The Costs of Employee
Benefits
Joseph J. Martocchio
What are Employee Benefits

Employee benefits refer to employee
compensation other than hourly
wage or salary
Two Dimensions of Employee
Benefits


The source of the benefit can be
characterized as legally required or
discretionary
The role the benefit serves recipients
can be characterized as protection,
paid time off, or accommodation and
enhancement
Legally Required Benefits

Legally required benefits are
mandated by several laws:
• Social Security Act of 1935
• State workers’ compensation laws
• Family and Medical Leave Act of 1993
Discretionary Employee Benefits

Discretionary benefits fulfill three
main roles:
• Protection programs
• Paid time
• Accommodation and enhancements
Income Protection Programs

Three types of protection programs:
• Disability insurance
• Life insurance
• Retirement plans
Defined Benefit Plans

Retirees receive guaranteed
payments for the duration of their
lives based on years of employment,
age, and final salary level before
retirement
Defined Contribution Plans



Plans allow employees to set aside a
portion of their salary for investment
purposes
These plans are riskier than defined
benefit plans due to the uncertainty
of the investment income
Employers may match a small
portion
Health Protection Programs


Programs refer to a host of practices
geared toward promoting sound
health
Health insurance plans represent the
largest portion of a company’s health
protection offerings
Health Insurance Programs




Fee-for-service plans
Managed care plans
Point-of-service plans
Savings accounts based on the
consumer-driven health care
philosophy
Fee-for-Service Plans

Provide protection for three types of
medical expenses: hospital expenses,
surgical expenses, and physicians’
charges
Managed Care Plans


Include HMOs and PPOs
Managed care plans impose
substantial restrictions on an
employee’s ability to make choices
about from whom they can receive
medical treatment
Point of Service Plans


Combines features of fee-for-service
systems and HMOs
Employees pay a nominal copayment
for each visit to a designated innetwork physician however the
possess the option to receive care
from out of network physicians for a
higher cost
Consumer-Driven Health Care


Flexible spending accounts (FSAs)
Health reimbursement accounts
(HRAs)
Paid Time Off



Vacation
Sick leave
Holidays
Accommodation and Enhancement
Programs

Promote opportunities for employees
and family members through:
• Mental and physical well being of
employees
• Family assistance programs
• Flexible work schedule
• Skills and knowledge acquisitions
Employer Costs for Compensation
and Benefits

Overall, benefits accounted for
approximately 30 percent of total
compensation costs
Environmental Factors and the
Cost of Benefits




Industry prospects with economic
conditions and forecasts
Government regulation of employee
benefits
Changing demographics of the labor
force
Advances in health care
Industry prospects with economic
conditions and forecasts


Economic forecasts can influence the
extent that the firm is willing to
invest in employee benefits
Employers will likely continue
employee benefits due to:
• Tax benefits
• Attracting and retaining quality
employees
Government Regulation of
Employee Benefits

The cost of legally required benefits
reduces the ability of the firm to pay
discretionary benefits
Changing Demographics of the
Workforce

Greater diversity in the workforce in
terms of gender, age, and cultural
makeup requires a greater array of
benefits programs
Advances in Health Care

Health insurance costs continue to
increase due to:
• Increasing life expectancies
• Aging of baby boomers
• Advances in medical research that add
diagnostic tests and treatments
• Higher expenditures to prolong the lives
of the terminally ill
Responses by the Firm to Rising
Benefit Costs



Requiring employees to pay more for
health care
Making greater investments in
accommodation and enhancement
benefits
Eliminating retiree health care
insurance coverage
Requiring Employees to Pay More
for Health Care


In addition to various insurance
plans, FSAs and HRAs provide an
important alternative to firms
These accounts provide employees
with resources to pay for medical
and related expenses not covered by
higher deductible insurance plans at
substantially lower costs to
employers
Increased Accommodation and
Enhancement Benefits



Decrease absenteeism and tardiness
Enhance worker productivity through
improved health
Education benefits may increase the
skills of employees and allow for
more flexibility within the workforce
Guidelines to Curbing Benefits
Costs


Employee contributions to help
companies save money by requiring
that employees pay a nominal
portion of the benefit costs
Waiting periods to limit participation
in the benefits program
Guidelines to Curbing Benefits
Costs Continued


Educate employees about the cost of
health care
Conduct utilization reviews to
evaluate the quality of specific health
care services
Guidelines to Curbing Benefits
Costs Continued

Use the services of independent case
management companies to ensure
that participants with serious health
problems receive essential medical
attention on a cost-effective basis
Guidelines to Curbing Benefits
Costs Continued

Provider payment systems that begin
with negotiations over amounts the
system will pay participating
physicians, health care facilities, and
pharmacies for the duration of the
managed care plan’s contract with
these providers
Summary

This chapter has covered:
• Types of benefits
• Types of health care plans
• Environmental factors
• Company responses
• Guidelines for cutting benefits costs