauffeured limousine to the club, perks have been democratized. Even Republic Airlines kicked off its recent frills-for-flying campaign with full-page newspaper ads announcing that it "knows what everyone in business wants out of life -- Perks."
Since inflation and tax-bracket creep started outpacing pay hikes in the late 1970s, corporations have relied increasingly on innovative fringe benefits -- beyond standard medical and life insurance policies -- to supplement employes' salaries. Hefty raises seemed to fatten IRS coffers more than wage-earner pocketbooks. Traditionally, many of the most common perks have been tax-free. And when employes are required to declare some as taxable income, the tax -- if actually paid -- is much less than the value of the benefit.
Companies have also favored perks because they can write off most of them as business expenses and avoid payroll taxes that they'd normally pay on comparable salaries. Generous fringes have become an effective recruiting tool.
The catch: The high visibility of today's improved job benefits has also attracted the attention of Uncle Sam. The result: new Internal Revenue Service regulations and the threat of even tougher tax proposals that, along with fundamental shifts in the American work place, are redefining fringe benefits.
Many employes are likely to see the first effects in their paychecks during the next few months, and later in their 1985 income-tax returns. In the next five years, benefits consultants predict, the traditional fringe-benefits plans that have remained intact and virtually unchanged for 40 years will undergo radical changes.
Starting this month, these perks become red flags to the IRS as taxable compensation: frequent-traveler bonuses, use of company cars for commuting, nonbusiness travel on company aircraft, vacations that go beyond the basic, employer-provided time off and company-paid tickets to entertainment and sporting events.
The rules, established by the Tax Reform Act of 1984 that Congress passed in June, define categories of fringe benefits that, at least for now, are nontaxable. Among the tax-exempt benefits: group life insurance up to $50,000, health insurance, employe discounts, benefits that cost the company nothing (such as free seats when available for theater employes) and job-related benefits such as magazine subscriptions.
Fringe benefits not specified as tax-free are taxable, with employers required to start in July a complicated process of record-keeping and withholding taxes for many such benefits dating from the first of the year.
So there's no such thing as a free lunch after all -- if the employer provides it simply as a perk.
"Probably the most significant fringe-benefit legislation enacted in recent times" is how Sen. Robert Dole (R-Kan.) has described the new law. As chairman of the Senate Finance Committee last year, Dole predicted it "will affect every employer, and will have a direct impact on future compensation planning and employer compensation."
Furthermore, conservative economists in Congress and the Treasury Department are now pushing for taxation of such traditionally sacrosanct benefits as medical insurance and pension benefits, calling them a source of millions of dollars in revenue that could help cut the deficit. Treasury proposals even favor eliminating tax-exempt status of employer-provided group term life insurance, educational benefits, legal services and dependent care. The result is a lot of hand-wringing, from the executive suite to receptionist desk.
A survey last year by William M. Mercer-Meidinger Inc., a benefits and compensation consulting firm with offices in 40 U.S. cities, of chief executive officers at "several hundred" major corporations, showed:
* 78 percent believe most U.S. companies will cut back on benefits if tax-exemption of basic benefits is ended.
* 90 percent believe eliminating tax preferences for benefits would have a negative effect on the health and welfare of workers and their families.
* 72 percent believe employes would not purchase replacement insurance to make up for reduced company benefits, even if their salaries were increased to make that possible.
* 85 percent believe employes would not invest money for their retirement under the same conditions.
* 73 percent believe if employers cut back on benefits, the government will be pressured to increase Social Security and welfare benefits.
"The latest changes that are being proposed are not really affecting the big fat cats," says Lance Tane, manager of the Flexible Compensation Team of the Wyatt Co. Executive Compensation Service, a benefits consulting firm headquartered in Washington.
"They're going after medical and life insurance of the working man. They would tax the basic benefits of the average worker. If the company provides a healthclub membership for an executive, then that should be taxable. And, under the existing law, it is. If a company were to loan an employe interest-free money to buy a computer, generally the employe should be taxed on 'imputed income' equal to the interest rate on that loan.
"These laws are all there. They're tough to enforce. And that's being used as a Trojan horse for the Treasury to push taxing of all benefits."
Tane argues that the Treasury Department's proposals would slash incentives for many employe benefits, subject millions of Americans to a hidden tax penalty, threaten benefit coverage and raise only minimal new tax revenues. He also says they're likely to alter fringe benefits as we know them today.
