Chapter 14 – Providing Employee Benefits
C. Retirement Plans
1. Employers have no obligation to offer retirement plans beyond the protection of
Social Security, but most offer some form of pension or retirement savings plan.
Figure 14.4, Sources of Income for Persons 65 and Older, shows that Social
Security checks amount to less than half of a retired person’s income.
2. Retirement plans may be contributory plans – those funded by contributions from
the employer and employee – or noncontributory plans – those funded with all
contributions coming from the employer.
3. Defined Benefit Plans: A defined benefit plan guarantees a specified level of
retirement income. These plans must meet the funding requirements of the
Employee Retirement Income Security Act (ERISA) of 1974. This law increased
the responsibility of pension plan trustees to protect retirees, establish certain rights
related to vesting – earning a right to receive the pension, and portability – being
able to move retirement savings when changing employers. This law also created
the Pension Benefit Guarantee Corporation (PBGC), which is the federal agency
that insures retirement benefits and guarantees retirees a basic benefit if the
employer experiences financial difficulties.
4. With a defined benefit plan, the employer sets up a pension fund to invest the
contribution. These plans protect employees from the risk that the pension fund will
not earn as much as expected.
5. Defined Contribution Plans: An alternative to defined benefits is a defined
contribution plan. This plan sets up an individual account for each employee and
guarantees the size of the investment into that account rather than the amount to be
paid out upon retirement.
6. Many kinds of defined contribution plans are available including:
a. Money purchase plan: The employer specifies a level of annual contributions.
b. Profit sharing and employee stock ownership plans: Incentive pay may take the
form of profit sharing and employee stock ownership plans (ESOPs)
c. Section 401(k) Plans: Employees contribute a percentage of their earnings and
employers may make matching contributions. The limit is $17,500 in 2014 and is
subject to cost-of-living increases in years after 2014.
7. Defined contribution plans free employers from the risks that investments will not
perform as well as expected. They put the responsibility for wise investing squarely
on the shoulders of each employee. A defined contribution plan also is easier to
administer.
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Chapter 14 – Providing Employee Benefits
9. Defined contribution plans offer an advantage to employees in today’s highly mobile
workforce. They do not penalize employees for changing jobs. With these plans,
retirement earnings are less related to the number of years an employee stays with
a company.
10. Cash Balance Plans: An increasingly popular way to combine the advantages of
defined benefit plans and defined contribution plans is to use a cash balance plan.
This type of retirement plan consists of individual accounts where all contributions
come from the employer. Usually the employer contributes a percentage of the
employee’s salary, say 4 or 5 percent. The money in the cash balance plan earns
interest according to a predetermined rate, such as the rate paid on U.S. Treasury
bills. If employees change jobs, they generally can roll over the balance into an
individual retirement account.
11. Government Requirements for Vesting and Communication: Along with
requirements for funding defined benefit plans, ERISA specifies a number of
requirements related to eligibility for benefits and communication with employees.
ERISA guarantees employees that when they become participants in a pension plan
and work a specified number of years, they earn a right to a pension upon
retirement. These rights are called vesting rights. In most cases, the vesting of
employer-funded pension benefits must take place under one of two schedules
selected by the employer:
a. The employer may vest employees after five years and may provide zero vesting
until that time.
b. The employer may vest employees over a three-to-seven year period, with at
least 20 percent vesting in the third year and at least an additional 20 percent in
each year after the third year.
12. Two less common situations have different vesting requirements. One is a “top-
heavy” pension plan, meaning pension benefits for key employees, such as highly
paid top managers, exceed a government-specified share of total pension benefits.
A top-heavy plan requires faster vesting for nonkey employees. Another exception
from the usual schedule involves multi-employer pension plans. These plans need
not provide vesting until after 10 years of employment.
13.The intent of vesting requirements is to protect employees by preventing employers
from terminating them before they meet retirement age in order to avoid paying
pension benefits. In addition, it is illegal for employers to transfer or lay off
employees as a way to avoid pension obligations, even if these changes are
motivated partly by business need.
14.ERISA’s reporting and disclosure requirements involve the Internal Revenue
Service, the Department of Labor, and employees. Within 90 days after employees
enter a plan, they must receive a summary plan description(SPD). This is a
report that describes the plan’s funding, eligibility requirements, risks, and other
details.
