Chapter 14

Providing Employee Benefits

freesoulproduction/Shutterstock

© 2022 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw Hill. 2
 What Do I Need to Know? 1

LO 14-1 Discuss the importance of benefits as a part of employee compensation.

LO 14-2 Summarize the types of employee benefits required by law.
LO 14-3 Describe the most common forms of paid leave.
LO 14-4 Identify the kinds of insurance benefits offered by employers.
LO 15-5 Define the types of retirement plans offered by employers.

© McGraw Hill 3
 What Do I Need to Know? 2

LO 14-6 Describe how organizations use other benefits to match employees’ wants and needs.
LO 14-7 Explain how to choose the contents of an employee benefits package.
LO 14-8 Summarize the regulations affecting how employers design and administer benefits
programs.
LO 14-9 Discuss the importance of effectively communicating the nature and value of benefits
to employees.

© McGraw Hill 4
 The Role of Employee Benefits

Employee Benefits
• Compensation to employees in forms other than cash.
• Help attract, retain, and motivate employees.
• Help employers tailor their compensation to the kinds of employees they need.
• Employees have come to expect that benefits will help them maintain economic
security.
• Benefits impose significant costs.
• Certain benefits are required by law.
• Creative benefits packages make companies competitive.

© McGraw Hill 5
 Figure 14.1 Benefits as a Percentage of Total Compensation

Access the text alternative for slide images. Source: Bureau of Labor Statistics, “Employer Costs for
Employee Compensation,” http://data.bls.gov, accessed May 7, 2020.
© McGraw Hill 6
 Table 14.1 Benefits Required by Law
Benefit
Social Security
Unemployment insurance
Workers’ compensation insurance
Family and medical leave
Health care
Employer Requirement
Flat payroll tax on employees and employers.
Payroll tax on employers that depends on state requirements
and experience rating.
Provide coverage according to state requirements; premiums
depend on experience rating.
Up to 12 weeks of unpaid leave for childbirth, adoption, or
serious illness.
For employers with at least 50 employees, payment of a fee to
the federal government if the employer does not meet
conditions for providing health insurance benefits.

© McGraw Hill 7
 Benefits Required by Law 1

Social Security
Employers and employees share cost through payroll tax to provide benefits in the
OASDHI program (Social Security):
• Old age (retirement) insurance.
• Unemployment insurance.
• Survivor’s insurance.
• Disability insurance.
• Hospital insurance (Medicare Part A).
• Medical insurance (Medicare Part B).

Benefits depend on a person’s age and earnings history.

© McGraw Hill 8
 Benefits Required by Law 2

Unemployment Insurance
Federally mandated program administered by states.
Minimizes unemployment hardship.
• Provides payments to offset lost income.
• Helps unemployed workers find new jobs.
• Gives employers incentive to stabilize employment.
• Preserves investments in worker skills.

Most funding comes from taxes on employers.

• Size of unemployment tax imposed on employer depends on the employer’s experience
rating.
• HR planning can keep experience rating favorable.
© McGraw Hill 9
 Benefits Required by Law 3

• To receive benefits, workers must meet four conditions:

1. Can demonstrate they were employed.
2. Be available for work.
3. Actively seeking work.
4. Were not discharged for cause, did not quit voluntarily, and are not out of work because
of a labor dispute.

© McGraw Hill 10
 Benefits Required by Law 4

Workers’ Compensation
State programs that provide benefits to workers who suffer work-related injuries/illness,
or to their survivors.
Operate under principle of no-fault liability:
• Employee does not need to show that employer was grossly negligent in order to receive
compensation.
• Employer is protected from lawsuits.

Generally two-thirds of workers’ earnings and tax free.

© McGraw Hill 11
 Benefits Required by Law 5

• Four major categories of benefits:

1. Disability income.
2. Medical care.
3. Death benefits.
4. Rehabilitative benefits.

• Cost influenced by kind of occupation involved, state where company is located,

employer’s experience rating.

© McGraw Hill 12
 Benefits Required by Law 6

Family and Medical Leave Act (FMLA)

Organizations with 50 or more employees must provide up to 12 weeks of unpaid leave:
• After childbirth or adoption.
• To care for a seriously ill family member.
• For an employee’s own serious illness.

Same/comparable job guaranteed upon employee’s return.

Must comply with Pregnancy Discrimination Act.

© McGraw Hill 13
 Benefits Required by Law 7

Patient Protection and Affordable Care Act

Employers are not required by law to provide health care.
• Those who choose not to must pay a penalty.
• Choice depends on number of full-time employees.

Small businesses can buy insurance from SHOP.

Law is complex and changing; HR professionals must continue to educate themselves on
the requirements.

