Diploma in Business Management

Employee benefits consist of a large number of diverse organizational rewards. This diversity makes it difficult to categorize and discuss the characteristics of benefits in general, since each one needs to be dealt with independently. In fact, benefits administration has become a specialized function within organizations that requires specific training and experience.

Although it is hard to develop commonalities among benefits, there are a number of factors that need to be considered when discussing any benefit. Those to be examined briefly here are purpose, contribution, and cost.

The central purpose of benefits in the employment exchange is to foster membership or continuity of employment. Security is a major theme in benefits, as well. Many organizations also talk of social concern, the fact that they would not want to see their employees be without insurance protection or suffer in their retirement. So although the major overall aim of benefits from the employer's standpoint is membership, some other advantages can occur from granting benefits. In order for a person to concentrate on performing well, he or she must be able to concentrate upon the job. Having protection from uncertainty provides this ability to concentrate. Benefits provide security in three areas: age, unemployment, and sickness and accident.

But security is an after-the-fact type of protection. There are also benefits that employers provide with the expectation that their provision will improve or maintain the current level of performance of the employee. These benefits are largely in the form of time off (which is expected to help the employee recuperate or reduce fatigue on the job), programs to improve the health of the employee, and programs to improve the employee's future worth to the organization, such as educational reimbursement.

The costs of providing a benefit are a major consideration. Most benefit administrators can show that the benefits are cost-effective by the savings that they can attain through proper administration of the particular benefits.

A final consideration is who should pay for the benefits, or more likely, how much each partner to the employment exchange should contribute to the cost of the benefit. To the degree that the employee pays for the benefit, the employer cannot claim it as his or her contribution to the employment exchange. But there are good reasons to share the costs of particular benefits. The employee sees the benefit more clearly as a part of the employment exchange when costs are shared, and the employee has a larger and more direct stake in keeping benefit costs down when both parties are contributing to the cost of the benefit.

The result of this is that health care premiums typically total 4 times the cost of all other insurance-related benefit premiums that a company pays. (Insurance brokers joke of the amount of time spent discussing group life, vision, dental, long-term disability, accidental death and disability, employee assistance, etc. when medical premiums take 80% of an organization�s elective benefit dollars ? and provide insurance agents 80% of their income.)

Although there is no set way of classifying benefits, ERI has been surveying and reporting on benefits for many years and uses the five categories of benefits shown in Exhibit 8-1.

Exhibit 8-1. Categorization of Employee Benefits
Type of Benefit
	1.	Legally required payments (employer's share only)
			a.	Old-age, survivors, disability, and health insurance (FICA taxes)
			b.	Unemployment compensation
			c.	Workers' Compensation (including estimated cost of self-insured)
			d.	Railroad retirement tax, railroad unemployment and cash sickness insurance, state sickness benefits insurance, etc.
	2.	Retirement plan, insurance, and other agreed-upon payments (employer's share only)
			a.	Retirement plan premiums and retirement plan payments not covered by insurance-type plan (net)
			b.	Life insurance premiums; death benefits; hospital, surgical, medical, and major medical insurance premiums, vision, dental, etc. (net)
			c.	Salary continuation or long-term disability
			d.	Dental insurance premiums
			e.	Discounts on goods and services purchased from company by employees
			f.	Employee meals furnished by company
			g.	Miscellaneous payments (compensation payments in excess of legal requirements, separation or termination pay allowances, moving expenses, etc.)
	3.	Paid rest periods, lunch periods, wash-up time, travel time, clothes-change time, get-ready time, etc.
	4.	Payments for time not worked
			a.	Paid vacations and payments in lieu of vacation
			b.	Payments for holidays not worked
			c.	Paid sick leave
			d.	Payments for National Guard (or army or other reserve duty); jury, witness, and voting pay allowances; payments for time lost due to death in family or other personal reasons, etc.
	5.	Other items
			a.	Profit-sharing payments
			b.	Contributions to employee thrift plans
			c.	Christmas or other special bonuses, service awards, suggestion awards, etc.
			d.	Employee education expenditures (tuition refunds, etc.)
			e.	Special wage payments ordered by courts, payments to union stewards, etc.
			f.	Employee assistance programs (drug recovery, alcohol, etc.)
			g.	Gainsharing
Source: Reprinted from Employee Benefits 1984, Copyright 1986 by The Chamber of Commerce of the United States of America. Used by permission of the publisher.

