Module 04: Discussion: Entitlement and Performance HR

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CHAPTER 12

Managing Employee

Benefits

Learning Objectives

Explain how companies use benefits as a competitive advantage

Identify four key benefit design considerations

Specify three legally required benefits

Discuss the trends in retirement plans and compare defined benefit and defined contribution plans

Learning Objectives (continued)

Explain the importance of managing the costs of health benefits and identify some methods of doing so

Describe the growth of financial, family-oriented, and time-off benefits and their importance to employees

Benefits

Tangible indirect rewards provided to an employee or group of employees for organizational membership

Includes retirement plans, paid time off, health insurance, life and disability insurance, and many more

Health insurance represents the largest percentage of benefit costs, followed by paid time off, legally required benefits, and retirement plans

Benefits and H R Strategy

Benefits approach adopted as part of total rewards depends on many factors, such as:

Size of the organization

Workforce competition

Organizational life cycle

Employee demographics

Financial circumstances

Corporate strategic approach

Benefits as a Competitive Advantage

Benefits are offered to:

Aid recruiting and retention

Improve organizational performance

Meet legal requirements

Reinforce the company philosophy of social and corporate citizenship

Benefits as a Competitive Advantage (continued)

Benefits can influence employees’ decisions about:

Which employer to work for

Whether to stay with or leave an organization

When to retire

Tax-Favored Status of Benefits

Most benefits are not taxed as income to employees

Exception: Paid time off

Gross-up: To increase the net amount of what the employee receives to include the taxes owed on the amount

Global Benefits

Benefits differ significantly across the globe

In many countries, employers and employees are taxed heavily to pay into government funds

Multinational companies must determine how to compensate both host-country nationals and expatriates so that all employees will feel that they are being treated fairly

Decisions about compensation impact global attraction and retention of employees among international employers

Public-Sector Benefits

Public sector workers

Enjoy more benefits than those in the private sector

Belong to labor unions at a much higher rate than nongovernment workers

Their union contracts include:

Free health care

Traditional defined benefit pension plans

Types of Benefits

Some benefits are mandated by laws and government regulations

Others are offered voluntarily by employers as part of their H R strategy

Organizations provide greater security and support to workers with diverse personal circumstances by offering additional benefits

Benefits professionals should constantly review changes in compliance and mandated benefits and shifting employee priorities

Types of Benefits (continued 1)

Legally required health care benefits

Consolidated Omnibus Budget Reconciliation Act (C O B R A) and Health Insurance Portability and Accountability Act (H I P A A) provisions

P P A C A

Medical plans

Medicare

Voluntary health care benefits

Dental and vision care

Wellness programs

Types of Benefits (continued 2)

Legally required financial benefits

Life, disability, and long-term care insurance

Education assistance

Relocation/home buying assistance

Severance pay

Legally required time-off benefits

Military-service leave

Voluntary time-off benefits

Public-service leave, vacation, holidays, and bereavement leave

Types of Benefits (continued 3)

Legally required family benefits

F M L A provisions

Voluntary family benefits

Domestic partner benefits

Adoption benefits

Child care and elder care

Legally required retirement benefits

Social Security

A D E A and O W B P A provisions

Types of Benefits (continued 4)

Voluntary retirement benefits

Defined benefit plans

Defined contribution plans

401(k) plans

Cash balance pension plans

Phased retirement programs

Legally required security benefits

Workers’ compensation

Unemployment compensation

Benefit Design Decisions

Many key decisions must be made as part of benefits design:

What percentage of total rewards should be provided as benefits?

What benefits do employees value?

Should standard or flexible benefit choices be offered?

Which employees should be covered?

What is the budget for benefits?

Should internal or external administration be preferred?

