Employee Benefits
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Chapter 13 of Human Resource Management: Gaining a Competitive Advantage
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Employee Benefits
- 5. Benefit Programs Social Insurance Private Group Insurance Family-Friendly Policies Retirement Pay For Time Not Worked 13-
- 11. Types of Defined Contribution Plans Money Purchase Profit-sharing Employee Stock Ownership 13-
- 21. 2 Phenomena in Cost Control Efforts 13-
- 24. Communicating With Employees 13-
Notas do Editor
- Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6- The cost of benefits adds an average of 37 percent to every dollar of payroll, thus accounting for about 27 percent of the total employee compensation package. Controlling labor costs is not possible without controlling benefits costs. On the behavioral side, benefits seem to influence whether potential employees come to work for a company, whether they stay, when they retire—perhaps even how they perform (although the empirical evidence, especially on the latter point, is surprisingly limited). Different employees look for different types of benefits. Employers need to regularly reexamine their benefits to see how well they meet current needs.
- Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6- Learning Objectives: Discuss growth and its reasons in benefits costs. Explain provisions of employee benefits programs. Compare U.S. and other countries’ employee benefits. Describe effects of benefits management on cost and work-force quality. Explain importance of effectively communicating nature and value of benefits to employees. Describe regulatory constraints that affect the way employee benefits are designed and administered.
- Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6- 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.
- Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6- Although 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.
- Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6- Benefits programs usually fall into the following five categories: social insurance, private group insurance, retirement, pay for time not worked, and family-friendly policies.
- Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6- 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.
- Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6- 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 haveworked steadily in the past (often 52 weeks), are availablefor 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. A very important feature of the unemployment insurance program is that no state imposes the same tax on every employer. Instead, the size of the tax depends on the employer’s experience rating. Employers that have a history of laying off a large share of their workforces pay higher taxes than those who do not. In some states, an employer that has had very few layoffs may pay no state tax. In contrast, an employer with a poor experience rating could pay a tax as high as 5 to 10 percent, depending on the state. Benefits also vary by state, but they are typically about 50 percent of a person’s earnings and last for 26 weeks. Because unemployment insurance is, in effect, legally required, management’s discretion is limited here, too. Management’s main task is to keep its experience rating low by avoiding unnecessary workforce reductions. No state imposes the same tax on every employer. Unemployed workers are eligible for benefits if they have 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.
- Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6- Workers' compensationlaws 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
- Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6- 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.Twomajor types: medical insurance and disability insurance. 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.
- Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6- A defined benefit plan guarantees (“defines”) a specified retirement benefit level to employees based typically on a combination of years of service and age as well as on the employee’s earnings level (usually the five highest earnings years). 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.Pension Benefit Guaranty Corporation (PBGC) The agency that guarantees to pay employees a basic retirement benefit in the event that financial difficulties force a company to terminate or reduce employee pension benefits. Employee Retirement Income Security Act (ERISA) The 1974 act that increased the fiduciary responsibilities of pension plan trustees, established vesting rights and Portability provisions, and established the Pension Benefit Guaranty Corporation (PBGC). Cash Balance Plan Retirement - the 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.
- Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6- Two 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. The Pension Protection Act of 2006 requires defined contribution plans holding publicly traded securities to provide employees with (1) the opportunity to divest employer securities and (2) at least three investment options other than employer securities. Cash Balance Plan Retirement plan in which the 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. the account earns interest at a predefined rate. The term “money purchase” stems from the fact that employees often use the money to purchase an annuity rather than taking it as a lump sum. Profit sharing plans and employee stock ownership plans are also often used as retirement vehicles. Both permit contributions (cash and stock, respectively) to vary from year to year, thus allowing employers to avoid fixed obligations that may be burdensome in difficult financial times. Section 401(k) plans (named after the tax code section) permit employees to defer compensation on a pretax basis. Annual contributions in 2009 are limited to $16,500, increasing by up to $500 annually thereafter through 2010, depending on inflation. For those as a 50 or over, an additional $5,500 par year in catch-up contributions are also permitted. Additionally, many employers match some portion of employee contributions.
- Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6- 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. This type of retirement plan consists of individual accounts, as in a 401(k) plan. But in contrast to a 401(k), all the contributions come from the employer. Usually, the employer contributes a percentage of the employee’s salary, say, 4 or 5 percent. The money in the cash balance plan earns interest according to a predetermined rate, such as the rate paid on U.S. Treasury bills. Employers guarantee this rate as in a defined benefit plan. This arrangement helps employers plan their contributions and helps employees predict their retirement benefits. If employees change jobs, they generally can roll over the balance into an individual retirement account.
- Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6- Summary Plan Description (SPD) A reporting requirement of the Employee Retirement Income Security Act (ERISA) that obligates employers to describe the plan’s funding, eligibility Requirements, risks, and so forth within 90 days after an employee has entered the plan. 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. Vesting schedules that may be used: Employees are vested after five years of service. Employers may vest employees over a three- to seven-year period, with at lea st 20 % in the third year and each year thereafter.
- Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6- As many as 30 days of vacation is not uncommon for relatively new employees in Europe. By contrast, there is no legal minimum in the United States, but 10 days is typical for large companies. U.S. workers must typically be with an employer for 20 to 25 years before they receive as much paid vacation as their western European counterparts. 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.
- Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6- 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 1993. 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.
- Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6- Family and Medical Leave 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 Employees are guaranteed the same or a comparable job on their return to work. Employees with less than one year of service or who work under 25 hours per week or who are among the 10 percent highest paid are not covered. Many employers had already taken steps to deal with this issue, partly to help 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.
- Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6- 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).
- Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6- In the United States, health‑care expenditures have gone from 5.3 percent of the GNP ($27 billion) in 1960 to 15.3 percent (approximately 2.1 trillion) recently. Also, the United States compares poorly with other countries on measures of life expectancy and infant morality. Furthermore, over 46 million people in the United States are uninsured as of 2007. 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.
- Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6- 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.
- Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6- 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 programsuse little or no outreach to individuals and provide no ongoing motivational support. Active wellnesscenters assume that behavior change requires not only awareness and opportunity, but also support and reinforcement. As noted in Figure 13.5 , all three models, health education, physical fitness facilities and Follow-up models, are effective in reducing the risk factors associated with cardiovascular disease (obesity, high blood pressure, smoking, and lack of exercise). However, the follow-up model is significantly better than the other two in reducing the risk factors.
- Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6- Since 2000, health care premium costs have more than doubled. Two important phenomena are often encountered in cost control efforts. First, piecemeal programs may not work well because steps to control one aspect (such as medical cost shifting) may lead employees to “migrate” to other programs that provide medical treatment at no cost to them (like workers’ compensation). Second, there is often a Pareto group, which refers to a small percentage (perhaps 20 percent) of employees being responsible for generating the majority (often 60 to 80 percent) of health care costs. Obviously, cost control efforts will be more successful to the extent that the costs generated by the Pareto group can be identified and managed effectively.
- Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6- Employers may change staffing practices to control benefits costs. 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. The IRS looks at several factors, including the permanency of the relationship between employer and worker, how much control the employer exercises in directing the worker, and whether the worker offers services to only that employer. Permanency, control, and dealing with a single employer are viewed by the IRS as suggestive of an employment relationship.
- Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6- Methods include personal interviews, focus groups, and questionnaires. Assessments of employee benefit preferences need to be done. Relevant questions might include: What benefits are most important to you? • If you could choose one new benefit, what would it be? • If you were given x dollars for benefits, how would you spend it? Demographicswill 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.
- Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6- E ffective communication of benefits information to employees is critical if employers own health insurance.are to realize sufficient returns on their benefits investments. employees will be least satisfied with their benefits if their cost is high and they are well informed. One thing an employer should consider with respect to written benefits communication is that more than 27 million employees in the United States may be functionally illiterate. Of course, there are many alternative ways to communicate benefits information. (See Table 13.10 .) Nevertheless, most organizations spend little to communicate information about benefits, and much of this is spent on general written communications. Considering that Bureau of Labor Statistics data cited earlier indicate that private-sector organizations spend an average of more than $16,000 per worker per year on benefits, together with the complex nature of many benefits and the poor understanding of most employees, the typical communication effort may be inadequate. Organizations are increasingly using Web-based tools to personalize and tailor communications to individual employees.
- Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6- Rather than a single standard benefits package for all employees, flexible benefit plans (flex-plans or cafeteria-style plans) permit employees to choose the types and amounts of benefits they want for themselves. The plans vary according to such things as whether minimum levels of certain benefits (such as health care coverage) are prescribed and whether employees can receive money for having chosen a “light” benefits package (or have to pay extra for more benefits).Theseaccounts 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.
- Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6- 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.
- Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6- As a general rule, all benefits packages must meet certain rules to be classified as qualified plans. What are the advantages of a qualified plan? Basically, it receives more favorable tax treatment than a nonqualified plan. In the case of a qualified retirement plan, for example, these tax advantages include (1) an immediate tax deduction for employers for their contributions to retirement funds, (2) no tax liability for the employee at the time of the employer deduction, and (3) tax-free investment returns (from stocks, bonds, money markets, or the like) on the retirement funds. What rules must be satisfied for a plan to obtain qualified status? Each benefit area has different rules. 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 1992. It specifies that employees with disabilities have equal access to the same health insurance coverage as other employees. The Financial Accounting Statement (FAS) 106issued by the Financial Accounting Standards Board went into effect in 1993. 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. The need to balance the interests of shareholders, current employees, and retirees in this area will be one of the most difficult challenges facing managers in the future
- Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6- Many organizations have become less paternalistic in their employee benefits strategies. Employees now have more responsibility, and sometimes more risk, regarding their benefits choices. One change has been in the area of retirement income plans, where employers have moved toward greater reliance on defined contribution plans. Such plans require employees to understand investing; otherwise, their retirement years may not be so happy. The risk to employees is especially great when defined contribution plans invest a substantial portion of their assets in company stock. One reason companies do this is because they wish to move away from an entitlement mentality and instead link benefits to company performance. However, if the company has financial problems, employees risk losing not only their jobs, but also their retirement money. Another change has been in the area of health care benefits, where companies have reduced or sometimes eliminated such benefits. Again, the responsibility for anticipating this possibility increasingly falls with employees. In the health care area, employees are being asked to increase the proportion of costs that they pay and also to use data on health care quality to make better choices about health care.