Designing and Administering Benefits Chapter 12 Designing and Administering Benefits Employee benefits in the last century have increased in complexity from the standard benefits of health insurance, retirement plans, and vacation time that all companies offer to employees. In this chapter, we will discuss how to set up a compensation system that utilizes benefits that are critical to moving toward strategic organizational objectives. Copyright © 2016 Pearson Education, Inc.

Chapter Challenges Grasp an overview of benefits Develop the benefits strategy Know the legally required benefits After reading Chapter 12, you should be able to grasp an overview of benefits, develop the benefits strategy, and know the legally required benefits. Copyright © 2016 Pearson Education, Inc.

Chapter Challenges Have familiarity with the voluntary benefits Learn practices for administering benefits You will also be able to have familiarity with the voluntary benefits and will learn practices for administering benefits. Copyright © 2016 Pearson Education, Inc.

Managerial Perspective Benefit issues are important to employees Benefits are a powerful recruiting tool Benefits help retain talented employees Certain benefits play a part in managerial decisions Benefits are important to managers Managers must become familiar with benefits, as they are a very important component of employee compensation and are used to recruit and retain good employees. Following are among the reasons to understand benefits: Benefit issues are important to employees Benefits are a powerful recruiting tool Benefits help retain talented employees Certain benefits play a part in managerial decisions Benefits are important to managers Copyright © 2016 Pearson Education, Inc.

An Overview of Benefits Employee Benefits Indirect compensation Based on group membership Provide security for employees and family Costly: 1929, 3% of payroll; 2013, 30.9% Employee benefits are group membership rewards that provide security for employees and their family members. They are sometimes called indirect compensation because they are given to employees in the form of a plan rather than cash. Today’s cost to employers for providing benefits to employees is about 30.9% of employee payroll compared to 3% back in 1929. Copyright © 2016 Pearson Education, Inc.

How the Benefit Dollar Is Spent This slide shows how the benefit dollar is divided in the average firm. Employee benefits protect employees from risks that could jeopardize their health and financial security. They provide coverage for sickness, injury, unemployment, and old age and death. They may also provide services or facilities that many employees find valuable, such as child-care services or an exercise center. Copyright © 2016 Pearson Education, Inc.

Benefit Terminology Contributions Coinsurance Copayment Deductible Flexible benefit programs There are many different terms used when discussing benefits. Let’s take a look at the various terminology used for benefits. Contributions are payments made for benefits coverage. Contributions for a specific benefit may come from the employer, employee, or both. Coinsurance refers to payments made to cover health care expenses that are split between the employer’s insurance company and the insured employee. A copayment is a small payment made by the employee for each office visit to a physician under a health plan. The health plan pays for additional medical expenses that exceed the copayment at no cost to the employee A deductible is an annual out-of-pocket expenditure that an insurance policyholder must make before the insurance plan makes any reimbursements. Flexible benefit programs are benefit programs that allow employees to select the benefits they need most from a menu of choices. Copyright © 2016 Pearson Education, Inc.

Cost of Benefits in the United States Federal tax policy Federal legislation Union influence Cost savings of group plans The cost of employee benefits in the United States has increased dramatically over the decades as businesses have offered more and more benefits. Federal law requires employers to provide social security, unemployment insurance benefits, worker’s compensation, and family and medical leave. Employers that meet the tax policy guidelines receive tax deductions for their benefits expenditures. Unions have been in the forefront of the movement to expand employee benefits for the last half century. In recent years, unions have been asking for dental-care coverage, extended vacation periods, and unemployment benefits beyond those required by federal law. Employers can provide benefits for much less money than employees would pay to obtain them on their own. When insurance companies can spread risk over a large group of individuals, they can reduce the cost of benefits per person. Copyright © 2016 Pearson Education, Inc.

Legally Required Benefits Types of Benefits Legally Required Benefits Health Insurance Retirement Insurance Benefits can be organized into six categories: legally required benefits, health insurance, retirement benefits, insurance, paid time off, and employee services. Paid Time Off Employee Services Copyright © 2016 Pearson Education, Inc.