This breakdown will be used as we discuss the major features of today's benefit packages. Some of the benefits (profit sharing and service awards) are awarded for people's performance and not for their membership. As such we would not consider them benefits.

This chapter examines voluntary employer benefit programs, including retirement plans, insurance and time off. Chapter 9 will look at legally required benefits, including Social Security, Unemployment Insurance and Workers' Compensation.

This category of benefits, and the next (insurance), validates the statement that in the United States, employee protection arrangements have been left to organizations rather than government. The programs covered in this section are controlled by laws when offered, but are not required by law.

A major benefit requirement is to provide economic security for employees upon retirement. This can be accomplished in a number of ways.

In essence, all methods of providing economic stability in later life are done by deferring current compensation to some future time, but some programs do this more obviously than others. The least visible form to the employee is the retirement plan program. In a retirement plan program, money is put away in a fund each year for the employee's eventual retirement. At retirement the employee begins to receive the money put away for him or her. Thus a retirement plan program is a tradeoff between current income and future security. It is not strange, then, that desire for and interest in retirement plan programs increases with age. The problem is that in order to have a retirement income that is satisfactory, one must be concerned about it from a young age.

Retirement plan programs have been a part of organization benefit packages for a long time. During the early 1970s there was a great deal of concern about retirement plan programs as it became clear that many employees who thought they were covered by such programs discovered that they were not. This was partially an administrative situation involving very complicated plans and partially an economic problem where organizations had not funded the pension plans and could not meet the demands of retirees. The result of these problems was the Employee Retirement Income Security Act (ERISA), which sets forth the standards that the organization's retirement plan program must meet. The act does not say that the organization must have a retirement plan program but does say that if it does have a retirement plan program the program must meet certain standards.

In addition to ERISA, tax laws affect the development and administration of retirement plan programs. Since there is a deferral of income from today to tomorrow, the IRS is interested in seeing that this deferral is not abused to avoid taxation. In addition, the tax laws are concerned with treating all employees in the organization in a nondiscriminatory manner. What this means is that retirement plans cannot be established that benefit only a portion of the organization's employees, usually executives, if the plan is to qualify for the above-mentioned tax advantages.

The design of a retirement plan program calls for identifying who, when, and how.

Our placement of benefits as membership rewards in the employment exchange would suggest that a retirement plan program include all employees. But this may ignore two factors: length of time in the organization and the value of the reward in retaining different groups of employees. If the program is to encourage continued membership, then a waiting period before entrance into the program makes sense. Likewise, certain groups, particularly executives, have needs that are different from those of other employee groups.

ERISA has some rules regarding who shall be in the program. The law requires that any employee who (1) has been employed for one year or (2) is 21 years of age, whichever occurs later, must be included.

Tax considerations have to do with whether the program is qualified. Participation eligibility must be 70 percent and participation at least 80 percent of the eligible population. The importance to the employee of the plan being qualified is that the monies placed in the fund for the employee are not counted as income to the employee in that year. Thus, in order to be qualified, retirement plan programs must benefit only employees and their beneficiaries and not discriminate in favor of particular employee groups, such as executives.

Vesting. A second part of the who question involves the idea of vesting. The term vesting means that the employee has an interest in the accrued benefits of the retirement plan program. These benefits cannot be taken away even if the employee quits or is, fired. This is a requirement of ERISA and was placed in the law because organizations would avoid paying retirement plans by letting people go before their retirement age. Also, having to stay all of one's working life with a particular organization in order to receive a retirement plan reduces labor mobility drastically.