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whole or part.
Chapter 14 – Providing Employee Benefits
D. “Family-Friendly” Benefits
1. As employers have recognized the significance of employees’ need to manage
conflicts between their work and family roles, many have added “family-friendly”
benefits to their employee benefits. These benefits include family leave policies and
child care. Family-friendly benefits often produce spillover effects in the form of
loyalty because employees see the benefits as evidence that the organization cares
about its people.
2. Family Leave: Family-friendly benefits often include some form of family or
parental leave granting employees time off to care for children and other
dependents. Federal law requires 12 weeks of unpaid leave, but some companies
may choose to offer more generous leave policies. California requires 6 weeks of
leave up to 55 percent of pay.
3. Child Care: Many companies provide some form of child-care benefits. These
benefits may take several forms, requiring different levels of organizational
involvement.
4. College Savings: As workers’ children grow up, their needs shift from maternity
leave and child care to college tuition. Some organizations have supported this
concern by sponsoring tax-favored 529 savings plans. These plans let parents and
other family members defer taxes on the earnings of their deposits into the 529
account.
5. Elder Care: As the population of the nation’s elderly grows, so do the demands on
adult children to care for elderly parents, aunts, and uncles. In response to this,
many employers have added elder-care benefits. These benefits typically
emphasize information and support, rather than direct financial assistance.
E. Other Benefits
1. The scope of possible employee benefits is limited only by the imagination of the
organization’s decision makers. Traditional extra benefits include subsidized
cafeterias, on-site health care for minor injuries and illnesses, and moving expenses
for newly hired or relocating employees.
2. To encourage learning and attract the kinds of employees who wish to develop their
knowledge and skills, many organizations offer tuition reimbursement programs.
3. For demanding, high-stress jobs, organizations may look for benefits that help
employees put in the necessary long hours and alleviate stress.
V. Selecting Employee Benefits
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whole or part.
Chapter 14 – Providing Employee Benefits
1. Although the government requires certain benefits, employers have wide latitude in
creating the total benefits package they offer employees.
2. Decisions about which benefits to include should take into account the organization’s
goals, its budget, and the expectations of the organization’s current employees and those
it wishes to recruit in the future.
A. Organization’s Objectives
1. A logical place to begin selecting employee benefits is to establish objectives for the
benefits package.
2. Table 14.2 is an example of one organization’s benefits objectives.
B. Employees’ Expectations and Values
1. To meet employee expectations about benefits, it can be helpful to see what other
organizations offer. Employers can purchase survey information about benefits
packages from private consultants. In addition, the Bureau of Labor Statistics gathers
benefits data.
2. With regard to value, medical insurance is a high-value benefit because employees
usually realize that a surgery or major illness can be financially devastating. Vision
and dental care tend to be much less expensive, but many employees appreciate this
type of coverage because so many people receive dental or vision care in the course
of a year.
3. Employers should consider that the value placed on various benefits is likely to differ
from one employee to another. At a broad level, basic demographic factors such as
age and sex can influence the kinds of benefits employees want.
4. The choice of benefits may influence current employees’ satisfaction and may also
affect the organization’s recruiting in terms of both the ease of recruiting and the kinds
of employees attracted to the organization.
5. Organizations need to consider the signals sent by their benefits package as they set
goals for benefits and select benefits to offer.
6. Cafeteria-Style Benefits: Organizations can address differences in employees’ need
and empower their employees by offering flexible benefits plans in place of a single
benefits package for all employees. These plans, often called cafeteria-style plans,
offer employees a set of alternatives from which they can choose the types and
amounts of benefits they want. The plans vary.
7. Cafeteria-style plans have a number of advantages such as:
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whole or part.
Chapter 14 – Providing Employee Benefits
a. The selection process can make employees more aware of the value of the
benefits
b. The individual choice enables each employee to match his or her needs to the
company’s benefits
c. The company avoids the cost of providing employees with benefits they do not
value
8. A drawback of cafeteria-style plans is that they have a higher administrative cost,
especially in the design and set-up stages. Another possible drawback is that
employee selection of benefits will increase rather than decrease costs because
employees will select the kinds of benefits they expect to need the most.
