2 Learning Objectives 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.Discuss how employee benefits in the United States compare with those in other countries.Describe the effects of benefits management on cost and work-force quality.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.
3 IntroductionThe average cost of benefits adds up to about 37 percent for every payroll dollarbenefits compose about 27 percent of the total compensation package.Benefits are unique because: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.Effective management of benefits is crucial for organizations to be competitive, since benefits are a substantial portion of labor costs. In addition, another concern is the rapid increase in the cost of health care.The cost of benefits adds up to about 37 percent for every payroll dollar.Benefits are unique in that, first, there is not a great deal of evidence on the impact that benefits have on attraction and retention of employees, when employees decide to retire, or on employees' performance level. Employees may not be aware of benefits, how much they cost, or how to use them. If this is the case, they are not getting value from the money spent on benefits.
4 Reasons for Benefits Growth Laws mandating benefits passed during and after the Great DepressionWage and price controls instituted during WWII and labor shortagesThe tax treatment of benefits programsThe marginal tax rate is the percentage of an additional dollar of earnings that goes to taxesLarge group v. individual insuranceOrganized laborEmployer differentiationAlthough cash is preferred by most people, since it is less restrictive, some of the following factors have contributed to less emphasis on cash and more on benefits: Several laws were passed during and after the Depression that mandated benefits; The tax treatment of benefits is often more favorable for employees than that of wages and salaries; therefore, benefits are perceived as being of value; Acquiring benefits represented a tangible success for unions and was often seen as more important than a small wage increase.
5 Benefit Programs Social Insurance Family-Friendly Private Group PoliciesPrivate GroupInsuranceBenefits programs usually fall into the following categories: social insurance, private group insurance, retirement, pay for time not worked, and family-friendly policies.Pay For Time NotWorkedRetirement
6 Social SecuritySocial 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 any tax penalty for earnings influence retirement decisions.Having begun with the Social Security Act of 1935, which only implemented the first two listed, the combined list is now the federal Old Age, Survivors, Disability, and Health Insurance (OASDHI) program. Over 90 percent of American workers are covered; exceptions are railroad and federal, state, and local government employees who often have their own plans.Social Security retirement benefits are free from federal tax and free from state tax in about one‑half of the states.Both employers and employees are assessed a payroll tax.In recent years, many employers have used early retirement to reduce employment.
7 Unemployment Insurance Unemployment insurance has the following objectives:to offset lost income during involuntary unemployment,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 theyhave a prior attachment to the workforce,are available for work,are actively seeking work,were not discharged for cause, did not quit voluntarily, and are not out of work because of a labor dispute.Unemployment insurance (established by the Social Security Act of 1935) 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, and to preserve investments in worker skills by providing workers with income during short‑term layoffs. The program is financed through federal and state taxes on employers. Unemployed workers are eligible for benefits if they have worked steadily in the past (often 52 weeks), are available for and are seeking work, were not discharged for cause, did not quit voluntarily, and/or are not out of work because of a labor dispute. Benefits vary by state, but are usually about 50 percent of a person's earnings in his or her last 26 weeks.
8 Workers’ Compensation Workers' compensation laws cover job-related injuries and death.The system is based on no-fault liability.Approximately 90 percent of U.S. workers are covered.Workers' compensation laws protect employees who are involved in job‑related injuries and the families of workers who accidentally die on the job.Workers' compensation benefits are related to disability income, medical care, death benefits, and rehabilitative services.Benefits vary by state, but are usually about two‑thirds of predictability earnings and are tax‑free.Many actions can be taken to reduce claims—making the workplace safer, holding managers accountable for accidents, and monitoring employees' treatment to get them back to work as quickly as possible
9 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 for up to 36 months following a qualifying event, such as termination.Disability insurance includes short-term plans and long-term plans.Private group insurance is 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. Most organizations offer this benefit.The Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985 requires employers to permit employees to extend their health insurance coverage at group rates for up to 36 months following a "qualifying event" such as termination (except for gross misconduct), death, and other events. Disability insurance includes short‑term plans that provide coverage for six months or less, at which point long‑term plans take over (often for life). Salary replacement is most often between 50 and 70 percent. Benefits based on employer contributions are taxed.
