Employee Benefits (Encyclopedia of Business and Finance)
Employee benefits are compensations given to employees in addition to regular salaries or wages. These compensations are given at the entire or partial expense of the employer. Benefit packages usually make up between 30 and 40 percent of an employee's total compensation for employment, which makes them an important aspect of the terms of employment. While some employee benefits are required by law, many employers offer additional benefits in order to attract and retain quality workers and maintain morale. Some types of benefits are also used as incentives to encourage increased worker productivity.
LEGALLY REQUIRED BENEFITS
While some benefits are offered as incentives to attract workers, some are legally required. For example, employers must provide workers' compensation insurance, which pays the medical bills
for job-related injuries and provides an income for employees who become disabled because of a job-related injury. Social Security must be paid by the employer (in addition to the amounts deducted from employee's pay) to help meet employees' retirement needs, and employers must pay for unemployment insurance to compensate workers in the event that their job is eliminated. The Family and Medical Leave Act, passed by Congress in 1993, requires large employers to provide workers with unpaid leave for family or medical emergencies (up to 12 weeks of unpaid, job-protected leave per year). Under this law, employees are guaranteed that they can return to the same or a comparable position and that their health care coverage will be continued during the leave.
TRADITIONAL TYPES OF EMPLOYEE BENEFITS
Because of continually rising health care costs, one of the most desirable types of benefits for employees to have is a health insurance plan. These plans can be set up to cover the individual worker and, in many cases, the worker's family as well; they may or may not include such options as dental, eye, chiropractic, hospital, and other types of health care. Health insurance plans may be provided at no cost to employees, or they may be made available at a more desirable rate than employees could get on their own. The health insurance aspect of a benefit package is often the major deciding factor in whether a person accepts a position with a company. The degree of health insurance is often more important to a potential employee than the salary level; especially when children are an issue.
Most benefit plans also include a certain number of paid sick days, personal days, and/or vacation days. Many companies are finding ways of increasing the flexibility of employee benefits. One way to increase flexibility is to group sick, vacation, and personal days into a certain amount of paid time off (PTO). PTO allows employees to take days offor example, to care for a sick child, observe a religious holiday, or go on vacationithout having to explain why. The PTO benefit helps employees because their time is more flexible, and it helps employers by maintaining morale and reducing unanticipated absenteeism.
Life insurance and retirement options are another type of benefit many companies offer their employees. These types of benefits often encourage employees to remain with the same company because they do not want to cash in their life insurance or retirement plans. This tends to make employees more loyal to the company because their future is invested with the company. It also gives the employee a feeling of power by having some control over planning for retirement.
EXPANDED TYPES OF EMPLOYEE BENEFITS
While health care, paid time off, and retirement plans are the most common types of benefits employees receive, some companies offer even more types of benefits to help attract and retain employees as well as increase employee morale and improve job performance. One example of this type of benefit is tuition reimbursement, which allows employees to further their education while working. Motivating employees to better themselves at the employer's expense, helps the company keep knowledgeable employees.
With the growing number of single parents and dual-career couples in the work force, many companies have opened day-care facilities in the workplace where employees can feel safe about leaving their children. On-site child care is obviously a very desirable benefit for parents because it allows them to check up on the children, cut down on travel time, and be available in case of an emergency. However, some childless workers feel that this benefit discriminates against them because they get no use out of the day-care facility. One way many companies are handling this type of concern is through a cafeteria plan. While there are several different ways to set up a cafeteria plan, such as setting aside pre-tax dollars for medical expenses, one of the most useful ways is to give employees many different benefit options to choose from. Each employee is given a set allowance that can be used toward any benefit the employee chooses, allowing the employees to pick the options that will most benefit them. The cafeteria plan is one fair way to handle benefits for everyone concerned.
Another characteristic of the work force is its increasingly older age. As a result, there are an increasing number of workers with aging parents who need care. Many companies recognize the need for elder care and are providing benefits to help, such as referral services for quality nursing homes and flexible work hours and/or days off so employees can care for aging parents.
Other benefits provided by some employers include credit unions to help employees with financial needs, gym facilities to allow employees to fit exercise into their busy schedules, cafeterias that sell reduced price meals to working employees, and on-site laundry services where employees can have laundry done while they are at work. Making the work environment seem more like a family helps boost employee morale and improve working relationships. Many companies provide uniforms for their employees, so that workers do not have to worry about ruining their own clothing. The uniforms also help with the feeling of unity because everyone in the company is dressed similarly. Because transportation can often be a problem for employees, some companies are even providing transportation options as a benefit to employees. Disney World, in Orlando, Florida, has a shuttle that picks employees up from their living quarters and takes them to work. Corn detasslers meet in a central location and a bus takes them to the site. Sales people are often provided with a company car.
While these types of benefits are meant to attract and retain employees as well as create a positive work environment, some types of employee benefits are used to encourage increased performance. The following are the four main types of benefits used as incentives to encourage employees to exhibit superior performance:
- Profit sharing gives the employee a portion of the company profits. Profit sharing is often done through making shares of company stock part of the employee benefit package. Employees receive a certain number of shares of stock each year, which provides employees an incentive to help the company succeed. This might also be accomplished through a yearly profit-sharing bonus.
- Gain sharing rewards employees for exceeding a predetermined goal by sharing the extra profits. If profits exceed the goal, employees share in the extra profits.
- Lump-sum bonuses are a one-time cash payment based on performance. Lump-sum bonuses may be an annual reward, such as a Christmas bonus, where the purpose is to share profits with the employees, and thus motivate them.
- Pay for knowledge rewards employees for continuing their education and/or learning new job tasks. The more education or experience an employee has, the higher he/she moves up on the pay-for-knowledge pay scale. Pay for knowledge is an incentive for employees to continue their education because it results in immediate rewards on the job.
In addition to what we typically think as employee benefits, many employers also offer "perks " to their employees. Typically limited to employees in management positions, these perks include such benefits as country club or health club memberships, a company car, special parking privileges at work, tickets for sporting events, first-class travel accommodations, and generous expense accounts. However, certain types of perks are also being extended to employees in many different types of positions. One type of perk that is common in many retail stores is an employee discount on merchandise bought from the place of employment. For example, Dayton Hudson's Target stores offer a 10 percent discount to employees and their immediate families when purchasing merchandise from any Target store. Employees of local movie theaters often receive free movie tickets as a perk, while many restaurant employees receive free or reduced-price meals. By offering employees such perks, the company is providing a strong incentive for employees to continue working there.
