Lecture 2
Introduction to Employee Benefits
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Why study employee benefits?
Define “employee benefits”
Show the significance of employee benefits
Identify factors that have contributed to the
growth of group insurance
• Describe job opportunities in the field
• Current issues in employee benefits
Why Study Employee Benefits?
• To assist you in making personal choices
involving employee benefits
• To recognize the importance of employee
benefits for companies
• To prepare for work in this specialty
– Pricing and developing
– Negotiating
– Implementing
Definition of Employee Benefits
Narrow
Employer provided
benefits for:
Death
Accident
Sickness
Retirement
Unemployment
Broadest
All benefits and
services, other than
wages, provided to
employees
Five Traditional Categories of
Employee Benefits
• Legally required social insurance programs
– Social Security, Workers’ Compensation
• Payments for private insurance and retirement
plans
– Medical, disability, life insurance
• Payments for time not worked
– Vacations, parental leave, sabbaticals
• Extra cash payments to employees
– Educational expenses, suggestion awards
• Cost of services to employees
– Subsidized cafeterias, adoption assistance, parking
Significance of Employee Benefits
For 1995 the Average Cost per Employee
was $14,659 (42.0% of Payroll)
Selected Categories
Medical
$3668
Holidays and Vacation
3564
Legally Required Benefits
3109
Retirement and Savings
2620
Life insurance
140
Source: U.S. Chamber of Commerce Survey
Significance of Employee Benefits continued
Estimated total employer cost in 1995: $1.5
trillion or 41.8% of payroll
Estimated value for 1929: 3% of payroll
Estimated value for 1965: 21.5% of payroll
In addition, employee payroll deductions
equaled 13.1% of payroll in 1995
Significance of Employee Benefits continued
• Social insurance plans
– Social Security coverage almost universal
• Cost is 15.3% of payroll
– 90% of workers covered for unemployment
– 95% of workers covered for workers’ comp.
• Group life
– $4.7 trillion coverage in force
– 1 million contracts with 145 million certificates
Significance of Employee Benefits continued
• Group disability income insurance
– Over 75% covered for short term disability
– About 25% covered for long term disability
• Group medical expense insurance
– Premiums for medical expense coverage exceed
14% of GNP
– About 185 million people covered under group
medical insurance
• Retirement plans
– Approximately 104 million people covered
– Assets of private pension plans exceed $3.6 trillion
Factors Influencing the Growth
of Employee Benefits
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Industrialization
Influence of organized labor
Wage controls
Cost advantages
Tax advantages
Inflation
Legislation
Employment Opportunities in
Employee Benefits
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Marketing
Human resources
Finance
Insurance
Accounting
Communications
Actuarial science
Social science
Medical
Current Issues in Employee Benefits
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Impact of terrorism on group life insurance
“Janitor insurance” – abuses of COLI
Health care costs
Health care quality
Mental health parity
DNA testing
Social Security reform
Medicare prescription drug coverage
Long term care insurance
Current Issues in Employee Benefits
(cont.)
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Mismanagement of 401(k) plans
Investing in your employer’s stock
Accounting treatment for stock options
Cash balance pension plans
Impact of pension investments on firm profits
Unfunded pension liabilities