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Human Resource Management

Fifteenth Edition

Chapter 13

Benefits and Services

Where Are We Now… Chapter 13 Benefits and Services

The main purpose of this chapter is to explain the third major pay component: employee benefits.

The main topics we discuss are pay for time not worked benefits, insurance benefits, retirement benefits, employees’ services benefits, flexible benefits, and using benefits to improve engagement and performance.

This chapter will complete Part 4 of the text in our discussion of employee compensation.

Learning Objectives (1 of 2)

13-1. Name and define each of the main pay for time not worked benefits.

13-2. Describe each of the main insurance benefits.

13-3. Discuss the main retirement benefits.

After studying this chapter, you will be able to:

13-1. Name and define each of the main pay for time not worked benefits.

13-2. Describe each of the main insurance benefits.

13-3. Discuss the main retirement benefits.

Learning Objectives (2 of 2)

13-4. Outline the main employees’ services benefits.

13-5. Explain the main flexible benefit programs.

13-6. Explain how to use benefits to improve engagement, productivity, and performance.

After studying this chapter, you will also be able to:

13-4. Outline the main employees’ services benefits.

13-5. Explain the main flexible benefit programs.

13-6. Explain how to use benefits to improve engagement, productivity, and performance.

Introduction: The Benefits Picture Today

Figure 13-1 Relative Importance of Employer Costs for Employee Compensation (private industry), June 2015

Source: Based on Employer Costs For Employee Compensation—June 2015, http :// www.bls.gov/news.release/pdf/ecec.pdf accessed September 17, 2015.

“What are your benefits?” is the first thing many applicants ask. Benefits—indirect financial and nonfinancial payments employees receive for continuing their employment with the company—are an important part of just about everyone’s compensation. They include things like health and life insurance, pensions, paid time off, and child-care assistance.

Employee benefits account for about 37% of wages and salaries (or about 30% of total payrolls).

Figure 13-1 summarizes the breakdown of benefits as a percentage of employee compensation.

Policy Issues

Employers therefore should design benefits packages carefully. The list of policy issues includes what benefits to offer, who receives coverage, whether to include retirees in the plan, whether to deny benefits to employees during initial “probationary” periods, how to finance benefits, cost-containment procedures, and how to communicate benefits options to employees.

I. Name and define each of the main pay for time not worked benefits.

There are many benefits and ways to classify them.

We will classify them as (1) pay for time not worked (such as vacations), (2) insurance benefits, (3) retirement benefits, (4) personal services benefits, and (5) flexible benefits.

We will start our discussion with pay for time not worked.

Pay for Time Not Worked

Supplemental Pay Benefits

Can Be Very Costly

Pay for time not worked—also called supplemental pay benefits—is a very costly benefit, because of the large amount of time off most employees receive.

Supplemental pay benefits – Benefits for time not worked. Common time-off-with-pay benefits include holidays, vacations, jury duty, funeral leave, military duty, personal days, sick leave, sabbatical leave, maternity leave, and unemployment insurance payments for laid-off or terminated employees.

Unemployment Insurance

All states have their own unemployment insurance (or compensation) laws. These provide benefits to eligible workers who become unemployed through no fault of their own. The benefits derive from a tax on employers that can range from 0.1% to 5% of taxable payroll in most states. An employer’s unemployment tax rate reflects its rate.

Firms aren’t required to let everyone they dismiss receive unemployment benefits—only those released through no fault of their own. Thus, strictly speaking, a worker fired for chronic lateness can’t legitimately claim benefits. But many managers are lackadaisical in protecting their employers. Employers therefore spend thousands of dollars on unemployment taxes unnecessarily.

Vacation and Holidays

Most firms offer vacation and holiday benefits. About 90% of full-time workers and 40% of part-timers get paid holidays, an average of eight paid holidays off. Common U.S. paid holidays include New Year’s Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. On average, American workers get about 9 days of vacation leave after 1 year’s employment, 14 days after 5 years, and 17 after 10 years.

Firms should address several holiday- and vacation-related policy issues, such as how many vacation days employees get, and which days (if any) are paid holidays. Other vacation policy decisions include: Are employees paid for accrued vacation time if they quit before taking their vacations? Will you pay employees for a holiday if they don’t come to work the day before and the day after the holiday? And, should we pay some premium—such as time and a half—when employees must work on holidays?

Know Your Employment Law (1 of 4)

Some Legal Aspects of Vacations and Holidays

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Know Your Employment Law

Some Legal Aspects of Vacations and Holidays

Although federal law doesn’t require vacation benefits, the employer must still formulate its vacation policy with care. As an example, many employers’ vacation policies say vacation pay accrues, say, on a biweekly basis. By doing so, these employers obligate themselves to pay new employees pro rata vacation pay if they leave the firm during their first year. But if the employer’s vacation policy requires that a new employee pass his or her first employment anniversary before becoming entitled to a vacation, the employee gets no vacation pay if he or she leaves during that first year.

Another frequent question is whether the employer can cancel an employee’s scheduled vacation, for instance, due to a rush of orders. Here it’s important that the employer formulate its vacation policy so it’s clear that the employer reserves the right to require vacation cancellation and rescheduling if production so demands.

Sick Leave

Cost Reduction

Sick “banks”

Sick leave – provides pay to employees when they’re out of work due to illness.

Most policies grant full pay for a specified number of sick days—perhaps 12 per year—usually accumulating at the rate of, say, 1 day per month of service. The problem is that while many employees use their sick days only when sick, others use them whether they’re sick or not. In one survey, personal illnesses accounted for about 45% of unscheduled sick leave absences. Family issues (27%), personal needs (13%), and “entitlement” (9%) were other reasons cited.

Such absenteeism costs U.S. employers perhaps $100 billion per year, with personal illness accounting for about a third of the absences.

