Chapter 12 Employee Benefits
CHAPTER 12
EMPLOYEE BENEFITS
CHAPTER OVERVIEW
The chapter is introduced with the stories of three loyal, long-term employees whose retirement plans were drastically altered. Due to changes in their employers’ pension plans, each person was forced to adapt to reduce payouts. The stories reflect changes in benefits happening in countless companies. Benefits are generally membershipbased rewards which are desirable to employees and which can be designed to meet the diverse needs of today’s workers. The costs and complexities of both legally required benefits and voluntary ones, such as health insurance, retirement plans and time off are presented, as well as current issues, including flexibility of benefits choices and availability of benefits for families, domestic partners and retirees. Effective benefits administration allows companies to attract and retain good workers by creatively and cost-effectively offering employees more than just their paycheck.
Additional Features of This Chapter:
Exhibit 12-1 is a listing of the major benefits typically offered and the percentage of employees participating.
Exhibits 12-2 and 12-3 provide sample Health Maintenance Organization and
Preferred Provider Organization coverage plans.
Exhibit 12-6 calculations demonstrate the financial impact of flexible spending account plans.
“Ethical Issues in HRM” discusses the issue of benefits for domestic partners.
“Diversity Issues in HRM” covers what happens to benefits, pay and job security when employees must report for military duty.
“Did You Know: Benefits Around The Globe” highlights some benefits available internationally.
“Workplace Issues: Revising the Stock Option Plan” explores stock options and
FASB standards.
ADDITIONAL LECTURE OR ACTIVITY SUGGESTIONS
Benefits Bowl. The topic of employee benefits is complex, including lots of detail about laws, requirements and options. A good way to help the students learn some of the details, without listening to a dry lecture is to use a contest format. Make up a set of questions based on the chapter, and give student teams the chance to choose their
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Chapter 12 Employee Benefits questions by number or by picking them out of a hat or bowl. One option is to let each team have a chance, in turn, to answer a question, but to open it up to the floor if the designated team cannot get the right answer in one minute. You can keep track of the number of points earned by each team for correctly answered questions, and either offer grade points or a prize at the end of the session for the team with the most points.
This activity also illustrates the impact of team rewards on worker behavior.
Writing Assignments and/or Speakers: So much is happening in the benefits area today, that this is an excellent topic to have students research in current HRM and news sources or to have speakers who are benefits administrators or vendors (e.g., a representative from a local HMO).
Review the “Did You Know: Benefits Around The Globe?” in class. Ask students why they think benefits are different among different countries.
This may be an appropriate time in the course to discuss welfare reform and its impact on employers. A speaker from a local agency working with welfare recipients to assist them with employment could provide an interesting perspective on the benefits available to and needed by this segment of the labor force.
Students will also benefit from reviewing “real life” benefit packages. Ask students to bring in their own employer’s benefit packages. If they aren’t eligible, many HR professionals will give them a packet if they explain the purpose. If students are unemployed, encourage them to research plans on the Internet. The activity also compliments “Working With a Team” at the end of the chapter.
CHAPTER OUTLINE AND LECTURE SUGGESTIONS
I. Introduction: Employee benefits have grown in importance and variety and are typically membership-based rewards offered to attract and keep employees. They do not, however, directly affect a worker’s performance, but inadequate benefits lead to employee dissatisfaction.
A. Costs of Providing Employee Benefits
1. Benefit and service offerings add about 40 percent to an organization’s payroll cost.
2. Benefits become the focus of negotiations with employees when large wage and salary increases are not feasible.
B. Contemporary Benefits Offerings
1. Benefits today reflect the diversity of the work force.
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More than 25 percent of Fortune 500 companies, for example, offer domestic partner benefits -- coverage for an employee’s live-in partner, regardless of gender.
2. An HRM challenge is designing a benefits package which is attractive to applicants and current workers, and provides all the legally required benefits.