© McGraw Hill 14
 Figure 14.2 Percentage of Full-Time Workers with Access to Selected Benefit Programs

Access the text alternative for slide images. Source: Bureau of Labor Statistics, “Employee Benefits in the United
States, March 2019,” news release, September 19, 2019, https://www.bls.gov.
© McGraw Hill 15
 1
POLLING QUESTION Which optional benefits program is most important to you?

A. Paid leave
B. Medical insurance
C. Life insurance
D. Disability insurance
E. Retirement plans
F. “Family-friendly” benefits
G. Other benefits, such as tuition reimbursement and employee discounts

© McGraw Hill 16
 Optional Benefits Programs 1

Paid Leave
Major categories: vacations, holidays, sick leave.
• Must also account for other situations like jury and military duty.
• Optional paid leave for things like voting or donating blood.

There is NO legal requirement for paid leave in the U.S.

Average paid leave in U.S. after five years:
• 15 vacation days and 10 paid holidays.
• Sick-leave days accumulate with length of service.

Optional are personal days, floating holidays, and paid time off.

© McGraw Hill 17
 Paid Time Off

Paid time off is a way for employees to

enjoy time with their families and to
refresh their bodies and spirits. Is paid
time off an important factor for you when
accepting a position?

© McGraw Hill moorboard/SuperStock 18

 Optional Benefits Programs 2

Group Insurance—Medical Insurance

70% of all full-time employees in U.S. receive medical benefits.
• Hospital expenses, dental/vision care, prescription drug programs, etc.

Consolidated Omnibus Budget Reconciliation Act (COBRA):

• Employers required to allow employees to extend health insurance coverage at group rates
for up to 36 months after layoff, reduction in hours, or employee’s death (for dependents).

© McGraw Hill 19
 Optional Benefits Programs 3

Employer approaches to controlling health costs:

• Managed care: the insurer plays a role in decisions about health care, avoiding unnecessary
procedures.
• Health maintenance organizations (HMO): requires patients to receive their medical care
from the HMO’s health care professionals.
• Preferred provider organizations (PPO): contracts with health care professionals to provide
services at a reduced fee.
• Flexible spending accounts: employees set aside a portion of pretax earnings to pay for
eligible expenses.

© McGraw Hill 20
 Optional Benefits Programs 4

• High-deductible health plans: typically brings together insurance with a high deductible and
a medical savings account with a specified limit ($2,700 in 2020) that the employee
contributes to as a payroll deduction.
• Accountable care organizations (ACO): a network of health care providers that practice
value-based care; they agree to be paid based on results.
• Employee wellness programs (EWP): communications, activities, and facilities designed to
change health-related behaviors in ways that reduce health risks.

© McGraw Hill 21
 Figure 14.3 Health Care Costs in Various Countries

Access the text alternative for slide images. Source: Organisation for Economic Co-operation and Development,
“Health Spending,” OECD Data, https://data.oecd. org, accessed May 7, 2020.
© McGraw Hill 22
 Optional Benefits Programs 5

Group Insurance—Life Insurance

• Employers may provide life insurance or offer the opportunity to buy coverage at low
group rates.
• Term-life insurance: if employee dies during term of policy, beneficiaries receive a
death benefit payment.
• Benefits for accidental death and dismemberment.

© McGraw Hill 23
 Wellness Programs
Many companies offer wellness programs
such as yoga classes to encourage
employees to reduce their health risks as
insurance costs climb for both workers and
employers.

© McGraw Hill Wavebreakmedia Ltd/Getty Images 24

 Optional Benefits Programs 6

Group Insurance—Disability Insurance

Short-term disability insurance.
• Percentage of employee’s salary paid as benefits for six months or less.

Long-term disability insurance.

• Percentage of employee’s salary paid as benefits after an initial period and potentially for
rest of employee’s life.

Group Insurance—Long-Term Care Insurance

Employer provides benefits toward the cost of long-term care and related medical
expenses.

© McGraw Hill 25
 Figure 14.4 Sources of Income for Persons 65 and Older

Source: E BRI Databook on Employee Benefits, Chapter 3

(Employee Benefit Research Institute, July 2014), https:// www.ebri.org.
Access the text alternative for slide images.
© McGraw Hill 26
 Optional Benefits Programs 7

Retirement Plans
Contributory plan: funded by employer and employee.
Noncontributory plan: funded entirely by employer.
Defined-benefit plan: guarantees specified level of retirement income.
• Meets requirements of Employee Retirement Income Security Act (ERISA).
• Aided by the Pension Benefit Guarantee Corporation (PBGC).

© McGraw Hill 27
 Optional Benefits Programs 8

Defined-contribution plan: employer sets up account for each employee; specifies size
of contribution into account.
• Money purchase plan.
• Profit-sharing and employee stock ownership plans.
• Section 401(k) plans.

Cash balance plan: employer sets up account for each employee; contributes
percentage of employee’s salary.

