Feedback on the course HR
INeal
Noe11e_ch_13_FINAL.pptxChapter 13
Employee Benefits
©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
Learning Objectives
LO 13-1 Discuss the growth in benefits costs and the underlying reasons for that growth.
LO 13-2 Explain the major provisions of employee benefits programs.
LO 13-3 Discuss how employee benefits in the United States compare with those in other countries.
LO 13-4 Describe the effects of benefits management on cost and workforce quality.
LO 13-5 Explain the importance of effectively communicating the nature and value of benefits to employees.
LO 13-6 Describe the regulatory constraints that affect the way employee benefits are designed and administered.
©McGraw-Hill Education
Introduction
Average cost of benefits is about 46.3% for every payroll dollar and about 31.6% of total compensation package.
Benefits are unique because:
More regulation of benefits than direct pay
Almost obligatory for employers to provide
Complex for employees to understand
Employees may not even be aware of benefits available to them
©McGraw-Hill Education
Figure 13.1 Growth of Employee Benefits, Percentage of Wages and Salaries and of Total Compensation, 1929–2017, Civilian Workers
©McGraw-Hill Education
SOURCES: Data through 1990, U.S. Chamber of Commerce Research Center, Employee Benefits 1990, Employee Benefits 1997, Employee Benefits 2000 (Washington, DC: U.S. Chamber of Commerce, 1991, 1997, and 2000). Data from 1995 onward, “Employer Costs for Employee Compensation,” www.bls.gov.
4
Reasons for Benefits Growth 1 of 2
Factors Contributing to Growth
The Social Security Act and other legislation
Wage and price controls instituted during World War II
Tax treatment of benefits programs
Marginal tax rate
No employer taxes on most employee benefits
LO 13-1
©McGraw-Hill Education
The marginal tax rate is the percentage of additional earnings that goes to taxes.
5
Reasons for Benefits Growth 2 of 2
Factors Contributing to Growth continued
Cost advantage that groups typically realize over individuals
Growth of organized labor from the 1930s through the 1950s
Unique benefits are a means of differentiating employers in the eyes of current or prospective employees
©McGraw-Hill Education
6
Benefits Programs 1 of 13
Social Insurance (Legally Required)
Social Security
Unemployment insurance
Survivor’s insurance (1939)
Disability insurance (1956)
Hospital insurance (Medicare Part A, 1965)
Supplementary medical insurance (Medicare Part B, 1965) for the elderly
LO 13-2
©McGraw-Hill Education
7
Benefits Programs 2 of 13
Social Insurance (Legally Required) continued
Social Security continued
Covers more than 90% of U.S. employees
Begins at age 65 years and 6 months (full benefits) or age 62 (reduced benefits)
May be free from state and federal taxes
Paid for with payroll tax
©McGraw-Hill Education
8
Benefits Programs 3 of 13
Social Insurance (Legally Required) continued
Unemployment insurance
To offset lost income during involuntary unemployment
To help unemployed workers find new jobs
To provide an incentive for employers to stabilize employment
To preserve investments in worker skills by providing income during short-term layoffs
Financed through taxes on employers
Size of tax depends on the employer’s experience rating
©McGraw-Hill Education
9
Benefits Programs 4 of 13
Social Insurance (Legally Required) continued
Unemployment insurance continued
Must have a prior attachment to the workforce
Must be available for work
Must be actively seeking work (including registering at the local unemployment office)
Were not discharged for cause (such as willful misconduct), did not quit voluntarily, and are not out of work because of a labor dispute
©McGraw-Hill Education
10
Benefits Programs 5 of 13
Social Insurance (Legally Required) continued
Worker’s Compensation
Job-related injuries and death
No-fault liability
Employers immune from lawsuits
90% of U.S. workers covered
©McGraw-Hill Education
11
Benefits Programs 6 of 13
Social Insurance (Legally Required) continued
Worker’s Compensation continued
Disability income
Medical care
Death benefits
Rehabilitative services
©McGraw-Hill Education
12
Benefits Programs 7 of 13
Private Group Insurance
Medical insurance
Consolidated Omnibus Budget Reconciliation Act (COBRA)
Disability insurance
Short term
Long term
©McGraw-Hill Education
The Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985 requires employers to permit employees to extend their health insurance coverage at group rates for up to 36 months following a “qualifying event” such as termination (except for gross misconduct), a reduction in hours that leads to the loss of health insurance, death, and other events.