Starbucks’ Benefits Health care benefits (medical, prescription drugs, dental, and vision care) Retirement savings plan Life insurance and disability insurance Adoption assistance Domestic partner benefits Referral programs and support resources for child care and elder care Discounted Starbuck’s merchandise Participation in stock program Starbucks depends heavily on part-time employees to provide services to its customers. The company offers a broad array of employee benefits to its part-time employees. Part-time employees work between 20 and 40 hours per week and receive benefits noted here. UPS is also a company that offers benefits to its part-time workers. Some are similar to those offered by Starbucks. Copyright © 2016 Pearson Education, Inc.

The Benefits Strategy The Benefits Mix Benefits Amount Flexibility of Benefits To design an effective benefits package, a company needs to align its benefits strategy with its overall compensation strategy. The benefits strategy requires making choices in three areas: (1) benefits mix, (2) benefits amount, (3) and flexibility of benefits. The benefits mix is the complete package of benefits that a company offers its employees. At least three issues should be considered when making decisions about the benefits mix: (1) the total compensation strategy, (2) organizational objectives, and( 3) the characteristics of the workforce. The company must choose the market in which it wants to compete for employees and then provide a benefits package attractive to the people in the market. The benefits amount is the choice of benefits that governs the percentage of the total compensation package that will be allocated to benefits. This choice corresponds to the decision of fixed versus variable pay covered in a prior chapter. Once management determines the amount of money available for all benefits, it can establish a benefits budget and decide on the level of funding for each part of the benefits program. The flexibility of benefits choice concerns the degree of freedom employees have to tailor the benefits package to their personal needs. Some organizations have a relatively standardized benefits package that gives employees few options. This system makes sense in organizations that have a fairly homogeneous workforce. Copyright © 2016 Pearson Education, Inc.

Legally Required Benefits Social Security Retirement Income Disability Income Medicare Survivor Benefits Unemployment Insurance Actively Seeking Work involuntary Terminations Supplemental Unemployment Benefits With only a few exceptions, all U.S. employers are legally required to provide social security, workers’ compensation, and unemployment insurance coverage for their employees—benefits that are designed to give the workforce a basic level of security. Social security provides (1) income for retirees, the disabled, and survivors of deceased workers and (2) health care for the aged through the Medicare program. Social security is funded through a payroll tax paid in equal amounts by the employer and the employee. The social security tax in 2014 was 7.65% of an employee’s annual earnings on the first $117,000 of income. Social security has two components: a tax of 6.2% to fund retirement, disability, and survivor benefits, and a tax of 1.45% to fund Medicare. On the next slide, we’ll look at these social security benefits with eligibility and provisions. Unemployment insurance is established by the Social Security Act of 1935 and provides temporary income for people during periods of involuntary unemployment. The program is part of a national wage stabilization policy designed to stabilize the economy during recessionary periods. The program works to provide unemployed workers with enough income to maintain their consumption of basic goods and services, so the demand for these products will be sustained, which ultimately will preserve the jobs of many people who might otherwise be added to the ranks of the unemployed. The following people are not eligible for unemployment insurance: An employee who quits voluntarily An employee who is discharged for gross misconduct An employee who refuses an offer of suitable work An employee who participates in a strike A person who is self-employed Individuals may be eligible for benefits if they are actively seeking work and were involuntarily discharged from employment. Supplemental unemployment benefits are benefits given by a company to laid-off employees over and above stated unemployment benefits. Copyright © 2016 Pearson Education, Inc.

Social Security Benefits This slide represents the social security benefits, including the eligibility criteria and the provisions for each one. These benefits include retirement income, disability income, Medicare, and survivor benefits. Copyright © 2016 Pearson Education, Inc.

Unemployment Benefits Comparisons United States: 50% of salary for 6 months Italy: 80% of salary for 6 months Japan: 80% of salary for 10 months France: 75% of salary for 60 months Germany: 60% of salary for 12 months Sweden: 80% of salary for 15 months It is interesting to compare the level of replacement income and duration of benefits provided by unemployment insurance in the United States to the benefits provided to unemployed workers in other countries. Here is an example of benefits comparisons among selected countries. Copyright © 2016 Pearson Education, Inc.