Cost-Reduction Tactics – Employers use several tactics to reduce excessive sick leave absence. Some repurchase unused sick leave at the end of the year by paying their employees a sum for each unused sick day.

Many employers use pooled paid leave plans (or “banks”). These plans lump together sick leave, vacation, and personal days into a single leave pool.

Improving Performance: HR as a Profit Center (1 of 2)

Controlling Sick Leave

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Improving Performance: HR as a Profit Center

Controlling Sick Leave

Sick leave often gets out of control because employers don’t measure it. In one survey, only 57% of employers formally tracked sick days for their exempt employees. Three-fourths of the employers couldn’t provide an estimate of what sick pay was costing them. Therefore, the employer should first have a system for monitoring sick leaves and for measuring their financial impact. As an example, when she became director of the United Kingdom’s Driver and Vehicle Licensing Agency, the new director knew steps were needed to address its absence rate. The rate had peaked at 14 days out per employee in 2005, at a cost of about $20 million per year (then £10.3 million).

The new director organized a human resource absence initiative. The agency set a goal of reducing absences by 30% by 2010. Agency directors received absence-reduction goals, and their progress was tracked. The agency introduced new policies on special leave, rehabilitation support, and monitoring absentees. They made it easier for employees to swap work shifts, and introduced a guaranteed leave day policy. By 2010, the sickness absence rate was down to 7.5 days per employee and productivity was up, for multiyear savings of about $48 million dollars (£24.4 million).

Talk About it (Discussion): A note on this agency in Wikipedia refers to “amazingly high” levels of sick leave among staff at the DVLA [around 2007], with employees having an average of three weeks a year sick leave.” What sorts of inaction on the part of previous managers could help explain such poor attendance?

Source: Based on “Creating Holistic Time Off Programs Can Significantly Reduce Expenses,” Compensation & Benefits Review, July/August 2007, pp. 18–19; Rita Zeidner, “Strategies for Saving in a Down Economy,” HR Magazine, February 2009, p. 28. Judith Whitaker, “How HR Made a Difference,” People Management 27 (October 28, 2010).

Leaves and Family and Medical Leave Act

Parental leave is an important benefit. About half of workers are women, about 80% will become pregnant during their work lives, and many workers are single parents. Under the Pregnancy Discrimination Act, employers must treat women applying for pregnancy leave as they would any other employee requesting a leave under the employer’s sick leave policies.

Furthermore, the Family and Medical Leave Act of 1993 (FMLA) stipulates that: (see www.dol.gov/whd/regs/compliance/posters/fmlaen.pdf)

1. Private employers of 50 or more employees must provide eligible employees (women or men) up to 12 weeks of unpaid leave for their own serious illness, the birth or adoption of a child, or the care of a seriously ill child, spouse, or parent.

2. Employers may require employees to take their paid sick leave or annual leave as part of the 12-week leave provided in the law.

3. Employees taking leave are entitled to receive health benefits while they are on unpaid leave, under the same terms and conditions as when they were on the job.

4. Employers must guarantee most employees the right to return to their previous or equivalent position with no loss of benefits at the end of the leave.

In a survey of 416 human resource professionals, about half said they had approved FMLA leaves they believed were not legitimate, due to vague interpretations of the law. Others find tracking leaves problematic. Furthermore, though the leaves are usually unpaid, the costs associated with hiring and training temporary replacements are high.

Other laws govern sick leaves. For example, under the Americans with Disabilities Act (ADA), a qualified employee with a disability may be eligible for a leave if it’s necessary to accommodate the employee.

Know Your Employment Law (2 of 4)

FMLA Guidelines

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Know Your Employment Law

FMLA Guidelines

Managers who want to avoid granting non-required FMLA leaves need to understand the FMLA.

For example, to be eligible for leave under the FMLA, the employee must have worked for the employer for at least a total of 12 months and have worked (not just been paid, as someone might be if on leave) for 1,250 or more hours in the past 12 consecutive months. If these conditions do not apply, no leave is required.

Employers should have procedures for all leaves of absence (including those under the FMLA). In particular:

● Give no employee a leave until the reason for the leave is clear.

● If the leave is for medical or family reasons, the employer should obtain medical certification.

● Use a standard form to record both the employee’s expected return date and the fact that, without an authorized extension, the firm may terminate his or her employment (see Figure 13-2 in the text).

● One employment lawyer says employers should “kind of bend over backward” when deciding if an employee is eligible for leave based on an FMLA situation. However, employers can require independent medical assessments before approving FMLA disability leaves.

Severance Pay

Dismissal

Reduce Litigation

Downsizing

Many employers provide severance pay, a one-time separation payment, when terminating an employee. Most managers expect employees to give them 1 or 2 weeks’ notice if they plan to quit, so it seems appropriate to provide severance pay when dismissing an employee. Reducing the chances of litigation from disgruntled former employees is another reason. Severance pay also helps reassure employees who stay on after a downsizing that they’ll receive some financial help if they’re let go too.

Supplemental Unemployment Benefits

In some industries such as auto making, shutdowns to reduce inventories or change machines are common. Supplemental unemployment benefits are cash payments that supplement the employee’s unemployment compensation, to help the person maintain his or her standard of living while out of work.

II. Describe each of the main insurance benefits.

Next we will examine some main insurance benefits.

Insurance Benefits (1 of 2)

Most employers also provide a number of required or voluntary insurance benefits, such as workers’ compensation and health insurance. We’ll discuss these next.

Worker’s Compensation

Determining benefits

Controlling costs

Workers’ compensation – refers to the income and medical benefits provided in work-related accidents to the victims or their dependents, regardless of fault. Workers’ compensation can be monetary or medical, or a combination. Monetary awards are based on a formula regarding the disability involved and the worker’s average weekly wages.

