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1. Chapter 11 Employee Benefits

2. Learning Outcomes After studying this chapter, you should be able to Detect cost-effective strategies companies use to develop benefits plans. Identify and explain the employee benefits required by law. Describe the types of work-life benefits that employers may provide. Describe the different types of retirement programs and pension plans and the regulations related to them.

3. Discussion Starter #1 Walk while you work? To combat obesity and other health problems, GlaxoSmithKline, Humana, Mutual of Omaha, and Best Buy have begun utilizing treadmill desks like the one shown here. The treadmills move at a slow speed so employees do not get hot and sweaty and out of breath. What are some of the pros and cons of using treadmill desks at work?

4. Figure 11.1: Where a Dollar of Employee Compensation Goes in the United States

5. 11.1 Elements of a Successful Benefits Program Some benefits are legally required, whereas others are voluntarily granted by employers. Benefits are expensive. Many forces must be kept in balance for a benefits program to succeed. A firm’s managers must consider how to fund its benefits program and sustain it, as well as the tax consequences related to it. The needs of a company’s employees also must be considered because they can differ significantly from firm to firm. Whether a firm’s industry is unionized and the benefits offered by competitors will affect the types of benefits the firm is likely to have to offer. The benefits need to be compatible with the organization’s strategic compensation plan, including its total reward strategy.

6. 11.1a Selecting Benefits (slide 1 of 2) Before a new benefit is introduced, its need should first be determined through consultation with employees. Designing benefits programs with employee participation means employees are more satisfied with the final benefits plan and, ultimately, more likely to be satisfied with their jobs. Flexible Benefits To make it easier to accommodate the individual needs of different employees, a wide range of organizations have begun offering flexible benefits plans, also known as cafeteria plans. Flexible benefits plans (cafeteria plans) – Benefit plans that enable individual employees to choose the benefits that are best suited to their particular needs

7. 11.1a Selecting Benefits (slide 2 of 2) Flexible Benefits (cont’d) Compensation specialists often see flexible benefits plans as ideal. Employees select the benefits of greatest value to them, while employers manage benefits costs by limiting the dollars employees have to spend. Typically, employees are offered a basic or core benefits package of life and health insurance, sick leave, and vacation. Requiring a core set of benefits ensures that employees have a minimum level of coverage to protect against unforeseen financial hardships. Employees are then given a certain amount of funds to purchase whatever other benefits they need through the plan. Other benefit options might include prepaid legal services, financial planning, dental insurance, and long-term care insurance.

8. 11.1b Administering Benefits With the wide variety of benefits offered to employees today, administering an organization’s benefits program can be both costly and time-consuming. Online employee benefit systems have become mainstream for both large and small employers. Employees are provided with passwords that allow them to get information about their benefits plans, enroll in their plans of choice, change their coverage, or simply inquire about the status of their various benefit accounts without contacting an HR representative. Online benefits systems are often referred to as employee self-service (ESS) systems and can result in significant cost savings in benefits administration, improved accuracy of decisions, decreased processing time, and greater employee satisfaction.

9. 11.1c Communicating Employee Benefits (slide 1 of 7) Communicating employee benefits information improved significantly with the passage of the Employee Retirement Income Security Act (ERISA) in 1974. The act requires that employees be informed about their pension and certain other benefits in a manner calculated to be understood by the average employee. Additionally, employees can sue their employers for misleading them about health and welfare benefits under ERISA. When communicating employee benefits, the best advice is to use multiple media techniques.

10. 11.1c Communicating Employee Benefits (slide 2 of 7) Some general pointers for designing benefits information regardless of the medium include the following: Avoid complex language when describing benefits. Explain the purpose behind a benefit and the value it offers employees. Use graphics whenever possible to make the information understandable at a glance. Provide numerous examples to illustrate how a benefit choice might affect different types of employees, depending upon their personal circumstances. Cost Containment Strategies Many firms have either begun requiring employees to pay part of the cost of their benefits or, if they were already doing so, increasing the amounts they pay in the form of premiums, copays, and deductibles.

11. 11.1c Communicating Employee Benefits (slide 3 of 7) Containing Medical Benefits Costs High-deductible health insurance plans (HDHPs) – A medical insurance plan characterized by high deductibles but lower premiums for workers and a health spending account to which employers contribute funds employees can keep should they leave the organization An advantage of a health spending account (HSA) is that the funds remaining in the account at the end of the year belong to the employee, even if he or she leaves the company. The downside is that with an HDHP, when employees receive treatment, they have to pay either a percentage of their care or all of it until they meet a high threshold called a deductible.

