BUS 681 Week 4 discussion 1 & 2

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9 Discretionary Bene�its

Learning Objectives

When you �inish studying this chapter, you should be able to:

9-1. Discuss the origins of discretionary bene�its. 9-2. Explain the three categories of discretionary bene�its.

9-3. Summarize legislation that pertains to discretionary bene�its. 9-4. Discuss the fundamentals of designing and planning the bene�its program.

9-5. Explain the bene�its and costs of discretionary bene�its.

CHAPTER WARM-UP!

If your professor has assigned this, go to the Assignments section of mymanagementlab.com (http://mymanagementlab.com) to complete the Chapter Warm-Up! and see what you already know. After reading the chapter, you’ll have a chance to take the Chapter Quiz! and see what you’ve learned.

Today, discretionary bene�its represent a signi�icant cost to companies. In 2014, on average, companies spent nearly $15,000 per employee.1 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec10#ch09end1) For the same period, discretionary bene�its accounted for nearly 23 percent of employers’ total payroll costs.

As the term implies, discretionary bene�its are offered at the will of company management. Discretionary bene�its fall into three broad categories: protection programs, paid time off, and services. Protection programs provide family bene�its, promote wellness, and guard against income loss caused by such catastrophic factors as disability, serious illness, or death. Retirement plans assist employees to accumulate wealth as an income source throughout retirement. Paid time off, not surprisingly, provides employees time off with pay for such events as vacations. Services provide such enhancements as tuition reimbursement and day care assistance to employees and their families.

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9.1 ORIGINS OF DISCRETIONARY BENEFITS

9-1. Discuss the origins of discretionary bene�its.

In the past several decades, �irms have offered a tremendous number of both legally required and discretionary bene�its. In Chapter 10 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10#ch10) , we will discuss how the growth in legally required bene�its from a select body of federal and state legislation developed out of social welfare philosophies. Quite different from these reasons are several factors that have contributed to the rise in discretionary bene�its.

The rise of retirement plans, in particular, pension plans, appeared as one of the �irst signs in the use of discretionary bene�its. According to the Employee Bene�it Research Institute,2

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec10#ch09end2) the �irst pension plan in the United States was established in 1759 to bene�it widows and children of Presbyterian ministers. In 1875, the American Express Company established a formal pension plan. From that point until World War II, pension plans were adopted primarily in the railroad, banking, and public utility industries. The most signi�icant growth occurred after the favorable tax treatment of pensions was established through the passage of the Revenue Act of 1921, and government-imposed wage increase controls during World War II in the early 1940s led more companies to adopt discretionary employee bene�its.

Because of the government-imposed wage freezes, companies invested in expanded discretionary bene�its offerings as an alternative to pay hikes as a motivational tool. As a result, many companies began to offer welfare practices (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss476) . Welfare practices were “anything for the comfort and improvement, intellectual or social, of the employees, over and above wages paid, which is not a necessity of the industry nor required by law.”3

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec10#ch09end3) Moreover, companies offered employees welfare bene�its to promote good management and to enhance worker productivity.

The opportunities for employees through welfare practices varied. For example, some employers offered libraries and recreational areas, and others provided �inancial assistance for education, home purchases, and home improvements. In addition, employers’ sponsorships of medical insurance coverage became common, which, until the Patient Protection and Affordable Care Act of 2010, was made on a discretionary basis.

Quite apart from the benevolence of employers, employee unions also directly contributed to the increase in employee welfare practices through the National Labor Relations Act of 1935 (NLRA), which legitimized bargaining for employee bene�its. Even today, union workers tend to have greater access to discretionary bene�its than do nonunion employees.4 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec10#ch09end4) Table 9-1 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec1#ch09tab01) illustrates some of the differences in particular bene�its between nonunion and union employees as well as by major occupational groups, and full- and part-time work status.

Unions also indirectly contributed to the rise in discretionary bene�its offerings in nonunion settings. As we discussed in Chapter 2 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch02#ch02) , nonunion companies often fashion their employment practices after union companies as a tactic to minimize the chance that their employees will seek union representation5

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec10#ch09end5) and may offer their employees bene�its that are comparable to the bene�its received by employees in union shops.

TABLE 9-1 Percentage of Workers with Access to Selected Employee Bene�its in Private Industry: March 2014

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Worker Characteristics Vacation Sick Leave

Retirement Plans

Employee- Assistance Plans

On-site and Off-site Child

Care

Wellness Programs

Flexible Workplace

Worker Characteristics Vacation Sick Leave

Retirement Plans

Employee- Assistance Plans

On-site and Off-site Child

Care

Wellness Programs

Flexible Workplace

Total 77 61 65 54 11 39 6

Management occupations 88 82 80 54 17 54 17

Production, transportation, and material-moving occupations

82 56 70 49 5 32 5

Service occupations 55 40 38 38 8 24 8

Full-time 91 74 74 59 12 43 12

Part-time 35 24 37 38 6 25 6

Union 91 70 92 77 16 50 16

Nonunion 75 60 62 50 10 37 10 Source: Based on U.S. Bureau of Labor Statistics. (2014). National Compensation Survey: Employee Bene�its in the United States, March 2014 (Bulletin 2779). Available: www.bls.gov (http://www.bls.gov) , accessed March 11, 2015.

Through many decades, discretionary bene�it offerings were based on a relatively homogenous workforce, characterized by males who were the sole bread winners and provided for their wives and children. In recent decades, the labor force has become more diverse in terms of age, gender, race, ethnicity, and de�inition of families based on same-sex civil unions and marriage.6

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec10#ch09end6) Increasing diversity has given rise to �lexible bene�it plans, which we discuss later in this chapter. According to the U.S. Bureau of Labor Statistics, labor force diversity will continue to increase. A standardized, one-size-�its-all employer-sponsored bene�its program is most effective when the workforce is relatively similar in terms of needs and preferences.

For example, let’s assume a company’s workforce has 60 percent women and 40 percent men. Most of the women are of child-bearing age and most of the men range in age between their 50s and 60s. One could reasonably expect that there will be substantial differences in the needs and preferences for bene�its. Chances are that most of the women in this example may place a high value on day care bene�its while most of the men will not have a need for such bene�its because their children are likely to be near or at adulthood.

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9.2 CATEGORIES OF DISCRETIONARY BENEFITS

9-2. Explain the three categories of discretionary bene�its.

Several bene�its practices fall into the category of discretionary employee bene�its. We can explore these practices by recognizing the three broad goals employers hope to achieve when offering discretionary bene�its: protection, paid time off, and services to enhance work and life experiences.

Protection Programs

Three important discretionary protection programs include disability insurance, life insurance, and retirement programs. Until recently, employer-sponsored health insurance bene�its were offered on a discretionary basis, falling into the protection category. Since the passage of the Patient Protection and Affordable Care Act of 2010, the government has imposed an employer mandate for health insurance. As such, we will review health insurance as a legally required bene�it in Chapter 10 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10#ch10) .

DISABILITY INSURANCE

Disability insurance replaces income for employees who become unable to work because of sicknesses or accidents. Employees unfortunately need this kind of protection. At all working ages, the probability of being disabled for at least 90 consecutive days is much greater than the chance of dying while working; one of every three employees will have a disability that lasts at least 90 days.7

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec10#ch09end7)

Employer-sponsored or group disability insurance typically takes two forms. The �irst, short-term disability insurance (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss408) provides bene�its for a limited time, usually less than 6 months.8

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec10#ch09end8) Approximately 40 percent of private sector workers had access to employer-sponsored short-term disability plans in 2014.9

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec10#ch09end9) Access was greater in more hazardous work environments, such as manufacturing, where approximately 63 percent of workers had access. The second, long-term disability insurance (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss257) provides bene�its for extended periods between 6 months and life. Approximately 34 percent of private sector workers had access to employer-sponsored short-term disability plans in 2014.10

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec10#ch09end10) Access was greater in more hazardous work environments, such as manufacturing, where approximately 44 percent of workers had access.

Disability criteria differ between short- and long-term plans. Short-term plans usually consider disability as an inability to perform any and every duty of the disabled person’s occupation. Long-term plans use a more stringent de�inition, specifying disability as an inability to engage in any occupation for which the individual is quali�ied by reason of training, education, or experience.

Short-term disability plans classify short-term disability (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss407) as an inability to perform the duties of one’s regular job. Manifestations of short-term disability include the following temporary (short- term) conditions:

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Recovery from injuries

Recovery from surgery

Treatment of an illness requiring any hospitalization

Pregnancy—the Pregnancy Discrimination Act of 1978 mandates that employers treat pregnancy and childbirth the same way they treat other causes of disability (Chapter 2 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch02#ch02) )

Most short-term disability plans pay employees 60 to 70 percent of their pretax salary on a monthly or weekly basis.11 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec10#ch09end11) Many companies set a maximum bene�it amount. In 2014, the typical maximum annual bene�it amount was $2,400.

Three additional features of short-term disability plans include the preexisting condition clause, two waiting periods, and exclusions of particular health conditions. Similar to health insurance plans, a preexisting condition (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss348) is a mental or physical disability for which medical advice, diagnosis, care, or treatment was received during a designated period preceding the beginning of disability insurance coverage. The designated period is usually any time prior to employment and enrollment in a company’s disability insurance plan. Insurance companies impose preexisting conditions to limit their liabilities for disabilities that predate an individual’s coverage.