Legally Required Benefits Workers’ Compensation Compensation due to Injury on the job FMLA Birth or adoption of a child Care for sick spouse, child, or parent Serious health condition Workers’ compensation provides medical care, income continuation, and rehabilitation expenses for people who sustain job-related injuries or sickness. Also, it provides income to the survivors of an employee whose death is job related. Workers’ compensation is designed to provide a no-fault remedy to workers who are injured on the job. This means that even workers who were wholly at fault for their accidents can still receive a benefit. Employers who provide workers’ compensation coverage cannot be sued by injured employees. The rates that employers pay for workers’ compensation are based on three factors: (1) the risk of injury for an occupation, (2) the frequency and severity of the injuries sustained by a company’s workforce, and (3) the level of benefits provided or specific injuries within the state where the company is located. The HR staff can reduce workers’ compensation costs by (1) stressing a safe workplace, (2) auditing workers’ compensation claims, (3) establishing controls so that duplicate medical benefits are not paid out to workers, (4) designing jobs so that there are fewer injuries, and (5) encouraging workers who are partially disabled to come back to work on a modified-duty plan. The Family Medical Leave Act (FMLA) of 1993 requires most employers to provide up to 12 weeks’ unpaid leave to eligible employees for the following reasons: Birth of a child Adoption of a child To care for a sick spouse, child, or parent To take care of the employee’s own serious health problems that interfere with effective job performance The FMLA applies to businesses with 50 or more employees and to employers with multiple facilities that have 50 workers within a 75-mile radius. The law requires employers to give employees returning from FMLA leave the same job they held before taking the leave or an equivalent job. Employers must maintain health insurance coverage and other employee benefits. A 2008 amendment to the FMLA permits a spouse, son, daughter, parent, or next of kin to take up to 26 work weeks of leave to care for a member of the Armed Forces, including a member of the National Guard or Reserves, who is undergoing medical treatment, recuperation, or therapy, is otherwise in outpatient status, or is otherwise on the temporary disability retired list for a serious injury or illness. Copyright © 2016 Pearson Education, Inc.

Voluntary Benefits Health Insurance COBRA PACA (2010) HIPAA Traditional Health Insurance Health Maintenance Organization (HMO) Preferred Provider Organization (PPO) The benefits provided voluntarily by employers include health insurance (COBRA, PACA, HIPAA), retirement benefits, other types of insurance plans, time off, and employee services. Health insurance is a benefit that is required by law starting in 2015 of companies with 50 or more employees. For those below 50 employees, the law allows health insurance to be provided on a voluntary basis. Health insurance provides health coverage for both employees and their dependents, protecting them from financial disaster in the wake of a serious illness. The Consolidated Omnibus Budget Reconciliation Act (COBRA) gives employees the right to continue their health insurance coverage for 18 to 36 months after their employment has terminated. The Health Insurance Portability and Accountability Act (HIPAA) is a federal law that protects an employee’s ability to transfer between health insurance plans without a gap in coverage due to a preexisting condition. The Patient Affordable Care Act (PACA) is a federal law passed in 2010 that guarantees that affordable health care is available to people in the United States. Traditional health insurance is provided by an insurance company that acts as an intermediary between the patient and health care provider develop a fee schedule based on the cost of medical services in a specific community. Health maintenance organizations (HMOs) are health care plans that provide comprehensive medical services for employees and their families at a flat annual fee. Preferred provider organizations (PPOs) are health care plans in which an employer or insurance company establishes a network of doctors and hospitals to provide a broad set of medical services for a flat fee per participant. In return for the lower fee, the doctors and hospitals that join the PPO network expect to receive a larger volume of patients. Copyright © 2016 Pearson Education, Inc.

