Chapter

13

Employee Benefits

After reading this chapter, you should be able to:

Discuss the growth in benefits costs and the underlying
reasons for that growth.
Explain the major provisions of employee benefits
programs.
Describe the effects of benefits management on cost and
work-force quality.
Chapter

13

Employee Benefits

Explain how employee benefits in the United States

compare with those in other countries.
Explain the importance of effectively communicating the
nature and value of benefits to employees.
Describe the regulatory constraints that affect the way
employee benefits are designed and administered.
 Introduction
 The average cost of benefits adds up to about 37 percent for
every payroll dollar
 benefits compose about 27 percent of the total compensation
package.
 Benefits are unique because:
 there is little evidence on the impact that benefits have on
attraction, retention, retirement, and performance level.
 there is more regulation of benefits than of direct pay.

 benefits have become almost obligatory for employers to

provide.
 benefits are complex for employees to understand.
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 Reasons for Benefits Growth
 Laws mandating benefits passed during and after the
Depression
 Wage and price controls instituted during WWII and labor
shortages
 The tax treatment of benefits
 The marginal tax rate is the percentage of additional
earnings that goes to taxes
 Buying group v. individual insurance
 Organized labor

 Employer differentiation

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 Benefit Programs

Social Insurance

Family-Friendly Private Group

Policies Insurance

Pay For Time Not

Retirement
Worked

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 Social Security
 Social Security includes provision for old-age insurance,
unemployment insurance, survivors' insurance, disability
insurance, hospital insurance, and supplementary medical
insurance.
 Social Security retirement benefits are free from federal tax and
free from state tax in some states.
 Currently, full benefits begin at age 65 or a reduced benefit can
begin at age 62.
 Both employers and employees are assessed a payroll tax.

 The eligibility age for benefits and the tax penalty for earnings
above a certain level seem to influence behavior to retire in the
mid-60s.
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 Unemployment Insurance
 Unemployment insurance has the following objectives:
 to offset lost income during involuntary employment,
 to help unemployed workers find new jobs,

 to provide an incentive for employers to stabilize

employment,
 to preserve investments in worker skills by providing workers
with income during short-term layoffs.
 Unemployed workers are eligible for benefits if they have
worked steadily in the past (often 52 weeks).
 Benefits vary by state, but are usually about 50 percent of a
person's earnings in his or her last 26 weeks
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 Workers’ Compensation

Workers' compensation laws protect employees

who are involved in job-related injuries and the
families of workers who accidentally die on the
job.
The system is based on no-fault liability.

About 90 percent of U.S. workers are covered.

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 Private Group Insurance
 Offered at the discretion of employers, and plans are not legally
required.
 Group rates are lower because of economies of scale, the ability
to pool risks, and the greater bargaining power of a group.
 Medical insurance tends to be the most important benefit for
people.
 The Consolidated Omnibus Budget Reconciliation Act
(COBRA) requires employers to permit employees to extend
their health insurance coverage at group rates following a
"qualifying event” such as termination.
 Disability insurance includes short-term plans and long-term
plans.
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 Retirement
Defined Benefit Plan
 Guarantees a specified
retirement benefit level to
employees.
 Insulates employees from
investment risk, which is borne
by the company.
 PBGC guarantees basic
retirement benefit in case of
financial difficulties.
 ERISA increased the fiduciary
responsibilities of pension plan
trustees, and established vesting
rights and portability provisions.
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Defined Contribution Plan
 Does not promise employees a
specific benefit level after
retirement.
 Employers shift investment risk
to the employee.
 There is no need to calculate
payments based on age and
service.
 Most prevalent in small
companies.
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Types of Defined Contribution Plans

Money Purchase Plan

Employee Stock
Profit-sharing Plan
Ownership Plan

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 Cash Balance Plans

An employer sets up an

individual account for each
employee and contributes a
percentage of the employee’s
salary.
The account earns interest at a
predefined rate.

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 Funding, Communication, and
Vesting Requirements
 A summary plan description (SPD) obligates employers
to describe the plan's funding, eligibility requirements,
risks, and so on.
 ERISA guarantees that employees, after working a certain
number of years, earn the right to a pension at retirement.
 These are referred to as vesting rights.
 Vesting schedules that may be used are as follows:
 Employees are vested after five years of service.
 Employers may vest employees over a three- to seven-year
period, with at least 20 percent in the third year and each year
thereafter.
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 International Comparisons
Percentage of private sector labor force that is
covered by a pension:
 United States, 45 percent;
 France, 100 percent;

 Switzerland, 92 percent;

 Germany, 42 percent

 Japan, 39 percent.