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II. Legally Required Benefits
A. Social Security
1. Financed by equal employee and employer contributions, based on a percentage of earnings.
2. Provides income for retirees, disabled workers & surviving dependents.
3. Provides some health insurance coverage through Medicare.
B. Unemployment Compensation
1. Funded by employers who pay combined federal and state tax imposed on taxabl e wage base; tax varies based on organization’s unemployment experience.
2. Provides employees with some income continuation during periods of involuntary unemployment; typical coverage is for 26 weeks.
C.
Workers’ Compensation
1. Worker’s compensation is paid for by the organization; rates based on likelihood of accidents, past history, and the type of industry.
2. Benefits pay expenses and/or compensate for losses, based on a fixed schedule of minimums and maximums, resulting from work-related accidents or illness, regardless of fault.
D. Family and Medical Leave Act - 1993
1. Requires employers with 50 or more employees to allow up to 12 weeks of unpaid leave for family or medical reasons.
2. Specifies record-keeping requirements and communication requirements that must be met by the employer.
III. Voluntary Benefits: What can be offered is only limited by creativity and budget.
Some of the more common are addressed here.
A. Health Insurance costs US businesses more than $450 billion annually – about
13 cents per every dollar wage earned.
1. Traditional health insurance a. Typically has the fewest coverage limitations for the employee, but is also usually the most expensive. b. UCR fees are “usual, customary and reasonable” fees for service.
2. Health Maintenance Organizations (HMOs) a. Alternative benefit required by Health Maintenance Act of 1973. b. Broad comprehensive care provided by designated service centers for fixed fees. c. Promotes preventive care. d. Health care choices significantly limited.
3. Preferred Provider Organizations (PPOs) a. Member health care providers agree to provide services at a fixed fee; employees are encouraged by lower rates to use member or “preferred” providers. b. Utilization review procedures generate data on plan use.
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4. Employer-operated coverage a. Employers self-fund insurance programs, operated under a Voluntary
Employees Beneficiary Association (VEBA) to reduce costs. b. Often hire third party to administer.
B. Health insurance continuation

Consolidated Omnibus Budget Reconciliation Act (COBRA) provides for continuation of benefits for up to three years after an employee leaves a job; cost is paid by the employee.
C. The HIPAA Requirement
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The Health Insurance Portability and Accountability Act of 1996 imposed on employers and health providers regulations regarding the confidentiality of employee health information.
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This significance of confidentiality is magnified by growing concerns about identify theft.
IV. Retirement Benefits
A. Employee Retirement Income Security Act (ERISA) of 1974
1. Defines employee vesting rights (right to pension benefits even if one leaves the company).
2. Enables pension rights to be portable .
3. Sets up Pension Benefit Guaranty Corporation (PBGC) (claims corporate assets to cover inadequately funded pension plans).
4. Requires Summary Plan Description (SPD) (explanation of benefits in
“plain” language).
B. Defined Benefit Plans
1. Plan specifies the dollar benefit workers receive at retirement.
2. Usually based on some formula of years of service and average final compensation.
C. Defined Contribution Plans
1. Employee and employer may contribute to account based on rules established for contribution
2. Amount of benefits depends on success of account investments.
D. Money Purchase Pension Plan:
1. Type of defined contribution plan; organization commits to depositing fixed amount of mon ey or percentage of employee’s pay annually.
2. Amount of contribution is regulated by IRS
E. Profit-Sharing Plans
1. Variation of defined contribution plan.
2. Company amount contributed depends on profit level in the organization.
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3. Contribution is optional, not required.
F. Individual Retirement Accounts (IRAs)
1. Currently designed for lowerincome workers who don’t have pension programs at work
2. Can defer taxes on amount deposited and interest earned in retirement account.
G. Roth IRAs
1. Effective in 1998
2. Eligible employees can contribute post-tax up to $3,000 annually; can be withdrawn tax-free after a certain age. (Note: This figure may increase; consider checking www.irs.gov
for latest limitations.)
H. 401(k)s: Permit workers to set aside specified amount of income on taxdeferred basis; employers may match employee contribution.
