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2. 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

3. 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. Chapter 13

4. 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.

5. 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

6. Benefit Programs Social Insurance Private Group Insurance Family-Friendly Policies Retirement Pay For Time Not Worked

7. 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.

8. 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

9. 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.

10. 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.

11. 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. 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.

12. Types of Defined Contribution Plans Money Purchase Plan Profit-sharing Plan Employee Stock Ownership Plan

13. 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.

14. 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.

15. 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.

16. 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.

17. 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.

18. 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.

19. 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.

20. 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.

21. 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.

22. 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.

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.

24. 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

25. 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.

26. 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.