Voluntary Benefits Health Insurance Coverage of Employees’ Partners Health Savings Accounts (HSAs) Health Care Cost Containment Insurance Plans Traditionally, health insurance benefits have been offered only to employees and their spouses or dependents. Today, employers are being asked to offer the same health insurance benefits to employees’ domestic partners—that is, unmarried heterosexual or homosexual partners. A health savings account (HSA) is a qualified health plan with a high deductible that lets individuals save money for health care expenses with pretax dollars and lets unspent money accumulate as a tax-free stash of money. Health care cost containment: A company’s HR benefits manager can control health care costs by designing health insurance plans carefully and by developing programs that encourage employees to adopt healthier lifestyles. HR staff can do this by (1) developing a self-funded arrangement for health insurance, (2) coordinating health insurance plans for families with two working spouses, (3) developing a wellness program for employees, and (4) offering high-deductible health plans for employees. Companies offer many insurance plans, including life insurance and long-term disability insurance. Copyright © 2016 Pearson Education, Inc.

Retirement Benefits Employee Retirement Income Security Act (ERISA) Defined Benefit Plans Defined Contribution Plans After retiring, people have three main sources of income: social security, personal savings, and retirement benefits. ERISA is a federal law established in 1974 to protect employees’ retirement benefits from mismanagement. The key provisions of ERISA cover who is eligible for retirement benefits, vesting, and funding requirements. Minimum age cannot be greater than 21 years. Vesting: Full vesting after three years of service or 20% vesting after two years of service and a further 20% vesting each year thereafter. Defined benefit plan: A retirement plan that promises to pay a fixed dollar amount of retirement income based on a formula that takes into account the average of the employee’s last three to five years of earnings prior to retirement. Defined contribution plans: Retirement plans in which the employer promises to contribute a specific amount of funds into the plan for each participant. The final value of each participant’s retirement income depends on the success of the plan’s investments. The next slide shows a comparison of defined contribution retirement plans. Copyright © 2016 Pearson Education, Inc.

A Comparison of Defined Contribution Retirement Plans For each of the defined contribution retirement plans, we see whom it is available to, whom it is appropriate for, the maximum contributions, and the tax break on contributions/earnings. Copyright © 2016 Pearson Education, Inc.

Voluntary Benefits Paid Time Off Sick Leave Vacations Severance Pay Paid Parental Leave Holidays and Other Time Off Employee Services There are several paid-time-off voluntary benefits that many companies offer. These include sick leave, vacations, severance pay, paid parental leave, and holidays and other time off. Employee services are employee benefits that employers provide on a tax-free or tax-preferred basis to enhance the quality of employees’ work or personal lives. These may include charitable contributions, counseling, education subsidies, elder care, child care, parking, emergency loans, housing, and many, many more. Copyright © 2016 Pearson Education, Inc.

Administering Benefits Flexible Benefits Types of Plans Challenges Benefits Communication The HR department usually takes the lead in administering benefits, but managers need to help communicate options to employees, provide advice occasionally, keep records, and be prepared to call on the HR department if disputes arise. Flexible benefit programs allow employees to choose from a selection of employer-provided benefits such as vision care, dental care, health insurance coverage for dependents, additional life insurance coverage, long-term disability insurance, child care, elder care, more paid vacation days, legal services, and more. The types of flexible benefit plans are modular plans, core-plus options plans, and flexible spending accounts. The challenges with flexible benefits are (1) adverse selection, (2) employees who make poor choices, and (3) administrative complexity. Benefits communication is a critical part of administering an employee benefits program. The two major obstacles to effective benefits communication are (1) increasing complexity of benefits packages, and (2) employers’ reluctance to devote enough resources to explain these complex packages to employees. Copyright © 2016 Pearson Education, Inc.

Summary and Conclusions An Overview of Benefits The Benefits Strategy Legally Required Benefits Voluntary Benefits Administering Benefits To summarize, when designing benefits it is extremely important to design a program that aligns with the overall strategy of the organization. In this chapter, we have looked at an overview of benefits, the benefits strategy, legally required benefits, voluntary benefits, and administering benefits. Copyright © 2016 Pearson Education, Inc.

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