Chapter 13: Managing Employee Benefits
Chapter 13
Managing Employee Benefits
Learning Objectives
After students read this chapter, they should be able to:
• Define a benefit and identify four strategic benefits considerations.
• Analyze the differences between employee benefits in the United States compared to
those in other countries.
Chapter Overview
Employee benefits represent one of the most significant HR issues facing employers with
their aggregate costs now at approximately 30% to 40% of payroll. This chapter presents
an overview of the most significant issues associated with benefits and describes benefits
offered under five classifications—security, health care, retirement, financial, family-
oriented, and time off.
Chapter 13: Managing Employee Benefits
costs. Specific approaches include passing on a portion of the costs to employees through
copayments and employee contributions, offering managed care options, using mini-
medical plans, and using Consumer-Driven Health (CDH) plans including Health Savings
Financial benefits including insurance, financial services, relocation assistance, and
education assistance are then described and the chapter ends with a discussion of family-
oriented benefits and time-off benefits.
Chapter Outline
Chapter 13: Managing Employee Benefits
A benefit is a tangible indirect reward provided to an employee or group of employees for
organizational membership. Benefits often include retirement plans, paid time off, health
insurance, life and disability insurance, and many more.
Benefits are costly for the typical U.S. employer, averaging from 30% to 40% of payroll
expenses. In highly unionized manufacturing and utility industries, they may be over 70%
of payroll. At a minimum, a company will contribute more than 8% of workers’ pay to
provide legally required benefits. Figure 13-1 shows the per-hour costs employers spend
for typical benefits.
HR Headline: Sprinting to Health
Almost half of the employees who started the program finished the entire 12-week
challenge. Many employees have continued to engage in the healthy behaviors
adopted during the challenge. Sprint’s employee engagement increased as a result
of the program because individuals felt that the company really cared about them.
Chapter 13: Managing Employee Benefits
I. Benefits and HR Strategy
A challenge for employers is how to balance the increasing costs of benefits against the
value of those benefits to the organization goals. benefits should be an element of the total
rewards package when determining organizational strategies regarding compensation.
A. Benefits as Competitive Advantage
Benefits can be used to create and maintain a competitive advantage for the
organization. While they represent a significant cost, benefits are an important factor in
employee commitment and retention. Employers recognize that attracting and retaining
employees and increasing productivity are business objectives that can be enhanced
through effective design of benefit programs.
B. Tax-Favored Status of Benefits
Providing employee benefits rather than wages can be advantageous for employees.
Most benefits (except for paid time off) are not taxed as income to employees. The tax-
Chapter 13: Managing Employee Benefits
C. Global Benefits
There are significant differences in benefits across the globe. In many countries,
retirement, health, and other benefits are provided through programs administered by
the government. Employers and employees are taxed heavily to pay into government
funds that cover these benefits.
HR Skills and Applications: Gross up Pay Calculation
To determine the “true” value of employee benefits, HR professionals can calculate
the “gross–up” amount that represents the equivalent pay to the employee. Gross-
up means to increase the net amount of what the employee receives to include the
To calculate how much the $200 is really worth to Harold, calculate the gross-up by
following these steps:
• 100% – tax% = Net%
(100% – 38%) = 62%
Chapter 13: Managing Employee Benefits
extensive around the world. The United States is the only major developed nation that
does not guarantee workers paid sick leave.
D. Public-Sector Benefits
Workers in the public sector have for many years enjoyed more generous benefits than
those in the private sector. Many states and cities face serious budget shortfalls because
of the funding requirements for employee retirement and health care plans.
II. Managing Benefits
Benefit programs must be designed, administered, measured, and communicated. To
A. Benefits Design
Organizations design benefit plans with a goal of providing value for employees while
remaining cost-effective for the company. Figure 13-4 highlights key decisions made
when a benefits program is designed.
Flexible Benefits
A flexible benefits plan allows employees to select the benefits they prefer from
options established by the employer. As a result of the changing composition of the
Chapter 13: Managing Employee Benefits
inappropriate benefits package. Younger employees may decide not to participate in
the retirement plan because they believe retirement is decades away and that there is
sufficient time to save in the future. Another problem can be adverse selection by
employees, whereby only higher-risk employees select and use certain benefits.
Part-Time Employee Benefits
Another key design issue is whether or not to provide benefits to part-time
employees. Many employers do not provide part-time employee benefits, except
HR Skills and Applications: Getting the Best Bang for the Benefits Buck
There are several recommended steps a company can take in order to maximize
the value of employee benefits and insure that employees are attracted to the
offerings.