Flexible Benefits Plan

Allows employees to select the benefits they prefer from options established by the employer

Disadvantages

Employees may choose an inappropriate package

Younger employees may decide not to participate in the retirement plan

Adverse selection: Situation in which only higher-risk employees select and use certain benefits

Offering more choices leads to higher administrative costs for the organization

Part-Time Employee Benefits

Part-time employees

Most do not receive employee benefits except some paid time off

Least likely to receive health and life insurance benefits

Provided in proportion to the percentage of full-time work they provide

Domestic Partner Benefits

Under federal law, same-sex spouses may be entitled to benefits

If same-sex couples get divorced, one partner may be entitled to a share of retirement benefits

Court decision resulted in elimination of domestic partner benefits by some employers

Approximately one-third of companies that previously provided health care benefits to domestic partners have dropped that coverage

Generational Differences in Benefit Needs

Benefits attractive to older workers

Modified work schedules, part-time benefits, simplified seasonal travel, wellness programs, and financial planning programs

Millennial employees place high value on in-person interactions regarding their employee benefits

In-person interactions and ongoing communications may enhance the perceived value employees obtain from employer-sponsored benefit plans

Benefits Administration and Technology

Open enrollment: Time when employees can change their participation level in various benefit plans and switch between benefit options

Many organizations outsource benefits administration

Third-party administrator (T P A): Vendor that provides enrollment, recordkeeping, and other administrative services to organizations

Benefits Administration and Technology (continued 1)

Technology and employee self-service

Internet and computer-based systems are being used to:

Communicate benefits information

Conduct employee benefits surveys

Facilitate benefits administration

Decrease expenses

Increase positive communication

Effectively connect people across many H R functions

Benefits Administration and Technology (continued 2)

Self-service

Technology that allows employees to:

Enroll in and change their benefit choices

Track their benefit balances

Submit questions to H R staff members and external benefit providers

Frequently Used Benefit Metrics

Benefits as a percent of payroll

Benefit costs per F T E

Benefit costs by employee group

Benefits administration costs

Health care costs per F T E

Retirement plan participation rate

Paid time-off utilization

Tuition reimbursement costs

Benefit Cost Control

Reducing or dropping benefits

Cost sharing with employees

Sponsoring wellness programs

Offering employee health education

Changing prescription drug programs

Consolidating benefits packages into more streamlined offerings

Benefit Communication

Employees are not aware of values and costs associated with benefits

Employers can develop special benefit communication systems to inform employees about the monetary value of the benefits

Using Internet and social media might help increase employee access to benefits information

Year-round, multichannel communications can help workers better appreciate the value of their benefits

Benefit Communication (continued)

When communicating benefit information, consider:

Timing and frequency

Communication methods

Any specialized content

Providing rationale for significant changes to existing plans

Some companies provide a personal benefit statement, which translates benefits into dollar amounts

Legally Required Benefits

Social Security Act of 1935: Provides old age, survivor’s, disability, and retirement benefits

Funded by both employees and employers through a tax on employees’ wages or salaries

Amount of wages subject to tax is reviewed and increased periodically

Medicare: Government-operated health insurance for Americans aged 65 and above and for some citizens with disabilities

Funded by a tax on employers and employees

Long-term viability of funding is in question

Workers’ Compensation

Security benefits provided to workers who are injured on the job

Concepts that balance the rights of employers and employees under workers’ compensation

No-fault insurance: Injured worker receives benefits even if the accident was the employee’s fault

Exclusive remedy: Workers’ compensation benefits are the only benefits injured workers may receive from the employer to compensate for work-related injuries

Unemployment Compensation

Established as part of the Social Security Act of 1935

Provides a minimum level of benefits for workers who are out of work

Each state operates its own system, so benefits differ by state

Companies pay an unemployment tax

Out-of-work and actively-looking employees can receive up to 26 weeks of pay at the rate of 50 to 80 percent of normal pay

Retirement Benefits

Many states have state-sponsored retirement plans for workers whose employers do not provide optional retirement savings plans

Many private employers freeze the traditional plans and restrict new employees from enrolling

Results in retired individuals relying on Social Security payments, which were not designed to provide full retirement income

Can be a valuable tool for attracting and retaining workers

Figure 12-6: The Three-Legged Stool of Retirement Income

Features of Retirement Plans

Vesting: A benefit that cannot be taken away

If employees have not been employed long enough to be vested, no pension rights accrue to them except the funds they have contributed

Portability: Allows employees to move their retirement benefits from one employer to another

Once employees are vested in a plan, they can transfer their retirement benefits from one employer to another

Retirement Plan

Program established and funded by the employer and/or employees to fund employees’ retirement years

Types of retirement plans

Defined benefit plan: Employees are promised a pension amount based on age and years of service

Defined contribution plan: Employer and/or employee makes an annual payment to an employee’s retirement account

