Chapter 11 Employee Benefits

Recall the goals of compensation:

To attract To retain To motivate

Which of these goals can benefits address?

Benefits costs
1929 average benefits cost = 3% of payroll costs Today average benefits cost = 40% of total labor costs Why the increase?? 1929 It wasnt standard practice to pay benefits until WWII when employers were put under wage/price freezes and could not increase employees pay (to control inflation during the war)
Employers got around this by giving employees more benefits (as a substitute for a wage increase)

1935-present union influence

1960s-present increase in benefits legislation
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Benefits strategy
Need to ask the question why are we offering XYZ benefit?
Benefits mix What should the overall benefits package look like? Look at the labor market to determine the mix

What do the employees look like that we are competing for? High tech firms young computer geeks, low average tenure what benefits would interest this group?? How diverse is the workforce? Different benefits will be attractive to different groups

Benefits amount What percentage of total compensation will benefits make up? Look at product market to determine the amount (we dont want to pay more for our benefits than our direct competitors)

Providing for Flexibility

Flexible Benefits Plans (Cafeteria Plans)
Benefit plans that enable individual employees to choose the benefits that are best suited to their particular needs.

A basic or core benefits package of life and health insurance, sick leave, and vacation ensures that employees have a minimum level of coverage. Employees use credits to buy whatever other benefits they need/want.

Flexible Benefits Plans: Advantages

Employee advantages:
Benefits are better matched to their individual needs (important in a diversified workforce). Employees gain a greater understanding of the benefits offered to them and the costs incurred.

Employer advantages:
Maximize the psychological value of their benefits program by paying only for highly desired benefits.

Use benefits as a competitive advantage in the recruiting and retention of employees.

Flexible Benefits Plans: Disadvantages

For employees:
Poor employee benefits selection results in unwanted financial costs bad benefits decision making

For employers:
There are added costs to establishing and maintaining the flexible plan. Employees pick only the benefits they use which increases the cost to the employer

Legally Mandated Benefits

1. Social Security Insurance 2. Unemployment Insurance 3. Workers Compensation Insurance 4. Family and Medical Leave

1. Social Security Insurance

Social Security Act (1935)
Payroll tax on both employees and employers

Old Age & Survivors Insurance Provides long-term disability benefits Must work 40 quarters (earning at least $900) in an occupation covered by Act to qualify for benefits Benefits paid are determined by an individuals life-time earnings
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Social Security Insurance

Social security is funded by contributions by both the ER and the EE 6.20% tax of annual earnings on first $106,800 provides income for retirees Annual Max has been climbing sharply over the past decade: 1997 max annual earnings taxed = $65,400 2010 max = $106,800 1.45% tax on all income provides Medicare benefits Ee As 2010 income= $110,000 As SS contribution = $6,200 As medicare contribution = $1595 Ee Bs 2010 income = $1,000,000 Bs SS contribution = $6,200 Bs medicare contribution = $14,500

Social Security (continued)

In order to be eligible to collect retirement income, you must have worked 40 quarters (10 years) Increasing age requirement for collecting SS retirement: Born before 1950, full benefits starting age 65 (62-64 80% benefits) Born after 1950, full benefits start at age 66 Born after 1960, full benefits start at age 67 SS retirement income will provide about 30% of ones earnings in your final year of retirement -- What does this suggest??? Concern for the future of SS baby boomers will be retiring at high numbers in the coming years
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Social Security (continued)

In the year 2000 = 3.4 working employees putting in to SS for every 1 retiree receiving benefits Soon there will be closer to a 1 to 1 relationship How is Congress addressing this issue? - increasing age requirements - increasing salary cap for SS tax - some discussion of having employees put SS money into their own personal account Why was the Social Security Act passed in the first place?

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2. Unemployment Insurance
Established by the SSA of 1935 Tax paid by employer only (based on the employers experience rating) Provides temp income for people involuntarily unemployed Benefit is based on an employees recent earnings. Involuntarily unemployed workers are eligible for up to 26 weeks of unemployment benefits.
Unemployed workers are required to seek suitable employment.
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Unemployment Insurance (cont.)