Workers’ compensation laws aim to provide sure, prompt income and medical benefits to work-related accident victims or their dependents, regardless of fault. Every state has its own workers’ compensation law and commission, and some run their own insurance programs. However, most require employers to carry workers’ compensation insurance with private, state-approved insurance companies. Neither the state nor the federal government contributes any funds for workers’ compensation.

How Benefits are Determined – Workers’ compensation can be monetary or medical. In the event of a worker’s death or disablement, the person’s dependents receive a cash benefit based on prior earnings—usually one-half to two-thirds the worker’s average weekly wage, per week of employment. Most states have a time limit—such as 500 weeks—for which benefits can be paid.

Controlling Workers’ Compensation Costs – It is important to control workers’ compensation claims (and therefore costs). The employer’s insurance company usually pays the claim, but the employer’s premiums reflect the amount of claims. Fewer claims also imply fewer accidents.

There are several ways to reduce workers’ compensation claims:

Screen out accident-prone workers.

Reduce accident-causing conditions.

Case management is a popular cost-control method.

Moving aggressively to support the injured employee and to get him or her back to work quickly is important too.

Hospitalization, Health, and Disability Insurance

Coverage

HMO

PPO

Mental Health Benefits

Health insurance looms large in many people’s choice of employer, because it’s so expensive.

Hospitalization, health, and disability insurance helps protect employees against hospitalization costs and the income loss arising from off-the-job accidents or illness.

Coverage – Under the Patient Protection and Affordable Care Act, employers with at least 50 full-time-equivalent employees are to offer minimum levels of affordable health-care coverage or pay a penalty. Most employer health plans provide at least basic hospitalization and surgical and medical insurance for all eligible employees at group rates.

HMOs – Many employers offer membership in a health maintenance organization (HMO), a medical organization consisting of specialists (surgeons, psychiatrists, and so on), often operating out of a health-care center. It provides routine medical services to employees who pay a nominal fee. Employees often have “gatekeeper” doctors who must approve appointments with specialist doctors. The HMO receives a fixed annual fee per employee from the employer (or employer and employee), regardless of whether it provides that person service.

PPOS – Preferred provider organizations (PPOs) are a cross between HMOs and the traditional doctor–patient arrangement: They are “groups of health care providers that contract with employers, insurance companies, or third-party payers to provide medical care services at a reduced fee.” Unlike HMOs, PPOs let employees select providers (such as doctors) from a relatively wide list, and see them in their offices, often without gatekeeper doctor approval. Providers agree to discounts and to certain controls, for example, on testing.

Disability insurance – Provides income protection for salary loss due to illness or accident, and may continue until age 65 or beyond. Disability benefits usually range from 50% to 75% of the employee’s base pay if he or she is disabled.

Mental Health Benefits – The World Health Organization estimated that more than 34 million people in the United States between the ages of 18 and 64 suffer from mental illness. Mental illnesses represent about 24% of all reported disabilities, more than disabling injuries, cardiovascular diseases, and cancer combined. The Mental Health Parity Act of 1996 (as amended in 2008) sets minimum mental health-care benefits; it also prohibits employer group health plans from adopting mental health benefits limitations without comparable limitations on medical and surgical benefits.

Know Your Employment Law (3 of 4)

Patient Protection and Affordable Care Act of 2010

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Know Your Employment Law

Patient Protection and Affordable Care Act of 2010

As noted, under the Patient Protection and Affordable Care Act, employers with at least 50 full-time-equivalent employees are to offer minimum levels of affordable health-care coverage or pay a penalty. To be eligible, an employee must work at least 30 hours per week or a total of 130 hours in a calendar month. The bill was signed into law by President Obama in 2010, and employers face a number of other deadlines under the act. By 2018, employers with health-care plans that cost more than the threshold the law sets (for instance, $27,500 for family coverage) have to pay a 40% tax on the amount of coverage over $27,500. Individual and group health plans that already provide dependent coverage must expand eligibility up to age 26.

Again, employers with 50 or more employees must either offer full-time employees coverage or risk paying an excise tax. So at one extreme employers might offer a certain minimum level of insurance affordable to at least 95% of its full-time employees and dependents; or at the other extreme not offer minimum essential coverage and pay a penalty of $167 per month for each full-time employee. Under the law, each state (or, when necessary, the federal government) may run public health insurance exchanges—in effect, marketplaces for buying and selling insurance. In part to discourage employers from dropping their health-care plans and sending employees to the health exchanges, the law imposes those fines of $2,000 per worker on any employer with more than 50 workers who doesn’t offer a health insurance plan. The act’s deadlines are changing. Back in 2013 the administration put several Affordable Care Act elements on hold. And it issued new rules allowing states that planned to offer exchanges to have 2 extra years, until 2015, to verify eligibility. Because employers have to pay a 40% surcharge beginning in 2018 on health insurance plans exceeding $27,500 for a family (or $10,200 for an individual), many employers are moving to reduce their health-care benefits, for instance by increasing employee co-pays and deductibles. To avoid penalties that could reach $2,000 per employee, some employers are directing employees who qualify for Medicaid to sign up for it, instead of employer-supplied insurance. Some employers are considering eliminating their health plans, or turning more full-time workers into part-timers working less than 30 hours per week. About 43% of employers surveyed say their workers will have to pay more for their health-care plans. Others are considering reducing their coverage. Other employers calculate that it may be cheaper to pay the penalty than supply the insurance.

COBRA

COBRA—the Consolidated Omnibus Budget Reconciliation Act—requires most private employers to continue to make health benefits available to separated employees and their families for a time, generally 18 months after separation. The former employee must pay for the coverage. Employers ignore COBRA’s regulations at their peril. The employer does not want separated employees to leave and be injured, and then claim it never told them they could have continued their insurance coverage. Therefore, when a new employee first becomes eligible for the company’s insurance plan, the person must receive (and acknowledge receiving) an explanation of his or her COBRA rights. And all employees separated from the company should sign a form acknowledging that they received and understand those rights. (See Figure 13-3 in the text for a checklist.)