Comparison of Defined Benefit and Defined Contribution Retirement Plans

Defined Benefit

Typically funded at least in part by employer

Amount of benefit paid at retirement is predetermined

Defined Contribution

Typically funded by employee and employer

Amount of benefit at retirement is determined on the basis of investment performance

Comparison of Defined Benefit and Defined Contribution Retirement Plans (continued 1)

Defined Benefit

Investment risk borne by employer

Benefit guaranteed by Pension Benefit Guaranty Corporation (P B G C)

Defined Contribution

Investment risk borne by employee

Benefit not guaranteed

Comparison of Defined Benefit and Defined Contribution Retirement Plans (continued 2)

Defined Benefit

Amount of contribution changes on the basis of actuarial assumption

Common in public sector and unionized workforces

Defined Contribution

Amount of contribution is defined by employee participation level and company match

Common in private sector and nonunion workforces

Common Defined Contribution Plans

Profit-sharing plans

Employee stock ownership plans (E S O P’s)

401(k) plan: Allows for a percentage of an employee’s pay to be withheld and invested in a tax-deferred account

Auto-enrollment: Employee contributions to a 401(k) plan are started automatically when an employee is eligible to join the plan

Some companies also use auto-escalation

Auto-escalation: Automatic increases of 1 percent a year to a 401(k) plan

Legal Regulation of Retirement Benefits

Employee Retirement Income Security Act (E R I S A) in 1974

Ensures that private pension plans and other plans governed by E R I S A meet minimum standards

Requires plans to periodically provide participants with information about plan features, funding, and benefit accrual amounts

Retirement Benefits and Age Discrimination

According to a 1986 amendment to the Age Discrimination in Employment Act (A D E A), most employees cannot be forced to retire at a specific age

Legal Regulation of Retirement Benefits (continued 1)

Early retirement

Many pension plans include provisions for early retirement to allow workers to retire before the normal retirement age

Phased retirement is an alternative used by individuals and firms

Some employers use early retirement buyout programs to cut back their workforces and reduce costs

Legal Regulation of Retirement Benefits (continued 2)

Older Workers Benefit Protection Act (O W B P A) in 1990

Enacted as an amendment to the A D E A

Requires equal treatment for older workers in early retirement or severance situations

Sets specific criteria that must be met if older workers are asked to sign waivers promising not to sue for age discrimination in exchange for severance benefits during layoffs

Health Care Benefits

Considered to be one of the most important benefits companies offer

Can cover medical, dental, prescription drug, and vision care expenses for employees and their dependents

Costs associated with health care coverage have increased considerably in the United States

Increased expenses have led companies to require employees to shoulder some of the costs

Patient Protection and Affordable Care Act (P P A C A)

Provisions were phased in over several years, culminating in universal coverage in 2014

The U.S. Supreme Court ruled in 2012 and 2015 that the law was constitutional even though many elements of the act were controversial and led to lawsuits

Original legislation required every individual to obtain health care coverage

This was eliminated in 2017 as part of the tax reform bill

Key Provisions of the P P A C A

Requires companies with 50 or more employees (who work 30 hours a week or more) to provide health care coverage or pay a penalty

Extends dependent coverage up to age 26

Eliminates lifetime and unreasonable annual benefit limits

Requires coverage for preventive services

Key Provisions of the P P A C A (continued)

Restricts insurance companies from setting rates based on an individual’s health status, medical conditions, and other health-related factors

Creates state-run health care exchanges through which insurance companies will offer competitive health plans

Employer-Sponsored Plans

Some employers might drop health insurance plans, cut staff, or reduce working hours to avoid providing coverage or paying penalties

Can have a negative effect on attracting, motivating, and retaining employees

While employer-sponsored health coverage is still a tax-favored benefit, employers must report the value of this coverage on employees’ W-2 forms

Controlling Health Care Benefit Costs

Approaches used by employers:

Increasing deductibles and copayments

Deductible: Money paid by an insured individual before a health plan pays for medical expenses

Copayments: Portion of medical expenses paid by an insured individual for medical treatment

Instituting high-deductible plans

Offering consumer-driven health plans

Increasing employee contributions

Controlling Health Care Benefit Costs (continued)

Using managed care

Managed care: Approaches that monitor and reduce medical costs through restrictions and market system alternatives

Limiting family coverage; excluding spouses

Spousal exclusion provisions limit access to a company’s health plan when an employee’s spouse works for another company that offers health insurance