10 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, established vesting rights and portability provisions, and established the PBGC.Defined Contribution PlanDoes not promise employees a specific benefit level upon 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.Employers have no obligation to provide retirement plans, although most do. If provided, the plan must meet the standards of Employee Retirement Income Security Act (ERISA). Social Security generally composes approximately 38 percent of retirees' income, while earnings from assets (savings and stock) compose 25 percent, and private pensions is 17 percent.Defined benefit plans insulate employees from investment risk, which is borne by the company.The Pension Benefit Guaranty Corporation (PBGC) guarantees to pay employees a basic retirement benefit in the event that financial difficulties force a company to terminate or reduce employee pension benefits.This agency was established by the Employee Retirement Income Security Act (ERISA) of 1974, which increased the fiduciary responsibilities of pension plan trustees, and established vesting rights and portability provisions. PBGC guarantees a basic benefit, not full replacement.A Defined Contribution Plan does not promise employees a specific benefit level after retirement. Rather, an individual account is set up for each employee with a guaranteed size of contribution. Employers therefore shift investment risk to the employee.
11 Types of Defined Contribution Plans Money Purchase PlanEmployee StockOwnership PlanProfit-sharing PlanTwo types of defined contribution plans are a money purchase plan and a 401(k). A money purchase Plan is when an employer specifies a level of annual contribution, and at retirement the employee receives the contribution and investment returns. Employees typically purchase an annuity rather than taking the money as a lump sum. Section 401(k) plans (the term comes from the tax code section) permit employees to defer compensation on a pretax basis. Annual contributions in 2004 are limited to $13,000 and are adjusted each year according to the Consumer Price Index.
12 Cash Balance PlansAn 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.Cash balance plans occur when 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.
13 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 upon 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.Besides specifying termination procedures as mentioned, ERISA requires certain guidelines to be met on management and funding. Employers are required to fund future obligations sufficiently. There are a number of reporting and disclosure requirements to the IRS, to the Department of Labor, and to employees. Even if an employee leaves the organization before retirement, the contributions are vested. Employee contributions are always vested. These requirements were designed to prevent organizations from terminating employees right before retirement or before they vest in the plan.
14 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 percentJapan, 39 percent.In the United States, about 45 percent of the private sector labor force is covered by a pension; in France, 100 percent; in Switzerland, 92 percent; in Germany, 42 percent; and in Japan, 39 percent. There are more defined benefit plans in Japan or Germany than in the United States.
15 Pay for Time Not WorkedIn the European Community, as many as 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.Some employers may see little advantage to paid vacation, holidays, sick leave, and so on, since there may be little (tangible) return. 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. Organizations try to avoid this by encouraging employees to accumulate sick days or pay employees (often a portion) for unused sick days.
16 Family-Friendly Policies To ease employees’ conflicts between work and nonwork, organizations may use family-friendly policies such as family leave policies and child care.The Family and Medical Leave Act:applies to organizations with 50 or more employees within a 75-mile radiusapplies 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.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 was signed by President Clinton in February The act requires organizations with 50 or more employees within a 75‑mile radius to provide as much as 12 weeks of unpaid leave after childbirth or adoption; to care for a seriously ill child, spouse, or parent; or for an employee's own serious illness.
17 Family-Friendly Policies Child Care - Employers may provide some type of child care support to employees:supplies and helps employees collect information about child care,vouchers or discounts for existing child care facilities, orchild care facility at or near worksites.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. Matching the work force needs to the program should choose the appropriate alternative.
18 Managing Benefits: Employer Objectives and Strategies Surveys and BenchmarkingThe 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 controlThe larger the cost of a benefit, the greater the possibility for savings.The rate of growth may result in serious costs in the future.Cost containment efforts can only work to the extent that the employee has significant direction in choosing how much to spend in a benefit category.Although some constraints are imposed legally, organizations have a great deal of latitude and need to evaluate the payoff of benefits. If organizations do not meet the expectations of employees, however, they violate an "implicit contract" between employer and employees.The company should know what the competition is doing. Surveys are available from private consultants and the Bureau of Labor Statistics (BLS). Costs data are available from the annual survey conducted by the Chamber of Commerce.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. Some legally required benefits can be controlled by experience ratings (see the example under workers' compensation).
19 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.In the United States, health‑care expenditures have gone from 5.3 percent of the GNP ($27 billion) in 1960 to 14 percent (approximately one trillion) recently. Also, the United States compares poorly with other countries on measures of life expectancy and infant morality. Furthermore, over 40 million people in the United States are uninsured as of 1999.Attempts at cost control have come through employers, since most health care is provided through organizations rather than through national health care as in Western Europe and Canada.Another trend is to shift costs to employees through the use of deductibles, coinsurance, exclusions and limitations, and maximum benefits.