12. Video Highlight #1 This video provides an explanation of what HSAs are and looks at the benefits that HSAs offer. “7 Key Benefits to a Health Savings Account ”

13. 11.1c Communicating Employee Benefits (slide 4 of 7) Containing Medical Benefits Costs (cont’d) Health maintenance organizations (HMOs) – Organizations of physicians and health care professionals that provide a wide range of services to subscribers and dependents on a prepaid basis Employees pay a small fixed fee called a copay, often $25 or $30, whenever they get medical treatment. Employers pay a fixed annual fee to the HMO to cover the majority of their employees’ medical costs. Employees who sign up for the plan must choose a general-practice physician, called a primary-care physician, from the HMO’s list of doctors. To see a specialist, employees need a referral from their primary-care physicians and must pay a higher copay.

14. 11.1c Communicating Employee Benefits (slide 5 of 7) Containing Medical Benefits Costs (cont’d) Preferred provider organization (PPO) – A network of physicians who establish an organization that guarantees lower health care costs to employers and their employees Unlike HMOs, PPOs allow employees to select their doctor of choice from a wider list of physicians. Employees do not need a referral to see a specialist. Employers sometimes couple PPOs and HMOs with different types of tax-advantaged accounts employees can use to pay their out-of-pocket health care expenses such as their copays, the cost of prescriptions drugs, and so forth. Health reimbursement accounts (HRAs) Flexible spending accounts (FSAs)

15. Figure 11.2: The Cost of Medical Procedures Abroad as a Percentage of U.S. Costs

16. 11.1c Communicating Employee Benefits (slide 6 of 7) Value-Based Health Initiatives Companies pursuing value-based health initiatives look at the medical care their employees most use and need—such as treatment for asthma, high blood pressure, or diabetes—and target benefits and health programs toward them. Wellness Programs Wellness programs – Employer-sponsored programs designed to encourage employees to maintain and improve their health and well-being by getting regular checkups, eating properly, exercising, and managing their stress levels so as to prevent costly and protracted illnesses.

17. 11.1c Communicating Employee Benefits (slide 7 of 7) Disease Management Programs Disease management programs – Programs that provide patients and their caregivers with information on monitoring and treating medical conditions, while coordinating communication between them, their health care providers, employers, and insurers Employee Assistance Programs Employee assistance programs (EAPs) – Services provided by employers to help workers cope with a wide variety of problems that interfere with the way they perform their jobs. An EAP typically provides diagnosis, counseling, and referral for advice or treatment when necessary for problems related to alcohol or drug abuse, emotional difficulties, and financial or family difficulties.

18. 11.2 Employee Benefits Required by Law Legally required employee benefits include: Employer contributions to social security Unemployment insurance Workers’ compensation insurance

19. 11.2a Social Security Insurance (slide 1 of 3) The Social Security Act was designed to protect workers against the loss of earnings resulting from old age and unemployment and was later amended to include disability. Together the programs have become referred to Old Age, Survivors, and Disability Insurance (OASDI). The Social Security program is supported by means of a tax levied against an employee’s earnings that must be matched by the employer in each pay period. The tax revenues are used to pay three major types of benefits: Retirement benefits Disability benefits Survivors’ benefits

20. 11.2a Social Security Insurance (slide 2 of 3) Retirement Benefits To qualify for retirement benefits, a person must have reached retirement age and be fully insured (earned 40 credits). An individual’s full retirement age depends on the year of his or her birth. Workers born after 1928 can collect full benefits once they’ve earned 40 credits, about 10 years of work. For those born after 1928, the age to collect full benefits has been gradually raised to age 67. The amount of monthly social security retirement benefits is based on earnings, adjusted for inflation, over the years an individual is covered by social security.

21. 11.2a Social Security Insurance (slide 3 of 3) Disability Benefits under Social Security Social security pays benefits to (1) people who cannot work because they have a medical condition that is expected to last a year or result in death and (2) certain members of an employee’s family who may qualify for benefits based on the person’s work history. Survivors’ Benefits Survivors’ benefits represent a form of life insurance paid to members of a deceased person’s family who meet the eligibility requirements. The amount of benefit survivors receive is based on the worker’s lifetime earnings doing work covered by social security. Medicare Retired people age 65 or older are eligible for Medicare, which includes both medical and hospital insurance and prescription drug coverage.