Two waiting periods include the preeligibility period and an elimination period. The preeligibility period (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss347) spans from the initial date of hire to the time of eligibility for coverage in a disability insurance program. Once the preeligibility period has expired, an elimination period (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss125) refers to the minimum amount of time an employee must wait after becoming disabled before disability insurance payments begin. Elimination periods exclude insigni�icant illnesses or injuries that limit a person’s ability to work for just a few days.

Short-term disability plans often contain exclusion provisions. Exclusion provisions (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss138) list the particular health conditions that are ineligible for coverage. Disabilities that result from self-in�licted injuries are almost always excluded. Short-term disability plans often exclude most mental illnesses or disabilities due to chemical dependencies (e.g., addictions to alcohol or illegal drugs). Many employers support addicted workers through employee assistance programs, which we will discuss shortly.

Long-term disability insurance provides a monthly bene�it to employees who, due to illness or injury, are unable to work for an extended period of time. Payments of long-term disability bene�its usually begin after three to six months of disability and continue for a speci�ied number of months. Payments generally equal a �ixed percentage of pre-disability earnings, most typically, 50 to 60 percent.12

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec10#ch09end12)

Long-term disability insurance companies rely on a two-stage de�inition for long-term disability. Long-term disability (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss256) initially refers to illnesses or accidents that prevent an employee from performing his or her “own occupation” over a designated period. The term own occupation applies to employees based on education, training, or experience. After the designated period elapses, the de�inition becomes more inclusive by adding the phrase “inability to perform any occupation or to engage in any paid employment.” The second-stage de�inition is consistent with the concept of disability in workers’ compensation programs (Chapter 10 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10#ch10) ). There are four types of disabilities: temporary total, permanent total, temporary partial, and permanent partial.

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Full bene�its usually equal 50 to 70 percent of monthly pretax salary, subject to a maximum dollar amount. As for short-term plans, the monthly maximum may be as high as $5,000. Long-term bene�its are generally subject to a waiting period of anywhere from 6 months to 1 year and usually become active only after an employee’s sick leave and short-term disability bene�its have been exhausted.

Long-term disability plans also include preexisting condition and exclusion clauses. These are similar to the provisions in short-term disability plans. Long-term plans impose two waiting periods: preeligibility period and elimination period. The preeligibility periods for short- and long-term plans are usually identical. When companies offer both plans, the elimination period expires upon the exhaustion of short-term bene�its. As discussed earlier, long-term plans become effective immediately following the end of short-term bene�it payments, making the elimination period virtually nonexistent. When companies offer long-term plans only, the elimination period runs three to six months following a disability.

Both short- and long-term disability plans may duplicate disability bene�its mandated by the Social Security Act and state workers’ compensation laws (Chapter 10 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10#ch10) ). These employer-sponsored plans generally supplement legally required bene�its. Employer-sponsored plans do not replace disability bene�its mandated by laws – workers’ compensation and disability bene�its through the Social Security Act of 1935, which we will discuss in Chapter 10 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10#ch10) .

LIFE INSURANCE

Employer-provided life insurance (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss251) protects employees’ families by paying a speci�ied amount to an employee’s bene�iciaries upon the employee’s death. Most policies pay a �ixed multiple of the employee’s salary. Customarily, the multiple equals one to two times an employee’s annual salary. Employer-sponsored life insurance plans also frequently include accidental death and dismemberment claims, which pay additional bene�its if death was the result of an accident or if the insured incurs accidental loss of a limb. In 2014, approximately 57 percent of private sector employees had access to employer-sponsored life insurance protection.13 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec10#ch09end13)

There are three kinds of life insurance: term life insurance, whole life insurance, and universal life insurance. Term life insurance (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss446) , the most common type offered by companies, provides protection to employees’ bene�iciaries only during a limited period based on a speci�ied number of years (e.g., 5 years) subject to a maximum age (e.g., 65 or 70). After that, insurance protection automatically expires. Neither the employee nor his or her bene�iciaries receives any bene�it upon expiration.

Whole life insurance (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss478) pays an amount to the designated bene�iciaries of the deceased employee, but unlike term policies, whole life plans do not terminate until payment is made to bene�iciaries. As a result, whole life insurance policies are substantially more expensive than are term life policies, making the whole life insurance approach an uncommon feature of employer-sponsored insurance programs. From the employee’s or his or her bene�iciary’s perspective, whole life insurance policies combine insurance protection with a savings (or cash accumulation plan). That is, a portion of the money paid to meet the policy’s premium will be available in the future. The amount will be augmented with a low �ixed annual interest rate of usually no more than two or three percent. Universal life insurance (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss459) combines features of term life insurance and whole life insurance. The insured may shift money between the insurance and savings components of the policy, making this a more �lexible alternative to whole life insurance.

RETIREMENT PROGRAMS

Retirement programs (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss380) provide income to employees and their bene�iciaries during some or all of their retirement. Individuals may

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participate in more than one program simultaneously where employers offer this option. Companies establish retirement or pension plans following one of three design con�igurations: a de�ined bene�it plan (commonly referred to as pension plan (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss326) ), a de�ined contribution plan, or hybrid plans that combine features of traditional de�ined bene�it and de�ined contribution plans. According to the U.S. Bureau of Labor Statistics, nearly 55 percent of workers employed in the private sector participated in at least one company-sponsored retirement plan from 1992–1993.14

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec10#ch09end14) In 2014, the participation rate has increased to approximately 65 percent as displayed in Table 9-1 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec1#ch09tab01) .15

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec10#ch09end15) However, there has been a noticeable decrease in participation rates for de�ined bene�it plans over the past several years. In 1992–1993, 32 percent of private sector employees participated in de�ined contribution plans, and slightly fewer participated in de�ined bene�it plans.16 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec10#ch09end16) In 2014, 60 percent participated in de�ined contribution plans, but only 19 percent participated in de�ined bene�it plans.17

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec10#ch09end17)

De�ined bene�it plans (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss98) guarantee retirement bene�its speci�ied in the plan document. This bene�it is usually expressed in terms of a monthly sum equal to a percentage of a participant’s preretirement pay multiplied by the number of years he or she has worked for the employer. Employees typically forfeit their bene�its if they leave their employer before meeting a minimum age and years of service requirement. Although the bene�it in these plans is �ixed by a formula, the level of required employer contributions �luctuates from year to year. The level depends on the amount necessary to make certain that bene�its promised will be available when participants and bene�iciaries are eligible to receive them. One of the reasons for the decline in de�ined bene�it plans is increasing longevity. On average, a 65-year old man will live to be 86.6 years old and a 65-year-old woman will live to be 88.8 years old.18

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec10#ch09end18) Longevity increases an employer’s necessary to ensure that these plans have suf�icient funds to support longer-living retirees.

Annual bene�its are usually based on age, years of service, and �inal average wages or salary. Retirement plan formulas specify annual retirement bene�its as a percentage of �inal average salary. Table 9-2 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec2#ch09tab02) illustrates these percentages for one retirement plan based on age and years of service. Looking at this table, let’s assume Mary retires at age 59 with 35 years of service. Let’s also assume her �inal average salary is $52,500. Mary multiplies $52,500 by the annual percentage of 68.20 percent. Her annual bene�it is $35,805.00 ($52,500 × 68.20 percent).

Under de�ined contribution plans (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss99) , employees have the option to make regular contributions to separate accounts in their names, based on a formula contained in the plan document. Formulas typically call for employers to contribute a given percentage of compensation annually with these funds automatically deducted from pay in equal amounts. Employers invest these funds on behalf of the employee, choosing from a variety of investment vehicles such as company stocks, diversi�ied stock market funds, or federal government bond funds. Most often employees are given a choice of investment vehicles based on the guidelines established by the employer.

Oftentimes, employers contribute money to de�ined contribution plans in the form of a company match (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss56) . A recent survey revealed that 92 percent of companies made matching contributions to de�ined contribution plans. Company matches are typically expressed as a percentage of an employee’s contribution, up to a limit, and this amount varies according to employer policy. When company matches are made, a company may provide a 50 percent match ($0.50 per dollar contributed by the employee) in the range of three to six percent of the salary. In other words, a company

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will not provide matching contributions for employee contributions below 3 percent or above 6 percent of salary. This approach challenges employees to save as much as possible.

TABLE 9-2 Annual Retirement Bene�its for a De�ined Bene�it Plan

Age

Years of Service 60 59 58 57 56 55

5 … … … … … …

6 … … … … … …

7 … … … … … …

8 13.36 12.56 11.76 10.96 10.15 9.35

9 15.03 14.13 13.23 12.32 11.42 10.52

10 16.70 15.70 14.70 13.69 12.69 11.69

.

.

.

.

35 68.20 68.20 68.20 68.20 68.20 68.20

36 70.50 70.50 70.50 70.50 70.50 70.50

37 72.80 72.80 72.80 72.80 72.80 72.80

38 75.10 75.00 75.00 75.00 75.00 75.00

39 77.40 75.00 75.00 75.00 75.00 75.00

40 79.70 75.00 75.00 75.00 75.00 75.00

+40 80.00 75.00 75.00 75.00 75.00 75.00

De�ined contribution plans specify rules for making contributions. Unlike de�ined bene�it plans, de�ined contribution plans do not guarantee particular bene�it amounts. Participants bear the risk of possible investment gain or loss. Account balances mainly depend on several factors, including contribution amounts, company matches, and investment performance. Compared to de�ined bene�it plans, de�ined contribution plans are portable. That is, an employee is able to take the balance of the account from employer to employer.