Other Laws

Other federal laws are pertinent. For example, among other things, the Employee Retirement Income Security Act of 1974 (ERISA) sets minimum standards for most voluntarily established pension and health plans in private industry. The Newborn Mother’s Protection Act of 1996 prohibits employers’ health plans from using incentives to encourage employees to leave the hospital after childbirth after less than the legislatively determined minimum stay. Employers who provide healthcare services must follow the privacy rules of the Health Insurance Portability and Accountability Act of 1996 (HIPAA). Employers must provide the same healthcare benefits to employees over the age of 65 that they do to younger workers, even though the older workers are eligible for federal Medicare health insurance.

Under the Americans with Disabilities Act, the health plan generally shouldn’t make distinctions based on disability. Under the Genetic Information Nondiscrimination Act of 2008 (GINA), even innocent actions can be problems. For example, if a health plan administrator writes down that a member’s mother passed away from breast cancer, making the note could conceivably violate the act. States such as California have their own FMLAs. Global employers must account for multinational legal, cultural, and programmatic insurance-related differences. For example, the most prevalent supplemental employee benefits in the United States are pension, medical, and life and long-term disability insurance; in the United Kingdom (with its national health program) they are pension, car benefit, and life and long-term disability.

Trends in Employer Health Care Cost Control

Wellness programs

Other cost-control options

Consumer-driven Health Plans (CDHP)

Defined Contribution

Accountable Care Organization (ACO)

Cost-Containment Specialist

A business with 50 employees might pay $1 million or more just for insurance coverage, before accounting for things like sick days. Health-care cost control is therefore one big way the HR department can improve profits. Employers are endeavoring to rein in health-care costs. Most cost-control efforts should start by instituting methods for measuring and auditing health-care costs. It makes little sense to initiate cost cuts when employers are paying out thousands or millions of dollars in erroneous claims.

Wellness Programs – Because various illnesses are preventable, many employers offer preventive programs. Employers offer a variety of preventive services and incentives. Some link each employee’s health-care premiums to his or her healthy behaviors. Clinical prevention programs include things like mammograms and routine checkups. Walgreens owns companies that provide on-site health-care services such as mammograms for employers. Health promotion and disease prevention programs include seminars and incentives aimed at improving unhealthy behaviors. Other wellness program trends include obesity management, stress management, senior health improvement, and tobacco cessation programs.

Other Cost-Control Options – Employers are taking other cost-control steps:

Consumer-driven health plans (CDHPs) are increasingly popular. These are high-deductible plans that give employees access to, for instance, a health savings account. (The Medicare Modernization Act of 2003 allows employers to establish tax-free health savings accounts [HSAs].)

Accountable care organizations (ACO), special vendors who help insurers, health-care providers, and others with the goal of improving costs and outcomes. Many others retain cost-containment specialists to help reduce such costs. And most negotiate more aggressively with their health-care insurance providers. Also important, make sure employees know the costs of their medical benefits.

Improving Performance: HR as a Profit Center (2 of 2)

The Doctor Is on the Phone

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Improving Performance: HR as a Profit Center

The Doctor Is on the Phone

With more than 12,000 employees in its health plan, Rent-A-Center was looking for a better way to get its employees the medical advice they required, while also reducing health plan costs. The company signed an agreement with Teladoc, Inc. Teladoc’s doctors provide medical consultations over the phone. In the first 16 months the new telemedicine program was in effect, Rent-A-Center saved more than $770,000 in doctor and hospital visits and in employee productivity that would have been lost. The program seems to be win-win. The Teladoc consultation is free to employees, compared to a $20 office co-payment, and the doctors are available 24 hours per day, usually within 30 minutes. If necessary, they call in antibiotics prescriptions. And for Rent-A-Center, there’s that extra $770,000 in their bottom line.

Talk About it (Discussion): Would you recommend this program to your employer? Why or why not?

Insurance Benefits (2 of 2)

Long-term care

Life insurance

Benefits for part-time and contingent workers

Long-term care insurance—for things like nursing assistance for former employees in their old age—is a key employee benefit. The Health Insurance Portability and Accountability Act of 1996 lets employers and employees deduct the cost of long-term care insurance premiums from their annual income taxes, making this benefit more attractive. Employers can also provide insurance benefits for several types of long-term care, such as adult day care, assisted living, and custodial care.

Life Insurance – In addition to hospitalization and medical benefits, most employers provide group life insurance plans. Such plans generally offer lower rates than individual plans, and usually accept all employees regardless of health or physical condition. In general, there are three key personnel policies to address: the benefits-paid schedule (the amount of life insurance benefits is usually tied to the employee’s annual earnings), supplemental benefits (continued life insurance coverage after retirement, for instance), and financing (the amount and percent the employee contributes). Accidental death and dismemberment coverage provides a lump-sum benefit in addition to life insurance benefits when death is accidental. It also provides benefits in case of accidental loss of limbs or sight.

Benefits for Part-Time and Contingent Workers – About 19 million people work part-time (less than 35 hours a week). The recession, more phased retirements, and a desire to better balance work and family life help explain this phenomenon. In any case, many firms provide holiday, sick leave, and vacation benefits to part-timers, and more than 70% offer some form of health-care benefits to them.

III. Discuss the main retirement benefits.

Next we will focus on a discussion of retirement benefits.

Retirement Benefits

The first contingent of baby boomers turned 65 a few years ago.

This presents two challenges for employers.

1st – (as we explained in Chapter 10 Careers and Retention), employers are taking steps to entice older workers to keep working in some capacity.

2nd – Retirement benefits such as federal Social Security and employer pension/retirement plans like the 401(k) are big issues.

Let examine these more.

Social Security

Retirement Benefits

Survivor’s Benefits

Death Benefit

Disability

Medicare

Most people assume that Social Security provides income only when they are older than 62, but it actually provides three types of benefits:

The familiar retirement benefits provide an income if you retire at age 62 or thereafter and are insured under the Social Security Act.

