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. McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

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 McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Benefit Programs Social Insurance Family-Friendly Private Group Policies Private Group Insurance Pay For Time Not Worked Retirement McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

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. McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

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 McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

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. McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

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. McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Retirement Defined Benefit Plan Defined Contribution 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. 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. McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Types of Defined Contribution Plans Money Purchase Plan Employee Stock Ownership Plan Profit-sharing Plan McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

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. McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

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. McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

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. McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

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. McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

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. McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

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. McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

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. McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

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. McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

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. McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

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. McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

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. McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Flexible Benefits (Cafeteria) Plans 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 package a better match between the package and the employee's needs, which improves satisfaction and retention cost reductions are often achieved Disadvantages include: high administrative cost adverse selection McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

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. McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

General Regulatory Issues Benefit plans must meet nondiscrimination rules. 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. McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.