Milkovich/Newman: Compensation, Ninth Edition
Chapter 13
McGraw-Hill/Irwin
Benefit Options
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter Topics

Legally Required Benefits

Retirement and Savings Plan Payments

Life Insurance

Medical and Medically Related Payments

Miscellaneous Benefits

Benefits for Contingent Workers
13-2
Exhibit: 13.1 Employee Benefit
Preferences
13-3
Legally Required Benefits
Workers’
Compensation
Social Security
Unemployment
Insurance
13-4
Exhibit 13.2 Categorization of Employee Benefits
13-5
Exhibit 13.3 Participation in Selected
Benefits, 2005
13-6
Overview: Workers’ Compensation

Form of no-fault insurance
– Employer liable for providing benefits to employees
that result from occupational disabilities or injuries,
regardless of fault
– Disability must be work-related

Covered by State, not Federal laws
– Employers pay premium to insurance company or
state fund
– For every dollar insurers take in to cover workplace
injuries and illnesses, they pay out $1.21 to cover
claims
13-7
Workers’ Compensation: Benefits and
Laws

Types of benefits:
– Permanent total disability and temporary total
disability
– Permanent partial disability - loss of use of a
body member
– Survivor benefits for fatal injuries
– Medical expenses
– Rehabilitation
13-8
Exhibit 13.4: Benefits by Type of
Injury: New Hampshire
13-9
Exhibit: 13.5: Commonalities in State
Workers’ Compensation Laws
13-10
Issues: Workers’ Compensation
Increased costs of medical
expenses
Cost
increases
due to . . .
Use of workers’
compensation as a surrogate
for more stringent
unemployment insurance
Cost of replacing worker wages
has risen
13-11
Workers’ Compensation

Social Security

Unemployment Insurance

Family and Medical Leave Act (FMLA)

Consolidated Omnibus Budget Reconciliation
Act (COBRA)

Health Insurance Portability and Accountability
Act (HIPAA)
13-12
Workers’ Compensation (cont.)

Retirement and Savings Plan Payments

Defined Benefit Plans

Defined Contribution Plans

Individual Retirement Accounts (IRAs)

Employee Retirement Income Security Act
(ERISA)
13-13
Social Security

Provides a basic foundation of security for
American workers and their families

For tax purposes, system is split into two
programs:
– Social Security - 6.2%
– Medicare - 1.45%
13-14
Issues: Social Security
Number
of retired workers is rising without a
corresponding increase in number of contributors
to offset costs
– Currently, 3.5 workers pay into system for each
person collecting benefits
– Within next 40 years this ratio drops to about 2 to 1
13-15
Issues: Social Security (Cont.)
 Reform
options:
– Increase payroll taxes
– Decrease benefits
– Use general revenues
– Have social security go to an employee’s own
account to be earmarked of his/her personal
retirement
13-16
Benefits under Social Security

Old age or disability benefits

Benefits for dependents of retired or disabled
workers

Benefits for surviving family members of a
deceased worker, and

Lump sum death payments
13-17
Unemployment Insurance
Financing:
– Majority of states, unemployment compensation is
financed exclusively by employers that pay federal
and state unemployment insurance tax
– Federal tax amounts to 6.2 percent of the first $7,000
earned by each worker
– States additionally impose a tax above the $7,000
figure
– The extra amount a company pays depends on its
experience rating
13-18
Unemployment Insurance (cont.)

Coverage:
– Eligibility requirements to receive benefits:
 Must meet State requirements for wages earned or time
worked during an established (one year) period of time
referred to as a “base period”
 Must be determined to be unemployed through no fault of
your own and meet other eligibility requirements of State
law
13-19
Unemployment Insurance (cont.)

Duration:
– Benefit duration involves a complex formula that
ensures extended benefits in times of high
unemployment
 When number of insured unemployed in a State reaches 6
percent
 When unemployment rate is greater than 5 percent and at
least 20 percent higher than in the same period of the two
preceding calendar years and remains that way for 13
weeks

Weekly benefit amount
 Controlling unemployment taxes
13-20
Family and Medical Leave Act
Coverage:
– Employers with 50 or more employees
Eligibility:
– 12 months employment with employer in which
employee works 1,250 hrs
Qualifying
events:
– Specified family or medical reasons
13-21
Family and Medical Leave Act (cont.)
Eligibility:
– Employee must have worked at least 1,250 hours
for the employer in the previous year
Common reasons
for leave:
– Caring for an ill family member or adopting a Child
13-22
Consolidated Omnibus Budget
Reconciliation Act (COBRA)
Coverage:
– Employers with 20 or more employees
Eligibility:
– Provides current and former employees and their
spouses and dependents with temporary extension of
health care benefits
Qualifying events:
– Specified events (e.g. layoffs)
Qualifying event
coverage:
– 18 to 36 months, depending on category of qualifying
event
13-23
Health Insurance Portability and
Accountability Act (HIPPA)

Key provisions
– Lessens an employer’s ability to deny coverage for a
preexisting condition
– Prohibits discrimination on the basis of healthrelated status
– Provides stringent privacy provisions
13-24
Retirement and Savings Plan Payments

Employees rank pensions in the top
three of all benefits in terms of
importance

Defined benefit plans

Defined contribution plans

Individual Retirement Accounts (IRAs)

Employee Retirement Income Security
Act (ERISA)
13-25
Defined Benefit Plans
Employer
provides a specific pension level
defined in terms of:
– Fixed dollar amount or
– Percentage-of-earnings amount that may vary with
years of seniority
Employer
finances this obligation by:
– Following an actuarially determined benefits formula
and
– Making current payments that will yield the future
pension benefit for a retiring employee
13-26
Defined Benefit Plans (Cont.)