Second are survivor’s or death benefits. These provide monthly payments to your dependents regardless of your age at death (assuming you’re insured under Social Security).

Finally, disability payments provide monthly payments to employees who become disabled totally (and to their dependents) if they meet certain requirements.

The Social Security system also administers the Medicare program, which provides health services to people age 65 or older. “Full retirement age” for non-discounted Social Security benefits traditionally was 65—the usual age for retirement. It is now 67 for those born 1960 or later.

Pension Plans

Contributory vs. Non-Contributory

Qualified vs. Non-qualified

Defined Contribution vs. Defined

Pension plans provide income to individuals in their retirement, and just over half of full-time workers participate in some type of pension plan at work. We can classify pension plans as contributory versus noncontributory plans, qualified versus nonqualified plans, and defined contribution versus defined benefit plans.

The employee contributes to the contributory pension plan, while the employer makes all contributions to the noncontributory pension plan.

Employers derive certain tax benefits (such as tax deductions) for contributing to qualified pension plans (they are “qualified” for preferred tax treatment by the IRS); nonqualified pension plans get less favorable tax treatment.

With defined benefit pension plans, the employee’s pension is specified (“defined”), in that the person knows in advance his or her pension benefits. A formula usually ties the pension to a percentage of the person’s retirement pay (for example, to an average of his or her last 5 years of employment), multiplied by the years he or she worked for the company. Due to tax law changes and other reasons, defined benefit plans now represent a minority of pension benefit plans.

Defined contribution pension plans specify (“define”) what contribution the employee and employer will make to the employee’s retirement or savings fund. Here the contribution is defined, not the pension.

Other Pension Plans

401(k) plans

Savings and Thrift

Profit-Sharing

Employee Stock

Cash Balance plans

Other Pension Plans include:

401(K) Plans – The most popular defined contribution plans are based on section 401(k) of the Internal Revenue Code, and are called 401(k) plans. The employee authorizes the employer to deduct a sum from his or her paycheck before taxes, and to invest it in the bundle of investments in his or her 401(k) account. The deduction is pretax, so the employee pays no tax on those dollars until after he or she retires (or removes the money from the 401(k) plan). The person can deduct annually an amount up to the IRS maximum (about $15,000). Employers often match employee’s 401(k) contributions dollar for dollar up to a set percentage. The employer arranges, usually with an investment company such as Fidelity Investments, to administer the 401(k) plan and to make investment options (typically mutual stock funds and bond funds) available to the plan. In the recent downturn, more employees made “hardship withdrawals” from their 401(k) plans.

Savings and Thrift plan – In any savings and thrift plan, employees contribute a portion of their earnings to a fund, and the employer usually matches this contribution completely or in part.

Employers use a deferred profit-sharing plan to contribute a portion of their profits in cash to a pension fund, regardless of the level of employee contribution (personal income taxes on those contributions are deferred until the employee retires or leaves the employer).

An employee stock ownership plan (ESOP) is a qualified, tax-deductible defined contribution plan in which employers contribute stock to a trust for eventual use by employees who retire.

Cash Balance Pension Plans – With defined benefits plans, to get your maximum pension, you generally must stay with your employer until you retire—the formula takes the number of years you work into consideration. With defined contribution plans, your pension is more portable—you can leave with it at any time, perhaps rolling it over into your next employer’s pension plan. Without delving into the details, cash balance plans are a hybrid; they have defined benefit plans’ more predictable benefits, but the portability advantages of defined contribution plans. The employer contributes a percentage of employees’ current pay to the employees’ pension plans every year, and employees earn interest on this amount.

Know Your Employment Law (4 of 4)

Pension Planning and the Law

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Know Your Employment Law

Pension Planning and the Law

Federal law regulates pension planning and administration. As a rule, pension planning requires expert help. The Employee Retirement Income Security Act of 1975 (ERISA) is the basic law. It requires that employers have written pension plan documents and adhere to certain guidelines, such as regarding eligibility. ERISA protects the employer’s pension or health plans’ assets by requiring that those who control the plans act responsibly. The fiduciary’s responsibility is to run the plan solely in the interest of participants and beneficiaries. Employers (and employees) also want their pension contributions to be “qualified,” or tax deductible, so they must adhere to the income tax codes. Under labor relations laws, the employer must let its unions participate in pension plan administration. The Job Creation and Worker Assistance Act provides guidelines regarding what rates of return employers should use in computing their pension plan values.

Pension Planning and the Law

PBGC

Membership Requirements

Vesting

More on Pension Planning and the Law….

ERISA established the Pension Benefits Guarantee Corporation (PBGC) to oversee and insure a pension if a plan terminates without sufficient funds. Thousands of benefits plans, both private and public, are worryingly underfunded. However, the PBGC guarantees only defined benefit plans, not defined contribution plans. And it will only pay a pension of up to about $60,000 per year for someone 65 years of age with a plan terminating as of 2015. So, high-income workers still face reduced pensions if their employers go bankrupt.

Membership Requirements – When does the employee become eligible for a pension? Under the Tax Reform Act of 1986, an employer can require that an employee complete a period of no more than 2 years’ service to the company before becoming eligible to participate in the plan. However, if it requires more than 1 year of service before eligibility, the plan must grant employees full and immediate vesting rights at the end of that period.

Vesting – Vested funds are the money employer and employee have placed in the latter’s pension fund that cannot be forfeited for any reason. The employees’ contributions are always theirs, of course. However, until ERISA, the employers’ contribution in many pension plans didn’t vest until the employee retired. Someone could have worked for a company for 30 years and been left with no pension if the company went bust 1 year before the person retired.