FLEXIBLE WORK PLANS
A flexible work plan is another type of employee benefit that has been proven to have a positive influence on employee productivity, attendance, and morale. A flexible work plan allows employees to adjust their working conditions within constraints set by the company and may include such options as flex-time, a compressed work-week, job sharing, and home-based work. Flex-time involves adjusting an employee's daily time schedule; it can be as simple as allowing a worker to come into work an hour earlier and leave an hour earlier than the normal 8-to-5 workday. Usually there are some time constraints set up by the company, but employees who work within those constraints can basically set their own schedules. A compressed workweek involves working longer hours each day for fewer days than the normal Monday-through-Friday work-week. For example, at many businesses employees work ten-hour days, four days a week.
Job sharing allows two or more people to divide the tasks of one job. It allows the same consistency as a full-time person, because the work is simply divided among the people who share the job responsibility. Job sharing is popular among people who only want to work part time but want a job with full-time responsibilities. These types of people include older workers, retirees, students, and working parents. Home-based work programs allow employees to perform their jobs at home instead of in an office setting. These people are often know as telecommuters, because they "commute" to work through electronic mail, faxes, and other types of telecommunications. Home-based work is popular with disabled workers, elderly workers, parents with small children, and workers who have had to relocate far away from the workplace because of a spouse's job change. Through home-based work, all of these types of employees are able to take care of personal and family responsibilities while maintaining and enjoying their job
Finally, it should be noted that the various types of benefits offered to employees can depend greatly on the size and type of the business as well as its geographic location. For example, a small business might be unable to afford to provide complete health care coverage for employees because there are not enough employees to divide the risk. This would cause the cost of the insurance to be high. On the other hand, a large company may not want to give all 1,000 employees a turkey for Thanksgiving because of the enormity of the undertaking. A video store would be more likely to give employees free movie rentals, while a restaurant would offer employees free or reduced-price meals. Employee benefits may be the major deciding factor for many people when choosing a company for employment. In order to attract and retain the best-quality employees, companies must be willing to offer flexible and extensive types of benefits to meet various employee needs.
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Employee Benefits (Encyclopedia of Management)
Employee benefits, sometimes called fringe benefits, are indirect forms of compensation provided to employees as part of an employment relationship. To compete for quality employees in today's marketplace, employers must do more than offer a "fair day's pay." Workers also want a good benefits package. In fact, employees have grown accustomed to generous benefits programs, and have come to expect them.
Employee benefits exist in companies worldwide, but the types and levels of benefits vary greatly from country to country. Generally speaking, companies in industrialized countries in Europe and North America offer employees the most generous benefit packages. Even within the industrialized world, however, employee benefits can vary significantly. For example, employees in Germany and other European countries receive more vacation days than the average U.S. employee. Conversely, most employers in the U.S. offer some form of medical/health insurance to employees. But most companies in European countries don't offer this employee benefit, because it is provided through government-sponsored socialized medicine programs.
Employee benefits were not a significant part of most employees' compensation packages until the mid-twentieth century. In the U.S., for example, benefits comprised only about 3 percent of total payroll costs for companies in 1929. According to U.S. Chamber of Commerce, however, employee benefits in the U.S. now comprise approximately 42 percent of total payroll costs. Several things account for the tremendous increase in the importance of employee benefits in the U.S. In the 1930s, the Wagner Act significantly increased the ability of labor unions to organize workers and bargain for better wages, benefits, and working conditions. Labor unions from the 1930s to 1950s took advantage of the favorable legal climate and negotiated for new employee benefits that have since become common in both unionized and non-union companies. Federal and state legislation requires companies to offer certain benefits to employees. Finally, employers may find themselves at a disadvantage in the labor market if they do not offer competitive benefit packages.
LEGALLY REQUIRED BENEFITS
In the U.S., legislation requires almost all employers to offer the social security benefit, unemployment insurance, and workers' compensation insurance. Larger companies (those with 50 or more employees) are also required to offer employees an unpaid family and medical leave benefit. Each of these legally required benefits is discussed briefly below.
The Social Security Act of 1935, as amended, provides monthly benefits to retired workers who are at least 62 years of age, disabled workers, and their eligible spouses and dependents. Social Security is financed by contributions made by the employee and matched by the employer, computed as a percentage of the employee's earnings. As of 2005, the combined contribution of employer and employee for retirement, survivors', and disability benefits was 12.4 percent of the first $90,000 of employee income. Monthly benefits are based on a worker's earnings, which are adjusted to account for wage inflation. The Social Security Act also provides Medicare health insurance coverage for anyone who is entitled to retirement benefits. Medicare is funded by a tax paid by the employer and employee. The tax rate for Medicare is a combined 2.9 percent of the employee's total wage or salary income.
Unemployment compensation provides income to unemployed individuals who lose a job through no fault of their own. Eligible workers receive weekly stipends for 26 weeks. The specific amount of the stipend is determined by the wages the claimant was paid during the previous year. Unemployment compensation laws in most states disqualify workers from receiving benefits under the following conditions:
- Quitting one's job without good cause. Workers who voluntarily quit their jobs are not eligible for unemployment compensation unless they can show good cause for quitting. Good cause exists only when the worker is faced with circumstances so compelling as to leave no reasonable alternative.
- Being discharged for misconduct connected with work. If employees are discharged for misconduct, they are not eligible for unemployment, unless they can show that the discharge was unfair. To ensure fair discharges, employers should make employees aware of work rules through employee handbooks, posting of rules, and job descriptions. Employers must also provide workers with adequate warnings prior to discharge (unless a serious violation, such as stealing, has occurred).
- Refusing suitable work while unemployed. Eligibility for unemployment compensation is revoked if an employee refuses suitable work while unemployed. Individuals must actively seek work and make the required number of search contacts each week. Benefits are terminated if the claimant refuses a bona fide job offer or job referral.
WORKERS' COMPENSATION INSURANCE.
