McGraw-Hill/Irwin Copyright © 2014 by the McGraw-Hill Companies, Inc. All rights reserved.

Need to Know
1. Importance of benefits as a part of employee compensation.
2. Types of employee benefits required by law.
3. Most common forms of paid leave.
4. Kinds of insurance benefits offered by employers.
5. Retirement plans offered by employers.
6. How organizations use other benefits to match employees’ wants and
needs.
7. How to choose an employee benefits package’s contents.
8. Regulations affecting how employers design and administer benefits
programs.
9. Importance of effectively communicating the nature and value of
benefits to employees.

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Role of Employee Benefits

• Benefits contribute to attracting, retaining, and

motivating employees.
• Variety of possible benefits helps employers tailor
their compensation to kinds of employees they need.
• Employees have come to expect that benefits will
help them maintain economic security.
• Benefits impose significant costs.

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Figure 13.1: Benefits as a Percentage
of Total Compensation

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Role of Employee Benefits

• Benefits packages are more complex than pay

structures, making them harder for employees to
understand and appreciate.
• The important role of benefits is one reason that
benefits are subject to government regulation.
 Legally required benefits.
 Tax laws can make benefits favorable.

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Table 13.1: Benefits Required by Law

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Benefits Required by Law:
Social Security
Federal Old Age, Survivors, Disability and Health
Insurance (OASDHI) program (Social
Security)combines:
 Old age (retirement) insurance
 Survivor’s insurance
 Disability insurance
 Hospital insurance (Medicare Part A)
 Supplementary medical insurance (Medicare Part B)

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Benefits Required by Law:
Social Security
• Employers and employees share Social Security
cost through a payroll tax. The percentage is set by
law.
• In 2012, employers paid a tax of 6.2% and
employees paid 4.2 % on the first $110,100 of the
employee’s earnings. Of that, majority goes to
OASDI, and 2.9 % of earnings goes to Medicare
(Part A).
• For earnings above $110,100, only the 2.9 % for
Medicare is assessed, with half paid by employer
and half paid by employee.
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Benefits Required by Law:
Unemployment Insurance
• Federally mandated program administered by
states to minimize unemployment hardships:
 Payments to unemployed workers.
 Help in finding new jobs.
 Incentives to stabilize employment.
• Most funding comes from federal and state taxes on
employers.

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Benefits Required by Law:
Unemployment Insurance
Size of unemployment tax imposed on each employer
depends on the employer’s experience rating:
 Number of employees a company has laid off in the past and cost
of providing them with unemployment benefits.
 Careful HR planning can minimize layoffs and keep their
experience rating favorable.

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Benefits Required by Law:
Unemployment Insurance
 To receive benefits, workers must meet four
conditions:
1. They meet requirements demonstrating they had been
employed.
2. They are available for work.
3. They are actively seeking work.
4. They were not discharged for cause, did not quit voluntarily,
and are not out of work because of a labor dispute.

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

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Benefits Required by Law:
Workers’ Compensation
Four major categories of benefits:
1. Disability income
2. Medical care
3. Death benefits
4. Rehabilitative benefits
About 9 out of 10 U.S. workers are covered by state
workers’ compensation laws; amount of benefits
income varies among states.
Generally it is two-thirds of the worker’s earnings
before the disability.
Benefits are tax free.

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Benefits Required by Law:
Workers’ Compensation
Cost of workers‘ compensation insurance depend on:
 Kinds of occupations involved
 State where company is located
 Employer’s experience rating

Unfavorable experience ratings lead to higher

insurance premiums.

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Benefits Required by Law:
Unpaid Family and Medical Leave
Family and Medical Leave Act (FMLA) of 1993
Requires organizations with 50 or more employees to
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

Employers must guarantee these employees same or

comparable job when they return to work.

