Human Resource Management: Gaining a Competitive Advantage Chapter 13 Employee Benefits McGraw-Hill/Irwin Copyright © 2010 by the McGraw-Hill Companies, Inc All rights reserved Learning Objectives  Discuss growth and its reasons in benefits costs  Explain provisions of employee benefits programs  Compare U.S and other countries’ employee benefits  Describe effects of benefits management on cost and work-force quality  Explain importance of effectively communicating nature and value of benefits to employees  Describe regulatory constraints that affect the way employee benefits are designed and administered 13-2 Introduction Average cost of benefits is about 37% for every payroll dollar  about 27% of total compensation package Benefits are unique because:  more regulation of benefits than direct pay  almost obligatory for employers to provide  complex for employees to understand 13-3 Reasons for Benefits Growth Laws mandating benefits passed during and after Great Depression Wage and price controls instituted during WWII and labor shortages Tax treatment of benefits programs  Marginal tax rate is % of an additional dollar of earnings that goes to taxes Large groupV individual insurance Organized labor Employer differentiation 13-4 Benefit Programs Social Insurance Family-Friendly Policies Pay For Time Not Worked Private Group Insurance Retirement 13-5 Social Security  Social Security provides old-age insurance, unemployment insurance, survivors' insurance, disability insurance, hospital insurance and supplementary medical insurance  Social Security retirement benefits are free from federal tax and free from state tax in some states  Full benefits begin at age 65 or a reduced benefit at 62  Both employers and employees are assessed payroll tax  Eligibility age for benefits and tax penalty for earnings influence retirement decisions 13-6 Unemployment Insurance  Objectives of Unemployment Insurance:   offset lost income during involuntary unemployment help unemployed workers find new jobs provide an incentive for employers to stabilize employment preserve investments in worker skills by providing workers with income during short-term layoffs No state imposes the same tax on every employer Unemployed workers are eligible for benefits if they have a prior attachment to the workforce are available for work are actively seeking work were not discharged for cause, did not quit voluntarily and are not out of work because of a labor dispute 13-7 Workers’ Compensation Workers' compensation laws cover job-related injuries and death  System is based on no-fault liability  Covers 90 %of U.S workers  Categories of Benefits: disability income medical care death benefits rehabilitative services 13-8 Private Group Insurance  Offered at employer’s discretion; plans not legally required  major types: medical insurance and disability insurance  Medical insurance -most important benefit; most full-time employees get such benefits  Disability insurance includes short-term and long-term plans  Group rates are lower because of economies of scale, ability to pool risks and greater bargaining power of a group  Consolidated Omnibus Budget Reconciliation Act (COBRA) requires employers to permit employees to extend health insurance coverage at group rates for up to 36months following a qualifying event, such as termination 13-9 Retirement Plans Defined Benefit • Guarantees a specified retirement benefit level to employees • Insulates employees from investment risk, which is borne by the company • PBGC guarantees basic retirement benefit in case of financial difficulties • ERISA increased fiduciary responsibilities of pension plan trustees, established vesting rights and portability provisions and established PBGC Defined Contribution • Does not promise employees a specific benefit level upon retirement • Employers shift investment risk to the employee • No need to calculate payments based on age and service • Most prevalent in small companies 13-10 Pay for Time Not Worked Vacation:  Europe- 30 days of mandated vacation is common  U S.- no legal minimum; 10 days is common Sick Leave Programs:  provide full salary replacement for a limited period of time, usually not exceeding 26 weeks  amount based on length of service, accumulating with service 13-14 Family-Friendly Policies To ease employees’ conflicts between work and non-work, organizations may use family-friendly policies such as family leave policies and child care Family and Medical Leave Act (FMLA):  applies to organizations with 50 or more employees within a 75-mile radius  applies to childbirth or adoption; care for a seriously ill child, spouse, or parent; or for an employee's own serious illness  Employees are guaranteed the same or comparable job when they return to work  Employees with less than a year of service or