Millions of workers are hurt or become sick for job-related reasons each year. All 50 states have workers compensation insurance laws that are designed to provide financial protection for such individuals. Specifically, these laws require the creation of a no-fault insurance system, paid for by employers. When workers suffer job-related injuries or illnesses, the insurance system provides compensation for medical expenses; lost wages from the time of injury until their return to the job (employees are given a percentage of their income, the size of which varies from state to state); and death (paid to family members), dismemberment, or permanent disability resulting from job-related injuries.
Nationwide, payouts for workers' compensation are relatively high and curbing costs is a priority for many U.S. companies. The increase in costs is primarily due to rising medical costs that now account for as much as 60 percent of total workers' compensation costs in some states. Fraudulent claims also increase costs.
OPTIONAL EMPLOYEE BENEFITS
Other employee benefits are quite common, but are not required by federal law in the U.S. Some of the more significant optional benefits are summarized below.
Basic health-care plans cover hospitalization, physician care, and surgery. Traditional fee-for-service health care coverage became increasingly expensive in the late twentieth century. As a result, many U.S. companies adopted "managed care" health care plans. In general, managed care plans cut health care costs for employers by requiring them to contract with health care providers to perform medical services for their employees at an agreed upon fee schedule, in exchange for the employer encouraging (sometimes requiring) the employees to receive their medical care within the approved network of health care providers.
Health Maintenance Organizations (HMOs) are one type of managed care plan. HMOs are organizations of physicians and other health-care professionals who provide a wide range of services for a fixed fee. When participants need medical services, they pay a nominal per-visit charge of $5 or $10. Because members visit their health care facility more frequently, potential problems can be discovered and eliminated before they can become major health threats. Thus, HMOs can save money through preventative medicine. However, employees have a limited number of doctors from which to choose and must get approval from a primary care physician for specialized treatment.
Preferred Provider Organizations (PPOs) provide services at a discounted fee in return for the company's participation, which creates increased business for the health facility. Employees may choose any member facility of their choice. PPOs are somewhat less restrictive of patient choice than HMOs, since they allow employees to receive health care outside the approved network if the employee is willing to shoulder a higher percentage of their health care expenses.
Employers are not legally required to offer health insurance to employees. If they do, however, the Consolidated Omnibus Budget Reconciliation Act (COBRA) provides for a continuation of health insurance coverage for a period of up to three years for employees who leave a company through no fault of their own. Such employees are required to pay the premiums themselves, but at the company's group rate.
LONG-TERM DISABILITY (LTD) INSURANCE.
This benefit provides replacement income for an employee who cannot return to work for an extended period of time due to illness or injury. An LTD program may be temporary or permanent. The benefits paid to employees are customarily set between 50 and 67 percent of that person's income.
Pensions, or retirement incomes, may be the largest single benefit most employees receive. In most instances, employees become eligible to participate in company pension plans when they reach 21 years of age and have completed one year of service. After they have satisfied certain age and time requirements, employees become vested, meaning that the pension benefits they have earned are theirs and cannot be revoked. If they leave their jobs after vesting, but before retirement, employees may receive these benefits immediately or may have to wait until retirement age to collect them, depending on the provisions of their specific pension plan.
Employers may choose from two types of pension plans-defined benefit plans or defined contribution plans. Defined benefit plans specify the amount of pension a worker will receive on retirement. Defined contribution plans specify the rate of employer and employee contributions, but not the ultimate pension benefit received by the employee. If a defined benefit plan is chosen, an employer is committing itself to an unknown cost that can be affected by rates of return on investments, changes in regulations, and future pay levels. Consequently, most employers have adopted defined contribution plans.
Companies establish pension plans voluntarily, but once established, the Employee Retirement Income Security Act of 1974 (ERISA) requires that employers follow certain rules. ERISA ensures that employees will receive the pension benefits due them, even if the company goes bankrupt or merges with another firm. Employers must pay annual insurance premiums to a government agency in order to provide funds from which guaranteed pensions can be paid. Additionally, ERISA requires that employers inform workers what their pension-related benefits include.
LIFE INSURANCE PLANS.
These employee benefits are very common. The premiums for basic life insurance plans are usually paid by the employer. Employee contributions, if required, are typically a set amount per $1,000 in coverage based on age. Employees are often given the opportunity to expand their coverage by purchasing additional insurance.
PERQUISITES AND SERVICES.
A host of possible perquisites and services may be offered to employees as benefits, such as pay for time not worked (e.g., vacation, holidays, sick days, personal leave), reimbursement for educational expenses, discount on company products or services, automobile and homeowner insurance, employee savings plans, tax-sheltered annuities, employer-sponsored child day care and sick child care, stock options, and so forth. Executives are frequently offered a variety of perquisites not offered to other employees. The logic is to attract and keep good managers and to motivate them to work hard in the organization's interest.
Two issues that are crucial to the management of employee benefits are flexible benefit plans and cost containment. Many employers now offer flexible benefit plans, also known as cafeteria plans. These plans allow employees to choose among various benefits and levels of coverage. Under a cafeteria plan, employees may choose to receive cash or purchase benefits from among the options provided under the plan. Flexible benefit plans present a number of advantages:
- Such plans enable employees to choose options that best fit their own needs. New workers, for example, may prefer cash; parents may prefer to invest their benefit dollars in employer-sponsored childcare programs; and older workers may decide to increase their pension and health care coverage.
- Deciding among the various options makes employees more aware of the cost of the benefits, giving them a real sense of the value of the benefits their employers provide.
- Flexible benefit plans can lower compensation costs because employers no longer have to pay for unwanted benefits.
- Employers and employees can save on taxes. Many of the premiums may be paid with pretax dollars, thus lowering the amount of taxes to be paid by both the employee and the employer.
Because of these advantages, flexible benefit plans have become quite popular: such plans are now being offered by many U.S. companies. However, some companies are shying away from cafeteria plans because they create such an administrative burden. Moreover, the use of such plans can lead to increased insurance premiums because of adverse selection. Adverse selection means that people at high risk are more inclined than others to choose a particular insurance option. For instance, a dental plan option would be chosen primarily by employees with a history of dental problems. Consequently, insurance rates would increase because the number of low-risk individuals enrolled in the programs would be insufficient to offset the claims of high-risk individuals.