13
Benefits Programs 8 of 13
Retirement
Defined benefit
Pension Benefit Guaranty Corporation (PBGC)
Employee Retirement Income Security Act (ERISA)
©McGraw-Hill Education
A defined benefit plan guarantees (“defines”) a specified retirement benefit level to employees based typically on a combination of years of service and age as well as on the employee’s earnings level (e.g., the three to five highest earnings years).
In the event of severe financial difficulties that force the company to terminate or reduce employee pension benefits, the Pension Benefit Guaranty Corporation (PBGC) provides some protection of benefits. Established by the Employee Retirement Income Security Act (ERISA) of 1974, the PBGC guarantees a basic benefit, not necessarily complete pension benefit replacement, for employees who were eligible for pensions at the time of termination. It insures the retirement benefits of 41 million workers in more than 24,000 plans.
Unlike defined benefit plans, defined contribution plans do not promise a specific benefit level for employees upon retirement.
money purchase plan, under which an employer specifies a level of annual contribution (such as 10% of salary). At retirement age, the employee is entitled to the contributions plus the investment returns.
Money purchase plan, an employer specifies a level of annual contribution (such as 10% of salary). At retirement age, the employee is entitled to the contributions plus the investment returns.
14
Benefits Programs 9 of 13
Retirement continued
Defined contribution
Individual account set up for each employee with a guaranteed size of contribution
Shift investment risk to employees
Money purchase plan
Profit- sharing plans
Employee stock ownership plans
Section 401(k) plans
Pension Protection Act (PPA) of 2006
©McGraw-Hill Education
Money purchase plan, an employer specifies a level of annual contribution (such as 10% of salary). At retirement age, the employee is entitled to the contributions plus the investment returns.
15
Figure 13.2 The Relationship of Retirement Savings to Age When Savings Begins and Type of Investment Portfolio
Jump to long description in appendix
SOURCE: A. Damodaran, “Annual Returns on Stock, T. Bonds and T. Bills: 1928–Current,” http://people.stern.nyu.edu/adamodar/New_Home_Page/datafile/histretSP
©McGraw-Hill Education
NOTE: Historical rates of return, geometric averages, 1928–2016: stocks (S&P 500), 9.53%; bonds (10-year U.S. Treasury Bond), 5.18%; cash (3-month U.S. Treasury Bill), 3.46%.
16
Benefits Programs 10 of 13
Retirement continued
Cash balance plans
All contributions come from the employer
Rate guaranteed in a defined benefit plan
©McGraw-Hill Education
Cash balance plan is a retirement plan in which the employer sets up an individual account for each employee and contributes a percentage of the employee’s salary; the account earns interests at a predetermined rate.
17
Benefits Programs 11 of 13
Retirement continued
Funding, communication, and vesting requirements
Employers are required to make yearly contributions that are sufficient to cover future obligations
Summary plan description
Vesting rights
©McGraw-Hill Education
Employees must receive within 90 days after entering a plan a summary plan description (SPD) that describes the plan’s funding, eligibility requirements, risks, and so forth.
ERISA guarantees employees that when they become participants in a pension plan and work a specified minimum number of years, they earn a right to a pension upon retirement. These are referred to as vesting rights.
18
Benefits Programs 12 of 13
Pay for Time Not Worked
Includes paid vacation, holidays, sick leave
No legal minimum in the U.S.
LO 13-3
©McGraw-Hill Education
Figure 13.3 Normal Annual Hours Worked Relative to United States
Jump to long description in appendix
SOURCE: Organization for Economic Cooperation and Development. Data for 2015. http://stats.oecd.org/Index.aspx? Section on Labour, Subsection on Labour Force Statistics. Accessed April 15, 2017.