C. Benefits’ Costs
1. Employers also need to consider benefits costs. Widely used sources of cost data
include the Bureau of Labor Statistics (BLS), Employee Benefit Research Institute,
and U.S. Chamber of Commerce. Annual surveys by the Chamber of Commerce state
the cost of benefits as a percentage of total payroll costs and in dollar terms.
2. In recent years, benefits related to health care have attracted particular attention
because these costs have risen very rapidly and because employers have a number
of options. These employer options include: shifting to HMOs and PPOs, shifting
more of the cost to employees, excluding or limiting the coverage for certain types of
claims, and developing wellness programs.
VI. Legal Requirements for Employee Benefits
1. The legal requirement for some benefits to be provided adds to the cost of
compensating employees.
2. Organizations looking for ways to control staffing costs may look for ways to structure
the workforce so as to minimize the expense of benefits such as: requiring overtime
rather than adding new employees, hire part-time workers, and use independent
contractors rather than hiring new employees.
3. Other legal requirements involve tax treatment of benefits, antidiscrimination laws, and
accounting for benefits.
A. Tax Treatment of Benefits
1. The IRS provides more favorable tax treatment of benefits classified as qualified
plans. The details vary from one type of benefit to another.
2. To obtain status as a qualified plan, a benefit plan must meet certain requirements.
In the case of pensions, these involve vesting and nondiscrimination rules.
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
Chapter 14 – Providing Employee Benefits
B. Antidiscrimination Laws
1. A number of laws are intended to provide equal employment opportunity without
regard to race, sex, age, disability, and several other protected categories. Some of
these laws apply to the organization’s benefits policies.
2. Legal treatment of men and women includes equal access to benefits so the
organization may not use the employee’s sex as the basis for providing more limited
benefits.
3. Laws such as the Pregnancy Discrimination Act, the Age Discrimination in
Employment Act, and the Americans with Disabilities Act are relevant to benefits
policies.
C. Accounting Requirements
1. A company’s financial statements must meet the many requirements of the Financial
Accounting Standards Board (FASB). These accounting requirements are intended
to ensure that financial statements are a true picture of the company’s financial
status and that outsiders, including potential lenders and investors, can understand
and compare financial statements.
2. Under FASB standards, employers must set aside the funds they expect to need for
benefits to be paid after retirement, rather than funding those benefits on a pay-as-
you-go basis.
VII. Communicating Benefits to Employees
1. Organizations must communicate benefits information to employees so they will
appreciate the value of their benefits. This is essential so that benefits can achieve their
objective of attracting, motivating, and retaining employees.
2. Employers have many options for communicating information about benefits. To increase
the likelihood that employees will receive and understand the messages, employers can
combine several media, such as brochures, question-and-answer meetings, intranet
pages, memos, and email.
3. An investment of creativity in employee communication can reap great rewards in the
form of committed, satisfied employees.
Did You Know?
Employees Say Benefits Matter
In a SHRM 2002 survey benefits ranked in the top five contributors to job satisfaction. The most
important benefits were paid time off and health insurance.
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
Chapter 14 – Providing Employee Benefits
Discussion Question with Possible Response
1. How do the data shown here support an argument that HR managers should
actively communicate with employee about their benefits?
Answers will vary
ROADMAP: Chapter Vocabulary
Employee benefits
Social Security
Unemployment insurance
Experience rating
Workers’ compensation
Family and Medical Leave Act (FMLA)
Patient Protection and Affordable Care Act
Consolidated Omnibus Budget Reconciliation Act (COBRA)
Health Maintenance Organization (HMO)
Preferred Provider Organization (PPO)
Flexible-spending account
Employee wellness program
Short-term disability insurance
Long-term disability insurance
Contributory plan
Noncontributory plan
Define-benefit plan
Employee Retirement Income Security Act (ERISA)
Pension Benefit Guarantee Corporation (PBGC)
Defined-contribution plan
Cash balance plan
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
Chapter 14 – Providing Employee Benefits
Vesting rights
Summary Plan Description (SPD)
Cafeteria-style plan
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.