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Chapter 13
Employee Benefits
2. ©McGraw-Hill Education
Learning Objectives
LO 13-1 Discuss the growth in benefits costs and the underlying
reasons for that growth.
LO 13-2 Explain the major provisions of employee benefits
programs.
LO 13-3 Discuss how employee benefits in the United States
compare with those in other countries.
LO 13-4 Describe the effects of benefits management on cost
and workforce quality.
LO 13-5 Explain the importance of effectively communicating the
nature and value of benefits to employees.
LO 13-6 Describe the regulatory constraints that affect the way
employee benefits are designed and administered.
3. ©McGraw-Hill Education
Introduction
Average cost of benefits is about 46.3% for every payroll
dollar and about 31.6% of total compensation package.
Benefits are unique because:
• More regulation of benefits than direct pay
• Almost obligatory for employers to provide
• Complex for employees to understand
• Employees may not even be aware of benefits
available to them
4. ©McGraw-Hill Education
Figure 13.1 Growth of Employee Benefits, Percentage of
Wages and Salaries and of Total Compensation, 1929–
2017, Civilian Workers
Jump to long description in appendix
5. ©McGraw-Hill Education
Reasons for Benefits Growth 1 of 2
Factors Contributing to Growth
• The Social Security Act and other legislation
• Wage and price controls instituted during World
War II
• Tax treatment of benefits programs
• Marginal tax rate
• No employer taxes on most employee benefits
LO 13-1
6. ©McGraw-Hill Education
Reasons for Benefits Growth 2 of 2
Factors Contributing to Growth continued
• Cost advantage that groups typically realize over
individuals
• Growth of organized labor from the 1930s through
the 1950s
• Unique benefits are a means of differentiating
employers in the eyes of current or prospective
employees
7. ©McGraw-Hill Education
Benefits Programs 1 of 13
Social Insurance (Legally Required)
• Social Security
• Unemployment insurance
• Survivor’s insurance (1939)
• Disability insurance (1956)
• Hospital insurance (Medicare Part A, 1965)
• Supplementary medical insurance (Medicare Part B,
1965) for the elderly
LO 13-2
8. ©McGraw-Hill Education
Benefits Programs 2 of 13
Social Insurance (Legally Required) continued
• Social Security continued
• Covers more than 90% of U.S. employees
• Begins at age 65 years and 6 months (full benefits) or
age 62 (reduced benefits)
• May be free from state and federal taxes
• Paid for with payroll tax
9. ©McGraw-Hill Education
Benefits Programs 3 of 13
Social Insurance (Legally Required) continued
• Unemployment insurance
• To offset lost income during involuntary unemployment
• To help unemployed workers find new jobs
• To provide an incentive for employers to stabilize
employment
• To preserve investments in worker skills by providing
income during short-term layoffs
• Financed through taxes on employers
• Size of tax depends on the employer’s experience rating
10. ©McGraw-Hill Education
Benefits Programs 4 of 13
Social Insurance (Legally Required) continued
• Unemployment insurance continued
• Must have a prior attachment to the workforce
• Must be available for work
• Must be actively seeking work (including registering at
the local unemployment office)
• Were not discharged for cause (such as willful
misconduct), did not quit voluntarily, and are not out of
work because of a labor dispute
11. ©McGraw-Hill Education
Benefits Programs 5 of 13
Social Insurance (Legally Required) continued
• Worker’s Compensation
• Job-related injuries and death
• No-fault liability
• Employers immune from lawsuits
• 90% of U.S. workers covered
12. ©McGraw-Hill Education
Benefits Programs 6 of 13
Social Insurance (Legally Required) continued
• Worker’s Compensation continued
• Disability income
• Medical care
• Death benefits
• Rehabilitative services
13. ©McGraw-Hill Education
Benefits Programs 7 of 13
Private Group Insurance
• Medical insurance
• Consolidated Omnibus Budget Reconciliation Act
(COBRA)
• Disability insurance
• Short term
• Long term
15. ©McGraw-Hill Education
Benefits Programs 9 of 13
Retirement continued
• Defined contribution
• Individual account set up for each employee with a
guaranteed size of contribution
• Shift investment risk to employees
• Money purchase plan
• Profit- sharing plans
• Employee stock ownership plans
• Section 401(k) plans
• Pension Protection Act (PPA) of 2006
16. ©McGraw-Hill Education
Figure 13.2 The Relationship of Retirement Savings to Age When
Savings Begins and Type of Investment Portfolio
Jump to long description in appendix
SOURCE: A. Damodaran, “Annual Returns on Stock, T. Bonds and T. Bills: 1928–Current,” http://people.stern.nyu.edu/adamodar/New_Home_Page/datafile/histretSP
18. ©McGraw-Hill Education
Benefits Programs 11 of 13
Retirement continued
• Funding, communication, and vesting
requirements
• Employers are required to make yearly contributions that
are sufficient to cover future obligations
• Summary plan description
• Vesting rights
20. ©McGraw-Hill Education
Figure 13.3 Normal Annual Hours Worked
Relative to United States
Jump to long description in appendix
SOURCE: Organization for Economic Cooperation and Development. Data for 2015. http://stats.oecd.org/Index.aspx? Section on Labour, Subsection on Labour Force Statistics. Accessed April 15, 2017.