Managing prescription drug costs

Increasing health preventive and wellness efforts

Consumer-Driven Health (CDH) Plan

Provides employer financial contributions to employees to help cover their health-related expenses

Gives employees ownership of their health care dollars

Wellness Initiatives

Many plans broaden the definition of wellness to include social, financial, and behavioral health programs in a more holistic approach to employee well-being

Companies should carefully assess any wellness programs before implementing them to ensure employee concerns are considered

Balancing individual privacy concerns with corporate cost-saving initiatives can blur ethical lines

C O B R A Provisions

Requires that employers with 20 or more full-time and/or part-time employees offer extended health care coverage to the following participants:

Employees who voluntarily quit or are terminated

Widowed or divorced spouses and dependent children of former or current employees

Retirees and their spouses and dependent children whose health care coverage ends

Any child who is born or adopted by a covered employee

C O B R A Provisions (continued)

Other individuals involved in the plan such as independent contractors and agents/directors

Qualifying events: Events that cause a plan participant to lose group health benefits

Examples:

Reduction in work hours or loss of employment constitutes a qualifying event for employees

Divorce or death of an employee constitutes a qualifying event for covered family members

H I P A A Provisions

Allow employees to switch their health insurance plans when they change employers

Require employers to:

Provide privacy notices to employees

Carefully store sensitive employee personal information

Not disclose employee health information without authorization

Dental and Vision Coverage

Employees typically pay a portion of the premium for dental and vision plans

Emphasize preventive care

Semiannual dental visits and annual optometry visits may be covered in full or at minimal cost to the employee

Common Types of Financial Benefits

Insurance

Medical, dental, life, disability, long-term care, and legal

Financial services

Credit union, purchase discounts, stock purchase plan, financial planning, and discount club membership

Education assistance

Tuition reimbursement, trade training, professional certification or licensure, and learning materials

Types of Insurance Benefits

Life insurance

Typical level of coverage is one and one-half or two times an employee’s annual salary

Disability insurance

Provides continuing income protection for employees who become disabled and are unable to work

Long-term care insurance

Allows employees to purchase insurance to cover costs for long-term health care in a nursing home, assisted-living facility, or at home

Types of Insurance Benefits (continued)

Legal insurance

Employees (or employers) pay a flat fee for a fixed number of hours of legal assistance each month

Family and Medical Leave Act (F M L A)

Enacted in 1993

Covers:

All federal, state, and private employers with 50 or more employees who live within 75 miles of the workplace

Employees who have worked at least 12 months and 1,250 hours in the previous year

Provides for unpaid leave

Family and Medical Leave Act (F M L A) (continued 1)

Leave provisions

Requires employers to allow eligible employees to take a maximum of 12 weeks of unpaid, job-protected leave during any 12-month period for the following situations:

Birth of a child and care for the newborn within one year of birth

Adoption or foster care placement of a child

Caring for a spouse, child, or parent with a serious health condition

Family and Medical Leave Act (F M L A) (continued 2)

Serious health condition of the employee

Illness or injury that requires inpatient care or continuing treatment by a health care provider for medical problems that exist beyond three days

Military family members who must handle the affairs for military members called to active duty

Twenty-six weeks leave to care for a military servicemember injured while on active duty

Guidelines Regarding F M L A Administration

Return to same or equivalent job

Continued health care benefits during leave

Intermittent leave permitted

Use of paid vacation and personal leave required

F M L A leave runs concurrently with other disability leave

No penalty under attendance policy

Guidelines Regarding F M L A Administration (continued)

30-day notice from employee required

Fitness-for-duty test upon return permitted

Family and Medical Leave Act (F M L A) (continued 3)

Impact of the F M L A

Significant percentage of employees have used it since its enactment

Employers have to cover the workload for employees on family leave

Employees seeking to balance work demands with family and medical situations place significant demands on H R professionals to ensure compliance with F M L A provisions

Family-Care Benefits

Family-based benefits

Adoption and fertility benefits

Child-care assistance

Elder-care assistance

Paid-Time-Off Benefits

Vacation and holiday pay

Leaves of absence

Family leave

Sick leave

Paid-time-off (P T O) plans

Employee-paid group benefits

H U M A N R E S O U R C E

MANAGEMENT

V A L E N T I N E M E G L I C H M A T H I S J A C K S O N

S I X T E E N T H E D I T I O N