Companies can contain costs in several ways. Because an employer's workers' compensation premiums increase with each payout, firms can prevent unnecessary costs by scrutinizing the validity of each claim. Some employers cut costs by deleting or reducing some of the benefits they offer employees. This approach, however, can negatively affect both recruitment and retention. A more viable approach is to offer benefits that are less costly, but equally desirable. Companies can continue to offer attractive benefits by implementing some of the cost containment strategies discussed next.
Many companies implement utilization review programs in order to cut health care costs by ensuring that each medical treatment is necessary before authorizing payment, and ensuring that the medical services have been rendered appropriately at a reasonable cost. These programs require hospital pre-admission certification, continued stay review, hospital discharge planning, and comprehensive medical case management for catastrophic injuries or illnesses.
Employers also closely examine their firm's health insurance carriers in order to address the following questions:
- Is the program tailored to company needs?
- Are the prices competitive?
- Will there be a good provider/vendor relationship?
- Will payouts be accurate (e.g., will the correct amount be paid to the right person)?
- How good is the customer service?
- Is the insurance carrier financially secure?
Some employers have been able to increase the attractiveness of their benefit programs while holding costs constant, allowing an organization to get more of a "bang for its buck" from these programs.
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Social Security Administration. Available from <<a href="http://www.ssa.gov">http://www.ssa.gov>.
U.S. Chamber of Commerce. Available from <<a href="http://www.uschamber.com">http://www.uschamber.com>.
Employee Benefits (Encyclopedia of Small Business)
Employee benefits encompass a broad range of benefitsther than salaryhat companies provide to their employees. Some of these benefits, such as workers' compensation, social security, and unemployment insurance, are required by law. The majority of benefits offered to employees, however, are bestowed at the discretion of the business owner. Such benefits, which are commonly called "fringe" benefits, range from such major expenditures as paid holidays, health insurance, paid vacations, employee stock ownership plans (ESOPs), and profit sharing to more modest "extras" like bestowing performance awards and prizes, providing an employee lunchroom, or paying for a company picnic.
Employee benefits are an indirect means of compensating workers, but they can be quite important in fostering economic security and stability within the work force. Insurance coverage, for instance, is often terribly expensive, so the company that offers medical and/or life insurance to employees as part of its benefits package is bestowing significant savings on those employees and their families. Companies, however, must be careful when putting together a compensation package for their work forces, and prudence is especially important for the small business owner. As Irving Burstiner remarked in 1989 in The Small Business Handbook, "all the 'extras' that firms have added to the basic compensation of their employees over the years amount to a sizable cost factor today." Noting that financial 'fringe benefits' can often add up to a startling amount of money, Burstiner added that "small firms are cautioned against adopting these fringe benefits too quickly and too freely. Some are almost mandatory if an organization is to compete effectively for personnel against other firms in the industry. Other fringe benefits, while perhaps desirable, should be postponed until the company is in a strong, healthy position."
Employee benefits are any kind of compensation provided in a form other than direct wages and paid for in whole or in part by an employer, even when they are provided by a third party such as the government, which disburses social security benefits that have been paid for by employers. Employee benefits can be most easily divided into two categories: mandatory and optional.
Mandatory Benefits. Mandatory benefits are required by law. They serve to provide economic security for employees (and their dependents) who have ceased working because of retirement, unemployment, disability, poor health, or other factors. Notable mandatory benefits include: Medicaid; basic Medicare; Public Assistance; Social Security retirement; Social Security disability; Supplemental Security income; unemployment insurance; and workers compensation.
Optional Benefits. Optional benefits are those that an employer has the option of providing. These optional, or supplementary, benefits include such major compensation areas as insurance and tax-qualified plans of deferred compensation. Such compensation programs are designed for the exclusive benefit of employees and their beneficiaries and are subject to specific Internal Revenue Service (IRS) regulations. Primary deferred compensation plans include: 1) Pension plansstablished and maintained by employers and paid out to employees over a period of years after retirement; 2) Annuity plansaid out of annuity or insurance contracts; 3) Stock bonus plansrrangement wherein employees are given stock in the company and receive money from appreciation in the value of shares and/or the dividends or income from that stock; 4) Profit-sharing programslan in which business profits earned by the employer are shared with employees; 5) 401(k) Plansption that allows employees to deduct a portion of their pre-tax salary and invest it in a profit-sharing, fixed contribution, or stock bonus plan.
Optional benefits are handled in a variety of ways under the tax code. Some are fully taxable, but others are tax-preferred, tax-exempt, or tax-deferred, meaning that taxes are not incurred on the benefit until it is used. Optional benefits serve many of the same basic functions as mandatory benefits, but also include perquisitesnown as "perks"nly tangentially related to actual business. These perks can range from country club membership to use of a company car.
Fully taxable optional benefits include cash bonuses and awards; non-qualifying stock bonuses; nonqualifying stock ownership and profit-sharing programs; and severance pay. Tax-preferred benefits include life insurance; long-term disability insurance; and sickness and accident insurance.
Tax-deferred benefits include 401(k) retirement plans; deferred profit-sharing plans; employee stock ownership plans (ESOPs); most types of qualified pension plans; stock bonus plans; and thrift savings plans.
Finally, tax-exempt benefits that companies may offer include cafeteria facilities and meals; dental and vision insurance; dependent care; flexible spending accounts; free or discount club memberships; health insurance for employees and retirees; legal assistance; free parking or parking subsidies; supplementary Medicare premiums; tuition reimbursement; and use of company car.
In addition, most companies offer time-oriented compensation packages that encompass paid vacations and holidays; paid sick days; flexible shifts; maternity and paternity leave; bereavement leave; jury duty; overtime; paid lunch; and sabbaticals. These time-oriented benefits, while optional, are among the most popular and widely used of the various non-salary compensation options.
A comprehensive benefits package, while expensive, can be an important and useful asset for a company. Indeed, while salary considerations remain paramount for many workers, an attractive benefits package can be a major factor when a prospective employee is weighing his or her options. A parent with two small children, for example, might well be willing to choose a lower-paying position with a company that offers a superior family health insurance package over a significantly higher paying one that does not provide good health insurance benefits for its employees and their dependents.