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 Pay for Time Not Worked
 In Western Europe, 30 days of mandated vacation is
common.
 In the United States, there is no legal minimum, although
10 days is common.
 Sick leave programs often provide full salary replacement
for a limited period of time, usually not exceeding 26
weeks.
 The amount of sick leave is often based on length of
service, accumulating with service.

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 Family-Friendly Policies
 Organizations are more frequently taking steps beyond
work schedules to ease the family-work conflicts. These
include child care and family leave policies.
 The Family and Medical Leave Act:
 applies to organizations with 50 or more employees within a
75-mile radius
 applies to childbirth or adoption; care for a seriously ill child,
spouse, or parent; or for an employee's own serious illness.
 Employees are guaranteed the same or comparable job when
they return to work.
 Employees with less than a year of service or those who work
less than 25 hours a week are not covered.
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 Family-Friendly Policies
Child Care - Employers may
provide some type of child care
support to employees:
a clearing house of child-care
information,
 financial contribution to cost of child
care, or
 subsidized on-site child care.

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 Managing Benefits: Employer
Objectives and Strategies
 Surveys and Benchmarking
 The company should know what the competition is doing.
 Surveys information is available from private consultants, the
Bureau of Labor Statistics (BLS), and the Chamber of
Commerce.
 Cost control
 The larger the cost of a benefit, the greater the possibility for
savings.
 Rate of growth must also be monitored since there may be
future problems.
 Cost containment is possible only if the employer has
discretion in revising benefits.
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 Healthcare: Controlling Costs and
Improving Quality
 In the United States, health-care expenditures have gone
from 5.3 percent of the GNP in 1960 to 14 percent recently.
 Attempts at cost control have come through employers,
since most health care is provided through organizations.
 A recent trend has been to shift costs to employees through
the use of deductibles, coinsurance, exclusions and
limitations, and maximum benefits.

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 Healthcare: Controlling Costs and
Improving Quality
Health maintenance
organizations (HMO)
 focus on preventive care and
outpatient treatment.
 require employees to use only
HMO services and providing
benefits on a prepaid basis.
 physicians and health-care
workers paid a flat salary to
reduce incentive of raising
costs.
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Preferred provider
organizations (PPOs)
 have contract with employers
and insurance companies, to
provide care at reduced fees.
 do not provide benefits on a
prepaid basis.
 employees often are not
required to use just the PPOs.
 tend to be less expensive than
traditional health care but more
expensive than HMOs.
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 Employee Wellness Programs
 Focus on changing work and non-work behaviors that may
lead to future health problems.
 There are two broad classes of EWP’s:
 Passive
 use little or no outreach to individuals and provide no ongoing
motivational support.
 e.g. health education programs and fitness facilities.

 Active
 assume that behavior change requires not only awareness and
opportunity, but also support and reinforcement.
 e.g. counseling.

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 Staffing Responsibilities that
Control Benefits Cost Growth
 Because benefit costs are fixed, the benefits
cost per hour can be reduced by having
employees work more hours.
 Have employees classified as exempt, since
they can then reduce their benefit costs per hour
without having to pay overtime.
 Classify workers as independent contractors
rather than employees, eliminating the
employer's obligation to provide legally
required benefits.

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 Flexible Benefits (Cafeteria) Plans
 Theseplans permit employees to choose the types and
amount of benefits that they want.
 Advantages include:
 employees can be more aware and appreciative of their
benefits package
 a better match between the package and the employee's needs,
which improves satisfaction and retention
 cost reductions are often achieved

 Disadvantages include:
 highadministrative cost
 adverse selection

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 Flexible Spending Accounts
Permit pretax contributions to an
employee account that can be drawn
on to pay for uncovered health-care
expenses.
Funds must be spent during the year
or they revert to the employer.
The major advantage is that take-
home pay increases.

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 General Regulatory Issues
 Benefit plans must meet nondiscrimination rules.
 Sex, age, and disability:
 Itis illegal for companies to require that women contribute more to a
pension plan than men.
 Employers cannot discriminate against employees over the age of 40
in terms of pay or benefits.
 employees with disabilities have equal access to the same health
insurance coverage as other employees.
 Monitoring Future Benefits Obligations - The Financial
Accounting Statement (FAS) 106 states that any benefits
(excluding pensions) provided after retirement, cannot be funded
on a pay-as-you-go basis.
 They must be paid on an accrual basis.
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