22. 11.2 Unemployment Insurance Unemployment insurance protects workers who lose their jobs through no fault of their own. Employers entirely foot the bill for this benefit via a payroll tax, which can vary widely by the state. Employees who are laid off are generally eligible for up to 26 weeks of unemployment insurance benefits during their unemployment. Workers eligible for unemployment benefits must submit an application for unemployment compensation with their state employment agencies, register for available work, and be willing to accept any suitable employment that may be offered to them. The amount of compensation workers are eligible to receive is determined by a worker’s previous wage rate and length of employment.

23. 11.2c Workers’ Compensation Insurance Workers’ compensation insurance – State-mandated insurance provided to workers to defray the loss of income and cost of treatment due to work-related injuries or illness Workers’ compensation law is governed by statutes in every state, which has different regulations governing the amount and duration of lost income benefits, including provisions for medical and rehabilitation services and how the state system is administered. Workers’ compensation laws also provide death benefits to surviving spouses and dependents. Workers’ compensation insurance covers workers injured on the job, whether injured on the workplace premises, elsewhere, or in an auto accident while on business, regardless of whether the employee is at fault. Workers that collect compensation cannot sue their employers for their injuries unless gross negligence by the employer led to the injury or the employer lacked the level of insurance required by law. Workers’ compensation also covers certain work-related illnesses.

24. 11.2d COBRA Insurance The Consolidated Omnibus Budget Reconciliation Act (COBRA) mandates that employers make health care coverage—at the same rate the employer would pay—available to employees, their spouses, and their dependents on termination of employment, death, or divorce.

25. 11.2e Benefits Provided by the Patient Protection and Affordable Care Act The key provisions of the Patient Protection and Affordable Care Act (PPACA) all employers need to consider include the following: Firms that employ 50 or more people who work 30 or more hours per week but do not offer them health insurance will have to pay a penalty to the government. Firms with 200 full-time employees are required to automatically enroll new full-time employees in their health care plans. Employers must offer coverage for their employee’s children until they turn 26. No copays or deductibles can be charged to employees and their dependents for certain “essential” health care services, which are generally preventive care related. Lifetime dollar limits on key health care benefits are not allowed. Employees cannot lose insurance coverage solely because of an honest mistake they or their employers made on their insurance applications.

26. Group Activity Step 1: Before participating in this activity, visit the following website : Obamacare Facts Step 2: Divide into two groups and conduct a debate on the following topics: What are some of the advantages of this health care plan? What are some of the disadvantages of this health care plan? In your opinion, do you feel that Obamacare has worked? Provide examples to substantiate your claims. Cite sources in cases where statistics are involved.

27. 11.2f Benefits Provided under the Family and Medical Leave Act The Family and Medical Leave Act (FMLA) applies to employers having 50 or more employees during 20 or more calendar workweeks in the current or preceding year. A covered employer must grant an eligible employee up to a total of 12 workweeks of unpaid leave in a 12-month period for one or more of the following reasons: Birth of and care for a newborn child Adoption or foster care placement of a child Care for an immediate family member with a serious medical condition Serious health condition of the employee Under the FMLA, employees are eligible to take leave if they: Have worked for their employers for at least 12 months Have at least 1,250 hours of service Work in firms that have 50 or more employees within a 75-mile radius

28. Video Highlight #2 It has been estimated that as many as 40 percent of the U.S. workforce is not eligible for the Family and Medical Leave Act (FMLA) because of its restrictions. A new bill, the Family and Medical Insurance Leave (FAMILY) Act, has been proposed by Senator Kirsten Gillibrand that would guarantee workers receive at least two-thirds pay for up to 12 weeks when they take time off for their own health conditions—including pregnancy and childbirth—or to care for others. In this video, Gillibrand talks about the benefits of the bill to both employers and employees. “Kirsten Gillibrand Is Giving Her Paid Family Leave Proposal Its First Trump-Era Test ”

29. Discussion Starter #2 Employers are required by law to provide specific benefits to employees. Which laws mandate benefits to employees, and what are the provisions of those laws?

30. 11.3 Work-Life Discretionary Benefits Many organizations are seeking to create a work-life organizational climate that allows employees to balance their work with their personal needs. Research shows that 60 percent of employees prefer to have work-life balance benefits, and that employees are 20 percent more engaged in and satisfied with their job when they’ve hit the right work-life balance.