The Internal Revenue Code (IRC) (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss225) , which is the body of tax regulation in the United States, sets annual contribution amounts to these plans on a pretax basis. That is, contributions are not subject to income tax. Annual addition (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss15) refers to the annual maximum allowable contribution to a participant’s account in a de�ined contribution plan. In 2015, annual additions were limited to the lesser of $53,000, or 100 percent of the participant’s compensation mainly based on the sum of employer and employee contributions.19

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec10#ch09end19) Of the annual addition, an employee’s contribution was limited to $18,000 ($24,000 for employees age 50 or above) or 100 percent of salary, whichever is less. Withdrawals in retirement are taxed.

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There are a variety of de�ined contribution plans. The most common are 401(k) plans, Roth 401(k) plans, and deferred pro�it sharing plans. Section 401(k) plans (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss397) are retirement plans named after the section of the IRC that created them. Following the previous description of de�ined contribution plans, 401(k) plans enable employees and employers to defer part of employee compensation to an employee’s account. Only private sector employers are eligible to sponsor 401(k) plans. The IRC established Roth 401(k) plans (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss383) in 2006. These plans are similar to 401(k) plans, but there are two noticeable differences. First, employee contributions are taxed at the individual’s income tax rate. Second, upon retirement, employee withdrawals are not taxed. Roth 401(k) plans are becoming an increasingly popular offering to help employees manage the uncertainty of possible changes in future income tax rates. For example, it is dif�icult to predict what income tax rates will be when an individual retires. The rates could be equal to, lower than, or greater than current income tax rates. Higher future income tax rates would require greater withdrawal amounts to meet retirees’ needs. Higher withdrawal rates would lower the value of a 401(k) plan more quickly, affecting the number of years in which available funds will provide income. Similar to 401(k) plans are Section 403(b) plans (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss2) and Section 457 plans (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss3) . 403(b) plans may be offered to employees of government and tax-exempt groups, such as schools, hospitals and churches. Section 457 plans apply to state government employees.

Companies set up pro�it sharing plans (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss357) to distribute money to employees. Companies choose between offering a current pro�it sharing plan as an incentive or a deferred pro�it sharing plan for retirement savings. Current pro�it sharing plans award employees with a share of the company’s pro�its, usually on an annual basis. Alternatively, deferred pro�it sharing plans (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss97) set aside money in employee accounts for use in retirement. For deferred plans, employees do not pay taxes until they make withdrawals in retirement. In 2015, companies could take a tax deduction for their contributions not to exceed 25 percent of each participant’s compensation or $53,000, whichever is the lesser amount.20

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec10#ch09end20)

Table 9-3 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec2#ch09tab03) summarizes selected differences between de�ined bene�it and de�ined contribution plans.

Hybrid plans (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss207) combine features of traditional de�ined bene�it and de�ined contribution plans. The cash–balance plan is the most common hybrid plan. Cash–balance plans (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss40) are structured as “de�ined bene�it plans that de�ine bene�its for each employee by reference to the amount of the employee’s hypothetical account balance.”21 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec10#ch09end21) Cash–balance plans are a relatively new phenomenon compared to traditional de�ined bene�it and de�ined contribution plans. Many companies have chosen to convert their de�ined bene�it plans to cash balance plans for two key reasons. First, cash balance plans are less costly to employers than de�ined bene�it plans. Second, these plans pay bene�its in a lump sum instead of a series of payments. Companies are presumably in a better position to recruit more mobile workers. Under a traditional de�ined bene�it plan, an employee who leaves employment prior to qualifying for a retirement annuity (a series of monthly payments for the rest of one’s life) will forfeit the annuity.

TABLE 9-3 Selected Differences between De�ined Bene�it and De�ined Contribution Plans

Characteristic De�ined Bene�it Plan De�ined Contribution Plan

Source: U.S. General Accounting Of�ice (2000). Cash Balance Plans: Implications for Retirement Income, GAO/HEHS-00-207. Washington, DC: General Accounting Of�ice, pp. 9–10.

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Characteristic De�ined Bene�it Plan De�ined Contribution Plan

Bene�it formula

Determines pension due at normal retirement age. Determines amount regularly contributed to individual account.

Form of bene�it expressed by formula

An annuity—a series of payments beginning at the plan’s normal retirement age for the life of the participant.

A single lump sum distribution at any time.

Funding Annual funding is based on an actuarial formula subject to strict limits set by the IRC and is not equivalent to annual increases in pension bene�its.

Annual contributions and investment earnings are held in an individual account.

Investment risk/pro�it

Employee is guaranteed bene�its regardless of investment returns on trust. Employer is responsible for ensuring suf�icient funding to pay promised bene�it.

Employee bears the investment risk, which can result in higher investment returns or the loss of previously accumulated pension bene�its.

Source: U.S. General Accounting Of�ice (2000). Cash Balance Plans: Implications for Retirement Income, GAO/HEHS-00-207. Washington, DC: General Accounting Of�ice, pp. 9–10.

Paid Time Off

The second type of discretionary bene�it is paid time off. This category is relatively straightforward. As the name implies, paid time off policies compensate employees when they are not performing their primary work duties as de�ined by the Portal-to-Portal Act (Chapter 2 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch02#ch02) ). The major types of paid time off bene�its are:

Holidays

Vacation

Sick leave

Personal leave

Jury duty

Funeral leave

Military leave

Clean-up, preparation, or travel time

Rest period “break”

Lunch period

Integrated paid time off policies

Sabbatical leave

Volunteerism

Companies offer most paid time off as a matter of custom, particularly paid holidays, vacations, and sick leave. In unionized settings, the particulars about paid time off are in the collective bargaining agreement. The paid time off

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practices that are most typically found in unionized settings are jury duty, funeral leave, military leave, clean-up, preparation, travel time, rest period, and lunch period.

For employees and employers, paid time off bene�its are signi�icant. These bene�its provide employees the opportunity to balance work and nonwork interests and demands. Companies stand to gain from sponsoring these bene�its. Employees may legitimately take time off from scheduled work without incurring loss of pay and bene�its, which should help reduce unapproved absenteeism from work. By keeping absenteeism in check, overall productivity and product or service quality should be higher. These bene�its also contribute toward positive employee attitudes and commitment to the company, particularly for employees with longer lengths of service. The length of paid time off, such as vacation time, can increase to several weeks with years of service.

A standout example of paid vacation policy can be found at the Internet company FullContact. Not only do employees receive their pay while on vacation, which is standard, but the founder of this company also provides each employee with $7,500 cash to spend on their vacation. The following Watch It! video describes this unique approach to paid vacations and the company’s rationale for offering this generous bene�it.

WATCH IT!

If your professor has assigned this, go to the Assignments section of mymanagementlab.com (http://mymanagementlab.com) to complete the video exercise titled Best Boss Ever Pays Employees to Go on Vacation.

As previously shown in Table 9-1 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec1#ch09tab01) , the majority of workers received paid time off bene�its in 2014. There have been three developments in paid time off offerings: integrated paid time off policies, sabbatical leave, and volunteerism. We will discuss each of these practices in turn, highlighting the bene�its of such paid time off practices to employers.

Integrated paid time off policies (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss221) or paid time off banks (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss315) combine holiday, vacation, sick leave, and personal leave policies into a single paid time off policy. Such policies do not distinguish among reasons for absence as do speci�ic policies. The idea is to provide individuals the freedom to schedule time off without justifying the reasons. This freedom should presumably substantially reduce the incidence of unscheduled absences that can be disruptive to the workplace because these policies require advance notice unless sudden illness is the cause (e.g., you went to sleep one evening feeling �ine and then wake up the next morning on a scheduled work day with a stomach virus). Integrated paid time off policies have become an increasingly popular alternative to separate holiday, vacation, sick leave, and personal leave plans because they are more effective in controlling unscheduled absenteeism than other types of absence control policies.22

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec10#ch09end22) In 2014, approximately 41 percent of companies used a paid time off bank arrangement.23

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec10#ch09end23) Integrated policies also relieve the administrative burden of managing separate plans and the necessity to process medical certi�ications in the case of sick leave policies.

Paid time off banks do not incorporate all types of time off with pay. Bereavement and funeral leave are stand- alone policies because the death of a friend or relative is typically an unanticipated event beyond an employee’s control. Integrating funeral leave into paid time off banks would also likely create dissatisfaction among workers because it would signal that grieving for a deceased friend or relative is equivalent to a casual day off. Jury duty and witness leave, military leave, and nonproduction time are in�luenced by law, and nonproduction time is negotiated as part of a collective bargaining agreement. Sabbatical leaves are also not included in paid time off banks because these are extended leaves provided as a reward to valued, long-service employees.

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Sabbatical leaves (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss385) are paid time off for such professional activities as a research project or curriculum development. These practices are common in college and university settings and apply most often to faculty members. Most universities grant sabbatical leaves to faculty members who meet minimum service requirements (e.g., 3 years of full-time service) with partial or full pay for up to an entire academic year. The service requirement is applied each time, which limits the number of leaves taken per faculty member.

Outside academia, sabbatical leaves are usually limited to professional and managerial employees who stand to bene�it from intensive training opportunities outside the company’s sponsorship. Sabbatical leaves are most suitable for such employees as computer engineers whose standards of knowledge or practice are rapidly evolving. Companies establish guidelines regarding quali�ication, length of leave, and level of pay. An important guideline pertains to minimum length of employment following completion of a sabbatical. For example, companies require employees to remain employed for a minimum of 1 year following the sabbatical or repay part or all of one’s salary received during the sabbatical. This provision is necessary to protect a company’s investment and to limit moves to competitors. For example, Capterra, which maintains a comprehensive catalog of business software, offers a 5-week, fully paid sabbatical every �ive years to each of its employees.24

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec10#ch09end24) According to Capterra’s CEO, the cost of a sabbatical equals a 10 percent reduction in productivity on an annual basis, but only 2 percent over a 5- year period. He maintains that the bene�it to the company and the employee’s health and personal growth is a worthwhile expense.