20 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.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.The use of alternative providers has increased. Health maintenance organizations (HMO) focus on preventive care and outpatient treatment, requiring employees to use only HMO services and providing benefits on a prepaid basis. HMOs pay physicians and other health‑care workers on a flat salary basis to reduce incentives to increase patient visits or tests. Preferred provider organizations (PPOs) are groups of health‑care providers who contract with employers, insurance companies, and so on, to provide health care at reduced fees. They do not provide benefits on a prepaid basis, and employees often are not required to use just the PPOs. Employers will provide incentives to use PPOs. PPOs tend to be less expensive than traditional health care but more expensive than HMOs.
21 Employee Wellness Programs Focus on changing behaviors both on and off work time that could eventually lead to future health problems.There are two broad classes of EWP’s:Passiveuse little or no outreach to individuals and provide no ongoing motivational support.Activeassume that behavior change requires not only awareness and opportunity, but also support and reinforcement.Employers may also vary employee contributions based on the employee's health and risk factors.Employee wellness programs (EWPs) focus on changing work and non-work behaviors that may lead to future health problems.There are two broad classes of EWP’s, passive and active. Passive programs use little or no outreach to individuals and provide no ongoing motivational support. Active wellness centers assume that behavior change requires not only awareness and opportunity, but also support and reinforcement.
22 Health Care Costs and Quality: Ongoing Challenges Two important phenomena are often encountered in cost control effortsPiecemeal programs may not work well because steps to control one aspect may lead to employees to “migrate” to other programs that provide medical treatment at no cost to them.There is often a so-called Pareto Group, which refers to a small percentage of employees being responsible for generating the majority of healthcare costs.It appears that efforts to control health‑care cost growth are beginning to bear fruit. Between 1994 and 1999, employer expenditures on Health Care fell nearly 17 percent. Two important phenomena are often encountered in cost‑control efforts: (1) piecemeal programs and (2) Pareto group.
23 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.Because benefit costs are fixed, the benefits cost per hour can be reduced by having employees work more hours. Organizations may try to have their employees classified as exempt, since they can then reduce their benefit costs per hour without having to pay overtime. Employers may be more likely to classify workers as independent contractors rather than employees, which eliminates the employer's obligation to provide legally required benefits.
24 Nature of the Workplace Assessing employee benefits preferences is essential.One approach is to use market research methods to assess employees’ preferences the same way consumers’ demand for products and services are assessed.Care must be taken not to raise employee expectations regarding future changes.Demographics will have consequences for the benefits that employees want; however, it may be misleading to make decisions on demographics alone. Methods such as personal or group interviews, focus groups, or questionnaires can be used to find out what benefits are important to employees. Organizations must be willing to act on the basis of this information. Organizations should consider the messages sent by benefits.
25 Flexible Spending Accounts These plans 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 packagea better match between the package and the employee's needs, which improves satisfaction and retentioncost reductions are often achievedDisadvantages include:high administrative costadverse selectionThese accounts permit pretax contributions to an employee account that can be drawn on to pay for uncovered healthcare expenses. Another account up to $5,000 can be used for dependent‑care expenses. Some of the advantages are that employees are more aware and appreciative of their benefits package. That there is a better match between the package and the employee's needs, which improves satisfaction and retention, and cost reductions are often achieved.
27 Flexible Spending Accounts Permits 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.Funds must be spent during the year or they revert to the employer (employees should therefore have predictable expenses). The major advantage is that take‑home pay increases.Flexible spending accounts also permit pretax contributions to an employee account that can be drawn on to pay for uncovered health care expenses. They allow funds to be spent during the year or they revert to the employer. And a last major advantage is that take-home pay is increased.
28 General Regulatory Issues Benefit plans must meet nondiscrimination rules and qualified plans.Sex, age, and disability:It is 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.All benefits packages must meet certain rules to be qualified for more favorable tax treatment. These rules discourage top management from developing plans that benefit only themselves.Ensuring equal treatment for men and women in areas besides pregnancy, is related to pensions.Under the Age Discrimination in Employment Act (ADEA) and later amendments, employers cannot discriminate against employees over the age of 40 in terms of pay or benefits.The Americans with Disabilities Act (ADA) went into effect in It specifies that employees with disabilities have equal access to the same health insurance coverage as other employees.The Financial Accounting Statement (FAS) 106 issued by the Financial Accounting Standards Board went into effect in Any benefits (excluding pensions) provided after retirement, such as health care, cannot be funded on a pay‑as‑you‑go basis. They must be paid on an accrual basis and entered as future‑cost obligations on financial statements.