Employee

Benefits
Employee Benefits
 
Employee benefits, sometimes called fringe benefits, are those
rewards that employees receive for being members of the
organization and for their positions in the organization. Unlike
wages, salaries, and incentives, benefits are usually not related to
employee performance. The term fringe benefits was coined over
40 years ago by the War Labor Board. Reasoning that employer
provided benefits such as paid vacations, holidays, and pensions
were 'on the fringe of wages,' the agency exempted them from
pay controls. It has been argued that this action, more than any
single event, led to the dramatic expansion of employee benefits
that has since occurred. However, because of the significance of
benefits to total compensation, many employers have dropped the
word fringe for fear that it has a minimizing effect.
What Are Employee Benefits?
 
In general employee benefits can be grouped into five
major categories which are not all mutually exclusive:
 
🙡 legally required
🙡 retirement related
🙡 insurance related
🙡 payment for time not worked
 
Most benefits apply to all employees of the organization
however, some are reserved solely for executives.
Certain benefits, such as health insurance, are often
extended to include spouses. Some companies have
extended these coverage to include unmarried
heterosexual and homosexual partners of unmarried
employees.
Growth in Employee Benefits
 
Prior to the passage of the Social Security Act in 1935,
employee benefits were not widespread. Not only did
the act mandate certain benefits, but its implementation
greatly increased the general public's awareness of
employee benefits. By this time, unions had grown in
strength and had begun to demand more benefits in
their contracts. Thus, the 1930s are generally viewed
as the birth years for employee benefits.

Legally Required Benefits

 
As mentioned earlier, the law mandates certain benefits.
This section discusses three benefits that fall in this
category: social security, unemployment, and workers'
compensation benefits.
Social security
 
Social security is a federally administered insurance system.
Under current federal laws, both employer and employee must
pay into the system, and a certain percentage of the employee's
salary is paid up to a maximum limit. With few exceptions, social
security is mandatory for employees and employers. The most
noteworthy exceptions are state and local government
employees. For these employees to become exempt, a majority
must vote to do so, and another retirement system must be
substituted. Self‑employed persons are required to contribute to
social security at a rate higher than that paid by a typical
employee, but lower than the combined percentage paid by both
employer and employee. The payments distributed under social
security can be grouped into three major categories: retirement
benefits, disability benefits, and health insurance.
Retirement benefits under social security
 
To be eligible for periodic payments through
social security, a person must have reached
retirement age, actually be retired, and be fully
insured under the system. The full periodic
allotment to which the retiree is entitled may
begin at age 65 for persons born before 1938. The
age requirement increases slightly for persons
born during 1938 or later (up to a maximum of age
67 for those born during 1960 or later). Those
who retire as early as age 62 receive lesser
amounts. A person is considered fully retired
when he or she is earning from gainful
employment less than a prescribed amount of
money.
Disability benefits
 
Pensions may be granted under social security to
eligible employees who have a disability that is
expected to last at least 12 months or to result in
death. To be eligible, a person must have worked in a
job covered by social security for at least 5 out of 10
years before becoming disabled. These pensions are
calculated with basically the same methods used for
calculating retirement benefits.
Health insurance
 
Health insurance under social security, commonly
known as Medicare, provides partial hospital and
medical reimbursement for persons over 65.
Hospital insurance, which is known as Part A, is
financed through the regular social security funds.
Most hospital expenses and certain outpatient, post
hospital, and home nursing expenses are covered by
Part A of Medicare. The medical insurance, known
as Part B, helps a participant pay for a number of
different medical procedures and supplies that are
completely separate from hospital care.
 
Unemployment compensation
 
Unemployment compensation is designed to provide funds to
employees who have lost their jobs through no fault of their own and
are seeking other jobs. Title IX of the Social Security Act of 1935
requires employers to pay taxes for unemployment compensation,
However, the law was written in such a manner as to encourage
individual states to establish their own unemployment system. If a
state established its own unemployment compensation system
according prescribed federal standards, the proceeds of the
unemployment taxes paid an employer go to the state.
 