I. Other Retirement Income Vehicles: See Exhibit 12-4 for a summary.
V. Paid time off
A. Vacation and Holiday Leave
1. Vacation time is usually related to the length of time on the job.
2. Some companies also allow personal days that can be used for any reason.
B. Disability Insurance Programs : Provides salary continuation for short-term disabilities (sick leave) and long-term disabilities (coverage usually effective after
6 months).
1. Some companies provide financial incentives to employees to not use their sick leave.
2. Longterm disability plans usually replace a portion of the employee’s salary, often 60 percent.
VI. Survivor Benefits
A. Two types: contributory and non-contributory. The text focuses on noncontributory, which is in general employer-funded.
B. Group Term Life Insurance: Benefit is usually based on one to five times annual rate of pay.
C. Travel insurance: Life insurance for business travel-related deaths.
D. The service side of benefits
1. These include social and recreational events, employee assistance programs, credit unions, housing, tuition reimbursement, uniforms, companypaid transportation and parking, etc.
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2. Employers often can provide services at no cost or at a significant reduction from the usual cost.
VII. An Integrative Perspective on Employee Benefits: Flexible benefits programs allow employees to choose which benefits they want and help to keep costs down.
A. Flexible spending accounts
1. Under Section I25 of the Internal Revenue Code employees can set aside a designated dollar amount before taxes for specified services, such as healthcare premiums, medical expenses, dependent child-care and group legal services.
2. IRS requires that accounts for different purposes be separate and that all money be spent during the year or forfeited.
3. Money set aside in these accounts is not subject to federal, state, and social security taxes.
B. Modular plans: Employees choose a pre-designed package of benefits from several options.
C. Core-Plus Options Plans: Employees are given core coverage (e.g. medical, life, disability) with option to select other benefits.
DEMONSTRATING COMPREHENSION: Questions for Review
1. Describe why companies provide benefits to their employees. What effect do companies expect benefits will have on employee work behaviors?
Employers offer benefits to employees to attract and retain them. Benefits are expected by today’s workers, and as such, must be offered in such a way that they provide meaning and value to the employees.
Benefits, while necessary for attracting and retaining employees, typically have very little impact on employee work behavior. Benefits are linked to employment rather than performance. However, the company’s failure to provide adequate benefits may lead to decreased worker morale.
2. How does ERISA provide protection for a worker’s retirement?
The Employment Retirement Income Security Act (ERISA) has had a significant effect on retirement programs. Its primary emphasis is to ensure that employees have a vested right to their retirement monies, to ensure that appropriate guidelines are followed in the event of a retirement plan termination, and to ensure that employees understand their benefits through the Summary Plan
Description.
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3. Identify and describe four legally required benefits.
Legally required benefits are Social Security, unemployment compensation, workers’ compensation, and leaves specified under the Family and Medical
Leave Act. Social Security is a transfer program, funded by current employees to support workers who are disabled or retired. Social Security also serves as a minimum level of retirement income for most workers employed in the United
States. Unemployment compensation provides income continuation to employees who lose a job through no fault of their own. Unemployment compensation typically lasts for 26 weeks. Workers’ compensation provides income continuation for employees who are hurt or disabled on the job; it also provides compensation for work-related deaths or permanent disabilities.
Employers covered by the Family and Medical Leave Act are required to provide qualified employees with up to 12 weeks of unpaid leave to care for a new child, their own or family members’ illnesses.
4. Describe why an employee might select a PPO health insurance benefit over an HMO.
PPOs offer more choices of health care providers. Although the HMO coverage may be more comprehensive, the employees must use the HMO physicians and hospitals. In a PPO plan, the employee may have to pay deductibles and copayments, but will pay lower rates when they choose a member of the Preferred-
Provider Organization to provide physician, hospital or other services.
5. Describe the difference between a defined benefit pension plan and a defined contribution pension plan.
In a defined benefit plan, a specific amount of money, based on an actuarial calculation, is set aside each year in a trust fund for the employees by the employer. The pension payout is typically calculated using a formula that often includes average final compensation and years of service.