©McGraw-Hill Education
Benefits Programs 13 of 13
Family-Friendly Policies
Family leave
Family and Medical Leave Act
Child care
Vouchers or discounts
Child care near worksites
©McGraw-Hill Education
Since 1993 the Family and Medical Leave Act requires organizations with 50 or more employees within a 75-mile radius to provide as much as 12 weeks of unpaid leave after childbirth or adoption; to care for a seriously ill child, spouse, or parent; or for an employee’s own serious illness.
21
Managing Benefits: Employer Objectives and Strategies 1 of 10
Surveys and Benchmarking
Private consultants
U.S. Chamber of Commerce
Bureau of Labor Statistics
LO 13-4
©McGraw-Hill Education
Table 13.5 The Five Most Highly Ranked Benefits Objectives for Employers
Increase employee productivity
Increase employee satisfaction
Increase employee loyalty
Attract employees
Help employees make better financial decisions
©McGraw-Hill Education
Figure 13.4 Employee Benefits Cost by Category, Private-Sector Workers
Jump to long description in appendix
SOURCE: U.S. Department of Labor, “Employer Costs for Employee Compensation—December 2016,” March 17, 2017, News Release USDL-17-0321.
©McGraw-Hill Education
Managing Benefits: Employer Objectives and Strategies 2 of 10
Cost Control
Cost of a benefit category
Growth trajectory of the benefit category
Cost of legally required benefits
Medical and other insurance are targets for cost control
©McGraw-Hill Education
Managing Benefits: Employer Objectives and Strategies 3 of 10
Cost Control continued
Health care: controlling costs and improving quality
U.S. spends more on health care than any other country in the world, most through employers
Employers can shift costs to employees through deductibles, coinsurance, exclusions and limitations, and maximum benefits.
Cost reductions
HMOs and PPOs
©McGraw-Hill Education
Managing Benefits: Employer Objectives and Strategies 4 of 10
Cost Control continued
Health care: controlling costs and improving quality continued
Employee wellness programs
Focus on changing behaviors both on and off work time that could eventually lead to future health problems
Preventive in nature
Passive or active
©McGraw-Hill Education
Managing Benefits: Employer Objectives and Strategies 5 of 10
Cost Control continued
Health care: controlling costs and improving quality continued
Health care costs and quality: Ongoing challenges
Average annual premium for family coverage $18,142
Piecemeal programs may not work
Pareto group
©McGraw-Hill Education
Managing Benefits: Employer Objectives and Strategies 6 of 10
Cost Control continued
Staffing responses to control benefits cost growth
Benefits cost per hour can be reduced by having employees work more hours
Classify employees as exempt
Temporary workers
Independent contractors
©McGraw-Hill Education
Managing Benefits: Employer Objectives and Strategies 7 of 10
Nature of the Workforce
Demographic factors impact types of benefits desired
Marketing research
What benefits are most important to you?
If you could choose one new benefit, what would it be?
If you were given x dollars for benefits, how would you spend it?