31. 11.3a Child and Elder Care Elder care – Care provided to an elderly relative by an employee who remains actively at work Beyond the loss of organizational productivity and higher employee costs, a growing concern of employers is the negative effects of caregiving on employee health. To help employees meet the challenges of caregiving, organizations may offer elder care counseling, educational fairs and seminars, printed resource materials, support groups, and special flexible schedules and leaves of absence. Backup care program – A benefit program whereby an employer supplies or subsidizes temporary care for its employee’s elders or children when their regular arrangements fall through

32. 11.3b Payment for Time Not Worked (slide 1 of 3) The “payment for time not worked” category of benefits includes: Paid vacations Bonuses given in lieu of paid vacations Payments for holidays not worked Paid sick leave Military and jury duty Payments for absence due to a death in the family or other personal reasons The United States is the only country in which paid time off is not mandatory.

33. 11.3b Payment for Time Not Worked (slide 2 of 3) Vacations with Pay Employees in the United States who work for large companies often get 10 paid days of vacation a year. Most companies require their employees to take their vacation days by the end of the year or forfeit them. Paid Holidays The federal government recognizes 10 legal holidays. Private employers are not required to offer employees these days off or pay employees for them. Sick Leave Most public employees, as well as many in private firms, receive a set number of sick leave days each year to cover periods when workers are unable to work because of illness or injury.

34. Figure 11.3: Federally Recognized Holidays in the United States

35. 11.3b Payment for Time Not Worked (slide 3 of 3) Sabbaticals Sabbatical – Paid (or unpaid) time away from a job for 4 or more weeks employees take off to renew themselves before returning to work Severance Pay Severance pay – A one-time payment sometimes given to an employee who is being involuntarily terminated Employers who are downsizing often use severance pay as a means of lessening the negative effects of unexpected termination of employees. Supplemental Unemployment Benefits Supplemental unemployment benefits – A plan that enables an employee who is laid off to draw weekly benefits from the employer, which draws from a fund created for this purpose, in addition to state unemployment compensation

36. 11.3c Life Insurance Group term life insurance provides death benefits to beneficiaries and may also provide accidental death and dismemberment benefits. The premium costs are normally paid by the employer, with the face value of the life insurance equal to two times the employee’s yearly wages. These programs frequently allow employees to purchase additional amounts of insurance for nominal charges. In addition, many companies allow employees to purchase life insurance for their spouses and dependents via their company plans. This is an attractive benefit because the rates employees pay for the insurance are often lower when purchased through their company plans.

37. 11.3d Long-Term Care Insurance Long-term care insurance is designed to pay for nursing home and other medical-related costs during old age.

38. Figure 11.4: Other Benefits Organizations Offer Employees

39. 11.3f Pension Plans (slide 1 of 3) Types of Pension Plans There are two major ways to categorize pension plans: According to contributions made by the employer Contributory plan – A pension plan in which contributions are made jointly by employees and employers Noncontributory plan – A pension plan in which contributions are made solely by the employer According to the amount of pension benefits to be paid Defined benefit plan – A pension plan in which the amount an employee is to receive on retirement is specifically set forth Defined contribution plan – A pension plan that establishes the basis on which an employer will contribute to the pension fund

40. 11.3f Pension Plans (slide 2 of 3) Types of Pension Plans (cont’d) Defined benefit plan: The amount employees collect is usually based on their years of service, average earnings during a specific period of time, and age at time of retirement. Defined contributions plan: The employer’s contributions may be made through profit sharing, thrift plans, matches of employee contributions, employer-sponsored individual retirement accounts (IRAs), and various other means. The amount of benefits employees receive on retirement is determined by the funds accumulated in their accounts and how well the investments purchased with the funds have grown over time.

41. 11.3f Pension Plans (slide 3 of 3) 401(k) Savings Plans A 401(k) is a type of defined contribution plan that allows employees to save through payroll deductions that reduce their taxable income and have their contributions matched by the employer. The return depends entirely on how much money goes into the plan, the rate of return on the investments purchased with the funds contributed, and, with stock-funded plans, the price of the company’s stock. Cash Balance Pension Plans The employer makes a yearly contribution into an employee’s retirement savings account, based on a percentage of the employee’s pay. Federal Regulations of Pension Plans Vesting – A guarantee of accrued pension benefits to participants at retirement age, regardless of their employment status at that time.

42. Discussion Starter #3 Describe 401(k) pension plans, listing their advantages and disadvantages.

43. 11.3g Domestic Partner Benefits More employers are granting benefits to employees who establish domestic partnerships, which can consist of same-sex and unmarried opposite-sex couples.