Employers can choose one of two minimum vesting schedules (employers can allow funds to vest faster if they wish). With cliff vesting, the period for acquiring a nonforfeitable right to employer matching contributions (if any) is 3 years. So, the employee must have nonforfeitable rights to these funds by the end of 3 years. With the second (graded vesting) option, pension plan participants must receive nonforfeitable rights to the matching contributions as follows: 20% after 2 years, and then 20% for each succeeding year, with a 100% nonforfeitable right by the end of 6 years.

Pension and Early Retirement

To trim their workforces or for other reasons, some employers encourage employees to retire early. Many such plans take the form of early retirement window arrangements for specific employees (often age 50+). The “window” means that for a limited time, the employees can retire early, generally with a combination of improved or liberalized pension benefits plus a cash payment. Unless structured properly, older employees can challenge early retirement programs as de facto ways for forcing them to retire against their will. Although it is generally legal to use incentives to encourage individuals to choose early retirement, the employee’s decision must be voluntary. Under the Older Workers’ Benefit Protection Act (OWBPA), the employee’s waiver must be knowing and voluntary, and give the employee ample time to consider the agreement and to seek legal advice.

Improving Performance Through HRIS: Online Benefits Management Systems

Benelogic

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Improving Performance Through HRIS: Online Benefits Management Systems

Benefits administration can require devoting hundreds of hours to answering employees’ questions (such as “If I retire in 2 years, what will be my monthly retirement income?”) about benefits and updating employees’ benefits information. Tasks like that cry out for online self-service benefits management applications. For example, when the organization that assists Pennsylvania school districts with their insurance needs decided to help the school boards automate their benefits administration, they chose a company called Benelogic. The solution, called the “Employee Benefit Electronic Service Tool,” lets users manage all aspects of benefits administration, including enrollment, plan descriptions, eligibility, and premium reconciliation, via their browsers. Benelogic hosts and maintains the Web application on its servers, and creates customized, Web-based applications for each school district. The system facilitates online employee benefit enrollment, and provides centralized call center support for benefit-related questions. It even handles benefits-related payroll and similar functions by collaborating with companies like ADP (for payroll). Each school board employee accesses the Benelogic site via a link on his or her own board’s Web site. Employers are also adding new services to their own benefits Web sites. In addition to offering things like self-enrollment, the insurance company USAA’s Web site (www.usaa.com) helps employees achieve better work–life balance. For example, employees can respond to a list of words (such as stressed), and see suggestions for dealing with stress. Boeing’s Pay & Benefits Profile site gives employees real-time information about their salary and bonuses, benefits, pension, and even special services such as child-care referrals.

Trends Shaping HR: Digital and Social Media

Communicating Benefits with Employees

Let’s take a look…

Trends Shaping HR: Digital and Social Media

There was a time not too long ago when communicating with employees about their benefits required a ponderous and expensive process involving communiqués from the central HR office, but with digital and social media that’s no longer the case. First, as just noted, employers are using benefits systems such as Benelogic, and in-house benefits Web sites. Others are pulling their Twitter feeds into their benefits Web sites to keep those Web sites up-to-date. Others use their company blogs to communicate employee perks and benefits. Some use their Facebook and LinkedIn pages to publicize their benefits to a wider audience. Recently, Siemens created an internal social media Web site for its 13,000 UK employees. Among other things, Siemens UK uses it to keep its employees up-to-date about its latest employee benefits offerings, to run real-time employee feedback polls about Siemens benefits, and to remind employees about the availability of various benefits. (For example, that each employee has points to use as part of the Siemens employee recognition program.) To facilitate employee benefits self-management, other employers provide workers with mobile apps (see, for example, http://appfinder.lisisoft.com/tag/employeebenefits.html). For example, clients of Discovery Benefits Inc., a benefits administrator, reportedly logged in through its app about 25,000 times in one recent year, saving Discovery the time it would have spent dealing with call-ins. On the other hand, social media sites get some workers in trouble. In one case, an employee took a sick day, saying that chronic pain prevented her from coming to work. Unfortunately, she posted pictures of herself drinking at a festival the day she was supposed to be home sick. One of her Facebook “friends” got the photo and showed it to a company supervisor. The company fired her for absence, and an appeals court upheld the employer’s decision.

IV. Outline the main employees’ services benefits.

Now we will learn about some of the main employees’ services benefits. Let’s discuss these now.

Personal Services and Family-Friendly Benefits

Software giant SAS Institute, Inc., is one company that offers generous employee benefits. The North Carolina firm keeps turnover at 4% in an industry where 20% is typical, partly by offering family-friendly benefits like paid maternity leave, day care on site, lunchtime piano concerts, massages, and yoga classes like this one.

Although time off, insurance, and retirement account for the lion’s share of benefits costs, most employers also provide various services benefits. These include personal services (such as legal and personal counseling), “family-friendly” services (such as child-care facilities), educational subsidies, and executive perquisites (such as company cars for its executives).

Personal Services

Credit Unions

Legal Services

Counseling

Social and Recreational

EAP

Personal services benefits include some of the following: credit unions, legal services, counseling, and social and recreational opportunities. (Some employers use the term voluntary benefits to cover personal services benefits that range from things like pet insurance to automobile insurance.)

(EAP) = Employee assistance programs – Provide counseling and advisory services, such as personal legal and financial services, child- and elder care referrals, adoption assistance, mental health counseling, and life event planning. EAPs are popular, with more than 60% of larger firms offering them. One study found that personal mental health was the most common problem addressed by employee assistance programs, followed by family problems.

Family-Friendly (Work-Life) Benefits

Child / Elder Care

Education

Fitness

Flexible Schedules

Other Services

Several trends have changed the benefits landscape. There are more households where both adults work, more one-parent households, more women in the workforce, and more workers over age 65. Such trends lead many employers to bolster their family-friendly (or “work–life”) benefits.