One option that some companies have turned to is known as the "cafeteria plan" or "flexible benefit program." Under this type of arrangement, employees are given a certain number of "credits" which they can use to choose, from a menu of possible benefits, the benefits that they most desire for themselves and their families. Each worker thus puts together his or her own individualized package of employee benefits.
INCOME PROTECTION BENEFITS
Indeed, a chief role of employee benefits is to provide various types of income protection to groups of workers. Five principal types of income protection delivered by benefits are: disability income replacement; medical expense reimbursement; retirement income replacement; involuntary unemployment income replacement; and replacement income for survivors. Different mandatory and voluntary elements of each of these categories are typically combined to deliver a benefits package to a group of workers that complements the resources and goals of the organization supplying the benefits.
Disability Benefits. Benefits that provide disability income replacement include programs such as Social Security and worker compensation. The bulk of these benefits are mandatory, although numerous supplementary plans, most of which are tax-favored, exist. Most organizations seek to assemble a disability package that will provide an adequate safety net, yet not act as a disincentive to return to work. A common objective is long-term income reimbursement of 60 percent of pay, which is preceded by higher levels of reimbursement, usually as much as 100 percent during the first six months of disability. Long-term disability pay typically ends at retirement age (when pension payments begin), or when the worker recovers or finds another job.
Another disability-related benefit incentive is sick pay, although companies handle this category in a variety of ways. Some organizations have instituted policies that provide cash awards for unused sick days at the end of the year. Others opt to combine separate leave policies for vacation, illness, and "personal time" into a single policy for paid time off. (Such a policy provides employees with an allotment of days off each year that can be used at the employee's discretion.) Employers may vary the quality of their disability package with different co-payment options, limits on payments for voluntary coverage, and extended coverage for health insurance, life insurance, and medical benefits related to the disability.
Medical Benefits. Medical expense reimbursements are typically one of the most expensive and important elements of a company's compensation package. The two primary types of voluntary medical coverage options are fee-for-service plans and prepaid plans. In addition to voluntary plans, government-backed health care plans, such as Medicare and Medicaid, serve as safety nets to furnish medical coverage to select groups of society and to those least able to afford other types of health insurance.
Under traditional fee-for-service plans, the insurer pays the insured directly for any hospital or physician costs for which the insured is covered. Under a prepaid plan, insurance companies arrange to pay health care providers for any service for which an enrollee has coverage. The insurer effectively agrees to provide the insured with health care services, rather than reimbursement dollars. Typical features of prepaid plans are reduced administrative expenses and a greater emphasis on cost control. The most common type of prepaid plan is the health maintenance organization (HMO).
Most plans cover basic costs related to: hospitalization, including room and board, drugs, and emergency room care; professional care, such as physician visits; and surgery, including any procedures performed by surgeons, radiologists, or other specialists. More comprehensive plans provide higher dollar limits for coverage or cover miscellaneous services not encompassed in some basic plans, such as medical appliances and psychiatric care. The most inclusive plans eliminate deductible and coinsurance requirements and may even cover dental, vision, or hearing care.
Companies have many options that they can pursue in shaping their medical benefits packages. Indeed, a dizzying array of co-insurance, co-payment, and coverage limit options are available today. Some companies pick comprehensive medical benefits packages that handle all health care costs incurred by employees and their dependents, while others select less expensive plans that call for employee co-payment of insurance coverage and/or high deductibles (the deductible is a set amount that an individual must pay before insurance coverage begins). The plan that a company ultimately selects is predicated on any number of factors, from its own financial well-being to the benefits packages offered by its industry competitors.
Retirement Benefit. Companies provide retirement-related employee benefits through three avenues: Social Security, pension plans, and individual savings. The Social Security system is a federal government program paid for by a tax on earnings; this tax is shared equally by both employee and employer. The system, which is administered primarily through the Social Security Administration, provides payments to qualified individuals; it is designed to defray income lost by people as a result of old age, unemployment, or sickness.
Pension plans are primarily financed by employers. Unlike the financially troubled U.S. Social Security system, pension plans, which are created by private employers, are subject to strict government controls designed to ensure their long-term existence. The two major categories of pension funds are defined benefit and defined contribution. Under the former arrangement, workers are assured a specified level of regular payments (given expected Social Security disbursements) upon retirement, and the company is responsible for managing the account. In contrast, defined contribution plans utilize such savings techniques as money purchase plans, stock ownership plans, and profit sharing. Companies make regular contributions to workers' accounts through those different instruments, and may also integrate employee contributions. The beneficiary simply receives the value of the contributions, with interest, at retirement. The latter methodology is preferred by some because of its comparative flexibility and the fact that taxes on earnings are deferred.
The third type of retirement benefit offered by many employers is the supplementary individual savings plan. These plans include various tax-favored savings and investment options. Employers may also provide retirement benefits such as retirement counseling, credit unions, investment counseling, and sponsorship of retiree clubs and organizations.
Unemployment Benefits. Many employers offer some form of protection against termination as a benefit to employees. This is due in part to the fact that termination benefits are required under various circumstances by collective bargaining agreements and state and federal laws. A common unemployment benefit is severance pay. Under this arrangement, a worker whose employment is terminated may be compensated financially with a lump sum or a series of payments. Length of employment is generally an important factor in determining severance pay. It is important to note, however, that an employee who is discharged because of legitimate misconduct is not entitled to receive unemployment benefits. "The unemployment office will note the precise language you used when they determine if an ex-employee is entitled to receive unemployment insurance benefits," noted Mark A. Peterson in The Complete Entrepreneur. "If your employee quit without good cause, he cannot receive any benefits. If you fire him for mis-conduct connected with work, he cannot receive any benefits. If he fails to accept other suitable work that you may have offered him, he cannot receive any benefits." Peterson and other small business consultants thus encourage small business owners to contest unemployment claims that have been unfairly lodged against them, for they can ultimately result in higher premium payments for the business.
Some industries provide supplemental unemployment pay plans. These are employer-funded accounts designed to ensure adequate and regular payments to workers, usually members of labor unions, during periods of inactivity. Other companies, meanwhile, provide placement assistance to workers who have been laid off.