Volunteerism (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss470) refers to giving of one’s time to support a meaningful cause. More and more companies are providing employees with paid time off to contribute to causes of their choice. In 2013, approximately 20 percent of companies offered paid time off for volunteer activities, trending up since 2007.25

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec10#ch09end25) In many instances, companies tout this bene�it as a form of work–life balance and a mechanism for the betterment of the community. Brokerage company Charles Schwab provides employees with eight paid hours per year for this purpose. Managers have the discretion to provide additional paid time off for volunteer activities.26

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec10#ch09end26) From a company’s standpoint, a meaningful cause is associated with the work of not-for-pro�it organizations, such as the United Way, to help improve the well-being of people. There are a multitude of meaningful causes throughout the world including improving literacy, providing comfort to terminally ill patients, serving food at shelters for individuals who cannot afford to feed themselves, serving as a mentor to children who do not have one or more parents, and spending time with elderly or disabled residents of nursing homes who may no longer have living friends or family. Companies generally do not dictate the causes for which employees would receive paid time off, except they exclude political campaign and political action groups for eligibility because of possible con�licts of interest with company shareholders and management.

Companies favor providing paid time off for volunteer work for three reasons. First, volunteer opportunities allow employees to balance work and life demands. Second, giving employees the opportunity to contribute to charitable causes on company time represents positive corporate social responsibility, enhancing the company’s overall image in the public eye. Third, paid time off to volunteer is believed to help promote retention. Employees are likely to feel that the employer shares similar values, possibly boosting commitment to the company. The amount of time off ultimately varies considerably from company to company, ranging anywhere between 1 hour per week and, in limited cases for long-service employees, several weeks.

Services

EMPLOYEE ASSISTANCE PROGRAMS

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Employee assistance programs (EAPs) (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss126) help employees cope with such personal problems that may impair their job performance as alcohol or drug abuse, domestic violence, the emotional impact of AIDS and other diseases, clinical depression, and eating disorders. In 2014, approximately 54 percent of private-sector employees and 74 percent of government employees had access to an EAP.27

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec10#ch09end27)

Companies offer EAPs because many employees are likely to experience dif�iculties that interfere with job performance. Although EAP costs are substantial, the bene�its seem to outweigh the costs. For example, the annual cost per employee of an EAP is approximately $50 to $60. Anecdotal evidence, however, indicates that employers’ gains outweigh their out-of-pocket expenses for EAPs: savings from reduced employee turnover, absenteeism, medical costs, unemployment insurance rates, workers’ compensation rates, accident costs, and disability insurance costs. Most important, the majority of employees who take advantage of EAP resources bene�it; unfortunately, large-scale evaluation studies are virtually nonexistent.

Depending on the employer, EAPs provide a range of services and are organized in various ways. In some companies, EAPs are informal programs developed and run on-site by in-house staff. Other employers contract with outside �irms to administer their EAPs, or they rely on a combination of their own resources and help from an outside �irm.

FAMILY ASSISTANCE PROGRAMS

Family assistance programs (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss151) help employees provide elder care and child care. Elder care programs provide physical, emotional, or �inancial assistance for aging parents, spouses, or other relatives who are not fully self-suf�icient because they are too frail or disabled. Child care programs focus on supervising preschool-age dependent children whose parents work outside the home. Many employees now rely on elder care programs because of their parents’ increasing longevity and the growing numbers of dual-income families. Child care needs arise from the growing number of single parents and dual- career households with children.

A variety of employer programs and bene�its can help employees cope with their family responsibilities. The programs range from making referrals to on-site child care or elder care centers to company-sponsored day care programs, and they vary in the amount of �inancial and human resources needed to administer them. The least expensive and least labor-intensive programs are generally referral services. Referral services are designed to help workers identify and take advantage of available community resources, conveyed through such media as educational workshops, videos, employee newsletters and magazines, and EAPs.

Flexible scheduling and leave (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss162) allows employees the leeway to take time off during work hours to care for relatives or react to emergencies. Flexible scheduling, which includes compressed work weeks (e.g., 10-hour days or 12-hour days), �lextime, and job sharing, helps employees balance the demands of work and family. In addition to �lexible work scheduling, some companies allow employees to extend their legally mandated leave sanctioned by the Family and Medical Leave Act (see Chapter 10 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10#ch10) ). Under extended leave, employers typically continue to provide such employee bene�its as insurance and promise to secure individuals comparable jobs upon their return.

Day care (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss94) is another possible bene�it. Some companies subsidize child or elder day care in community-based centers. Elder care programs usually provide self-help, meals, and entertainment activities for the participants. Child care programs typically offer supervision, preschool preparation, and meals. Facilities must usually maintain state or local licenses.

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TUITION REIMBURSEMENT

Companies offer tuition reimbursement programs (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss455) to promote their employees’ education. Under a tuition reimbursement program, an employer fully or partially reimburses an employee for expenses incurred for education or training. There is substantial variability in the percentage of tuition an employer reimburses. Some companies vary the percentage of tuition reimbursed according to the relevance of the course to the companies’ goals or the grades employees earn.

Tuition reimbursement programs are not synonymous with pay-for-knowledge programs (Chapter 5 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch05#ch05) ). Instead, they fall under the category of employee bene�its. Under these programs, employees choose the courses they wish to take when they want to take them. In addition, employees may enroll in courses that are not directly related to their work. As we discussed in Chapter 5 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch05#ch05) , pay-for- knowledge is one kind of core compensation. Companies establish set curricula that employees take, and they generally award pay increases to employees who successfully complete courses within the curricula. Pay increases are not directly associated with tuition reimbursement programs.

TRANSPORTATION SERVICES

Some employers sponsor transportation services (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss454) , programs that help bring employees to the workplace and back home again by using more energy-ef�icient forms of transportation. They may sponsor public transportation or vanpools: employer-sponsored vans or buses that transport employees between their homes and the workplace.

Employers provide transit subsidies to employees working in metropolitan and suburban areas served by mass transportation (e.g., buses, subways, and trains). Companies may offer transit passes, tokens, or vouchers. Practices vary from partial subsidy to full subsidy.

Many employers must offer transportation services to comply with the law. Local and state governments increasingly request that companies reduce the number of single-passenger automobiles commuting to their workplace each day because of government mandates for cleaner air. The Clean Air Act Amendments of 1990 require employers in large metropolitan areas such as Los Angeles to comply with state and local commuter-trip reduction laws. Employers may also offer transportation services to recruit individuals who do not care to drive in rush-hour traf�ic. Furthermore, transportation services enable companies to offset de�icits in parking space availability, particularly in congested metropolitan areas.

Employees obviously stand to bene�it from these transportation services. For example, using public transportation or joining a vanpool often saves money by eliminating such commuting costs as gas, insurance, car maintenance and repairs, and parking fees. Moreover, commuting time can be quite lengthy for some employees. By leaving the driving to others, employees can use the time more productively by reading, completing paperwork, or “unwinding.”

OUTPLACEMENT ASSISTANCE

Some companies provide technical and emotional support through outplacement assistance (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss313) to employees who are being laid off or terminated. They do so with a variety of career and personal programs designed to develop employees’ job-hunting skills and strategies and to boost employees’ self-con�idence. A variety of factors leads to employee termination. Those best suited to outplacement assistance programs include:

Layoffs due to economic hardship

Mergers and acquisitions

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Company reorganizations

Changes in management

Plant closings or relocation

Elimination of speci�ic positions, often the result of changes in technology

Outplacement assistance provides such services as personal counseling, career assessments and evaluations, training in job search techniques, resume and cover letter preparation, interviewing techniques, and training in the use of such basic workplace technology as computers. Although bene�icial to employees, outplacement assistance programs hold possible bene�its for companies as well. They can promote a positive image of the company among those being terminated, as well as their families and friends, by helping these employees prepare for employment opportunities.

WELLNESS PROGRAMS

In the 1980s, employers began sponsoring wellness programs (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss477) to promote and maintain employees’ physical and psychological health. Wellness programs vary in scope. They may emphasize weight loss only, or they may emphasize a range of activities such as weight loss, smoking cessation, and cardiovascular �itness. Programs may be offered on- or off-site. Although some companies invest in staf�ing professionals for wellness programs, others contract with such external vendors as community health agencies or private health clubs. An important goal besides promoting employee health is containing health care costs. The evidence appears to be mixed.28 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec10#ch09end28) Nowadays, nearly 90 percent of employers offer �inancial incentives or prizes to employees who strive for better health.29

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec10#ch09end29) For example, Johnson & Johnson employees pay $500 less for their annual health insurance premium if they complete a health pro�ile, which the company uses to recommend wellness activities. Some employers, on the other hand, impose penalties for employees who do not engage in at least three wellness activities (for example, completing a health assessment). For instance, Houston, Texas, municipal employees take a $25 monthly pay reduction for failure to complete designated wellness activities.

Companies need to ensure that wellness programs are not a condition of employment. Recently, the U.S. Equal Employment Opportunity Commission charged that Orion Energy violated the Americans with Disabilities Act by requiring an employee to submit to medical exams and inquiries that were not job-related or of business necessity.30 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec10#ch09end30) This employee refused to participate in the wellness program. In response, the company deducted the entire cost of the health insurance premium from this employee’s pay, and, ultimately, terminated her employment. The disposition of the case was not reached by the time this edition of the book went to press.

