Flexible benefits plans: what are they and how do they work? [2025 update]

Flexible benefits are one of the most requested workplace perks. However, employers often don’t offer them.

Failing to meet the demand for flexible benefits is a huge missed opportunity. It could leave your organization devoid of top talent, and lead your competitors to recruit and retain the best candidates out there. 

So what are flexible benefit plans, and why are they important for the modern workforce? In this article we take a deep dive into the topic, exploring what flexible benefits plans are, how they work, and why they benefit employers and employees.

What is a flexible benefit plan?

A flexible benefits plan is an employee benefit program that allows individuals to customize their compensation package by choosing from a wealth of options, including health insurance, retirement plans, or employee wellness programs.

Employees can tailor benefits to better suit their individual needs and preferences, fostering greater satisfaction and flexibility within the workplace.

How do flexible benefits plans work?

With flexible benefits plans, employees can allocate a certain portion of their total compensation toward the benefits that best suit their lifestyles.

The allocation process involves employees making choices during an open enrollment period, and adjustments can be made during qualifying life events.

Employees have the flexibility to choose from a variety of benefits. For example, an employee with young children may prioritize child care assistance or additional parental leave, while another employee may opt for a higher contribution to a retirement savings plan.

The flexibility extends beyond traditional benefits, with options like Flexible Spending Accounts (FSAs) for healthcare expenses or dependent care, allowing employees to set aside pre-tax dollars for specific needs.

Flexible benefits plans comparison

Want to learn more about Flexible Spending Accounts? Get all the details with our easy-to-understand guide on FSA explained.

Examples of flexible benefits

1. Flexible healthcare benefits

Flexible healthcare benefits allow employees to choose healthcare options that align with their specific medical needs and preferences. Options include, but are not limited to:

• Health Savings Account (HSA) – A tax-advantaged savings account that allows employees to contribute pre-tax dollars for medical expenses. Contributions roll over yearly, providing long-term savings for healthcare costs.

• Healthcare Flexible Spending Account (Healthcare FSA) –  An account where employees can set aside pre-tax funds to cover qualified medical expenses. Unlike HSAs, FSAs may have a use-it-or-lose-it rule, requiring employees to spend the funds within the plan year.
• Health Reimbursement Arrangement (HRA) – An HRA is an employer-funded account used for reimbursing employees for qualified medical expenses, offering flexibility in plan design and contribution levels.
• Preferred Provider Organization (PPO) – A health insurance plan that provides more flexibility in choosing healthcare providers, both in-network and out-of-network, without requiring referrals.
• Health Maintenance Organization (HMO) – A health insurance plan that typically requires members to choose a primary care physician and obtain referrals to see specialists.
• High Deductible Health Plan (HDHP) – A health insurance plan with a higher deductible and lower premiums. Often paired with HSAs, it allows employees to save on premiums while having the option to contribute to an HSA for qualified medical expenses.

2. Lifestyle Spending Accounts (LSAs)

Lifestyle Spending Accounts or LSAs allocate a predetermined amount of money to employees, allowing them to choose how to spend it on a range of lifestyle-oriented benefits. This approach grants employees the autonomy to address personal needs, promoting work-life balance and job satisfaction.

LSAs cover diverse lifestyle expenditures beyond typical healthcare and insurance options. Employees can allocate funds towards areas such as fitness classes, wellness apps, home office equipment, or even educational courses.

For employers, LSAs contribute to a comprehensive and competitive benefits package that attracts and retains top talent. LSAs are cost-effective, as employers can control the allocated amounts, and the unused funds may not carry over, ensuring budget predictability.

If you want to offer LSAs as part of your compensation package, <span class="text-style-link text-color-blue" fs-mirrorclick-element="trigger" role="button">schedule a consultation</span> with one of our experts.

3. Commuter benefits

Commuter benefits give employees a pre-tax way to manage commuting costs, providing financial relief for expenses related to public transportation or parking. Employees can allocate pre-tax dollars to cover commuting expenses, reducing their taxable income and making daily travel more affordable.