To receive unemployment compensation, an individual must submit an
application through the state employment office and must meet three
eligibility .requirements: The individual must (1) have been covered
by social security for a minimum number of weeks, (2) have been laid
off (in some states, discharge employees may qualify), and (3) be
willing to accept any suitable employment :offered through thestate's
unemployment compensation commission.
Workers' compensation
 
Workers' compensation is meant to protect
employees from loss of income and to cover extra
expenses associated with job related injuries or
illness. Since 1955, several states have allowed
workers' compensation payments for job‑related
cases of anxiety, depression, and certain mental
disorders. Although some form of workers'
compensation is available in all 50 states, specific
requirements, payments, and procedures vary among
states.
However, certain features are common to virtually all programs:
 
1. The laws generally provide for replacement of lost income, medical
expense payments, rehabilitation of some sort, death benefits to survivors,
and lump‑sum disability payments.
 
2. The employee does not have to sue the employer to get compensation; in
fact, covered employers are exempt from such lawsuits.
 
3. The compensation is normally paid through an insurance program financed
through premiums paid by employers.
 
4. Workers' compensation insurance premiums are based on the accident and
illness record of the organization. A large number of paid claims results in
higher premiums.
 
5. An element of coinsurance exists in the workers' compensation coverage.
Coinsurance is insurance under which the beneficiary of the coverage
absorbs part of the loss.
 
6. Medical expenses, on the other hand, are usually covered in full under
workers' compensation laws.
 
7. It is a no‑fault system; all job ‑related injuries and illnesses are covered
regardless of where the fault for the disability is placed.
Retirement‑Related Benefits
 
In addition to the benefits required
by law under social security, many
organizations provide additional
retirement benefits. These
benefits are in the form of private
pension and retirement plans.
 
Pension plans
 
Pension and retirement plans, which provide a source of income
to people who have retired, represent money paid for past
services. Private pension plans can be funded entirely by the
organization or jointly by the organization and the employee
during the time of employment. Plans requiring employee
contributions are called contributory plans; those that do not are
called noncontributory plans. Funded pension plans are financed
by money that has been set aside previously for that specific
purpose. Non funded plans make payments to recipients out of
current contributions to the fund. One popular form of pension
plan is the defined‑benefit plan. Under a defined‑benefit plan, the
employee pledges to provide a benefit determined by a definite
formula at the employee’s retirement date. The other major type
of retirement plan is the defined‑contribution plan, which calls for
a fixed or known annual contribution instead of a known benefit.
Defined‑benefit plans
 
Defined‑benefit plans make up the majority of
pension plans and have a specified formula for
calculating benefits. Although there are numerous
such formulas, the most popular approach has been
the final‑average pay plan, in which the retirement
benefit is based on average earnings in the years,
generally two or five, immediately preceding
retirement. The actual benefit sum is then computed
as a function of the person's calculated average
earnings and years of service. In another common
approach, the flat‑benefit plan, all participants who
meet the eligibility requirements receive a fixed
benefit regardless of their earnings.
ERISA and related acts
 
In an effort to ensure the fair treatment of employees
under pension plans, Congress passed the ERISA
(Employee Retirement Income Security Act) in 1974
This law was designed to ensure the solvency of
pension plans by restricting the types of investments
that could be made with the plan's funds and providing
general guidelines for fund management. ERISA also
requires that employees have vested rights in their
accrued benefits after certain minimum requirements
have been met.
Mandatory retirement
 
The 1978 amendment to the Age Discrimination in
Employment Act (ADEA) forbade mandatory
retirement before age 70 for companies employing
20 or more people in the private sector and at any
age for federal employees. Prior to the effective date
of this amendment, January 1, 1979, employers could
choose any age for mandatory retirement. An
amendment to ADEA that took effect in January 1987
eliminated mandatory retirement at any age for
employees of companies with 20 or more employees.
Early retirement
 
As an alternative to mandatory retirement, some
organizations offer incentives to encourage early
retirement. This method of reducing the work force
is often viewed as a humanitarian way to reduce the
payroll and reward long‑tenured employees. The
types of incentives offered vary, but often include a
lump‑sum payment plus the extension of other
benefits, such as medical insurance. Another popular
incentive is to credit the employee with additional
years of service that can be used under a
defined‑benefit plan.
 