Smoking cessation (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss416) , stress reduction, nutrition and weight loss, exercise and �itness activities, and health-screening programs are the most common workplace wellness programs. Smoking cessation plans range from simple campaigns that stress the negative aspects of smoking to intensive programs directed at helping individuals to stop smoking. Many employers offer courses and treatment to help and encourage smokers to quit. Other options include offering nicotine replacement therapy (e.g., nicotine gum and patches) and self-help services. Many companies sponsor such antismoking events as the Great American Smoke-Out, during which companies distribute T-shirts, buttons, and literature that discredit smoking.

Stress management (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss434) programs can help employees cope with many factors inside and outside work that contribute to stress. For instance, job conditions, health and personal problems, and personal and professional relationships can make employees anxious and therefore less productive. Symptoms of stressful workplaces include low morale, chronic

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absenteeism, low productivity, and high turnover rates. Employers offer stress management programs to teach workers to cope with conditions and situations that cause stress. Seminars focus on recognizing signs of stress and burnout, as well as on how to handle family- and business-related stress. Stress reduction techniques can improve quality of life inside and outside the workplace. Employers bene�it from increased employee productivity, reduced absenteeism, and lower health care costs.

Weight control and nutrition programs (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss475) are designed to educate employees about proper nutrition and weight loss, both of which are critical to good health. Information from the medical community has clearly indicated that excess weight and poor nutrition are signi�icant risk factors in cardiovascular disease, diabetes, high blood pressure, and cholesterol levels. Over time, these programs should give employees better health, increased morale, and improved appearance. For employers, these programs should result in improved productivity and lower health care costs.

Companies can contribute to employees’ weight control and proper nutrition by sponsoring memberships in such weight-loss programs as Weight Watchers. Sponsoring companies may also reinforce weight-loss programs’ positive results through support groups, intensive counseling, competitions, and other incentives. Companies sometimes actively attempt to in�luence employee food choices by stocking vending machines with nutritional food.

FINANCIAL EDUCATION

Some companies have added �inancial education to employee bene�it offerings. Financial education programs provide employees with the resources for managing personal budgets and long-term savings (e.g., for retirement). Companies are increasingly including �inancial education as part of the bene�its program. These companies reason that �inancial education is a relatively low-cost bene�it that helps employees plan current and future (retirement) budgets.

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9.3 LEGISLATION PERTINENT TO DISCRETIONARY BENEFITS

9-3. Summarize legislation that pertains to discretionary bene�its.

Many laws guide the design and implementation of discretionary employee bene�its practices. In Chapter 2 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch02#ch02) , we reviewed the relationship between core compensation and the National Labor Relations Act, the Fair Labor Standards Act, and key antidiscrimination laws such as Title VII of the Civil Rights Act of 1964. These laws also have bearing on discretionary bene�its practice in a more general way. Here we review additional key laws that in�luence discretionary employee bene�its practice: the Internal Revenue Code (IRC), the Employee Retirement Income Security Act of 1974 (ERISA), and the Pension Protection Act of 2006.

Internal Revenue Code

As noted previously, the IRC is the set of regulations pertaining to taxation in the United States (e.g., sales tax, company [employer] income tax, individual [employee] income tax, and property tax). Taxes represent an essential source of revenue to fund federal, state, and local government programs. The Internal Revenue Service (IRS) is the government agency that develops and implements the IRC and levies penalties against companies and individuals who violate the IRC. Since the early 1900s, the federal government has encouraged employers to provide retirement bene�its to employees with tax breaks or deductions. In other words, the government allowed employers to exclude retirement plan payments from their income subject to taxation. This “break” reduced the amount of a company’s required tax payments. In general, the larger the contributions to retirement plans, the greater the reduction in the amount of taxes owed to the government. The IRC also permits employees to make contributions to bene�its such as health care and retirement plans on a pretax basis. Earlier in the chapter we discussed 401(k) plans. The tax deductibility of bene�its costs also requires that employers meet particular requirements set forth by the Employee Retirement Income Security Act (ERISA), which we discuss next.

Employee Retirement Income Security Act of 1974 (ERISA)

The Employee Retirement Income Security Act of 1974 (ERISA) (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss129) was established to regulate the implementation of various employee bene�its programs, including medical, life, and disability programs, as well as pension programs. The essence of ERISA is protection of employee bene�its rights.

ERISA addresses matters of employers’ reporting and disclosure duties, funding of bene�its, the �iduciary responsibilities for these plans, and vesting rights. Companies must provide their employees with straightforward descriptions of their employee bene�it plans, updates when substantive changes to the plan are implemented, annual synopses on the �inancing and operation of the plans, and advance noti�ication if the company intends to terminate the bene�its plan. The funding requirement mandates that companies meet strict guidelines to ensure having suf�icient funds when employees reach retirement. Similarly, the �iduciary responsibilities require that companies not engage in transactions with parties having interests adverse to those of the recipients of the plan and not deal with the income or assets of the employee bene�its plan in the company’s own interests.

As noted, tax incentives encourage companies to offer retirement programs. Some of the ERISA Title I and Title II provisions set the minimum standards required to qualify pension plans for favorable tax treatment. Quali�ied plans (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss361) entitle employers and employees to substantial tax bene�its. Employers and employees speci�ically do not pay tax on their contributions within dollar limits that differ for de�ined bene�it and de�ined contribution plans. In addition, the investment earnings of the trust in which plan assets are held are generally exempt from tax. Finally, participants or bene�iciaries generally do not pay taxes on the value of retirement bene�its until they receive distributions. A company’s failure to meet any of the minimum standard provisions “disquali�ies” pension plans from receiving

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favorable tax treatment. Nonquali�ied plans (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss296) refer to pension plans that fail to meet at least one of the minimum standard provisions. Quali�ied plans possess 13 fundamental characteristics. Table 9-4 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec3#ch09tab04) lists these characteristics. We will brie�ly discuss four of the more fundamental standards next – participation requirements, coverage requirements, vesting rules, and nondiscrimination rules.

TABLE 9-4 Characteristics of Quali�ied Retirement Plans

Participation requirements

Coverage requirements

Vesting rules

Accrual rules

Nondiscrimination rules

Key employee and top-heavy provisions

Minimum funding standards

Social Security integration

Contribution and bene�it limits

Plan distribution rules

Quali�ied survivor annuities

Quali�ied domestic relations orders

Plan termination rules and procedures

Participation requirements (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss317) apply to pension plans. Employees must speci�ically be allowed to participate in pension plans after they have reached age 2131

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec10#ch09end31) and have completed 1 year of service (based on 1,000 work hours).32

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec10#ch09end32) These hours include all paid time for performing work and paid time off (e.g., vacation, sick leave, and holidays). Coverage requirements (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss88) limit the freedom of employers to exclude employees. Quali�ied plans do not disproportionately favor highly compensated employees.33 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec10#ch09end33) The IRS speci�ies the criteria for highly compensated employee status. We will review these criteria in Chapter 11 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch11#ch11) on executive compensation. Vesting (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss466) refers to an employee’s nonforfeitable rights to retirement plan bene�its.34

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec10#ch09end34) There are two aspects of vesting. First, employees are always vested in their contributions to pension plans. Second, companies must grant full vesting rights to employer contributions on one of the following two schedules: cliff vesting (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss47) or 6-year graduated

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schedule (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss4) . Cliff vesting schedules must grant employees 100 percent vesting after no more than 3 years of service. That is, after 3 years of participation in the pension plan, an employee has the right to receive all of the contributions plus interest on the contributions made by the employer. This schedule is known as cliff vesting because leaving one’s job prior to becoming vested under this schedule is tantamount to falling off a cliff—an employee loses all of the accrued employer contributions. On the other hand, companies may use a gradual vesting schedule. The 6-year graduated schedule allows workers to become 20 percent vested after 2 years and to vest at a rate of 20 percent each year thereafter until they are 100 percent vested after 6 years of service. Nondiscrimination rules (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss293) prohibit employers from discriminating in favor of highly compensated employees in contributions or bene�its, availability of bene�its, rights, or plan features.35 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec10#ch09end35) In addition, employers may not amend pension plans so that highly compensated employees are favored.

Pension Protection Act of 2006

The Pension Protection Act (PPA) was designed to strengthen employee rights and is an amendment to ERISA. The PPA focuses on bettering employee rights in at least two ways. The �irst consideration applies to de�ined bene�it plans and the second applies to de�ined contribution plans.

DEFINED BENEFIT PLANS

First, this law should strengthen the �inancial condition of the Pension Bene�it Guaranty Corporation (PBGC) (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss325) , which is a self-�inanced corporation established by ERISA to insure private-sector de�ined bene�it plans. Companies that offer de�ined bene�it plans are required to pay an insurance premium to protect retirement income promised by these retirement plans. Companies that underfund these plans pay substantially higher costs for insurance protection because they are at greater risk for not having the funds to pay promised retirement bene�its. The PPA aims to strengthen the PBGC �inancial condition by making it more dif�icult for companies to skip making premium payments. Finally, the PPA raises the amount that employers can contribute to pension funding with tax advantages, creating an additional incentive to adequately fund pension plans.

DEFINED CONTRIBUTION PLANS

The PPA makes it easier for employees to participate in de�ined contribution plans. Millions of workers who are eligible to participate in their employers’ de�ined contribution plans do not contribute to them. In 2014, only 70 percent with access to a de�ined contribution plan chose to participate.36

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec10#ch09end36) There are a variety of reasons why employees choose not to participate; however, a prominent reason is that most individuals feel they do not have suf�icient knowledge about how to choose investment options that will help them earn suf�icient money for retirement. In addition, once employees make the decision to participate in these plans and have been making regular contributions, they are not likely to stop. With these issues in mind, the PPA enables companies to enroll their employees automatically in de�ined contribution plans and provides greater access to professional advice about investing for retirement. In addition, this Act requires companies to offer multiple investment options to allow employees to select how much risk they are willing to bear.