This benefit aligns with the evolving nature of work and supports employees in adopting sustainable commuting options. By providing a pre-tax structure, employers contribute to the financial well-being of employees while promoting environmentally friendly transportation choices.

4. Retirement savings options

Pre-tax retirement savings options, such as 401(k) plans and Roth IRAs, play a crucial role in helping employees plan for their future while enjoying potential tax benefits. Similar to the structure of HSAs, employees contribute a portion of their pre-tax income to these retirement accounts. This allows for tax-deferred or tax-free growth, depending on the specific retirement plan.

Highlighting the dual purpose of HSAs is essential here, emphasizing that they serve not only as healthcare savings tools but also as a tax-advantaged way to save for retirement. This strategic use of pre-tax contributions provides employees with a comprehensive approach to financial planning.

5. Childcare benefits

Childcare benefits within a flexible benefits package are designed to assist employees in managing the costs associated with childcare. This employee benefit operates on a pre-tax basis, allowing employees to set aside a portion of their income before taxes to cover eligible childcare expenses. Similar to FSAs, this approach provides a tax-efficient way for employees to address their childcare needs, making it more financially manageable.

By offering pre-tax childcare benefits, employers contribute to creating a family-friendly workplace and support employees in achieving a healthier work-life balance.

6. Employee assistance programs (EAP)

Employee Assistance Programs (EAP) are designed to support employees' mental and emotional well-being. This benefit provides access to confidential counseling services, mental health resources, and assistance for personal challenges. Similar to other pre-tax benefits, employees can utilize EAP services without the financial burden of taxable income.

By offering EAP as part of the flexible benefits package, employers prioritize the holistic well-being of their workforce. This benefit not only contributes to a positive work environment but also demonstrates a commitment to addressing employees' mental health needs through a tax-efficient structure.

7. Work-from-home support

As remote work becomes increasingly prevalent, work-from-home support addresses the unique needs of employees in creating an effective home office environment. This flexible benefit allows employees to allocate pre-tax funds for essential work-from-home purchases such as office supplies, ergonomic furniture, and internet expenses.

Leveraging pre-tax accounts for work-from-home essentials enhances the tax efficiency of these purchases, making remote work more accessible and comfortable for employees. This approach aligns with the evolving nature of work and demonstrates an employer's commitment to supporting a flexible and productive work environment.

What are the advantages of flexible benefits plans?

What are the real-world advantages of offering flexible benefits plans? Here are 7 points to consider.

1. Increased employee satisfaction

Flexible benefits plans significantly enhance employee satisfaction by addressing and accommodating the diverse needs of individuals within the workforce. The customization these plans offer empowers employees to select benefits that align with their specific requirements, whether related to healthcare preferences, wellness support, or work-life balance initiatives.

According to “Work Flexibility and Work-Related Well-Being,” a 2021 study published in the International Journal of Environmental Research and Public Health, employees who perceive their benefits as flexible report higher levels of job satisfaction and overall well-being. This correlation underscores the value of personalized benefits in creating a more engaged and content workforce.

Several factors contribute to how flexible benefits drive satisfaction:

• Customization of benefits: Allowing employees to tailor their benefits packages to their unique needs enhances job satisfaction by providing choices that resonate with their individual circumstances. To achieve this, employers should offer a variety of benefit options during the enrollment process.
• Acknowledgment of preferences: Recognizing and addressing employee preferences fosters appreciation and builds a positive workplace culture. Conducting regular surveys can help employers identify what matters most to their teams and adjust benefits offerings accordingly.
• Recognition of diversity: Flexible benefits demonstrate support for employees at various life stages and circumstances, such as new parents, caregivers, or young professionals. Employers should include diverse benefits options tailored to different demographics to ensure inclusivity.

By implementing these strategies, organizations can create a workplace environment where employees feel valued and supported, leading to heightened satisfaction and long-term loyalty.