• Link benefits to business objectives—tie benefit programs to company core
values and business objectives. Use benefits like time off to reward employees
who perform well or meet goals.
• Don’t let the dust build up—employee preferences and the labor markets
change. Prevent benefit programs from “getting stale” by reviewing them
every year. An annual checkup helps to keep benefits aligned with the
Chapter 13: Managing Employee Benefits
Domestic Partner Benefits
Under some state laws, same-sex domestic partners may be entitled to coverage on
company medical insurance plans and to be recognized under retirement plans as a
surviving spouse. In states where gay marriage is legal, companies must treat same-
sex partners in the same manner as traditional married couples.
Older Workers Benefit Needs
III. Benefits Administration, Technology, and Communication
Legal compliance, recordkeeping, enrollment and participation issues result in a significant
administrative responsibility for organizations. Organizations may elect to have internal
benefits professionals handle these duties or they may use employees and vendors to
streamline many of the routine clerical tasks involved. Many organizations offer an open
enrollment period once a year. Open enrollment is a time when employees can change
their participation level in various benefit plans and switch between benefit options.
Outsourcing Benefits Administration
With the myriad of benefits, it is easy to see why many organizations must make
Chapter 13: Managing Employee Benefits
conduct employee benefits surveys, and facilitate benefits administration.
Information technology makes it possible for companies to offer self-service to
employees. Self-service allows employees to change their benefits choices, track
their benefits balances, and submit questions to HR staff members and external
benefits providers. However, not all employees can easily navigate the online system
for benefits enrollment and maintenance.
A. Benefits Measurement
The significant costs associated with benefits require that analyses be conducted to
determine the payoffs for the expenditures. Numerous HR metrics can be used to
evaluate whether benefits are providing the expected results in terms of employee
B. Benefits Cost Control
Since benefits costs have risen significantly in the past several years, particularly for
health care, employers are focusing more attention on measuring and controlling them,
even reducing or dropping benefits offered to employees. Increases in employer
expenditures for benefits are growing faster than increases in wages for employees.
C. Benefits Communication
Employees generally do not know much about the values and costs associated with the
benefits that they receive from employers. This is in large measure due to ineffective
communication by the company.
Chapter 13: Managing Employee Benefits
communication systems to inform employees about the monetary value of the benefits
they provide.
Younger employees (Generation Y) generally give low marks to their company’s
benefit communications. They find that the information they receive is not informative
or helpful in their decision making regarding benefit participation. Companies that
address this by providing personal counseling and making online content more
interactive can engage this group of employees and improve the perception of value
delivered by benefits.
Benefits Statements
Some employers give individual employees a personal statement that translates
benefits into dollar amounts. These statements give the employee a snapshot of the
total compensation they receive. They help employees to see the “hidden
paycheck”—the value of their benefits.
D. Types of Benefits
There are many mandated benefits that employers in the United States must provide to
employees by law. The United States requires fewer employee benefits than many other
Chapter 13: Managing Employee Benefits
of benefits most important to them from the “menu” of options offered by the employer.
IV. Legally-Required Benefits
The earliest benefits law was the Social Security Act passed at the end of the Great
Depression. Since the 1970s, federal statutes have been enacted to address financial and
employment security for workers, particularly those with medical problems.
A. Social Security and Medicare
The Social Security Act of 1935 and its later amendments established a system to
Social Security
Employees and employers share in the cost of Social Security through a tax on
employees’ wages or salaries. When the law was first enacted, employers and
employees each contributed 1% of worker wages to the fund. By 1990 the rate had
increased to 6.2% paid by each party (for a total of 12.4%), which is the current rate
Medicare
Medicare is the health insurance program for older Americans (age 65 and above)
and for some disabled citizens. Medicare is funded by a tax on employers and
employees. Each party pays 1.45% of employee earnings. Unlike the taxes paid for
Chapter 13: Managing Employee Benefits
Medicare is a comprehensive, government-operated insurance program that provides
a broad spectrum of benefits. Participants share in some of the costs for hospital
stays, physician visits, diagnostic tests, and prescription drugs.
B. Workers’ Compensation
Workers’ compensation provides security benefits to workers who are injured on the
job. State laws require most employers to provide workers’ compensation coverage by
purchasing insurance from a private carrier, state insurance fund, or self-insurance.
C. Unemployment Compensation
Unemployment compensation was established as part of the Social Security Act of 1935
to provide a minimum level of benefits for workers who are out of work. Each U.S.
state operates its own unemployment compensation system and benefit levels and job-
search provisions differ significantly from state to state. Each company pays an
unemployment tax that is based on an “experience rate” which reflects the number of
claims filed by workers who leave.