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9.4 DESIGNING AND PLANNING THE BENEFITS PROGRAM

9-4. Discuss the fundamentals of designing and planning the bene�its program.

As noted earlier, discretionary bene�its can work strategically by offering protection programs, paid time off, and services. As they plan and manage employee bene�its programs, HR professionals should keep these functions in mind. There is probably no single company that expects its employee bene�its program to meet all these objectives. Company management, along with union representatives as appropriate, must therefore determine which objectives are the most important for a particular workforce.

Many experts argue that employee input is essential to developing a successful program. Such input helps companies target the limited resources they have available for employee bene�its to those areas that best meet employees’ needs. For example, if a company’s workforce includes mostly married couples who are raising young children, family assistance programs would probably be a priority. By involving employees in program development, they are most likely to accept and appreciate the bene�its they receive. Companies can involve employees in the bene�its determination process in such ways as surveys, interviews, and focus groups. Fundamental design issues include:

Who receives coverage

Financing of bene�its

Employee choice

Cost containment

Communication

Employers can ascertain key information from employees that can be useful in designing these programs. The areas of input emphasize employees’ beliefs about other employers’ bene�its offerings and employees’ thoughts about the value of the bene�its they receive.

Determining Who Receives Coverage

Companies decide whether to extend bene�its coverage to full-time and part-time employees or to full-time employees only. As shown in Table 9-1 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec1#ch09tab01) , part-time workers have much less access to bene�its than full-time employees.

Another scope issue companies must address is employees’ status. In many companies, employees’ initial term of employment (usually shorter than 6 months) is deemed a probationary period (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss356) , and companies view such periods as an opportunity to ensure that they have made sound hiring decisions. Many companies choose to withhold discretionary employee bene�its for all probationary employees. Companies bene�it directly through lower administration-of-bene�its costs for these employees during the probationary period.

Financing

Human resource managers must consider how to �inance bene�its. In fact, the available resources and �inancial goals may in�luence, to some extent, who will receive coverage. Managers may decide among noncontributory, contributory, and employee-�inanced programs or some combination thereof. Noncontributory �inancing

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(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss292) implies that the company assumes total costs for each discretionary bene�it. Under contributory �inancing (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss80) , the company and its employees share the costs. Under employee-�inanced bene�its (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss128) , employers do not contribute to the �inancing of discretionary bene�its. The majority of bene�it plans today are contributory, largely because the costs of bene�its have risen so dramatically. In 2014, the percentage of employees who were required to contribute to funding the following bene�its is as follows: Life insurance (6 percent), long-term disability (8 percent), short-term disability (17 percent), and health insurance (100%).37

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec10#ch09end37) On average, the employee share of the contributions for health insurance was 31 percent.

Employee Choice

Human resource professionals must decide on the degree of choice employees should have in determining the set of bene�its they will receive. If employees within a company can choose from among a set of bene�its, as opposed to all employees receiving the same set of bene�its, the company is using a �lexible bene�its plan (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss161) or cafeteria plan (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss35) . Companies implement cafeteria plans to meet the challenges of diversity, as discussed earlier. Although there is limited evidence regarding employees’ reactions to �lexible bene�its, the existing information indicates bene�it satisfaction, overall job satisfaction, pay satisfaction, and understanding of bene�its increased after the implementation of a �lexible bene�its plan.38 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec10#ch09end38) Many of these outcomes are desirable because they are known to lead to reduced absenteeism and turnover.

TABLE 9-5 Core Plus Option Plan

The core plus option plan contains two sets of bene�its: core bene�its and optional bene�its. All employees receive a minimum level of core bene�its:

Term life insurance equal to one times annual salary

Health protection coverage (e.g., indemnity plan, self-funded, HMO, PPO) for the employee and dependents

Disability insurance

All employees receive credits equal to 4 to 7 percent of salary, which can be used to purchase optional bene�its: Dental insurance for employee and dependents

Vision insurance for employee and dependents

Additional life insurance coverage

Paid vacation time up to 10 days per year

If an employee has insuf�icient credits to purchase the desired optional bene�its, he or she can purchase these credits through payroll deduction.

Cafeteria plans vary,39 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec10#ch09end39) so only the two most common will be discussed here. Flexible spending accounts (FSAs) permit employees to pay for certain bene�its expenses (e.g., health care or child care) with pretax dollars. Each year, employees elect the amount of salary-reduction dollars they wish to allocate to this kind of plan. Employers then use this money to reimburse employees for expenses incurred during the plan year that qualify for repayment. IRS regulations limit the amount

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an employee may set aside each year in their FSA. In 2015, an employee was eligible to contribute up to $2,550 for his or her own medical expenses. For dependent care FSA accounts, the limit was $5,000.

Core plus option plans (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss85) extend a preestablished set of such bene�its as medical insurance as a program core, which is usually mandatory for all employees. Beyond the core, employees may choose from an array of bene�its options that suit their personal needs. Companies establish upper limits of bene�its values available to each employee. If employees do not choose the maximum amount of bene�its, employers may offer an option of trading extra bene�its credits for cash. Table 9-5 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec4#ch09tab05) illustrates the choices of a typical core plus plan.

Cost Containment

Overall, HR managers today try to contain costs. As indicated earlier, the rise in health care costs is phenomenal, so employee bene�its now account for a substantial percentage of total compensation costs incurred by companies. In 2014, total employee bene�its accounted for 31.2 percent.40

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec10#ch09end40) Discretionary bene�its costs accounted for nearly 25 percent. The current amount has risen dramatically over the past few decades. This increase would not necessarily raise concerns if total compensation budgets were increasing commensurably. As we discussed in Chapter 8 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch08#ch08) , the growth in funds available to support all compensation programs has stagnated. As a consequence, employers face dif�icult trade-offs between employee bene�its offerings and increases in core compensation.

Communication

Earlier, we noted that employees often regard employee bene�its as an entitlement. Thus, it is reasonable to infer that employees are not aware of their value. In fact, employees are either not aware of or undervalue the employee bene�its they receive. Given the signi�icant costs associated with offering employee bene�its, companies should try to convey to employees the value they are likely to derive from having such bene�its. For example, a personal bene�its summary, displayed in Table 9-6 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec4#ch09tab06) , is a useful approach. A bene�its communication plan is therefore essential. An effective communication program should have three primary objectives:41 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec10#ch09end41)

To create an awareness of and appreciation for the way current bene�its improve the �inancial security and the physical and mental well-being of employees

To provide a high level of understanding about available bene�its

To encourage the wise use of bene�its

TABLE 9-6 Sample Personal Statement of Bene�its

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Companies have traditionally used printed brochures to summarize the key features of the bene�its program and to help potential employees compare bene�its offerings with those of other companies they may be considering. When new employees join the company, initial group meetings with bene�its administrators or audiovisual presentations can detail the elements of the company’s bene�its program. Shortly after group meetings or audiovisual presentations (usually within a month), new employees should meet individually with bene�its administrators, sometimes known as “counselors,” to select bene�its options. After employees select bene�its, the company should provide them with personal bene�its statements that detail the scope of coverage and value of each component. Beyond these particulars, companies may update employees on changes in bene�its (i.e., reductions in or additions to bene�its choices or coverage) with periodic newsletters.

TABLE 9-7 Menu of Employee Bene�it Options

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This section is designed to provide detailed information regarding your bene�its as a University of Illinois employee. It will give you a comprehensive explanation of each bene�it and the resources you will need to initiate enrollment, make changes, or �ind answers to questions regarding your bene�its. Please select from the following categories:

Announcements—Provides announcements of upcoming sign-up periods or events and updated information relating to your bene�its.

Bene�its Directory—Provides a listing of staff members, including addresses, phone numbers, and e- mail addresses for the Bene�its Service Center and each campus.

Bene�it Choice—Bene�it Choice is an annual open enrollment period that allows employees to make changes to their state of Illinois health, dental, and life insurance coverages, and enroll or re-enroll in �lexible spending accounts.

Bene�it Forms—Provides links to printable and online bene�it forms.

Bene�its Statement—Provides a statement outlining your current bene�it enrollments and instructions for accessing that information.

Bene�its Summary—Provides a detailed, comprehensive description of each bene�it plan and its provisions.

Frequently Asked Questions—Provides a list of commonly asked questions relating to your bene�its.

Leave Information—Provides time off related information for such bene�its as family medical leave, sick leave, and vacation leave.

Retirement Planning Seminars—Provides dates and sign-up information.

Contemporary information sources include a company’s intranet. An intranet is a useful way to communicate bene�its information to employees on an ongoing basis beyond the legally required written documents. In an era of the paperless of�ice, employees are less likely to have written materials readily available. Employees can review general information about the bene�its program whenever they want. For example, Table 9-7 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec4#ch09tab07) lists general information about the kinds of bene�its options available at the University of Illinois. In the online version of such a list, each item (e.g., announcements, bene�its directory) would contain a hyperlink that leads to more detailed information.

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9.5 THE BENEFITS AND COSTS OF DISCRETIONARY BENEFITS

9-5. Explain the bene�its and costs of discretionary bene�its.