2. Enhanced recruitment and retention

‍Flexible benefits plans are a powerful tool for attracting and retaining top talent. By offering customizable benefits, companies can cater to the diverse expectations of prospective employees, making them more competitive in the talent market. With 89% of HR leaders stating that improving total rewards is a top priority, flexible benefits are becoming a must-have for organizations aiming to recruit the best candidates.These plans not only attract talent but also foster loyalty and engagement among current employees. The ability to tailor benefits to individual needs creates a sense of appreciation and belonging. Employees who feel that their employer understands and accommodates their unique circumstances are more likely to stay with the company for the long term.Key factors that contribute to enhanced recruitment and retention include:

• Flexible benefit customization: Customizable benefits appeal to a wide range of potential employees by addressing specific needs and preferences. To leverage this, companies should highlight the flexibility of their benefits packages in job postings and during interviews to attract a diverse talent pool.
• Increased employee engagement: Personalized benefits foster loyalty by showing employees that their needs are valued. Employers can enhance this effect by providing clear communication about benefit options during onboarding to ensure employees fully understand and appreciate their choices.
• Competitive talent attraction: In a competitive job market, offering flexible benefits differentiates the company from others. Staying updated on industry trends and continuously refining benefits offerings allows companies to stand out and appeal to top-tier candidates.

With these strategies, companies can use flexible benefits to create a compelling value proposition for both prospective and current employees, driving recruitment success and long-term retention. Flexible benefits are not just a perk - they are a strategic advantage in building a loyal and high-performing workforce.

‍3. Cost-efficiency for employers

‍Flexible benefits plans offer significant cost-efficiency for employers by addressing key areas of expenditure. While the initial setup may require an investment, the long-term savings and advantages often outweigh the upfront costs. These plans not only enhance employee satisfaction but also contribute to reducing turnover, boosting productivity, and lowering tax burdens.A primary driver of cost-efficiency is the reduction in turnover rates.

Companies offering personalized benefits packages experience higher employee loyalty, as employees feel valued and understood. This minimizes the costs associated with recruitment, onboarding, and training, which can quickly add up in high-turnover environments. By focusing on long-term employee satisfaction through flexible benefits, organizations create a more stable and engaged workforce.Key factors contributing to cost-efficiency include:

• Reduced turnover: Personalized benefits help retain employees, saving on recruitment and training expenses. Employers can achieve this by prioritizing long-term employee satisfaction through targeted benefits that address diverse needs.
• Productivity gains: Engaged employees are more motivated and productive, leading to better organizational performance. Regularly using engagement surveys to identify and resolve workplace issues ensures sustained satisfaction and optimal productivity levels.
• Tax savings from pre-tax benefits: Flexible benefits that include pre-tax options, such as healthcare or commuter benefits, reduce payroll taxes for employers. Promoting these options widely among employees maximizes participation, increasing cost-effectiveness for the organization.

4. Tax savings for employees

‍Flexible benefits plans offer significant tax-saving opportunities for employees, making them a valuable component of modern compensation strategies. By allowing pre-tax contributions to accounts such as Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs), and commuter benefits, these plans help employees reduce their taxable income while covering essential expenses.HSAs, for example, allow employees to set aside pre-tax funds to pay for medical expenses, from doctor visits to prescription medications.

Similarly, FSAs provide pre-tax dollars for medical costs or dependent care, making healthcare and childcare more affordable. Commuter benefits also allow employees to allocate pre-tax earnings for public transit or parking expenses, easing the financial burden of daily travel.Key accounts that contribute to tax savings include:

• Health Savings Account (HSA): Reduces taxable income while helping employees manage medical expenses.
• Flexible Spending Account (FSA): Allows employees to use pre-tax funds for healthcare and dependent care costs, such as childcare or medical equipment.
• Commuter benefits: Provides tax-efficient solutions for commuting expenses like transit passes or parking fees.