Survivor Benefits. Like disability compensation, benefits for the survivors of deceased employees are comprised primarily of mandatory Social Security and workers compensation benefits. Eligibility for these benefits is determined by such factors as age, marital status, and parental responsibilities. In addition, a plethora of different privately financed benefit packages are available; many of these enjoy favored tax status. Most plans are set up to make payments to a beneficiary designated by the employee. Payment levels are usually contingent on the cause of death. For example, a worker killed while on the job would likely receive much more than an employee who died at home or on vacation. A common survivorship benefit is some form of term life insurance that takes advantage of tax preferences and exemptions. Those plans often allow employees to make financial contributions as well.
EMPLOYEE BENEFITS AND SMALL BUSINESS
The entrepreneur who is launching a new business faces a daunting array of options when the time arrives to design a compensation package for his or her employees. As Michael Armstrong observed in A Handbook of Human Resource Management, benefits "are no longer merely the icing on the cake of cash remuneration, but a considerable part of it." But before making any decisions as to the character and scope of an employee benefits package, the new small business owner needs to gain a familiarity with the various laws and regulations that apply to employee benefits. "There are numerous federal and state laws which regulate the administration of wages and benefits," wrote Jill A. Rossiter in Human Resources: Mastering Your Small Business. "For example, the Federal Fair Labor Standards Act stipulates the minimum wage and regulated overtime pay." In addition to withholding various federal, state, and local taxes from payroll checks, employers also are responsible for adhering to "other laws [that] specifically regulate the administration of retirement programs, withholdings for child care, etc. Finally, there are tax laws regarding what payments are and are not deductible as normal business expenses and what benefits might be taxable to the employees." Given these myriad factors, small business consultants commonly recommend that the owner(s) of a fledgling small business enterprise utilize the services of legal and accounting professionals when putting together their company's benefits packages.
The small business owner should work to put together a fair and equitable package, but he or she should also remain mindful of business realities and the ultimate need to be a profitable enterprise. The intelligent entrepreneur will research typical compensation packages both in the geographic region and in the industry in which they will be operating. Newspapers, associations, libraries, and various municipal and state agencies all can be helpful sources of information in this regard. Successful entrepreneurs also need to gauge their own expenses and business expectations (in terms of profitability, growth, debt, etc.) when pondering the character of the benefits package they will offer. Employee benefits can be a significant business cost, and if your profit margin is slimr if you expect to operate in the red for your first few years of operationhen you need to be cautious. Some fringe benefitsacation days, for examplere practically mandatory in today's business environment. But others, such as health insurance or pensions, can create an unacceptable burden on a new company. In addition, there are also some industries whose membership simply does not offer much in the way of fringe benefits for its workers, either because of narrow profit margins or the laws of supply and demand within the labor market.
In the final analysis, the benefits package that a new or growing company puts together should be predicated on a few very important factors: company size and financial health, regional standards, industry standards, employee benefits offered by competitors, and work force needs.
Briggs, Virginia L., Michael G. Kushner and Michael J. Schinabeck. Employee Benefits Dictionary. The Bureau of National Affairs, Inc., 1992.
Burstiner, Irving. The Small Business Handbook. Prentice Hall, 1989.
"Easier Done than Said." Employee Benefit News. December 1,2000.
Fundamentals of Employee Benefit Programs. Employee Benefit Research Institute, 1990.
Jenks, James M. and Brian L.P. Zevnik. Employee Benefits Plain and Simple. Collier Books, 1993.
Michael, Andy. "Playing a Pivotal Role." Employee Benefits. December 2000.
Peterson, Mark A. The Complete Entrepreneur. Barron's Educational Series, 1996.
Rossiter, Jill A. Mastering Your Small Business Human Resources. Upstart Publishing, 1996.
Simmons, John G. "Flexible Benefits for Small Employers." Journal of Accountancy. March 2001.
SEE ALSO: Employee Reward Systems; Sick Leave and Personal Days
Employee Benefits (Encyclopedia of Business)
Employee benefits are indirect means of compensating workers; employees receive these benefits above and beyond their wages. Unlike wages alone, benefits foster economic security and stability by insuring beneficiaries against uncertain events such as unemployment, illness, and injury. Furthermore, some benefit programs serve to protect the income and welfare of American families. A common distinction between direct forms of employee compensation, such as wages, and indirect compensation, or benefits, is that the former creates an employee's standard of living, whereas the latter protects that standard of living.
The range of employee benefits includes educational, employee incentive, family, government, health, lifestyle, recreational, retirement, savings, and transportation benefits. While some benefitsuch as government sanctioned onesre mandatory, others are supplementary or optional at the discretion of employers. The availability of these supplementary benefitsealth insurance and pension coverage in particulars dependent on a number of factors, but most importantly on the size of a company, according to Benefits Quarterly.
Toward the end of the 20th century, employee benefits evolved from defined-benefit programs to contribution-defined programs where employers relinquished some of the responsibility to employees. With defined-benefit programs, employers determine pensions by using standard formulas based on employees' salaries and years of service to figure the monthly amount employees receive. Contribution-defined programs, on the other hand, use similar formulas based on salaries and years of service, but they vary, depending how much money employees contribute to their retirement funds, such as 401(k) plans.
Due to the high cost of basic benefits such as health insurance and pensions, more employers opted for benefits with lower price tags, such as sports tickets, pet days, concierge services, health club memberships, and massages in the 1990s. For example, the percentage of U.S. workers with pension coverage dropped from 55 percent in 1979 to 51 percent in 1996, according to the Economist.
Rudimentary employee benefit programs were brought over from Europe and implemented in the colonies. In fact, one of the first recorded benefit programs in American history was the Plymouth Colony settlers' military retirement program, which was established in 1636. Subsequent benefit programs of note included: Gallatin Glassworks' profit sharing plan (1797); American Express Co.'s private employer pension plan (1875); Montgomery Ward's group health, life, and accident insurance program (1910); federal tax incentives to employers sponsoring pension plans (1921); and Baylor University Hospital's group hospitalization program (1929).
Despite the implementation of several different types of benefit programs in both the government and private sectors, employee benefits before the 1930s were negligible by current standards. The Great Depression, however, provided an impetus for the formation of more advanced and substantial social mechanisms that could provide economic stability. Of import were the retirement provisions of the Social Security program enacted at the federal level in 1935. Tax-favored status for compensation received by employees during sickness or injury was added in 1939.