Discretionary bene�its, like core compensation, can contribute to a company’s competitive advantage for the reasons discussed earlier (e.g., tax advantages and recruiting the best-quali�ied candidates). Discretionary bene�its can also undermine the imperatives of strategic compensation. Companies that provide discretionary bene�its to employees as entitlements are ultimately less likely to promote competitive advantage than companies that design discretionary employee bene�its programs to �it the situation.

Management can use discretionary bene�it offerings to promote particular employee behaviors that have strategic value. For instance, when employees take advantage of tuition reimbursement programs, they are more likely to contribute to the strategic imperatives of product or service differentiation or cost reduction. Knowledge acquired from job-relevant education may enhance the creative potential of employees, as well as their ability to suggest more cost-effective modes of work. On the other hand, deferred pro�it sharing plans may contribute to companies’ strategic imperatives by instilling a sense of ownership in employees and a drive to help position the company to earn signi�icant pro�its over the long run.

A company can use discretionary bene�its to distinguish itself from the competition. In effect, competitive bene�its programs potentially convey the message that the company is a good place to work because it invests in the well- being of its employees. Lucrative bene�its programs will presumably attract a large pool of applicants that include high-quality candidates, positioning a company to hire the best possible employees.

Finally, the tax advantage afforded companies from offering particular discretionary bene�its has strategic value. In effect, the tax advantage translates into cost savings to companies. These savings can be applied to promote competitive advantage. For example, companies pursuing differentiation strategies may invest these savings into research and development programs or employee development. Companies pursuing lowest-cost strategies may be in a better position to compete because these savings may enable companies to lower the prices of their products and services without cutting into pro�its.

COMPENSATION IN ACTION

Many employees feel entitled to certain bene�its that they consider to be the positive consequence of organizational membership. While some bene�its are required by law, it will be up to the organization to decide on other bene�its that are offered and administered. As a line manager or HR professional, you might be in charge of creating a bene�its program, but you will certainly be called on to interpret policy in order to meet the requests of employees. Whether you are dealing with the creation or interpretation of bene�its, you will want to have access to accurate information so your organization’s offerings serve as true bene�its for employees and not a source of frustration and ambiguity.

Action checklist for line managers and HR—helping employees understand and fully utilize bene�its

HR takes the lead

Ensure that the employee bene�its handbook is up to date and accurate. Depending on the employee population, both an online version and a hard copy of the manual should be accessible.

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Create workshops to help employees understand the unique aspects of the bene�its offered by the organization—highlight confusing aspects and aspects that are not well known.

While many companies now have call centers that answer bene�its questions for employees, seek to stay up to date on company policies and legal requirements so that, when more complex bene�its issues arise (e.g., long-term disability, sabbaticals, and outplacement services), the questions can be dealt with in a sensitive and timely manner.

Line managers take the lead

Suggest ways to keep the “explaining your bene�its” portion of new employee orientation engaging and interesting. The session should be conducted by HR (or the bene�its specialist).

Keep track of the most common bene�its questions that arise. Seek to be educated by HR on the speci�ics of these speci�ic policies so responses can be given quickly and accurately.

When changes to bene�its are made, call employees together to discuss rationale and what can be done to make full use of the existing bene�its.

END OF CHAPTER REVIEW

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Summary

Learning Objective 1: A variety of social and economic factors contributed to companies’ adoption of discretionary employee bene�it practices. For example, the federal government provided tax incentives to companies that offered bene�its. Wage freezes during World War II prompted companies to offset those freezes with new or enhanced bene�its.

Learning Objective 2: The three categories of discretionary bene�its include protection programs, paid time off, and services. An example of a protection program is life insurance. Vacation is one among many paid time off bene�its. Wellness programs provide important services to employees’ health and welfare.

Learning Objective 3: A host of laws in�luence the design and implementation of discretionary bene�it practices, including the Internal Revenue Code, the Employee Retirement Income Security Act, and the Pension Protection Act.

Learning Objective 4: Bene�it program design entails consideration of many factors including who is eligible to participate, �inancing of bene�its, employee choice in determining bene�its, cost containment methods, and communication plans.

Learning Objective 5: Discretionary bene�its are an essential component of the total compensation system. When designed properly, discretionary bene�it practices can help promote particular behaviors through promoting wellness, �inancial security, work-life balance, and so forth.

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Key Terms welfare practices 203 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec1#page_203) short-term disability insurance 204

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec1#page_204) long-term disability insurance 204

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec1#page_204) short-term disability 205

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec2#page_205) preexisting condition 205

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec2#page_205) preeligibility period 205

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec2#page_205) elimination period 205

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec2#page_205) exclusion provisions 205

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec2#page_205) long-term disability 205

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec2#page_205) life insurance 206 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec2#page_206) term life insurance 206

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec2#page_206) whole life insurance 206

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec2#page_206) universal life insurance 206

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec2#page_206) retirement programs 206

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec2#page_206) pension plan 206 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec2#page_206) de�ined bene�it plans 206

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec2#page_206) de�ined contribution plans 207

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec2#page_207) company match 207 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec2#page_207) Internal Revenue Code (IRC) 208

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec2#page_208) annual addition 208 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec2#page_208) Section 401(k) plans 208

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec2#page_208) Roth 401(k) plans 208

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec2#page_208) Section 403(b) plans 208

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec2#page_208) Section 457 plans 208

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec2#page_208) pro�it sharing plans 208

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec2#page_208) deferred pro�it sharing plans 208

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hybrid plans 208 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec2#page_208) cash-balance plans 208

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec2#page_208) integrated paid time off policies 210

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec2#page_210) paid time off banks 210

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec2#page_210) sabbatical leaves 210 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec2#page_210) volunteerism 211 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec2#page_211) employee assistance programs (EAPs) 211

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec2#page_211) family assistance programs 211

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec2#page_211) �lexible scheduling and leave 212

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec2#page_212) day care 212 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec2#page_212) tuition reimbursement programs 212

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec2#page_212) transportation services 212

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec2#page_212) outplacement assistance 213

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec2#page_213) wellness programs 213

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec2#page_213) smoking cessation 213

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec2#page_213) stress management 213

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec2#page_213) weight control and nutrition programs 215

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec3#page_215) Employee Retirement Income Security Act of 1974 (ERISA) 214

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec2#page_214) quali�ied plans 215 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec3#page_215) nonquali�ied plans 215

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec3#page_215) participation requirements 215

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec3#page_215) coverage requirements 215

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec3#page_215) vesting 215 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec3#page_215) cliff vesting 215 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec3#page_215) 6-year graduated schedule 216

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec3#page_216) Nondiscrimination rules 216

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec3#page_216) Pension Bene�it Guaranty Corporation (PBGC) 216

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec3#page_216) probationary period 217

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec4#page_217) noncontributory �inancing 217

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contributory �inancing 217 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec4#page_217)

employee-�inanced bene�its 217 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec4#page_217)

�lexible bene�its plan 217 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec4#page_217)

cafeteria plan 217 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09lev1sec4#page_217) core plus option plans 218

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MyManagementLab CHAPTER QUIZ! If your professor has assigned this, go to the Assignments section of mymanagementlab.com (http://mymanagementlab.com) to complete the Chapter Quiz! and see what you’ve learned.

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Discussion Questions 9-1. Many compensation professionals are faced with making choices about which discretionary bene�its to

drop because funds are limited and the costs of these bene�its continually increase. Assume you must make such choices. Rank-order discretionary bene�its from the ones you would most likely eliminate to the ones you would least likely eliminate. Explain your rationale. Do such factors as the demographic composition of the workforce of the company matter? Explain.

9-2. Discuss your views about whether discretionary employee bene�its should be an entitlement or something earned based on job performance.

9-3. Assume that you are an HRM professional whose responsibility is to develop a brochure for the purpose of conveying the value of your company’s bene�its program to potential employees. Your company has asked you to showcase the bene�its program in a manner that will encourage recruits to join the company. Develop a brochure (of no more than one page) that lists the bene�its and the objectives.

9-4. Conduct some research in order to identify examples of innovative bene�it practices. A useful starting point is an Internet search using phrases such as “best companies to work for.”

9-5. Are employees more likely to favor de�ined contribution plans over de�ined bene�it plans? How about employers? Explain your answers.

CASE Time Off At Superior Software Services

Case can be found on MyManagementLab.

As she hangs up the telephone, Joan Jackson realizes that she needs to consider changing her company’s time off policies. She just received a call from an employee reporting off work because he is sick. This is the second employee on the same project team to call off this week, and the unscheduled absence will likely cause a delay in meeting the project deadline.

Joan, the president of Superior Software Services, is proud that her company has earned a reputation for providing high-quality software solutions. Superior recruits and retains top software engineers and also boasts an impressive administrative staff. However, even with a talented staff, Joan is concerned about the company’s ongoing ability to meet project deadlines.

Over the past few months, unscheduled absences have caused Superior to delay the delivery of software products to a few clients. When a staff member calls in to take a sick day without prior notice, shifting employees to cover the work in order to meet a deadline is dif�icult. Joan believes Superior’s time off policies may be causing some of the problems.

Superior offers employees 7 vacation days and 5 sick days each year. The company has a policy that employees may use sick days only for illness or emergencies. Employees may not schedule sick days in advance. Vacation days are scheduled at the beginning of the year. Employees receive approval of their requested vacation days on a seniority basis, so most employees designate the days they will take their vacation within the �irst few weeks of a new year so they are able to effectively plan vacation travel.