Determination of benefit levels
– Average earnings at end of tenure (last 3 – 5 years)
or
– Average career earnings or
– Fixed dollar amount not dependent on earnings
13-27
Defined Contribution Plans


Require specific contributions by employer
Final benefit received by employees is unknown
– Dependent on investment success of plan manager

Three popular forms of these plans
– 401 (k) plan
– Employee Stock Ownership Plan (ESOP)
– Profit sharing
 Can be considered a defined contribution plan if distribution
of profits is delayed until retirement

Cash balance plans hybrid of defined benefit
and defined contribution plans
13-28
Exhibit. 13.10: Relative Advantages of
Different Pension Alternatives
13-29
Individual Retirement Accounts (IRAs)

Tax-favored retirement savings plan that
individuals can establish themselves
– IRAs are used mostly to store wealth accumulated in
other retirement vehicles, rather than as a way to
build new wealth
13-30
Employee Retirement Income Security
Act (ERISA)

Eligibility: Employees at least 21 years old
– Employers may require 6 months of service as a
precondition for participation

Vesting: Length of time employee must work
for employer before entitled to employer
payments to plan
– Any contributions made by an employee to a
pension fund are immediately and irrevocably vested
– Employer’s contribution must vest according to two
formulas
13-31
Employee Retirement Income Security
Act (ERISA) (cont.)

Portability: Issue for employees moving to new
companies
– Law does not require mandatory portability of
private pensions
– An employer may voluntarily agree to permit
portability (pension rights must be vested)

Pension Benefit Guaranty Corporation (PBGC):
Insures payment of certain pension plan benefits
13-32
How Much Retirement Income to
Provide?

What level of retirement income should be set as
a target?
 Should social security benefits be factored in
when considering level of retirement income?
 Should other post-retirement income sources be
integrated with pension?
 How large a role should seniority play in
determining pension level?
 What can a company afford?
13-33
Life Insurance

One of the most common employee benefits

87% of medium and large companies offer life
insurance

Most companies offer term policies
– Value of one to two times an employee’s salary
– Most plan premiums paid completely by employer
– Varying amounts of additional coverage often an option
13-34
Health and Medical Benefits
General Health
Care
Health Care:
Cost Control
Strategies
Short- & LongTerm Disability
Dental
Insurance
Vision Care
13-35
General Health Care
An
employer’s share of health care costs is
contributed into one of six health care systems:
– Community-based system
– Commercial insurance plan
– Self-insurance
– Health maintenance organization (HMO)
– Preferred provider organization (PPO)
– Point-of-service plan (POS)
13-36
Controlling Health Care Costs: Three
Strategies
Motivate
employees to change their demand for
health care via changes in either design or
administration of policies
Change
structure of health care delivery systems
and participate in business coalitions
– HMOs
– PPOs
13-37
Controlling Health Care Costs: Three
Strategies (cont.)

Promote preventive health programs
– No-smoking policies
– Healthy food in cafeterias and vending machines
13-38
Controlling Health Care Costs:
Strategy One
Practices
related to design and administration of
health plan
– Increase deductibles
– Change coinsurance rates
– Reduce maximum benefits
– Coordinate benefits with employees and spouses
13-39
Controlling Health Care Costs: Strategy
One (cont.)
– Audit health care charges
– Require preauthorization for visits to facilities
– Require mandatory second opinion for procedures
– Use intranet technology to allow employees access
to online benefit information
13-40
Short- and Long-Term Disability

Workers’ compensation covers disabilities that
are work-related

Social security has provisions for disability
income to those who qualify

Private sources of disability income:
– Employee salary continuation plans
– Long-term disability plans
13-41
Miscellaneous Benefits
Paid Time Off
During Working
Hours
Payment for Time
Not Worked
Child Care
Elder Care
Legal Insurance
Domestic Partner
Benefits
13-42
Paid Time Off During Working Hours

Rest periods

Lunch periods

Wash-up time

Travel

Clothes-change time

Get-ready time
13-43
Pay for Time Not Worked

Paid vacations and
payments in lieu of vacation

Payments for holidays not
worked

Paid sick leave

Other
– National guard
– Army, or other reserve duty
– Jury duty
– Voting pay allowances
– Personal reasons
13-44
Exhibit 13.18: Employees Receiving
Leave Time Benefits
13-45
Exhibit 13.19: Benefits Received: FullTime vs. Contingent Employees
13-46