those who work less than 25 hours a week are not covered 13-15 Family-Friendly Policies  Family and Medical Leave Act requires organizations with 50 or more employees within a 75-mile radius to provide as much as 12 weeks of unpaid leave after childbirth or adoption; to care for a seriously ill child, spouse, or parent; or for an employee’s own serious illness  Child Care:  Employers may provide some type of child care support to employees: • supplies and helps employees collect information about child care, • vouchers or discounts for existing child care facilities or • child care facility at or near worksites 13-16 Managing Benefits: Employer Objectives and Strategies Surveys and Benchmarking  Company should know what competition is doing  Surveys information is available from private consultants, Bureau of Labor Statistics (BLS) and Chamber of Commerce Cost control  Larger the benefit cost, greater the savings possibility  Growth rate of may result in serious future costs  Cost containment efforts work to extent that the employee has significant direction in choosing how much to spend in a benefit category 13-17 Healthcare: Controlling Costs and Improving Quality  In U S spends more on health care than any other country  Health-care expenditures have risen from 5.3 % of GNP in 1960 to 15.3% today  Cost control attempts – by employers such as managed care, fall into six major categories: plan design use of alternative providers use of alternative funding methods claims review education and prevention external cost control systems  Trend - to shift costs to employees through use of deductibles, coinsurance, exclusions and limitations and maximum benefits 13-18 Healthcare: Controlling Costs and Improving Quality Health Maintenance Organizations (HMO) Preferred Provider Organizations (PPOs) • focus on preventive care and outpatient treatment • require employees to use only HMO services and provide benefits on a prepaid basis • physicians and health-care workers paid a flat salary to reduce incentive of raising costs • contract with employers and insurance companies to provide care at reduced fees • not provide benefits on a prepaid basis • employees often are not required to use justPPOs • less expensive than traditional health care but more expensive than HMOs 13-19 Employee Wellness Programs  Focus on changing behaviors on and off work time that could lead to future health problems  Classes of EWP’s: Passive -use little or no outreach to individuals and provide no ongoing motivational support Active- assume that behavior change requires not only awareness and opportunity, but also support and reinforcement  Types of Employee Wellness Designs Health education Physical fitness fitness facilities Follow-up model 13-20 Phenomena in Cost Control Efforts 13-21 Staffing Responses to Control Benefits Cost Growth Because benefit costs are fixed, benefits cost per hour can be reduced by having employees work more hours Classify employees as exempt, since they can reduce their benefit costs per hour without having to pay overtime Classify workers as independent contractors rather than employees, eliminating the employer's obligation to provide legally required benefits 13-22 Nature of the Workplace  Assessing employee benefits preferences is essential  Use market research methods to assess employees’ preferences same way consumers’ demand for products and services are assessed  Care must be taken not to raise employee expectations regarding future changes 13-23 Communicating With Employees 13-24 Flexible Spending Accounts Permit employees to choose types and amount of benefits Advantages include:  employees more aware and appreciative of their benefits package  better match between package and employee's needs, which improves satisfaction and retention  cost reductions Disadvantages include:  administrative cost  adverse selection 13-25 Flexible Spending Accounts Permits pretax contributions to an employee account that can be drawn on to pay for uncovered health care expenses Funds must be spent during the year or they revert to the employer Major advantage -take-home pay increases 13-26 General Regulatory Issues  Benefit plans must meet nondiscrimination rules and qualified plans  Sex, Age, and Disability:  It is illegal for companies to require women to contribute more to a pension plan than men  Employers cannot discriminate against employees over age 40 in pay or benefits  Employees with disabilities have equal access to same health insurance coverage as other employees  Monitoring Future Benefits Obligations– Financial Accounting Statement (FAS) 106-any benefits (excluding pensions) provided after retirement cannot be funded on a pay-as-you-go basis; must be paid on an accrual basis  Need to balance interests of shareholders, current employees, and