"The Treasury proposal has an enormous cost," he says. "It would subject employes to hardships and dismantle the system of employer-sponsored benefits that has served this country since World II."
Most corporations are taking a wait-and-see approach to the proposed changes. But even companies with a long tradition of innovation and generosity in fringe benefits are considering alternatives.
"We're keeping a close eye on tax legislation and how it affects our corporation and our employes," says Charlie Hucker, director of corporate communications at Hallmark Cards Inc.
While new tax laws have forced Hallmark to consider other benefits systems, Hucker says the company -- which started serving free refreshments during work breaks almost 50 years ago -- plans to wait until the dust settles in Congress before considering changes to a popular perk package that includes an employe physical fitness building, adoption assistance of up to $1,000, employe profit sharing and free indoor parking.
Other companies say tax laws and proposals aren't the only factors forcing a retooling of the fringe-benefit system.
"What you have is a convergence of several trends," says Tane, "that has created a situation where traditional benefit plans don't make sense anymore.
"The traditional benefits program is designed for the working male with a wife and two kids at home. He's a mythical creature in decline. More than 60 percent of today's families have dual wage earners. So traditional benefits aren't really effective in meeting the needs of today's employes.
"Also, as medical insurance escalates in price, companies are getting concerned about money being spent."
The likely successor to traditional benefits plans, according to some benefits consultants, is the "cafeteria plan," or flexible compensation plan, that was initially shunned as an administrative headache almost a decade ago.
Flexible compensation plans generally provide employes with one category of fixed benefits -- minimum standards such as medical and disability insurance -- and a second flexible category with a menu of benefits from which each worker picks and chooses according to his or her own needs.
An employe who prefers less vacation time, for instance, might choose more insurance for psychiatric care. A woman whose husband's medical insurance covers the entire family can redirect the cost of her coverage, say, toward child-care benefits or a better dental plan.
And now, more importantly, they allow employes to choose between taxable and nontaxable benefits -- a bonus that has stirred new interest in the flexible compensation concept.
When Virginia National Bank and First & Merchants Corp. merged a year ago, the new company, Sovran Bank, decided to offer its employes a flexible benefits plan as a strategy for merging the two previous benefit packages.
"The approach was to give employes credit equal to what the companies had been spending on benefits and let them select from a menu of benefits," says Ray Hinton, Sovran senior vice president of Human Resources.
"They could structure a benefit program that best suits their individual needs. It allows them to use pre-tax rather than after-tax dollars to buy these benefits. And, Sovran was able to do it without significantly increasing its benefits costs."
For Debbie Stienberger, an administrative assistant at a Sovran Bank in Springfield, Va., the new plan, itself, was a perk. At age 25, she needed only standard medical coverage and, because her sister-in-law is an attorney, decided against the legal assistance benefit. She is covered by her husband's life insurance, so she used those credits for other benefits.
But besides providing a chance to choose, says Stienberger, the flexible plan is a welcome learning process for most employes. "Every year we have the opportunity to reenroll in the plan, which means we have to review our situations and our choices. It forces us to become knowledgeable about our benefits."
The flexible programs are usually met with enthusiasm by employes. When the 114-year-old Medical Center Hospital of Vermont this month switched to a cafeteria plan, it gave employes the opportunity to choose between their traditional benefits or the new system. Eighty-five percent changed plans, according to Phillips Kerr, the hospital's director of Human Resources.
*But Kerr and Sovran's Hinton agree that the flexible compensation system does have some characteristic kinks.
"It significantly increases administrative complexity in benefits and payroll," says Hinton. Although new computer capabilities and software have eased the difficulty, "It would be much more attractive if there were a stable regulatory environment that didn't continually change benefit rules."
The flexible system, adds Hinton, also "enhances the need to communicate more with employes, which is costly to the employer. That's a negative and a positive. Employers have bemoaned for years that employes don't appreciate the benefits and their value. But as a result of this, the employe gets the full picture on benefits."
Uncertainty about regulations on fringe benefits, according to Tane, has kept down the number of companies introducing flexible cafeteria plans. But 15 of the top 100 banks in the United States have adopted some form of the system, and others that previously labeled it as "pie-in-the-sky" are now considering it.
"The one-size-fits-all benefits package of the past is no longer viable," says Tane. "Cafeteria plans are destined to play a central role in the future of employe benefits . . . because everybody -- employer and employe -- benefits from them."