With a defined contribution plan, each employee has an individual account to which both the employee and the employer may make contributions. There may be some options on investment choices. Final benefits depend on the outcome of the investments. These plans are growing in popularity, since they offer more flexibility to both employer and employee.
6. Describe the inherent potential for abuse in offering a sick-leave benefit.
If the plan is a use it or lose it plan, some employees may be “sick” for as many days each year as they are entitled. If employees don’t have any other option, they may use sick days to take care of other family members or personal business. Companies try to minimize abuse by offering rollover options, such as
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Chapter 12 Employee Benefits extra vacation or pay for unused sick leave when it accumulates over a certain amount or when the employee leaves.
Some organizations combine all leave benefits (sick, vacation, personal) and allow employees the responsibility for deciding how to use their leave time.
7. Describe three types of flexible benefits programs.
Flexible spending accounts allow employees to set aside pretax dollars for certain expenses, such as child care or dental care. Modular plans allow flexible benefits selection by blocks or groups of benefits. Choice is limited to selection of one module in its entirety. Core-plus options plans provide core benefit coverage, and allow employees to purchase additional benefits from a menu of options.
LINKING CONCEPTS TO PRACTICE: Discussion Questions
1. “Social Security should serve as a foundation for employee retirement programs. Therefore, Congress should explore more extensive revisions to the program to ensure that the next generation of retirees will receive the benefit.” Do you agree or disagree with this statement? Explain your response.
Student response may/will vary. Some suggestions:
Agree: Social S ecurity was never intended to provide a person’s total retirement income, only to serve as a beginning. It needs to remain in place. As the population ages, it is clear that the existing program must be revised to ensure funds are available. If the program is eliminated instead of revised, it is highly likely that many people will not effectively plan for retirement, thus burdening society with their care.
Disagree: With the changing population demographics in the United States, the majority of today’s employees want to invest their own money and most could probably get a much better return than the government. Let people take responsibility for their own future.
2. “Security disability and survivor benefits should be the sole responsibility of each employee. A company simply cannot be responsible for the financial welfare of its employees. Additionally, legally required benefits provide some level of worker protection. Therefore, a major means of containing benefit costs should be the elimination of disability and survivor benefits.” Do you agree or disagree? Explain your response.
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Agree: People have to be responsible for their own financial well-being, and need to be encouraged to return to work as soon as possible. This is especially true today, when people can’t count on having a “permanent” job with ongoing benefits for their entire careers.
Disagree: Some employees are unable to plan, save and invest to cover emergencies, especially considering the high costs of medical care today.
Peace of mind may contribute to employee effectiveness, and good benefits help an organization’s reputation and ability to attract good people.
3. “Flexible benefits programs are employer inducements to reduce benefits costs. The average employee has neither the ability nor information to make such important choices. Employees should suspect such programs.” Do you agree or disagree? Explain your response.
Agree: Complicated choices are beyond many employees. The company that sends out a 200-page book each year to explain benefits choices is not providing much of a service. If the amount of money employees are given to spend on benefits remains the same from year to year, having a choice may still not mean that the employee is well covered for his/her needs.
Disagree: It is part of the employer’s responsibility to provide understandable information, but up to the employee to ask appropriate questions and take responsibility for his/her own choices. Aware and informed workers understand the value of the benefits their company provides, and are more responsible benefits consumers.
CASE APPLICATION 12-A: A PERKY WAY TO PRODUCTIVITY
CASE SUMMARY
Motek, Inc. is a software firm with employee retention strategies that have led to one of the lowest turnover rates in its industry. Employee benefits are a key component of the company’s HR strategy.
1. Describe the importance of employee benefits as a strategic component of fulfilling the goals of HRM.
Clearly the company acknowledges that employee turnover affects the bottom line. By identifying creative benefit solutions that appeal to the workforce, Motek keeps turnover low. We can assume that the savings gained through retention are (or are perceived to) outweigh the benefit costs.