23. ©McGraw-Hill Education
Table 13.5 The Five Most Highly Ranked
Benefits Objectives for Employers
1. Increase employee productivity
2. Increase employee satisfaction
3. Increase employee loyalty
4. Attract employees
5. Help employees make better financial decisions
24. ©McGraw-Hill Education
Figure 13.4 Employee Benefits Cost by Category,
Private-Sector Workers
Jump to long description in appendix
SOURCE: U.S. Department of Labor, “Employer Costs for Employee Compensation—December 2016,” March 17, 2017, News Release USDL-17-0321.
25. ©McGraw-Hill Education
Managing Benefits: Employer Objectives
and Strategies 2 of 10
Cost Control
• Cost of a benefit category
• Growth trajectory of the benefit category
• Cost of legally required benefits
• Medical and other insurance are targets for cost
control
26. ©McGraw-Hill Education
Managing Benefits: Employer Objectives
and Strategies 3 of 10
Cost Control continued
• Health care: controlling costs and improving
quality
• U.S. spends more on health care than any other country
in the world, most through employers
• Employers can shift costs to employees through
deductibles, coinsurance, exclusions and limitations, and
maximum benefits.
• Cost reductions
• HMOs and PPOs
27. ©McGraw-Hill Education
Managing Benefits: Employer Objectives
and Strategies 4 of 10
Cost Control continued
• Health care: controlling costs and improving
quality continued
• Employee wellness programs
• Focus on changing behaviors both on and off work time
that could eventually lead to future health problems
• Preventive in nature
• Passive or active
28. ©McGraw-Hill Education
Managing Benefits: Employer Objectives
and Strategies 5 of 10
Cost Control continued
• Health care: controlling costs and improving
quality continued
• Health care costs and quality: Ongoing challenges
• Average annual premium for family coverage
$18,142
• Piecemeal programs may not work
• Pareto group
29. ©McGraw-Hill Education
Managing Benefits: Employer Objectives
and Strategies 6 of 10
Cost Control continued
• Staffing responses to control benefits cost growth
• Benefits cost per hour can be reduced by having
employees work more hours
• Classify employees as exempt
• Temporary workers
• Independent contractors
30. ©McGraw-Hill Education
Managing Benefits: Employer Objectives
and Strategies 7 of 10
Nature of the Workforce
• Demographic factors impact types of benefits
desired
• Marketing research
• 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?
31. ©McGraw-Hill Education
Managing Benefits: Employer Objectives
and Strategies 8 of 10
Communicating With Employees and Maximizing
Benefits Value
• Employees and job applicants typically
underestimate the value of their benefits
• Organizations spend little time communicating
about benefits and costs
• Written information
• Online tools
LO 13-5
32. ©McGraw-Hill Education
Managing Benefits: Employer Objectives
and Strategies 9 of 10
Communicating With Employees and Maximizing
Benefits Value continued
• Flexible Benefits Plans
• Permit employees to choose the types and amounts of
benefits they want
• Employees can gain a greater awareness and
appreciation
• Should be a better match
• Overall cost reductions in benefits programs
• May have high administrative costs
• Adverse selection
33. ©McGraw-Hill Education
Managing Benefits: Employer Objectives
and Strategies 10 of 10
Communicating With Employees and Maximizing
Benefits Value continued
• Flexible Spending Accounts
• Permits pretax contributions of up to $2,600 to an
employee account that can be drawn on to pay for
uncovered health care expenses
34. ©McGraw-Hill Education
General Regulatory Issues 1 of 4
Affordable Care Act
• Does not require employers to provide health benefits, does
impose penalties in some cases on larger employers that do
not provide insurance to their workers or that provide
coverage that is unaffordable
• Increases the Medicare Hospital Insurance (Part A) payroll
tax on earnings for higher-income taxpayers
• New tax on so-called “Cadillac“ insurance plans provided by
employers
• Dependent coverage until age 26
• Wellness programs
LO 13-6
35. ©McGraw-Hill Education
General Regulatory Issues 2 of 4
Nondiscrimination Rules, Qualified Plans, and Tax
Treatment
• Qualified plan
• Receives more favorable tax treatment
• Each benefit area has different rules
36. ©McGraw-Hill Education
General Regulatory Issues 3 of 4
Sex, Age, and Disability
• The Supreme Court declared it illegal for
employers to require women to contribute more to
a defined benefit plan than men
• Age Discrimination in Employment Act (ADEA) and
the Older Workers Benefit Protection Act (OWBPA)
• Americans with Disabilities Act (ADA)
37. ©McGraw-Hill Education
General Regulatory Issues 4 of 4
Monitoring Future Benefits Obligations
• Financial Accounting Statement (FAS) 106
• Some companies are charging insurance
premiums to employees and retirees or ending
retiree benefits
• Pension Benefit Guaranty Corporation
39. ©McGraw-Hill Education
Appendix 1 Figure 13.1 Growth of Employee Benefits, Percentage
of Wages and Salaries and of Total Compensation, 1929–2017,
Civilian Workers
1929 1955 1965 1975 1990 1995 2000 2005 2010 2015 2017
Benefits as
percentage of
wages and
salaries
3.0 17.0 21.5 30.0 37.9 40.4 37.7 42.2 43.5 46.2 46.3
Benefits as
percentage of
total
compensation
2.9 14.5 17.7 23.1 27.5 29.2 27.4 29.7 30.3 31.6 31.6
Return to original slide
40. ©McGraw-Hill Education
Appendix 2 Figure 13.2 The Relationship of Retirement Savings
to Age When Savings Begins and Type of Investment Portfolio
A bar graph shows an annual investment of $3,000 made between
ages 21 and 29 will be worth much more at age 65 than a similar
investment made between ages 31 and 39. Second, different
investments have different historical rates of return. Between 1928 and
2016 the average annual return was 9.53% for stocks, 5.18% for
bonds, and 3.46% for cash (e.g., short-term Treasury bills or bank
savings accounts).