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Benefits Required by Law:
Unpaid Family and Medical Leave
• When employees experience pregnancy and
childbirth, employers must also comply with the
Pregnancy Discrimination Act.
• If an employee is temporarily unable to perform her
job due to pregnancy, the employer must treat her in
the same way as any other disabled employee. -
e.g., modified tasks, alternative assignments,
disability leave, or leave without pay

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Test Your Knowledge

XYZ company has determined that they will have to

reduce their benefits costs to stay competitive.
Which of the following solutions is not a choice for
XYZ?
a) Eliminate health coverage
b) Reduce the percentage of employees’ Social Security
insurance they pay.
c) Reduce their unemployment insurance costs by
managing their workforce to avoid layoffs.
d) Institute a safety program to minimize worker’s
compensation costs.
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Optional Benefits Programs

Group Retirement
Paid Leave
Insurance Plans

“Family- Other Quality

Friendly” of Work-Life
Benefits Benefits

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Optional Benefits Programs:
Group Insurance

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Optional Benefits Programs:
Paid Time Off
•Vacation Paid Time Off (PTO)
•

•Holidays Bank
– Most flexible approach
•Sick Leave
– Employer pools pools
•Personal Days personal days, sick days,
•Floating Holidays
and vacation days for
employees to use as
•Jury Duty need arises
•Funerals

•Military Duty

•Time Off to Vote

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 Optional Benefits Programs:
Domestic Partners
 Today, many employers also cover domestic
partners.
• Adult nonrelatives who lives with the employee
in a relationship defined as permanent and
financially interdependent.

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Figure 13.2: Percentage of Full-Time Workers
with Access to Selected Benefit Programs

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Medical Insurance

•70% of all full-time •Additional coverage may

employees in U.S. receive include:
medical benefits – Dental care
•Policies typically cover:
– Vision care
– Hospital expenses – Birthing centers
– Surgical expenses – Prescription drug
programs
– Visits to physicians
•Mental Health Parity Act
(1996)

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Medical Insurance

Consolidated Omnibus Budget Reconciliation Act

(COBRA) of 1985
 Federal law that requires employers to permit
employees or their dependents to extend their health
insurance coverage at group rates for up to 36 months
following a qualifying event:
 Layoff
 Reductionin hours
 Employee’s death

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Medical Insurance

 Six employer approaches to controlling health care

benefits costs:
1. Managed Care
2. Health Maintenance Organizations (HMO)
3. Preferred Provider Organizations (PPO)
4. Flexible Spending Accounts
5. Consumer-Driven Health Plans (CDHP)
6. Employee Wellness Programs (EWP)

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Figure 13.3: Health Care Costs in
Various Countries

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Life Insurance
Employers may provide life insurance to employees
or offer the opportunity to buy coverage at low group
rates.
Term life insurance – if the employee dies during the
term of the policy, the employee’s beneficiaries
receive a death benefit payment.
 Usually twicethe employee’s yearly pay.
 Additional benefits may include accidental death and
dismemberment.

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Disability Insurance
Short-Term Disability Insurance
Insurance that pays a
percentage of a disabled
employee’s salary as
benefits to employee for
six months or less.
Long-Term Disability Insurance
Insurance that pays a
percentage of a disabled
employee’s salary after
an initial period and
potentially for rest of
employee’s life.
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Optional Benefits Programs:
Retirement Plans
About half of employees working in private business
sector have employer-sponsored retirement plans.
• Contributory plan - retirement plan funded by contributions
from employer and employee.
• Noncontributory plan - retirement plan funded entirely by
employer contributions.

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Figure 13.4: Sources of Income for
Persons 65 and Older

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Optional Benefits Programs:
Retirement Plans
Defined benefit plan – pension plan that guarantees a
specified level of retirement income. Employer sets up
a pension fund to invest contributions. Such plans
must meet funding requirements of Employee
Retirement Income Security Act (ERISA) of 1974.
 Employer must contribute enough for the plan to cover all
benefits to be paid out to retirees.

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Optional Benefits Programs:
Retirement Plans
•Employee Retirement
Income Security Act
(ERISA): federal law that
increased responsibility of
pension plan trustees to
protect retirees,
• established certain rights
related to vesting and
portability, and created the
Pension Benefit Guarantee
Corporation.
•Pension Benefit
Guarantee Corporation
(PBGC): federal agency
that insures retirement
benefits and guarantees
retirees a basic benefit if
employer experiences
financial difficulties.
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Optional Benefits Programs:
Retirement Plans
Defined contribution plan – retirement plan in which
the employer sets up an individual account for each
employee and specifies the size of the investment
into that account.
 Money purchase plans
 Profit-sharing and employee stock ownership plans
 Section 401(k) plans

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Figure 13.5: Value of Retirement
Savings Invested at Different Ages

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Test Your Knowledge

Jakar does not know a lot about investing and wants

to ensure he has some retirement income when he is
old enough to retire. Agnes plans 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 contribution; defined benefit
b) Contributory; defined benefit
c) Defined benefit; defined contribution
d) Defined contribution; non-contributory

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Optional Benefits Programs:
Retirement Plans
Cash balance plan – retirement plan in which the
employer sets up an individual account for each
employee and contributes a percentage of the
employee’s salary.
 Account earns interest at a predefined rate.
 Arrangement helps employers plan their contributions and
helps employees predict their retirement benefits.
 If employees change jobs, they can roll over balance into
an individual retirement account (IRA).