These include child care, elder care, fitness facilities, and flexible work schedules—benefits that help employees balance their family and work lives. Let’s look into some of these examples:

Subsidized Child Care – Most working people make private provisions to take care of their children. Employers who want to reduce the distractions associated with finding reliable child care can help. Some employers simply investigate the day care facilities in their communities and recommend certain ones to employees. Others set up company-sponsored and subsidized day care facilities.

Sick Child Benefits – Unexpected absences accounted for a cost per absence to employers of about $700 per episode (for temp employees and reduced productivity, for instance). More employers are thus offering emergency child-care benefits.

Elder Care – The responsibility for caring for aging relatives can affect employee performance. One study found that, to care for an older relative, 64% of employees took sick days or vacation time, 33% decreased work hours, 22% took leaves of absence, 20% changed their job status from full- to part-time, 16% quit their jobs, and 13% retired early. More employers are therefore providing elder care services.

Educational Subsidies – The percentage of employers offering education benefits is diminishing. Such programs are expensive, and the employer may also be paying its best employees to leave. Payments may range from all tuition and expenses down to a fixed several hundred dollars per year. Many employers also reimburse non-job-related courses (such as a Web designer taking an accounting class) that pertain to company business. Many employers provide college programs on the employer’s premises, or remedial work in basic literacy.

Other Personal Services Benefits – Includes such as what Google, perennially one of the “100 best companies to work for,” is famous for its personal services benefits, and the remarkable thing is that most of them cost Google nothing. This is because Google arranges with local vendors to provide on-site programs such as ATMs, mobile libraries, bike repair, car wash and oil change, dry cleaning, haircuts and salons, and organic grocery delivery.

Diversity Counts Domestic Partner Benefits

Diversity Counts

Domestic Partner Benefits

When employers provide domestic partner benefits to employees, the employees’ same-sex or opposite-sex domestic partners are eligible to receive the same benefits (health care, life insurance, and so forth) as do the husband, wife, or legal dependent of one of the firm’s employees. Many employers offer domestic partner benefits. For instance, Northrop Grumman Corp. extends domestic partner benefits to the 9,500 salaried workers at its Newport News shipyard. The Defense of Marriage Act provided that employers may not treat same-sex domestic partners the same as employees’ spouses for purposes of federal law. However, in 2013, the U.S. Supreme Court struck down part of the Defense of Marriage Act. Under that ruling, gay couples married in states where it is legal must receive the same federal health, tax, Social Security, and other benefits heterosexual couples receive. In 2013, the United States Labor Secretary announced that the spousal leave provisions of the family and medical leave act apply to married gay couples. In 2015, the U.S. Supreme Court held that same-sex couples can marry nationwide.

The Strategic Context feature on the next slide illustrates how one employer uses benefits to support its strategic goals.

Improving Performance: The Strategic Context

Clif Bar

Let’s talk about it…

Improving Performance: The Strategic Context

Gary Erickson started Clif Bar as a small bakery and grew it into a company that’s been growing 20% per year. Central to his “healthy foods” strategy is the idea that his hundreds of employees should live the values of sustainability, healthiness, and eco-friendliness. Therefore, he put together a benefits package that encouraged just such values. For example, the company encourages eco-friendliness by reimbursing employees up to $6,500 if they buy hybrid or electric vehicles. Those who bike or walk to work receive $1,500 per year. Clif Bar’s subsidized cafeteria serves meals cooked with local organic ingredients. Employees become eligible for 6-week paid sabbaticals after 7 years working for the company. With employee turnover only 3%, in one recent year Clif Bar received over 7,500 applications for 114 open jobs, so his benefits plan also seems to be helping keep workforce costs under control.

Talk About it (Discussion): How do you think offering benefits like these affects Clif Bar’s recruiting and selection process and helps the company to keep costs down?

Source: Based on JP Mangalindan, “a healthier, more rewarding workplace,” fortune, October 6, 2014, pages 49–50.

Executive Perquisites

Company planes

Loans / Stock options

Financial Counseling

Relocation

When you reach the pinnacle of the organizational pyramid—or close to the top—you will find, waiting for you, the “executive perk.” Perquisites (perks for short) are special benefits for top executives.

They range from company planes to private bathrooms. Most fall between these extremes.

Perks include management loans (typically to exercise executives’ stock options); financial counseling; and relocation benefits, often including subsidized mortgages, purchase of the executive’s current house, and payment for the move. Publicly traded companies must itemize all executives’ perks (if they total more than $100,000).

V. Explain the main flexible benefit programs.

Next, let’s discuss the main flexible benefits.

Flexible Benefits Programs

Figure 13-4 One Page from Online Survey of Employees’ Benefits Preferences

Reprinted with permission from GrapeVine solutions.

Employees prefer choice in their benefits plans. In one survey of working couples, 83% took advantage of flexible hours (when available); 69% took advantage of the flexible-style benefits we’ll discuss next; and 75% said that they prefer flexible benefits plans. Given this, it is prudent to survey employees’ benefits preferences, perhaps using a form like that in Figure 13-4 (shown in the slide above). In any case, employers should provide for choice when designing benefits plans.

The Cafeteria Approach

Types of plans

Flexible spending

Debit cards

Core plus options

One way to provide a choice is with an aptly named cafeteria benefits plan. (Pay specialists use flexible benefits plan and cafeteria benefits plan synonymously.) A cafeteria plan is one in which the employer gives each employee a benefits fund budget, and lets the person spend it on the benefits he or she prefers, subject to two constraints. First, the employer must of course limit the total cost for each employee’s benefits package. Second, each employee’s benefits plan must include certain required items such as Social Security, workers’ compensation, and unemployment insurance.

Employees can often make midyear changes to their plans if, for instance, their dependent care costs rise and they want to divert contributions. IRS regulations require formal written plans describing the employer’s cafeteria plan, including benefits and procedures for choosing them.