retirees 13-27 Summary  Organizations less paternalistic employee benefit strategies  Employees have more responsibility and risk regarding benefits  Employers have greater reliance on defined contribution plans Such plans require employees to understand investing  Risk to employees is greater when defined contribution plans invest a substantial portion of their assets in company stock  If the company has financial problems, employees risk losing both their jobs and their retirement money  Companies have reduced or eliminated benefits giving more responsibility to employees  Employees are being asked to increase the proportion of costs that they pay and to use data on health care quality to make better choices about health care 13-28 [...]... Costs and Improving Quality Health Maintenance Organizations (HMO) Preferred Provider Organizations (PPOs) • focus on preventive care and outpatient treatment • require employees to use only HMO services and provide benefits on a prepaid basis • physicians and health-care workers paid a flat salary to reduce incentive of raising costs • contract with employers and insurance companies to provide care at... preferences same way consumers’ demand for products and services are assessed  Care must be taken not to raise employee expectations regarding future changes 13-23 Communicating With Employees 13-24 Flexible Spending Accounts Permit employees to choose types and amount of benefits Advantages include:  employees more aware and appreciative of their benefits package  better match between package and employee's... improves satisfaction and retention  cost reductions Disadvantages include:  administrative cost  adverse selection 13-25 Flexible Spending Accounts Permits pretax contributions to an employee account that can be drawn on to pay for uncovered health care expenses Funds must be spent during the year or they revert to the employer Major advantage -take-home pay increases 13-26 General Regulatory Issues... such as family leave policies and child care Family and Medical Leave Act (FMLA):  applies to organizations with 50 or more employees within a 75-mile radius  applies to childbirth or adoption; care for a seriously ill child, spouse, or parent; or for an employee's own serious illness  Employees are guaranteed the same or comparable job when they return to work  Employees with less than a year of... Obligations– Financial Accounting Statement (FAS) 106-any benefits (excluding pensions) provided after retirement cannot be funded on a pay-as-you-go basis; must be paid on an accrual basis  Need to balance interests of shareholders, current employees, and retirees 13-27 Summary  Organizations less paternalistic employee benefit strategies  Employees have more responsibility and risk regarding benefits... ERISA guarantees that employees, after working a certain number of years, earn the right to a pension upon retirement, referred to as vesting rights  Vesting schedules that may be used:  Employees are vested after five years of service  Employers may vest employees over a three- to seven-year period, with at least 20 %in the third year and each year thereafter 13-13 Pay for Time Not Worked Vacation:... Benefit plans must meet nondiscrimination rules and qualified plans  Sex, Age, and Disability:  It is illegal for companies to require women to contribute more to a pension plan than men  Employers cannot discriminate against employees over age 40 in pay or benefits  Employees with disabilities have equal access to same health insurance coverage as other employees  Monitoring Future Benefits Obligations–... supplies and helps employees collect information about child care, • vouchers or discounts for existing child care facilities or • child care facility at or near worksites 13-16 Managing Benefits: Employer Objectives and Strategies Surveys and Benchmarking  Company should know what competition is doing  Surveys information is available from private consultants, Bureau of Labor Statistics (BLS) and Chamber... Defined Contribution Plans Money Purchase Employee Stock Ownership Profit-sharing 13-11 Cash Balance Plans An employer sets up an individual account for each employee and contributes a percentage of the employee’s salary The account earns % at a predefined rate 13-12 Funding, Communication and Vesting Requirements  Summary plan description (SPD) obligates employers to describe plan's funding, eligibility... than 25 hours a week are not covered 13-15 Family-Friendly Policies  Family and Medical Leave Act requires organizations with 50 or more employees within a 75-mile radius to provide as much as 12 weeks of unpaid leave after childbirth or adoption; to care for a seriously ill child, spouse, or parent; or for an employee’s own serious illness  Child Care:  Employers may provide some type of child care