THE ECONOMICS OF EMPLOYEE BENEFITS Chapter 2 THE ECONOMICS OF EMPLOYEE BENEFITS McGraw-Hill/Irwin Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

WHY OFFER BENEFITS The Employer Has A Cost Advantage It Helps in Recruiting Certain Types of Workers Tax Incentives

COST ADVANTAGE Health Insurance Cost Employer $1000 Per Employee Each Employee To Purchase On Own, $2,500 Employees Benefit if Pay Deduction is Less than $2500 Employer Benefits If It Deducts More than $1000

2000 AVERAGE MEDICAL EXPENDITURES $920 Per Child $1481 Per Adult Age 1 8 - 44 $3154 Per Adults Age 45 - 64 $5864 Per Adult 65 and Older Higher For Women Than Men Higher For Whites Than For Minorities

TAX INCENTIVES Employee At 25% Tax Rate. $1,000 Raise, $250 to IRS $1,000 Health Care Plan Employee Receives Total Benefit Employee Would Have To Earn $1333.33 Pretax to Pay for it.

BENEFIT VALUE Option 1 $90,000 No Insurance Option 2 $75,000 with Insurance Benefit to Employee Only if Value is Greater than $15,000

WHO SHOULD PAY $100,000 Employee’s Salary $10,000 Insurance Increase Employer Reduces Profits by $10,000 per Employee? Or Employee Pay is Cut to $90,000?

WHY RATE INCREASES Improved, Expensive Technology Higher Care Quality Physicians’ Unionization Increased Use of Benefit Smaller Workforce

WHO PAYS $100,000 Salary to Attract Lawyer Would $80,000 & $20,000 Insurance Attract? Insurance Rate Increases $5000 Would $75,000 & $25,000 Still Attract?

COVERAGE Single Coverage - 78% Family Coverage - 90% Single Rate - $60.24 Family Rate - $228.98