After World War II, federal government initiatives caused a variety of benefits to become more popular with private-sector employers. For example, health-insurance premiums were made tax deductible to employers and became nontaxable to employees. As a result, health insurance and other benefits became extremely cost-effective forms of compensation in comparison to wages and salaries. Furthermore, tax-favored benefits became a popular bargaining tool for unions seeking to improve their total pay package. As living standards increased, moreover, people in industrialized nations began to view health insurance and other benefits as necessities, and even entitlements or individual rights.
Largely as a result of government policies, employee benefits in the public and private sectors exploded during the 1950s, 1960s, and 1970s. Government mandates required that employers supply their workers with benefits such as workers' compensation, Social Security, and Medicaid. And new tax laws goaded employers to offer a smorgasbord of optional benefits such as pension plans, life insurance, stock bonuses, dental care, child care, cafeteria plans, and many more. The proliferation of private-sector benefits ebbed during the late 1970s and 1980s, as the postwar U.S. economic expansion slowed and a new corporate cost-consciousness emerged. Nevertheless, by the late 1980s the federal government estimated that employee benefits represented about 36 percent, or $814 billion, of all wage and salary payments in the United States.
TYPES OF BENEFITS
Employee benefits are any kind of compensation provided in a form other than direct wages and paid for in whole or in part by an employer, even those provided by a third party. Third-party benefits include those offered by the government, which disburses Social Security benefits that have been paid for by employers.
Benefits fall into ten principal categories based on their function: educational, employee incentive, family, government, health, lifestyle, recreational, retirement, savings, and transportation benefits (examples provided below). While some benefits are mandatoryhose required by federal or state legislationhe majority are supplementary. With supplementary benefits, employers choose whether or not to offer them. Mandatory benefits provide economic security for employees who lack income as a result of unemployment, old age, disability, poor health, or other factors. Supplementary benefits not only serve as safety nets for employees, but also as incentives to attract employees and to encourage employee loyalty.
Based on the book Employee Benefits: Plain and Simple, the major benefits included in each category are listed below:
- Educational Benefits (Supplementary)
- Training/Continuing Education
- Tuition Reimbursement
- Personal Development
- Employee Incentive Benefits (Supplementary)
- Anniversary Programs
- Direct Deposit
- Food Services
- Profit Sharing
- Discount Program
- Severance Pay
- Family Benefits
- Child Care (Supplementary)
- Family/Maternity Leave (Mandatory)
- Flextime (Supplementary)
- Accident Insurance for Children and Spouse (Supplementary)
- Home Purchasing Assistance (Supplementary)
- Government Benefits (Mandatory)
- Social Security
- Supplemental Security Income
- Unemployment Insurance
- Workers' Compensation
- Health Benefits (Supplementary)
- Medical Coverage
- Dental Coverage
- Vision Coverage
- Physical Examinations
- Sick Days
- Health Club Memberships
- Fitness Center
- Lifestyle Benefits (Supplementary)
- Bereavement Leave
- Dependent Life Insurance
- Life Insurance
- Paid Holidays
- Reimbursement Accounts
- Recreational Benefits (Supplementary)
- Athletic Teams
- Country Club Membership
- Entertainment Bonuses: Theater or Sports Tickets
- Social Functions
- Retirement (Supplementary)
- Individual Retirement Accounts (IRAs)
- Pension Programs
- Retirement Advice
- Salary Deferral
- Savings (Supplementary)
- Credit Union
- Matching Savings
- Stock Options
- Thrift Savings
- U.S. Savings Bond Offers
- Transportation (Supplementary)
- Car Allowance
- Company Car
- Mass Transit Passes
- Moving Expenses
- Relocation Assistance and Subsidies
THE PRIMARY ROLE OF BENEFITS
Benefits are an important means of meeting employees' needs and wants. Employers frequently use optional or supplementary benefits as incentives to promote employee longevity, by attracting and keeping good workers. However, the primary role of employee benefits is to provide various types of income protection to groups of workers lacking income. Such income protection offers individual security and societal economic stability. Five principal types of income protection delivered by benefits are: (1) disability income replacement, (2) medical expense reimbursement, (3) retirement income replacement, (4) involuntary unemployment income replacement, and (5) replacement income for survivors. Different mandatory and voluntary elements of each of these categories are often combined to deliver a benefit package to a group of workers that complements the resources and goals of the organization supplying the benefits.
Benefits that provide disability income replacement include government programs such as Social Security and workers' compensation. The bulk of these benefits are mandatory, although numerous supplementary plans, most of which are tax favored, exist. Most organizations seek to assemble a disability package that will provide adequate safeguards, yet not act as a disincentive to return to work. A common objective is long-term income reimbursement of 60 percent of pay, which is preceded by higher levels of reimbursement, often as much as 100 percent during the first six months of disability. Long-term disability pay typically ends at retirement age (when pension payments begin), or when the worker recovers or finds another job. In addition, supplementary benefits such as disability insurance helps employees weather periods without pay due to disabilities not covered by government programs.
Other disability related incentives may include sick pay, including cash awards for unused sick days at the end of the year. Employers may vary the quality of their disability package with different copayment options, limits on payments for voluntary coverage, and extended coverage for related health insurance, life insurance, and medical benefits related to the disability.
Medical expense reimbursements are one of the most expensive and important of supplementary benefits. The two primary types of voluntary medical coverage options are fee-for-service plans and prepaid plans. In addition to voluntary plans, government-backed health-care plans, such as Medicare and Medicaid, serve as safety nets to furnish medical coverage to select groups of society and to those least able to afford other types of health insurance. In the early 1990s, about 67 percent of all full- and part time employees received medical coverage, according to the U.S. Bureau of Labor Statistics. About half of these employees were covered by employer paid individual insurance policies.
Under traditional fee-for-service plans, the insurer pays the insured directly for any hospital or physician costs for which the insured is covered. Under a prepaid plan, insurance companies arrange to pay health care providers for any service for which an enrollee has coverage. The insurer effectively agrees to provide the insured with health-care services, rather than reimbursement dollars. Prepaid plans offer the advantages of lower costs, which results in reduced administrative expenses and a greater emphasis on cost control. The most common type of prepaid plan is the health maintenance organization.