These tax savings not only enhance employees’ financial well-being but also demonstrate an employer’s commitment to supporting their workforce beyond basic salary. By incorporating pre-tax benefits into a flexible benefits plan, employers position themselves as partners in their employees’ financial health, fostering loyalty and engagement.

Promoting these options widely and educating employees on their advantages ensures greater participation and satisfaction, creating a win-win scenario for both employees and employers.

‍5. Improved work-life balance

‍Flexible benefits plans play a vital role in enhancing work-life balance by addressing the diverse demands of employees’ personal and professional lives. These plans provide financial support and flexibility, enabling employees to manage their responsibilities and well-being more effectively.

By offering options like Lifestyle Spending Accounts (LSAs), childcare benefits, and flexible scheduling, employers empower their workforce to achieve a healthier balance between work and personal commitments. LSAs are particularly impactful in supporting personal well-being and development. Employees can allocate funds toward wellness programs, fitness memberships, or personal growth courses, allowing them to prioritize activities that enhance their quality of life. This flexibility fosters a sense of control and satisfaction, improving engagement and productivity.

Childcare benefits are another critical component. By partnering with childcare providers or offering reimbursements, employers ease the financial burden on employees with families. This support helps working parents focus on their professional roles without the constant stress of managing childcare expenses.

Flexible scheduling further enhances work-life balance by accommodating personal and family needs. Remote work options, adjustable hours, or hybrid schedules provide employees with the flexibility to navigate their daily responsibilities more efficiently. These measures create a supportive work environment where employees feel valued and trusted.

‍6. Facilitates diversity and inclusion

‍Flexible benefits plans play a critical role in fostering diversity and inclusion by addressing the varied needs of a diverse workforce. These plans accommodate different lifestyles, family structures, abilities, and cultural backgrounds, creating an environment where all employees feel supported and valued.

Family planning assistance is a key example of how flexible benefits promote inclusivity. Offering benefits like adoption assistance, fertility treatments, or surrogacy support ensures employees from diverse family structures can access the resources they need. These offerings demonstrate that the organization values all paths to parenthood, fostering a sense of belonging and equity.

For employees with disabilities, ergonomic support can make a significant difference. Providing ergonomic office equipment, assistive technologies, or remote work options helps create a workplace that is accessible and accommodating. These measures not only meet physical needs but also reinforce the organization’s commitment to inclusivity.

Cultural sensitivity is another important aspect of inclusive benefits. Employers can recognize diverse cultural practices by offering flexible holiday policies that allow employees to observe their own religious or cultural holidays. Providing language assistance or multi-lingual resources further ensures that employees from different cultural backgrounds feel supported.

‍7. Agility in adapting to market trends

‍Flexible benefits plans equip organizations with the adaptability needed to respond to evolving market trends. In a fast-changing business environment, the ability to adjust benefits offerings ensures companies remain competitive, relevant, and appealing to current and prospective employees.

One major trend reshaping the workforce is the rise of remote work. Flexible benefits plans allow organizations to accommodate this shift by offering work-from-home support, such as pre-tax funds for home office equipment or reimbursements for internet expenses. These adjustments show a commitment to meeting employees where they are, both literally and figuratively, and foster loyalty and engagement.

As employee preferences evolve, the customization offered by flexible benefits ensures companies can stay aligned with workforce expectations. For instance, businesses can regularly review and update benefit options, replacing outdated offerings with perks that resonate with modern employees. This constant refinement demonstrates a commitment to meeting employee needs and contributes to satisfaction and retention.

Another major trend is the increased focus on health and wellness. Flexible benefits allow companies to introduce programs like mental health counseling, fitness memberships, or mindfulness apps. These additions align with employees’ growing awareness of physical and mental health, creating a more supportive and appealing workplace environment.

What to look for with a flexible benefit plan provider?

When selecting a flexible benefits plan provider, consider these 8 key criteria to ensure a seamless and tailored experience for both employers and employees.