Preretirement planning
 
A benefit that has recently evolved is preretirement
planning. The purpose of such a planning program is
to help employees prepare for retirement, both
financially and psychologically. At the most basic
level, preretirement planning provides employees
with information about the financial benefits they
will receive upon retirement. The subjects include
social security, pensions, employee stock
ownership, and health and life insurance coverage.
Other programs go beyond financial planning and
cover such topics as housing, relocation, health,
nutrition, sleep, exercise, part‑time work, second
careers, community service, recreation, and
continuing education.
Insurance‑Related Benefits
 
Insurance programs of various types represent an
important part of any benefit package. For example, the
U.S. Chamber of Commerce reported that of 929
companies surveyed in 1994, 98 percent provided some
form of medical insurance. At the same time, however,
many employees of small companies (which are not
included in the U.S. Chamber of Commerce survey) are
not covered by company‑sponsored health insurance.
Company‑sponsored medical insurance programs are
designed so that the employer pays either the entire
premium or a portion of it, with the employee responsible
for the balance. The entire issue of health insurance has
been vigorously debated by the U.S. Congress over the
last several years. Although no major legislative changes
related to health insurance have been enacted, some may
be forthcoming.
Health insurance
 
In addition to normal hospitalization and outpatient
doctor bills, some plan, now cover prescription drugs
and dental, eye, and mental health care. Many health
care plans incorporate a deductible, which requires
the employee to pay a certain amount of medical
expenses each year (usually $50 or $150 per person)
before the insurance becomes effective. The health
insurance plan then pays the bulk of the remaining
expenses. Some plans pay the entire cost of health
insurance for both the employees and dependents,
some plans require the employee to pay part of the
cost for dependents only, and some plans require the
employee to pay part of the cost for both.
Managed care
 
Due to rapidly escalating health care costs, many
organizations have turned to various forms of
managed care. The idea behind managed care
programs is for the provider of the heath care,
usually an insurance company, to organize and
manage the program in a manner that will control
costs. Managed care can be provided in a variety of
forms.
Life insurance
 
Life insurance is a benefit commonly available from
organizations. When provided for all employees, it is
called group life insurance. Costs of this type of
insurance, based on the characteristics of the entire
group covered, are typically the same per dollar of
insurance for all employees. Generally, the employer
provides a minimum coverage, usually $10,000 to
$20,000. Employees often have the option to purchase
more insurance at their own expense. A physical
examination is usually not required for coverage.
 
Accident and disability insurance
 
In addition to health, dental, and life insurance, many
organizations provide some form of accident or disability
insurance, or both. Most accident insurance is designed to
provide funds for a limited period of time, usually up to 16
weeks. The amount of benefit is often some percentage of the
accident victim's weekly salary. Disability insurance is
designed to protect the employee who experiences a
long‑term or permanent disability. Normally, a one‑ to
six‑month waiting period is required following the disability
before the employee becomes eligible for benefits. As with
accident insurance, disability insurance benefits are usually
calculated as a percentage of salary.
Payment for Time Not Worked
 
It is now standard practice for organizations to pay
employees for certain time when they do not work.
Rest periods, lunch breaks, and wash‑up times
represent times not worked that are almost always
taken for granted as part of the job. Recognized
holidays, vacations, and days missed because of
sickness, jury duty, and funerals represent other
compensated times that are not worked.
Paid holidays and paid vacations
 
Christmas Day, New Year's Day, Thanksgiving Day,
Independence Day, Labor Day, and Memorial Day
are currently provided as paid holidays by most
companies. One relatively new concept is the
floating holiday, which is observed at the discretion
of the employee or the employer. The number of
paid holiday provided by most companies appears
to have stabilized at an average of 9 to 16 per
year. 
Other Benefits
 
In addition to the previously discussed major
benefits, organizations may offer a wide range of
additional benefits, including food services, health
and first‑aid services, financial and legal advice,
counseling services, educational and recreational
programs, day care services, adoption assistance,
and purchase discounts.
 