Employers need to watch turnover rates and need to layoff as these will increase the premium the er will pay into the ins fund Individuals who may NOT collect unemployment:
1. individuals who quit voluntarily 2. individuals discharged for gross misconduct 3. those who have refused an offer of suitable work 4. ees on strike 5. self-employed individuals
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3. Workers Compensation Insurance

Workers Compensation Insurance
Federal- or state-mandated insurance (funded by an employer payroll tax) Insurance defrays the loss of income and cost of treatment due to work-related injuries or illness. Employer paid premium (ee doesnt contribute) Insurance rate the employer pays based on:

The risk of injury or illness for an occupation Each states level of benefits for injuries sustained by employees varies. The companys frequency and severity of employee injuries (the companys experience rating).

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Why did we need WC Insurance?

Injury is a cost of doing business
Early employers Master/apprentice Industrial revolution many workers under one roof, less personal concern for individual employees When ees would sustain injuries at work ers were not helping ees pay for cost of injury Courts at the time were pro-business example doctrines used by courts in the past:

1. Contributory negligence if it could be proven that ee contributed 1% to his/her own injuries, ER not liable 2. Fellow-servant rule if co-worker was a fault, ER not liable
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4. Family and Medical Leave (FMLA; 1994)

1. An employer must grant an eligible employee up to 12 workweeks of unpaid leave in a 12month period for the following reasons:
What four situations are covered for taking this leave??

2. Benefits continuation - employees on leave retain their benefits 3. Job restoration employees have the right to return to their job or an equivalent job.

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Employer FMLA Policies

Eligibility for leave: must have 12 months employment with ER (need not be consecutive) and 1,250 hours during 12 months prior to leave Leave may be taken intermittently Determining employees requirements to use accrued paid leave as part of FMLA what leaves must be taken at same time? 12 weeks leave; 4 weeks vacation differential in time off? Payment of insurance premiums while on leave Defining the 12 month period ERs have 4 options
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Determining the FMLA 12-month period

Recall that employees are entitled to 12 weeks leave every 12 month periodHow do you define 12 months? 1. calendar year (Jan 1 Dec 31) 2. fixed year (either fiscal year or employee anniversary date) 3. 12 months forward from date of first FMLA leave 4. Rolling 12 month period measured from today back 12 months Which of these options prevents leave stacking? Leave stacking = taking 24 consecutive weeks off (the last 12 weeks of the previous 12 month period and the first 12 weeks of the next 12 month period)
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Determining the FMLA 12-month period

Rolling 12 month = each time an ee takes FMLA leave, the remaining leave entitlement is any balance of the 12 weeks that has not been used in during the preceding 12 months Example: An employee requests FMLA leave for a serious health condition in January 2003. The employee has taken 8 weeks of FMLA leave during the 12 months prior to this request (OCT, NOV, DEC 2002). 1. How much FLMA leave is the employee entitled to at this time if the 12 month period is determined by the calendar year? 2. How much leave is the employee entitled to under the rolling 12 month method?

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12-month Calculation Method Notification

Employees who do not receive clear notice of calculation method can use whatever method provides them with the most leave America West handbook stated employees are entitled to up to twelve calendar weeks of unpaid FMLA leave within any 12 month period Courts ruled that this did not sufficiently communicate that AW used the rolling 12 month method
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California Family Rights Act

Law went into effect July 2004 Both provide 12 weeks leave for the 4 reasons we discussed under FMLA Grants 6 weeks (of the 12 FMLA) as paid 100% employee funded (.6% of wages up to $83,389) Partial pay receive approx 55% of pay (with a weekly cap; 2005 cap was $840/week) FMLA/CFRA leaves run concurrently CFRA gives rights to domestic partners (FMLA does not)
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Discretionary (Voluntary) Benefits

Includes all other possible benefits besides the four discussed so far Well focus on these voluntary benefits: 1. Health Insurance 2. Pension/retirement funds 3. Payment for time not worked

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1. Health Insurance
Represents 12.1% of employer payroll costs $6,101 = average annual ER expense for medical insurance per employee Cost of medical care has risen by 250% since 1980 How are organizations dealing with the increase in health care costs?
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Health Care Legislation

COBRA Consolidated Omnibus Budget Reconcilation Act (1986)
Requires ERs to continue health care coverage to ees and their dependents upon termination of employment for a specified period of time (18, 24, 36 months) Gives former ee and family insurance at a group rate Former ees pay 103% of cost of group rate Why was this law passed?