Chapter 13: Managing Employee Benefits
D. Additional Legally-Required Benefits
In addition to workers’ compensation and unemployment insurance most companies
V. Retirement Benefits
The aging of the workforce in many countries is affecting retirement planning for
individuals and retirement plan costs for employers and governments. In the United States,
the number of citizens at least 55 years or older has increased significantly in recent years,
and older citizens constitute a large portion of the population. More workers are delaying
retirement because of financial difficulties and decreased value of retirement savings
coupled with longer lifespans.
A. Retirement Plan Concepts
Certain rights are attached to retirement plans. One such right called vesting means that
the employee has a benefit that cannot be taken away. If employees resign or are
terminated before they have been employed long enough to be vested, no pension rights
Chapter 13: Managing Employee Benefits
have vested in a plan they can transfer their fund balances to other retirement plans if
they change jobs.
B. Retirement Plans
A retirement plan is a program established and funded by the employer and/or
employees to fund the employee’s retirement years. Organizations are not required to
offer retirement plans to employees beyond contributions to Social Security. There are
two broad categories of retirement plans—defined benefit plans and defined
contribution plans (Figure 13-11).
Defined-Benefit Pension Plans
Through a defined-benefit (DB) plan, employees are promised a pension amount
based on age and years of service. Contributions are based on actuarial calculations
Companies that provide defined benefit plans must comply with cumbersome and
strict rules regarding the funding of the plan. If the funding is inadequate to pay the
benefits promised, the company must make up the shortfall.
Defined benefit pension plans offer greater security to employees. The benefits are
guaranteed by the Pension Benefit Guaranty Corporation (PBGC). The PBGC
maintains a solvency fund to pay benefits if a company goes bankrupt and cannot
pay its retiree benefits.
Defined-Contribution Pension Plans
plans.
The 401(k) plan gets its name from section 401(k) of the federal tax code. This plan
is an agreement in which a percentage of an employee’s pay is withheld and invested
in a tax-deferred account. 401(k) plans now dominate the field of employment-based
retirement programs. These plans are attractive to employees because contributions
are made on a tax-deferred basis, so the employee pays lower income taxes during
working years.
Financial education and counseling can be used to help employees understand how to
manage their 401(k) and get the greatest value from the plan. People who use
investment help earn better returns on their retirement funds than those who go it
alone.
Cash Balance Pension Plans
VI. Legal Regulation of Retirement Benefits
Numerous laws and regulations affect retirement plans. Key regulations govern plan
communications, funding, and other important aspects of retirement programs.
A. Employee Retirement Income Security Act
Chapter 13: Managing Employee Benefits
Widespread criticism of many pension plans led to enactment of the Employee
Retirement Income Security Act (ERISA) in 1974. The purpose of this law is to insure
B. Retirement Benefits and Age Discrimination
According to a 1986 amendment to the Age Discrimination in Employment Act
(ADEA), most employees cannot be forced to retire at a specific age. In many employer
Early Retirement
Many pension plans include provisions for early retirement to allow workers to retire
before the normal retirement age. Phased retirements are alternatives being used by
individuals and firms. Phased retirement allows employees to bridge between these
two states while offering the company a chance to retain important knowledge and
skills.
Older Workers Benefit Protection Act
The Older Workers Benefit Protection Act (OWBPA) was enacted in 1990 as an
amendment to the ADEA. It requires equal treatment for older workers in early
retirement or severance situations. It also 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.
VII. Health Care Benefits
Chapter 13: Managing Employee Benefits
may significantly alter the involvement of employers in providing these essential benefits.
A. Increases in Health Benefits Costs
For several decades, the costs of health care have escalated at rates well above those of
inflation and increases in workers’ earnings. As a result of these large increases many
employers find that dealing with health care benefits is time consuming and expensive.
B. Health Care Reform Legislation
Landmark legislation enacted in 2010 revolutionized health care in the U.S., making
Key Provisions
The PPACA includes many important provisions intended to provide affordable
health care for all citizens. To achieve this goal, enrollment in health coverage is now
mandated for every citizen. Key elements of the law are highlighted in Figure 13-12.
C. Employer-Sponsored Plans
Employers will face a decision about continuing to offer their own health insurance
plans or to drop their plans in favor of government-sponsored coverage. Beginning in
Employers that provide high-cost health benefits to employees may face a 40% excise