Most plans cover basic costs related to: hospitalization, including room and board, drugs, and emergency-room care; professional care, such as physician visits; and surgery, including any procedures performed by surgeons, radiologists, or other specialists. More comprehensive plans provide greater coverage, especially of miscellaneous services not encompassed in basic plans, such as medical appliances and psychiatric care. The most inclusive plans eliminate deductible and coinsurance requirements, and may even cover dental, vision, or hearing care.
There are several specific methods that companies can use to vary the level of voluntary benefits provided in their medical benefit packages. For instance, employers may offer a high-deductible coverage plan as a way of lowering the cost of a plan (the deductible is the amount of initial costs covered by the insured before reimbursement begins). Likewise, different levels of coinsurance and copayments are usually available. For example, a beneficiary may be required to cover 10 percent of all costs incurred after the deductible amount up to a total of $100,000 (for a total payment by the insured of $10,000). A more expensive plan may reduce the beneficiary's share of those costs to 5 percent, or even zero. The total limit on insurer payments can also be adjusted: an individual lifetime maximum of $250,000 to $1 million is common.
Auxiliary medical-related employee benefits include wellness programs that teach and encourage exercise, weight control, how to stop smoking, and similar health benefits. Many companies also provide financial incentives for workers who achieve specific health-related goals, such as a certain height-to-weight ratio.
Companies provide retirement-related employee benefits through three avenues: Social Security, pension plans, and individual savings. Social Security mandates that workers and employers jointly fund an account that is managed by the federal government. The combined contribution totals about 15 percent of a worker's total salary. The money is placed in the fund, and most of it is invested in interest-paying securities and bonds backed by the government. The government pays benefits to beneficiaries when they reach retirement age. The amount of expected benefits varies by age, with younger contributors expected to receive at least a meager portion of their and their employer's total contribution. Approximately 50 million people receive Social Security benefits, while 135 million workers pump money into the program through wage deductions.
Pension plans are primarily financed by employers. Unlike the Social Security fund, funds created by private employers are subject to strict government controls designed to ensure their long-term existence. The two major categories of pension funds are defined benefit and defined contribution. Defined-benefit programs represent the traditional approach where workers are assured a determined income level (given expected Social Security disbursements) at retirement. The company finances the worker's account and manages the investments. In contrast, defined-contribution plans utilize investment techniques such as stock and bond purchases with an amount of money defined by the employer. Companies make regular contributions to workers' accounts through those different instruments, and may also integrate employee contributions. The employee simply receives the value of the contributions, with interest, at retirement. The obvious benefits are deferred taxes and flexibility in comparison to defined-benefit programs.
Other pension-related programs include profit-sharing pensions, money purchase pensions, 401(k) pensions, and target-benefit pensions. 401(k) programs receive contributions from both employers and employeesmployers generally match employee contributions. These programs allow the beneficiary to determine how much to save annually and they shelter employee savings from taxes until money is drawn from them. Furthermore, employees have the option of receiving monthly payments or lump sums after retirement with 401(k)s.
The third type of retirement benefit offered by many employers is supplementary individual savings plans. These plans include various tax favored savings such as individual retirement accounts (IRAs) and investment options. Employers may also provide retirement benefits such as retirement counseling, credit unions, investment counseling, and sponsorship of retiree clubs and organizations.
Most employers choose to offer some form of protection against involuntary termination as a benefit to employees. In addition, termination benefits are required under various circumstances by collective bargaining agreements and state and federal laws. The Federal Unemployment Tax Act, for example, regulates taxes collected and sets minimum limits on unemployment benefits for all 50 states. The law, however, allows states to determine their own specific policies within the guidelines of the act. Unemployed people may receive roughly 35 percent of their weekly wages for a minimum of 26 weeks.
A common unemployment benefit provided by employers is severance pay, which may take the form of a lump sum or continuing payments. In addition, some industries provide supplemental unemployment pay plans. These are employer-funded accounts designed to ensure adequate and regular payments to workers, usually members of labor unions, during periods of inactivity.
Because of the increase in employee layoffs caused by corporate restructuring during the 1980s and 1990s, many companies have initiated benefit plans that help their terminated workers find new jobs. These programs help workers to develop new skills, learn job-seeking techniques, relocate to new regions, and pay for professional outplacement assistance. At the executive level, some workers receive "golden parachutes," or similar severance packages. These benefits ensure that if the executive is terminated as a result of a hostile takeover or some other unforeseen event, he or she will receive a preset sum or allowance.
Like disability compensation, benefits for the survivors of deceased employees are comprised primarily of mandatory Social Security and workers' compensation benefits. Eligibility for such mandatory benefits is determined by factors such as age, marital status, and parental responsibilities. In addition, however, a plethora of different privately financed benefits are available for employer, most of which have a tax favored status. Most plans are set up to make payments to a beneficiary designated by the employee. Payment levels are usually contingent on the cause of death. For example, survivors of a worker killed while on the job would likely receive much more than survivors of an employee who died at home or on vacation. A common survivorship benefit is some form of term life insurance that takes advantage of tax preferences and exemptions. Those plans often allow employees to contribute, thus significantly raising the expected payoff at death.
SEE ALSO: Employee Stock Options and Ownership; Family Leave
updated by Karl Heil]
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Foster, Ronald M., Jr. The Manager's Guide to Employee Benefits. New York: Facts on File, 1986.
Fundamentals of Employee Benefit Programs. 5th ed. Washington: Employee Benefit Research Institute, 1996.
Gomez-Mejia, Luis R., ed. Compensation and Benefits. Washington: Bureau of National Affairs, 1989.
Jenks, James M., and Brian L. P. Zevnik. Employee Benefits: Plain and Simple. New York: Collier Books, 1993.
Lichtenstein, Jules H. "Factors Affecting Pension and Health Benefits Availability in Small and Large Businesses." Benefits Quarterly 14, no. I (winter 1998): 55 + .
"Unto Those that Have Shall Be Given." Economist, 21 December 1996,91.
Williams, Stephen J., and Sandra J. Guerra. Health Care Services in the 1990s. New York: Praeger Publishers, 1991.