1. Comprehensive plan customization

Look for a flexible benefits plan provider that offers a wide range of customizable options. The provider should understand the diverse needs of your workforce and provide flexibility in choosing benefits that align with individual preferences. A robust platform with varied benefit offerings ensures that employees can tailor their plans to their unique circumstances, enhancing overall satisfaction and engagement.

2. User-friendly technology platform

An intuitive and user-friendly technology platform is crucial for the successful implementation and administration of flexible benefits. The provider should offer a seamless digital experience that simplifies the enrollment process, allows easy tracking of benefits, and provides accessible support resources. A user-centric platform enhances employee engagement and streamlines benefits management for HR teams.

3. Compliance expertise

Ensure that the flexible benefits plan provider has a strong understanding of relevant regulations and compliance standards. Compliance expertise is crucial to avoiding legal issues and ensuring that benefit plans adhere to applicable laws. Look for a provider with a track record of staying updated on industry regulations, providing compliance support, and offering clear guidance on legal considerations related to flexible benefit plans.

4. Cost transparency and flexibility

Choose a provider that offers transparent pricing structures and clear communication regarding costs. Flexibility in pricing models, such as scalable options based on the size of your workforce, is essential. Transparent costs help organizations budget effectively and make informed decisions about the value of the flexible benefits program. Avoid providers with hidden fees or unclear pricing structures to ensure a straightforward and predictable financial arrangement.

5. Global availability and customization

Select a flexible benefits plan provider that accommodates global operations. The provider should offer customization options to meet the unique needs and regulations of different regions, especially for companies with a diverse workforce or remote employees. Global availability ensures that the benefits program can be seamlessly extended to employees in various countries.

7. Convenient payment methods

Prioritize a provider that offers convenient payment methods, such as the provision of debit cards for utilizing flexible benefits. This streamlines the reimbursement process for employees, allowing them to easily access and manage their benefits. The convenience of debit cards enhances the overall user experience and encourages higher utilization rates, contributing to the efficiency of the flexible benefits program.

8. Dedicated support

A provider should offer comprehensive assistance, handling procurement, administration, fulfillment, and compliance with the support of human experts rather than automated bots. Dedicated support ensures that employees and HR teams receive prompt and personalized assistance, fostering a positive experience throughout the implementation and ongoing management of the flexible benefits program.

What is the best flexible benefit plan?

The best flexible benefit plan recognizes the diverse needs of employees, and acknowledges that there's no one-size-fits-all solution. By providing a range of options and empowering employees to make choices based on their individual circumstances, organizations can tailor benefits to meet diverse preferences. This employee-centric approach fosters satisfaction, engagement, and a positive workplace culture, ultimately contributing to the success of the flexible benefits program.

How to get started with Forma

We’ve explored how flexible benefits plans can improve the proverbial health of your organization, offering a range of advantages to both employers and employees. But if this is the case, why aren’t flexible benefits the default? We believe that there are two main issues that prevent wider flexible benefits plan adoption.

One has to do with the lack of awareness about flexible benefits among key stakeholders. If there is no two-way communication between benefits managers and employees, there is no way for employees to express their preference for flexible benefits.

The other issue has to do with the perceived difficulty of implementing flexible benefits plans. Benefits managers don’t want to add extra complexity to their work, and they assume that introducing flexible benefits requires a lot of up-front investment, onboarding, etc.

Fortunately, both of these issues can be alleviated by utilizing a flexible benefits software solution such as Forma at your organization.

Give your employees the flexible benefits they deserve and <span class="text-style-link text-color-blue" fs-mirrorclick-element="trigger" role="button">schedule a consultation</span> with one of our experts today

^{This document is for informational purposes. Forma is not engaged in the practice of law. Nothing contained herein is intended as tax or legal advice nor is it intended to replace tax or legal advice from counsel. If you need tax or legal advice, please consult with counsel or a certified tax professional.}