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Optional Benefits Programs:
Retirement Plans
Vesting Rights Summary Plan Description

•Guarantee that when Report that describes a

employees become pension plan’s funding,
participants in a pension eligibility requirements,
plan and work a risks, and other details.
specified number of
years, they will receive a •Employers also provide an
individual benefit statement
pension at retirement age,
which describes employee’s
regardless of whether vested and unvested benefits.
they remained with the
employer.
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Optional Benefits Programs:
“Family-Friendly” Benefits

Family Leave

Child Care Benefits

College Savings Plans

Elder Care

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Optional Benefits Programs:
Other Quality of Work-Life Benefits
•Subsidized cafeterias •Tuition reimbursement
•On-site health care •On-site fitness center

services •On-site dry cleaning

•Moving and relocation services

expenses •Dues for professional
•Employee discounts on organizations
products •Off-site company

•Employee buying service recreation area

•Pet services

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Selecting Employee Benefits

Decisions about which benefits to offer should take

into account:
 Organization’s goals, objectives and budget
 Expectations of the organization’s current employees and
potential future recruits.
An organization that does not offer expected benefits
will have difficulty attracting and keeping employees.

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Table 13.2: An Organization’s Benefits
Objectives

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Employees’ Expectations and Values

• Employees expect to receive benefits that are

legally required and widely available.
• They value benefits they are likely to use.
• The value employees place on various benefits is
likely to differ from one employee to another.

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Employee Expectations and Values

Organizations can •Cafeteria-style plan: a

address differences in benefits plan that offers
employees’ needs and employees a set of
empower their alternatives from which
employees by offering they can choose the types
flexible benefits plans in and amounts of benefits
place of a single benefits they want.
package for all employees.

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Seven Ways Employers Can Control
Cost of Health Benefits
1. Shop for bargains.
2. Know what employees care about. Would they be
willing to accept a higher deductible if it means the
company can also afford prescription drug
coverage?
3. If employees are willing to take responsibility for
their own health care spending, offer a health-
savings account or consumer-driven plan.

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Seven Ways Employers Can Control
Cost of Health Benefits
4. Review your claims history to identify correctable
problems.
5. Encourage healthy behavior with incentives like
discounts for health club memberships, free health
screenings, and lower premiums for employees who
participate in a wellness program.
6. Promote a workplace culture that values healthy
habits.
7. Measure results of initiatives.

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Legal Requirements for Employee
Benefits

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Communicating Benefits to Employees

• Organizations must communicate benefits

information to employees so that they will
appreciate the value of their benefits.
• This is essential so that benefits can achieve their
objective of attracting, motivating, and retaining
employees.
• Employees are interested in their benefits, and they
need a great deal of detailed information to take
advantage of benefits.

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Summary
• Like pay, benefits help employers attract, retain,
and motivate employees.
• Employees expect at least a minimum level of
benefits, and providing more than minimum helps an
organization compete in the labor market.
• Benefits are also a significant expense, but
employers provide benefits because employees
value them and many benefits are required by law.

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Summary

• Employers must contribute to Social Security

through a payroll tax shared by employers and
employees.
• Employers must also pay federal and state taxes
for unemployment insurance.
• State laws require that employers purchase
workers’ compensation insurance.
• Major categories of paid leave are vacations,
holidays, and sick leave.

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Summary

• Medical insurance is one of the most valued

employee benefits.
• To manage costs of health insurance, many
organizations offer coverage through a health
maintenance organization or preferred provider
organization, or they may offer flexible spending
accounts.
• Retirement plans may be contributory or
noncontributory and defined benefit plans or
defined contribution plans.
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Summary

• Employers have responded to work-family role

conflicts by offering family-friendly benefits.
• In deciding contents of a benefits package,
organizations need to establish objectives and
select benefits that support those objectives.
• Organizations should also consider employees’
expectations and values.
• Employers must comply with numerous laws and
regulations affecting how they design and
administer benefits programs.
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