For 2002 and beyond, ERISA requires companies to adopt one of two vesting schedules for 401(k) and 403(b) plans::

For defined contribution plans, companies have the choice of three vesting schedules:

The easy answer to this is when the employee retires. But this answer hides more than it reveals. When is retirement?

Ordinarily retirement plan programs assume a retirement age of 65. This standard is under pressure from both directions today. On one hand the Age Discrimination Act says that employers cannot force a person to retire before 70, and some states have abolished mandatory retirement entirely. On the other hand, there is a trend toward early retirement of employees before the age of 65. Most organizations stay with the 65 figure as a model and adjust the payments made to people who retire early or late actuarially. An alternative way of dealing with this question is to define a number of years of service in the organization before the person is able to obtain full retirement plan benefits.

There are two circumstances other than retirement, death, and disability in which there is a payout from the retirement plan. Upon the employee's death the usual practice is to provide the deceased's beneficiary with the money that is in trust for the deceased. Most pension programs also have a disability retirement clause that, much like an early-retirement provision, pays the employee a proportion of the amount that the employee would be entitled to had he or she stayed employed until the normal retirement date.

This is the most complex question to answer and one that is affected by at least two major variables. The first of these is the contributor. In some plans only the employer contributes; in others both employer and employee contribute. Employee contribution plans tend to pay more than noncontributory ones. On top of Social Security, a further deduction from the paycheck may seem like a lot to the employee and certainly reduces his or her options for putting money away in other ways. But it also makes the retirement plan program more visible to the employee and makes it a shared contribution to the employment exchange.

The second variable is the type of program: defined benefit or defined contribution. These are so different that they are discussed separately below.

This is a category of benefits that many employees look forward to. It includes vacations, holidays, sick leave, maternity leave and personal leave.

The purpose of vacation is to give the employee time away from the job for rest and recreation. Over time there has been a trend toward granting more vacation time. This trend, if not being currently reversed, is clearly on hold. The practice seems to be to start with two weeks and work up to four weeks' vacation at around 15 years. The major issues in vacation policy are whether the vacation time can be carried over, if so how much, and whether to pay the employee off if the vacation time is forfeited. Allowing employees to build up a bank of vacation time creates a large potential cost to the organization and destroys the purpose of vacation � to get away from the job. So most companies have a policy limiting the amount of vacation time that can be stored.

The common number of paid holidays per year ranges from 9 to 12. Some of these are legally defined and others are the product of tradition or bargaining. Recent upturns in the economy and concession bargaining have increased the number of holidays in many industries.

The most common amount of sick leave is a day a month, amounting to 12 days a year. There are two opposing concerns with sick leave. The first is the person who abuses sick leave by taking it whether really sick or not. This employee then has no sick leave available when it is needed. The opposite problem is those employees who take no sick leave and thereby build up a large potential cost to the organization. This can be quite costly, since employees could build up their reserve while their salary rate is low and then use it when their salary rate is much higher. Every time the wage structure is adjusted, this affects the total potential cost of sick leave. To get around this problem organizations are limiting the buildup of sick leave just as they are vacations.

Employer provision of maternity health care benefits plays an important role in a benefit plan, especially as more and more women of childbearing age participate in the workforce. Most company-sponsored health care plans provide for prenatal care, delivery, and postnatal care. Federal law requires that if employer-provided insurance is offered, maternity-related expenses must be paid for on the same basis as other medical conditions. In addition, state laws must be consulted, since many states stipulate coverage of certain maternity care treatments.

This is a grab bag of time off for various reasons, such as death in the family, military leave, and jury duty. Many organizations are setting up a general category of personal leave rather than having a series of special circumstances that lead to different interpretations throughout the organization. In fact, one trend that is starting to take hold is to combine all the time-off categories just discussed and grant a certain number of days off per year for paid time off the job. It is left up to the employee to decide how these days are to be distributed.

		Diploma in Human Resource Management