© McGraw Hill 28
 Figure 14.5 Value of Retirement Savings Invested at Different Ages

Note: Investment portfolio consists of 60% stocks, 30% bonds, and 10% cash (for example, money-market
funds, bank savings accounts), assuming average rates of return based on historical rates from 19 28 to 2016.
Sources: Data from Aswath Damodaran, “Annual Returns on Stocks,
T. Bonds and T. Bills: 1928–Current,” http://people.stern.nyu.edu/
adamodar/New_Home_Page/datafile/histretSP.html.
Access the text alternative for slide images.
© McGraw Hill 29
 Optional Benefits Programs 9

Government Requirements for Vesting and Communication

• Vesting rights.
• When employees become participants in pension plans and work a specified number of
years, they are guaranteed to receive pension at retirement regardless of if they remained
with the employer.
• Summary plan description (SPD).
• Report that describes pension plan’s funding, eligibility requirements, risks, and other
details.
• Individual benefit statement describes employee’s vested and unvested benefits.

© McGraw Hill 30
 2
Jakar does not know a lot about investing and wants to ensure
he has some retirement income when he is retires. Agnes plans
POLLING QUESTION
on changing employers every few years and is interested in
investing her own money. Which plan would be best for Jakar
and Agnes, respectively?
A. Defined benefit; defined contribution
B. Defined contribution; defined benefit
C. Contributory; defined benefit
D. Defined contribution; non-contributory

© McGraw Hill 31
 Optional Benefits Programs 10

Family-Friendly” Benefits
Family leave.
• Federal law requires 12 weeks of unpaid
leave.

Child care.
College savings.
• 529 savings plans.

Elder care.

Ingram Publishing/SuperStock

© McGraw Hill 32
 Optional Benefits Programs 11

Other Benefits In order to

• Subsidized cafeterias. provide a relaxed
environment for
• On-site health care their employees,
services, fitness centers, some companies
dry cleaning. allow employees
• Moving and relocation. to bring their pets
to work. What
• Employee discounts. other unique
• Tuition reimbursement. benefits do
companies offer
• On and off-site company their employees?
recreation.
• Sabbaticals.

© McGraw Hill Stuart O’Sullivan/Getty Images 33

 Selecting Employee Benefits 1

The Organization’s Objectives

Decisions about benefits should take into account:
• Organization’s goals, objectives, and budget.
• Expectations of current employees and prospective recruits.

Organizations that do not offer expected benefits will have difficulty attracting and
keeping employees.

© McGraw Hill 34
 Selecting Employee Benefits 2

Employees’ Expectations and Values

Employees expect to receive benefits that are legally required and widely available.
• Bureau of Labor Statistics is a good source of benefits data.

They value benefits they are likely to use.

Value differs from one employee to another.

© McGraw Hill 35
 Selecting Employee Benefits 3

Organizations can offer flexible benefits plans in place of a single benefits package for all
employees.
• Addresses differences in employees’ needs.
• Empowers employees.

Cafeteria-style plan: employees can choose the types and amounts of benefits they
want from a set of alternatives.

© McGraw Hill 36
 Selecting Employee Benefits 4

Benefits’ Costs
Approaches to saving money:
• Shift from traditional health insurance to PPOs and HDHPs.
• Shift more of the cost to employees.
• Exclude or limit coverage for certain types of claims.

© McGraw Hill 37
 Legal Requirements for Employee Benefits 1

Tax Treatment of Benefits

Qualified plans: offer more favorable tax treatment of benefits.
• Employees may immediately take tax deduction on contributions to the plans.
• No immediate tax on employee for amount employer contributes.
• Tax-free earnings on money in retirement fund.

Plan must meet certain requirements to be a qualified plan.

© McGraw Hill 38
 Legal Requirements for Employee Benefits 2

Antidiscrimination Laws
Intended to provide equal employment opportunity without regard to race, sex, age,
disability, and several other protected categories.
• Pregnancy Discrimination Act.
• Age Discrimination in Employment Act (ADEA).
• Older Workers Benefit Protection Act of 1990.
• Americans with Disabilities Act (ADA).

© McGraw Hill 39
 Legal Requirements for Employee Benefits 3

Accounting Requirements
Financial Accounting Standards Board (FASB) sets requirements for companies’
financial statements.
• Ensures that statements are true picture of financial status.
• Employers must set aside funds they expect to need for benefits to be paid after retirement.
• Statement must list funds for retirement as future cost obligations.

© McGraw Hill 40
 Communicating Benefits to Employees

Communication Is Essential
• Employees must be given information about benefits.
• Benefits are necessary to attract, motivate, and retain talent.
• It is difficult for employees and applicants to understand the value of benefits, so
companies must help.
• Employers can use a variety of media to communicate.

© McGraw Hill 41
 End of Chapter 14

© 2022 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw Hill. 42