The Benefit Package
 
Unfortunately, many benefit packages are thrown
together piecemeal and are poorly balanced. There
are many reasons for this. The major problem is
that companies often add or delete new benefits
without examining their impact on the total
package. Also, they frequently add or delete
benefits for the wrong reasons, such as a whim of a
top executive, union pressures, or a fad. The key
to any successful benefit package is to plan the
package and integrate all of the different
components. Such an approach ensures that any
new benefit additions or deletions will fit in with
the other benefits currently offered.
Communicating the Benefit Package
 
Although most organizations provide some
form of benefits to their employees the
average employee often has little idea of what
he or she is receiving. An early 1990s survey
of 600 human resource managers found that
over 77 percent believed employees generally
did not understand the benefit programs pro
vided by their respective companies. Why arc
employees often unaware of their benefits?
One explanation is that organizations do not
make much of an effort to communicate their
employee benefits.
 
Employee Preferences among Benefits
 
If an organization expects to get the maximum return
from its benefit package in terms of such factors as
motivation, satisfaction, low turnover, and good
relations with unions, the benefits should be those
most preferred by its employees. Ironically, however,
organizations traditionally have done little to ensure
that this is the case. Historically, they have offered
uniform benefit packages selected by the human
resource department and top management. Only on
rare occasions or when demanded by a union contract
are employees consulted concerning their benefit
preferences.
 
Flexible‑benefit plans
 
Because of the differences in employee preferences,
some companies began to offer flexible benefit plans in
the mid‑1970s. Under a flexible‑benefit plan, individual
employees have some choice as to specific benefits
each will actually receive; usually employees select
from among several options how they want their direct
compensation and benefits to be distributed. The idea
is to allow employees to select benefits most
appropriate to their individual needs and lifestyles. For
example, a middle‑aged employee with several children
in school might choose to take a set of benefits
different than those chosen by a young, single
employee.
Why are flexible plans attractive?
 
Flexible plans may be of interest to organizations for several reasons:
 
🙡 Employee benefits are a very significant component of overall compensation.
 
🙡 Flexible benefits can allow employers to limit their contributions without alienating
employees, since options give employees some control over the distribution of benefits.
 
🙡 Lifestyles have changed in the past several years, causing employees to reevaluate the
need for certain traditional benefits. For example, in a family where both spouses work and
receive family medical insurance, one coverage is sufficient.
 
🙡 Benefits can be useful in recruiting and retaining employees. However when a mandatory
benefit package is largely unresponsive to a prospective employee's needs or to the retention
of present employees, the organization is wasting money.
 
🙡 The high cost of benefits is causing organizations to try to communicate effectively the
real cost to the employee. By making specific benefit choices, the employee becomes highly
familiar with the costs associated with each benefit.
 
🙡 There can be positive tax ramifications for employees. Also, because certain benefits are
taxable and others are not, different benefit mixes can be attractive to different employees
(the tax ramifications of flexible plans are discussed shortly).
 
🙡 A flexible plan can have a positive impact on employee attitudes and behavior.

🙡 It can lower overall health care costs.

Problems with flexible plans
 
Flexible plans are not without their difficulties. The
major problems are as follows:
 
🙡 A flexible plan requires more effort to administer.
 
🙡 Unions often oppose flexible plans because they are
required to give up control over the program details or
face losing some of their previously negotiated benefit
improvements.
 
🙡 Employees may not choose those benefits that are in
their own best interests.
 
🙡 Tax laws limit the amount of individual flexibility in
certain situations.