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Health Care Legislation

HIPAA Health Insurance Portability and Accountability Act (1996)
Deals with pre-existing health conditions (labor market friction) If you acquired an illness/health problem while working for ER A, then you want to take a new job at ER B, ER Bs health plan would not cover your medical expenses for the pre-existing condition Law provides coverage of the condition by the new ER If an ee has been treated for the condition within 6 months of the new job, the new ERs heath plan must cover it; If an ee has not been treated for the pre-existing condition within 6 months prior to switching jobs, ee can only be denied coverage for a 1 year period

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2. Pension/Retirement Plans
The number of people age 65 and older tripled to about 34 million between 1940 and 1995. According to U.S. census projections, people age 65 and older are expected to number 86 million by 2050. Eight baby boomers turn 50 every ten minutes. In 1940, a 65-year-old had a normal life expectancy of 12.7 more years. Currently, it is about 17 more years.

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Types of Pension Plans

Defined-benefit plan
The amount an employee is to receive upon retirement is specifically stated up front Employer is making a promise to its employees that it will pay you X dollars a month This benefit is typically determined by a formula based on factors such as:
Years of service Earnings your last year of employment Age upon retiring (see example handout)

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Types of Pension Plans

Defined-contribution plan
The amount an employer and employee contributes to the pension fund is specified. The amount the employee will receive upon retirement will depend on the amount of money that has accumulated in that ees retirement fund (and how well the fund was invested by the ee) Example 401(k) plans
Employees have contributions taken out of their pay via payroll deductions Employers may match a portion of employee savings. (usually .50 for every $1 the ee contributes)

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Differences between DB and DC Plans

Who assumes the risk (ER or EE)?
Defined benefit plan? Defined contribution plan?

Which plan would be easier for ER to forecast costs?

Defined benefit or defined contribution?

Which plan provides a benefit that is more easily communicated to the employee?
Defined benefit or defined contribution?
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Federal Regulation of Pension Plans

Employee Retirement Income Security Act (ERISA).
Private pension plans are subject to ERISA regulations; provides standards and controls for pension plans:

1. Communication standard 2. Minimum funding standards 3. Vesting standards

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ERISA Provisions
1. Communication standard
Benefits information must be communicated in a way that the average employee could understand

In-house publications (employee handbooks and organizational newsletters) Group meeting and training classes

Bulletin boards
Payroll inserts/pay stub messages Additionally, HR professionals must be careful not to give advice, guide, or counsel ees in benefits selection only provide information upon which employees can make informed decisions

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A Personalized Statement Of Benefits Costs

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ERISA Provisions
2. Funding Standard
Prior to ERISA, there was a high pension plan forfeiture rate ERs would go out of business and retirees and retirement funds would disappear or ERs did not put enough money away to cover future promised retirement income

ERs must put aside a certain amount of money each year to fund the plan
Must pay insurance (Pension Benefit Guaranty Corporation) to protect the plan (approx $20 per ee) the PBGC protects the retirement incomes of nearly 44.3 million American workers in more than 31,000 private defined benefit pension plans.

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ERISA Provisions
3. Vesting
Refers to the rights that an employee has to the benefits (upon retirement) that have accrued in the pension fund

Specifically addresses the money put into the retirement fund by the ER when can you call the ERs contribution to your account, your money? You always have the right to the money you contribute to your retirement

ERISA requires that plans must provide that employees will have vested rights in their accrued benefits after certain minimumyears-of-service requirements have been met (100% vested after 5 years OR 20% after 3 years, 20% each additional year until 100% vested). Is vesting the same thing as portability?

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3. Payment for Time Not Worked

Vacations with pay

Severance pay

Time Not Worked

Paid holidays

Sick leave

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Payment for time not worked

Paid holidays Typically ERs pay for around 10 holidays for employees/year Severance pay Why would employer offer this payment to the ee? Paid vacations Average # of vacation days for 1 year service in US = 10 days - Setting the vacation schedule (when you may take it) is typically done by seniority Sick leave Additional paid time off to be used for illness Unlike vacation time, sick leave typically can accrue over time why is this useful? Some companies are moving away from separate vacation and sick leaves and lumping together into Paid Time Off banks (PTO)

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