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2. Explain how Motek is using employee benefits as a motivating tool.
The benefits rewarded the desired behavior. For example, Motek wants employees to rest so they maintain their “edge.” The company’s generous vacation bonus rewards the desired behavior. By taking three-week vacations, employees can earn a $5000 bonus.
3. Do you believe the incentive benefits such as those offered at Motek can be used in other organizations? Why or why not?
Student opinions will vary. Suggestion:
Many companies would consider Motek’s approach to be excessive. Many factors influence the se lection of benefit components, such as a company’s financial condition, culture and workforce demographics.
CASE APPLICATION 12-B: TEAM FUN!
CASE SUMMARY
Tony and Edna need to talk with Kenny and Norton about employee benefits. At issue are what kind of benefits to offer to attract a diverse workforce, how to tailor benefit packages to employees’ wants while also being cost conscious, and what to do about retirement.
1.
As Tony’s intern, work up a presentation chart for three major health insurance options. Make a recommendation.
Traditional
– employee has most options, most expensive, declining in number due to cost
Health Maintenance Organization
– employee limited to physician and facilities with the HMO, usually costs the least, some problems with HMO stability and patient complaints
Preferred Provider Organization
– employee can use physicians in and out of the
PPO, most cost effective when use physicians in the plan, cost is usually in the middle of the three options, fastest growing plan
Most often recommended is the Preferred Provider Plan.
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2. How is TEAM FUN!’s vacation package different from most U.S. companies? Should it be the same? Why or why not?
Most companies offer a vacation package that increases the number of vacation days progressively as employees accumulate more years of service. If TEAM
FUN! were to change this benefit to be more like other companies, it should consider grandfathering current employees. Whether or not to change is a decision that should be made only after Kenny, Norton and Tony have looked at the entire benefit package.
3. Design a flexible benefits plan for TEAM FUN!
A core-plus options benefits plan typically has a basic core that includes medical coverage, life insurance, disability insurance, a 401(k) program, and standard time off with pay. Options that could be available are flexible spending accounts, dental insurance, and pre-paid legal services.
4. Evaluate the retirement policy in light of current human resources practices. Is it effective for this organization?
TEAM FUN! offers profit sharing and a tax shelter. However, it appears they’ve not given a lot of consideration to a formal retirement program. What they’ve had has worked well so far because profits have been good and bonuses paid almost every year. Plus, they’ve had no one who has been ready to retire. That will change with time, however, and they would do well to explore retirement plan options. Given the freedom employees have had to invest their money, a defined contribution plan would probably be preferred over a defined benefit plan.
5. Is TEAM FUN! familyfriendly? (Recall Edna’s comment from Chapter case
1-B.) Explain.
Edna’s comment in the chapter case 1 referred to ‘human resource issues’. Until
Kenny and Norton hired Tony their approach to having contented employees was to make work fun. Family-friendly employers recognize that home responsibilities have a great deal to do with how an employee also deals with work responsibilities. Child care and elder care, flexible schedules, company activities that involve families, and time off for family reasons are all noted as contributing to a family-friendly work environment. Tony is trying to inform and educate Kenny and Norton on the additional things they need to do to be truly family-friendly.
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WORKING WITH A TEAM: BENEFIT SELECTIONS
OVERVIEW
Students use exhibit 12-7 to structure their own benefits package. Then in teams, they explain and compare what they selected and whether the benefits they chose will be those they select later when they are in the workforce.
SUGGESTIONS/VARIATIONS
Have students discuss any other benefits that they think employees should be able to choose, or if they’re not sure, how they would find out.
Ask students to recommend a format for communicating information about an organization’s benefits and their administration to employees. Ideas can include an annual benefits
“fair,” corporate web page, dial-in information and administrative services, etc.
While some students interview benefits administrators, have other student team members interview employees in the same organization about their needs and perceptions of the benefits plan. Teams can then make recommendations to the organization about strengths and weaknesses of their program.
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