©McGraw-Hill Education
Managing Benefits: Employer Objectives and Strategies 8 of 10
Communicating With Employees and Maximizing Benefits Value
Employees and job applicants typically underestimate the value of their benefits
Organizations spend little time communicating about benefits and costs
Written information
Online tools
LO 13-5
©McGraw-Hill Education
Managing Benefits: Employer Objectives and Strategies 9 of 10
Communicating With Employees and Maximizing Benefits Value continued
Flexible Benefits Plans
Permit employees to choose the types and amounts of benefits they want
Employees can gain a greater awareness and appreciation
Should be a better match
Overall cost reductions in benefits programs
May have high administrative costs
Adverse selection
©McGraw-Hill Education
Managing Benefits: Employer Objectives and Strategies 10 of 10
Communicating With Employees and Maximizing Benefits Value continued
Flexible Spending Accounts
Permits pretax contributions of up to $2,600 to an employee account that can be drawn on to pay for uncovered health care expenses
©McGraw-Hill Education
General Regulatory Issues 1 of 4
Affordable Care Act
Does not require employers to provide health benefits, does impose penalties in some cases on larger employers that do not provide insurance to their workers or that provide coverage that is unaffordable
Increases the Medicare Hospital Insurance (Part A) payroll tax on earnings for higher-income taxpayers
New tax on so-called “Cadillac“ insurance plans provided by employers
Dependent coverage until age 26
Wellness programs
LO 13-6
©McGraw-Hill Education
General Regulatory Issues 2 of 4
Nondiscrimination Rules, Qualified Plans, and Tax Treatment
Qualified plan
Receives more favorable tax treatment
Each benefit area has different rules
©McGraw-Hill Education
General Regulatory Issues 3 of 4
Sex, Age, and Disability
The Supreme Court declared it illegal for employers to require women to contribute more to a defined benefit plan than men
Age Discrimination in Employment Act (ADEA) and the Older Workers Benefit Protection Act (OWBPA)
Americans with Disabilities Act (ADA)
©McGraw-Hill Education
General Regulatory Issues 4 of 4
Monitoring Future Benefits Obligations
Financial Accounting Statement (FAS) 106
Some companies are charging insurance premiums to employees and retirees or ending retiree benefits
Pension Benefit Guaranty Corporation
©McGraw-Hill Education
Financial Accounting Statement (FAS) 106 The rule issued by the Financial Accounting Standards Board in 1993 requiring companies to fund benefits provided after retirement on an accrual rather than a pay-as-you-go basis and to enter these future cost obligations on their financial statements
37
Appendix of Image Long Descriptions
©McGraw-Hill Education
Appendix 1 Figure 13.1 Growth of Employee Benefits, Percentage of Wages and Salaries and of Total Compensation, 1929–2017, Civilian Workers
| 1929 | 1955 | 1965 | 1975 | 1990 | 1995 | 2000 | 2005 | 2010 | 2015 | 2017 | |
| Benefits as percentage of wages and salaries | 3.0 | 17.0 | 21.5 | 30.0 | 37.9 | 40.4 | 37.7 | 42.2 | 43.5 | 46.2 | 46.3 |
| Benefits as percentage of total compensation | 2.9 | 14.5 | 17.7 | 23.1 | 27.5 | 29.2 | 27.4 | 29.7 | 30.3 | 31.6 | 31.6 |
©McGraw-Hill Education
Appendix 2 Figure 13.2 The Relationship of Retirement Savings to Age When Savings Begins and Type of Investment Portfolio
A bar graph shows an annual investment of $3,000 made between ages 21 and 29 will be worth much more at age 65 than a similar investment made between ages 31 and 39. Second, different investments have different historical rates of return. Between 1928 and 2016 the average annual return was 9.53% for stocks, 5.18% for bonds, and 3.46% for cash (e.g., short-term Treasury bills or bank savings accounts).
If historical rates of return were to continue, an investment in a mix of 60% stock, 30% bonds, and 10% cash between the ages of 21 and 29 would be worth about four times as much at age 65 as would the same amount kept in the form of cash.
©McGraw-Hill Education
Appendix 3 Figure 13.3 Normal Annual Hours Worked Relative to United States
Mexico 2,246 hours, 456 more hours annually than the U.S.
Korea 2,113 hours, 323 more hours annually than the U.S.
United States 1,790 hours
Japan 1,719 hours, 71 hours fewer than the U.S.
France 1,482 hours, 308 hours fewer than the U.S.
Germany 1,371 hours, 419 hours fewer than the U.S.
©McGraw-Hill Education
Appendix 4 Figure 13.4 Employee Benefits Cost by Category, Private-Sector Workers
As a percent of total compensation:
legally required: 7.8 percent%
retirement and savings plans: 4.0 percent
medical and other insurance: 8.0 percent
payments for time not worked: 7.0 percent
supplemental pay: 3.5 percent
Total benefits = $9.93, 30.3 percent of total compensation ($32.76)
©McGraw-Hill Education