Joan believes Superior’s current time off policy creates an incentive for employees to call off at the last minute. She has learned from supervisors that many employees use their sick days to take care of personal business such as

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attending parent–teacher conferences or running personal errands. These are often events that could be prescheduled time off, but employees do not feel they have a time off option to address such needs. Sick days can’t be prescheduled, and vacation days are often already committed at the beginning of the year.

Joan believes that changing the time off policies could reduce the number of unscheduled absences, but she is not sure if her idea will address her concerns. She is considering replacing the current vacation/sick day allowance with a paid time off (PTO) bank. Employees would receive 12 PTO days each year. They would be permitted to schedule preferred days off at the beginning of the year so that they can make vacation travel plans, and the remaining days could be saved for days when the employee is ill or could be scheduled ahead of time to take care of personal business. Joan believes this change will encourage employees to schedule their time off in advance when possible. With advance notice of absences, supervisors will be better able to plan projects and meet deadlines.

Questions:

9-6. Do you think changing Superior’s time off policies will decrease unscheduled time off?

9-7. Beyond reducing occurrences of unscheduled time off, are there any other bene�its to offering PTO?

9-8. Are there any disadvantages to offering PTO?

Crunch the Numbers! 401(k) Plan Contributions: Allowable Amounts and Employer Match

An additional Crunch the Numbers! exercise can be found on mymanagementlab.com (http://mymanagementlab.com) .

You have just begun work at XYZ Manufacturing Company. Among its bene�its offerings is a generous quali�ied 401(k) plan with an employer match. In 2015, your annual salary is $45,000 and you are age 55. You’ve decided to contribute 10 percent of your annual salary to your 401(k) plan even though the Internal Revenue Service allows you to contribute up to $24,000 in 2015 ($18,000 plus a $6,000 catch up contribution for employees age 50 or more). The annual addition is $53,000.

Questions:

9-9. How much more money would you need to contribute to meet the allowable maximum contribution?

9-10. In 2015, the company offers a $0.75 match for each dollar that you contribute between 3 percent and 6 percent of your annual salary. How much is the company match based on your 10 percent contribution?

9-11. Based on the sum of your answers to questions 9-9 and 9-10, what is the difference between the IRS maximum annual addition for 2015 and the total contribution to your 401(k) plan?

MyManagementLab Go to mymanagementlab.com (http://mymanagementlab.com) for Auto-graded writing questions as well as the following Assisted-graded writing questions:

9-12. If a company’s budget were extremely limited and could only afford to offer one bene�it, which would you select? Provide your rationale.

9-13. Name at least one discretionary bene�it practice that would help companies to have better control over absenteeism.

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9-14. MyManagementLab Only – comprehensive writing assignment for this chapter.

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Endnotes 1. U.S. Department of Labor. (2015, March 11). Employer costs for employee compensation, December 2014 (USDL: 15-0386). Available: www.bls.gov (http://www.bls.gov) , accessed March 14, 2015.

2. Employee Bene�its Research Institute. (1997). Pension Plans (Chapter 4 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch04#ch04) .). Fundamentals of Employee Bene�its Programs. Washington, D.C. Employee Bene�its Research Institute.

3. U.S. Bureau of Labor Statistics. (1919). Welfare Work for Employees in Industrial Establishments in the United States. Bulletin # 250, pp. 119–123.

4. U.S. Bureau of Labor Statistics. (2014). National Compensation Survey: Employee Bene�its in the United States, March 2014 (Bulletin 2779). Available: www.bls.gov (http://www.bls.gov) , accessed March 11, 2015.

5. Solnick, L. (1985). The effect of the blue collar unions on white collar wages and bene�its. Industrial and Labor Relations Review, 38, pp. 23–35.

6. Toossi, M. (2009). Labor Force Projections to 2018: Older workers staying more active. Monthly Labor Review, pp. 30–51.

7. Martocchio, J. J. (2014). Employee Bene�its: A Primer for the Human Resource Professional (5th ed.). Burr Ridge, IL: Irwin/McGraw-Hill.

8. U.S. Bureau of Labor Statistics. (2014). National Compensation Survey: Employee Bene�its in the United States, March 2014 (Bulletin 2779). Available: www.bls.gov (http://www.bls.gov) , accessed March 11, 2015.

9. U.S. Bureau of Labor Statistics. (2014). National Compensation Survey: Employee Bene�its in the United States, March 2014 (Bulletin 2779). Available: www.bls.gov (http://www.bls.gov) , accessed March 11, 2015.

10. U.S. Bureau of Labor Statistics. (2014). National Compensation Survey: Employee Bene�its in the United States, March 2014 (Bulletin 2779). Available: www.bls.gov (http://www.bls.gov) , accessed March 11, 2015.

11. U.S. Bureau of Labor Statistics. (2014). National Compensation Survey: Employee Bene�its in the United States, March 2014 (Bulletin 2779). Available: www.bls.gov (http://www.bls.gov) , accessed March 11, 2015.

12. U.S. Bureau of Labor Statistics. (2014). National Compensation Survey: Employee Bene�its in the United States, March 2014 (Bulletin 2779). Available: www.bls.gov (http://www.bls.gov) , accessed March 11, 2015.

13. U.S. Bureau of Labor Statistics. (2014). National Compensation Survey: Employee Bene�its in the United States, March 2014 (Bulletin 2779). Available: www.bls.gov (http://www.bls.gov) , accessed March 11, 2015.

14. Costo, S. L. (2006). Trends in retirement plan coverage over the last decade. Monthly Labor Review, February, pp. 58–64.

15. U.S. Bureau of Labor Statistics. (2014). National Compensation Survey: Employee Bene�its in the United States, March 2014 (Bulletin 2779). Available: www.bls.gov (http://www.bls.gov) , accessed March 11, 2015.

16. Costo, “Trends in retirement.” 17. U.S. Bureau of Labor Statistics. (2014). National Compensation Survey: Employee Bene�its in the United States,

March 2014 (Bulletin 2779). Available: www.bls.gov (http://www.bls.gov) , accessed March 11, 2015. 18. Rapoport, M. (2015). Longer lives hit companies with pension plans hard. The Wall Street Journal (February

23). Available: www.wsj.com (http://www.wsj.com) , accessed February 25, 2015. 19. I.R.C. §415(c). 20. I.R.C. §404(a)(3). 21. 26 Code of Federal Regulations §§1.401(a)(4)-8(c)(3)(I). 22. Markowich, M. M. (2007). Paid Time-Off Banks. Phoenix, AZ: WorldatWork Press. 23. WorldatWork (2014). Paid Time Off Programs and Practices (September). Available: www.worldatwork.org

(http://www.worldatwork.org) , accessed March 10, 2015.

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24. Harrison, K. (2014). The most popular employee perks of 2014. Fortune (February 19). Available: http://www.fortune.com (http://www.fortune.com) , accessed March 12, 2015.

25. Society for Human Resource Management (2013). 2013 Employee Bene�its: An Overview of Employee Bene�its Offerings in the U.S. Available: http://www.shrm (http://www.shrm) , accessed February 5, 2015.

26. Halzack, S. (2013). Paid time off for volunteering gains traction as a way to retain employees. The Washington Post (August 11). Available: http:/www.washingtonpost.com (http://www.washingtonpost.com) , accessed February 26, 2015.

27. U.S. Bureau of Labor Statistics. (2014). National Compensation Survey: Employee Bene�its in the United States, March 2014 (Bulletin 2779). Available: www.bls.gov (http://www.bls.gov) , accessed March 11, 2015.

28. Thomas, K. (2013). Companies get strict on health of workers. The New York Times (March 25). Available: www.NYTimes.com (http://www.NYTimes.com) , accessed February 7, 2015.

29. Wieczner, J. (2013). Your company wants to make you healthy. The Wall Street Journal (April 8). Available: www.wsj.com (http://www.wsj.com) , accessed January 15, 2015.

30. U.S. Equal Employment Opportunity Commission (2014). EEOC Lawsuit Challenges Orion Energy Wellness Program and Related Firing of Employee (Press release, August 20). Available: www.1.eeoc.gov (http://www.1.eeoc.gov) , accessed March 12, 2015.

31. I.R.C. §§410(a)(1), 410(a)(4); Treas. Reg. §1.410(a)-3T(b); ERISA §202(a). 32. I.R.C. §410(a)(3), Treas. Reg. §1.410(a)-5, 29 C.F.R. §2530.200b-2(a), ERISA §202(a)(3). 33. I.R.C. §414(q). 34. I.R.C. §§411(a)(2), 411(a)(5); Treas. Reg. §1.411(a)-3T; ERISA §203(a). 35. I.R.C. §401(a)(4). 36. U.S. Bureau of Labor Statistics. (2014). National Compensation Survey: Employee Bene�its in the United States,

March 2014 (Bulletin 2779). Available: www.bls.gov (http://www.bls.gov) , accessed March 11, 2015. 37. U.S. Bureau of Labor Statistics. (2014). National Compensation Survey: Employee Bene�its in the United States,

March 2014 (Bulletin 2779). Available: www.bls.gov (http://www.bls.gov) , accessed March 11, 2015. 38. Barber, A. E., Dunham, R. B., & Formisano, R. (1990). The Impact of Flexible Bene�it Plans on Employee

Satisfaction. Paper presented at the Fiftieth annual meeting of the Academy of Management, San Francisco, CA. 39. Martocchio, Employee Bene�its (5th ed.). 40. U.S. Department of Labor (December 10, 2014). Employer costs for employee compensation, September 2014

(USDL: 14-2208). Available: www.bls.gov/ect/htm (http://www.bls.gov/ect/htm) , accessed February 1, 2015. 41. Martocchio, Employee Bene�its (5th ed.).