Types of Plans – Cafeteria plans come in several varieties. To give employees more flexibility in what benefits they use, about 70% of employers offer flexible spending accounts for medical and other expenses. This option lets employees pay for certain benefits expenses with pretax dollars (so the IRS, in effect, subsidizes some of the employee’s expense). To encourage employees to use this option, some firms are offering debit cards that employees can use at their medical provider or pharmacy. Core plus option plans establish a core set of benefits (such as medical insurance), which are usually mandatory for all employees. Beyond the core, employees can then choose various benefits options.

Improving Performance: HR Tools for Line Managers and Small Businesses

Benefits and Employee Leasing

Let’s talk about it…

Improving Performance: HR Tools for Line Managers and Small Businesses

Benefits and Employee Leasing

Many businesses—particularly smaller ones—don’t have the resources or employee base to support the cost of many of the benefits we’ve discussed in this chapter. That’s one big reason they turn to “employee leasing.” In brief, employee leasing firms (also called professional employer organizations or staff leasing firms) assume all or most of the employer’s human resources chores. In doing so, they also become the employer of record for the employer’s employees, by transferring them all to the employee leasing firm’s payroll. The leasing firm thus becomes the employees’ legal employer, and usually handles employee-related activities such as recruiting, hiring (with client firms’ supervisors’ approvals), and paying taxes (Social Security payments, unemployment insurance, and so on).

Insurance and benefits are usually the big attraction. Even group rates for life or health insurance can be quite high when only 20 or 30 employees are involved. That’s where leasing comes in. Remember that the leasing firm is now the legal employer. The employees are thus part of a larger insurable group, along with other employers’ former employees. The small business owner may get insurance it couldn’t otherwise afford. As in dealing with all vendors, the employer should have a detailed negotiated agreement with the employee leasing firm. Define what the services will be; include priorities, responsibilities, and warranties. Understand that if the leasing firm merges into another firm, the new parent may require you to change your systems once the contract period expires.

Talk About it (Discussion): Explain how you believe you’d react to having your employer switch you to a leasing firm, and why?

Source: Based on Bill Roberts, “Good Vendor Relations,” HR Magazine, September 2011, p. 110.

Flexible Work Schedules

Flextime

Telecommuting

Compressed Workweek

Job Share

Work Share

Effectiveness

Flexible work schedules are popular. Single parents use them for balancing work and family responsibilities. And for many millennial employees, flexible work schedules provide a way to pursue their careers without surrendering the quality of life they desire.

There are several flexible work schedule options:

Flextime – A work schedule in which employees’ workdays are built around a core of midday hours, and employees determine, within limits, what other hours they will work.

Telecommuting—using technology to work away from the office—is popular. About 48% of employers offer ad hoc telecommuting options, while 17% offer them on a full-time basis.

Compressed Workweeks – Many employees, like airline pilots, don’t work conventional 5-day, 40-hour workweeks. Workers like these typically have compressed workweek schedules—they work fewer days each week, but each day they work longer hours. Some firms have four 10-hour day workweeks. Some workers—in hospitals, for instance—work three 12-hour shifts, and then take off for 4 days.

Job sharing – Allows two or more people to share a single full-time job. For example, two people may share a 40-hour-per week job, with one working mornings and the other working afternoons.

Work sharing – Refers to a temporary reduction in work hours by a group of employees during economic downturns as a way to prevent layoffs. Thus, 400 employees may all agree to work (and be paid for) only 35 hours per week, to avoid a layoff of 30 workers.

Effectiveness of Flexible Work Schedule Arrangements – Studies show that flexible work schedules have positive effects on employee productivity, job satisfaction, and employee absenteeism; the effect on absenteeism is generally greater than on productivity. Highly flexible programs were less effective than less flexible ones.

VI. Explain how to use benefits to improve engagement, productivity, and performance.

Finally, let’s examine how to use benefits to improve engagement, productivity, and performance.

Employee Engagement Guide For Managers

Costco’s Compensation Plan

Employee Engagement Guide For Managers

Costco’s Compensation Plan

Costco’s HR strategy is to deflect Walmart’s famously low costs and wages by paying employees more, and thereby producing improved employee engagement, productivity, and customer service. For example, Costco pays its employees on average about $21 per hour (not including overtime,) almost triple the federal minimum wage. That compares with Walmart’s average wage for full-time employees in the United States of $12.67 an hour.

Costco’s starting pay is $11.50 per hour, again far above the minimum wage. Costco’s employee benefits are also highly competitive, particularly compared with the typically sparse offerings in the retail industry. For example, Costco pays about 90% of the health insurance costs of its over 90,000 domestic employees. Its other benefits include (as examples) dental care, a pharmacy/prescriptions program, a vision program, a 401(k) plan, a dependent care assistance plan, an external network of professional counselors, voluntary short-term disability, long-term disability, and life insurance. Costco also extends these benefits to employees’ spouses, children, and domestic partners. To get the most from these plans, Costco employees can use www.costcobenefits.com, for instance, to find physicians in their areas.

Costco doesn’t directly measure employee engagement; it says it tracks engagement by “byproducts,” such as turnover and productivity. By those criteria, Costco’s engagement efforts seem to be working. Its sales per employee are about $500,000 a year versus $340,000 at Walmart’s Sam’s Club. Costco’s turnover is far below the retail industry average, and employee retention is higher. Costco, by the way, is not alone. Other large chains with traditionally excellent customer service, like Nordstrom and the Container Store, also do well financially, in part by treating employees well and keeping engagement up.

Chapter 13 Review

What you should now know….

In review of Chapter 13, you should now be able to:

13-1. Name and define each of the main pay for time not worked benefits.

13-2. Describe each of the main insurance benefits.

13-3. Discuss the main retirement benefits.

13-4. Outline the main employees’ services benefits.

13-5. Explain the main flexible benefit programs.

13-6. Explain how to use benefits to improve engagement, productivity, and performance.