If historical rates of return were to continue, an investment in a mix of
60% stock, 30% bonds, and 10% cash between the ages of 21 and 29
would be worth about four times as much at age 65 as would the same
amount kept in the form of cash.
Return to original slide
41. ©McGraw-Hill Education
Appendix 3 Figure 13.3 Normal Annual
Hours Worked Relative to United States
Mexico 2,246 hours, 456 more hours annually than the
U.S.
Korea 2,113 hours, 323 more hours annually than the U.S.
United States 1,790 hours
Japan 1,719 hours, 71 hours fewer than the U.S.
France 1,482 hours, 308 hours fewer than the U.S.
Germany 1,371 hours, 419 hours fewer than the U.S.
Return to original slide
42. ©McGraw-Hill Education
Appendix 4 Figure 13.4 Employee Benefits
Cost by Category, Private-Sector Workers
As a percent of total compensation:
legally required: 7.8 percent%
retirement and savings plans: 4.0 percent
medical and other insurance: 8.0 percent
payments for time not worked: 7.0 percent
supplemental pay: 3.5 percent
Total benefits = $9.93, 30.3 percent of total compensation
($32.76)
Return to original slide
Editor's Notes SOURCES: Data through 1990, U.S. Chamber of Commerce Research Center, Employee Benefits 1990, Employee Benefits 1997, Employee Benefits 2000 (Washington, DC: U.S. Chamber of Commerce, 1991, 1997, and 2000). Data from 1995 onward, “Employer Costs for Employee Compensation,” www.bls.gov. The marginal tax rate is the percentage of additional earnings that goes to taxes. 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), a reduction in hours that leads to the loss of health insurance, death, and other events. 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 (e.g., the three to five highest earnings years).
In the event of severe financial difficulties that force the company to terminate or reduce employee pension benefits, the Pension Benefit Guaranty Corporation (PBGC) provides some protection of benefits. Established by the Employee Retirement Income Security Act (ERISA) of 1974, the PBGC guarantees a basic benefit, not necessarily complete pension benefit replacement, for employees who were eligible for pensions at the time of termination. It insures the retirement benefits of 41 million workers in more than 24,000 plans.
Unlike defined benefit plans, defined contribution plans do not promise a specific benefit level for employees upon retirement.
money purchase plan, under which an employer specifies a level of annual contribution (such as 10% of salary). At retirement age, the employee is entitled to the contributions plus the investment returns.
Money purchase plan, an employer specifies a level of annual contribution (such as 10% of salary). At retirement age, the employee is entitled to the contributions plus the investment returns. Money purchase plan, an employer specifies a level of annual contribution (such as 10% of salary). At retirement age, the employee is entitled to the contributions plus the investment returns. NOTE: Historical rates of return, geometric averages, 1928–2016: stocks (S&P 500), 9.53%; bonds (10-year U.S. Treasury Bond), 5.18%; cash (3-month U.S. Treasury Bill), 3.46%. Cash balance plan is a 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 interests at a predetermined rate. Employees must receive within 90 days after entering a plan a summary plan description (SPD) that describes the plan’s funding, eligibility requirements, risks, and so forth.
ERISA guarantees employees that when they become participants in a pension plan and work a specified minimum number of years, they earn a right to a pension upon retirement. These are referred to as vesting rights. Since 1993 the 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. Financial Accounting Statement (FAS) 106 The rule issued by the Financial Accounting Standards Board in 1993 requiring companies to fund benefits provided after retirement on an accrual rather than a pay-as-you-go basis and to enter these future cost obligations on their financial statements
