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Employee Benefits

In her history of the Cadbury family’s chocolate business, Deborah Cadbury describes the innovative practices its founders implemented:

Should anyone fall ill, a doctor was hired in 1902 for the staff. The medical department expanded over time to include four nurses and a dentist, who were available to all employees free of charge. Free vitamin supplements were provided for those lacking stamina, and a convalescent home...was built for staff in need of a rest. These amenities may seem quaintly paternalistic by modern standards, but at a time when employees could be subjected to unhealthy or even dangerous working environments, it is small wonder that workers were queuing up to join Bournville.¹

Employee benefits are an integral part of a company’s total rewards program. They play a large part in employee satisfaction, motivation, and retention. In its report “Building a Better Benefits Program Without Breaking The Budget: Five Practical Steps Every Small Business Should Consider,” MetLife reports, “Of employees who say that they are satisfied with their benefits, 81 percent are also satisfied with their job. In comparison, of those who are dissatisfied with their benefits, only 23 percent are very satisfied with their jobs.”²

Mandatory Benefits

Social Security provides financial security to qualified workers when they retire or became disabled, or to their surviving dependents in the event of a worker’s death. Workers earn credits to qualify for benefits, and full retirement benefits are indexed to the individual’s age. Disability benefits are paid to workers who have not reached full retirement age once eligibility requirements are met.

Social Security tax, paid by both the employer and the employee, is calculated as a percentage of salary up to an annual maximum. The percentages and annual maximum can change each year.

Medicare provides hospital and medical benefits to people age 65 and older, or younger if they have certain medical conditions or disabilities. It is also paid by both the employer and the employee as a percentage of salary with no annual maximum.

Medicare has four parts:

1.    Hospital insurance (Part A) for inpatient care in a hospital or skilled nursing facility.

2.    Medical insurance (Part B) for doctors’ and other medical services and supplies.

3.    Medicare Advantage (Part C) allows people with Part A and Part B to receive all of their healthcare services through one provider organization.

4.    Prescription drug coverage (Part D) for medications doctors prescribe for treatment.

If an individual continues to work after age 65 and receives healthcare benefits from his or her employer, the employer benefits are primary to Medicare.

    For additional information, see the Social Security Administration website at www.ssa.gov and the Center for Medicare and Medicaid Services website at www.cms.gov.

Unemployment insurance provides temporary financial assistance to eligible workers who lost their jobs through no fault of their own. Individual states are responsible for administering and distributing unemployment insurance funds within the guidelines established by federal standards. Funding is based on a tax paid by the employer, with an experience rating based upon the number of workers that have been terminated.

To be eligible for unemployment insurance, an employee must:

    Meet the state requirements for wages earned or time worked during an established period of time referred to as a “base period.”

    Be determined under state law to be unemployed through no fault of your own.

    Be available and actively seeing work.

    Not refuse suitable employment.

Employers can manage their experience rating by having sound employment practices such as:

    Strategic hiring procedures for sourcing, recruiting, selecting, and hiring.

    Workforce plans to avoid one department hiring while another is laying off employees with similar skills and competencies.

    Policies and practices to manage the workforce and assure that performance and behavior issues are promptly and consistently addressed.

    Reviewing involuntary terminations.

    Documenting all employment decisions, especially terminations.

    Monitoring employee resignations to screen for constructive discharge.

    Promptly responding to inquiries about unemployment claims, presenting evidence at unemployment hearings, and challenging decisions to grant benefits that the employer believes are not deserved.

    For additional information, visit the website of your state employment office. A list of these offices can be found at https://us.jobs/state-workforce-agencies.asp

Workers’ compensation provides benefits to employees who incur a work-related injury or illness. The programs are enacted and administered by the individual states. There is no federal mandate that states provide a certain minimum level of benefits.

Workers’ compensation is a no-fault insurance plan paid by the employer. The amount that employers pay is experience-rated based on the percentage of employees in various job categories, and the employer’s previous claim activity. Employers with a high number of claims are likely to pay more.

Benefits under workers compensation include:

    Medical care and expenses.

    Rehabilitation expense.

    Income replacement during the period of disability when the employee is unable to work.

    Benefits to survivors in the event of an employee’s death.

The amount of the benefit a worker receives is tied to fixed schedules or actuarial tables that consider the seriousness of the injury, whether it is permanent or temporary, or a full or partial disability.

Employers can control costs by:

    Implementing safety programs that include training, injury prevention, and ongoing education and reinforcement;

    Providing transitional or “light duty” jobs that will allow employers to return to work earlier; and

    Consulting with occupational or medical specialists particularly for reoccurring or industry-specific issues.

    For additional information on each state’s workers’ compensation program, visit www.workerscompensation.com.

    For more information about workplace safety and security, see Chapter 29 (Risk Management).

The Family Medical Leave Act (FMLA) provides job-protected leave to eligible employees. This law is discussed in detail in Chapter 20 (The Legal Landscape of Employee Benefits).

Health and Welfare Benefits

Healthcare insurance is the most critical of the health and welfare benefits, and one that continues to be debated.

Indemnity (fee-for-service) plans are the least cost-effective. Individuals are free to use any qualified healthcare provider and the fees are generated when the services are used. There are limits on the dollar amount of coverage over time and annual deductibles are common. Reasonable and customary limits can be set on fees.

Managed-care plans focus on providing necessary treatment in a cost-effective manner. They include:

    Health maintenance organizations (HMOs) restrict the choice of physician to those in the group. These are generally prepaid healthcare plans where the providers are paid on a per capita basis rather than for actual treatment provided. A gatekeeper is usually used, typically the primary care physician, to determine whether or not patients need to be seen by a specialist.

    Preferred provider organizations (PPOs) combine features from the indemnity and HMO plans. They use a network of providers for services, but do not require a gatekeeper. The PPO negotiates fees with the providers, and deductibles are common. Individuals may use providers outside the network, but they will pay a higher percentage of the costs.

    Point-of-service (POS) plans include a network of providers, but the plan will pay for services of an out-of-network provider when a network provider refers the employee for care. However, if the employee sees an out-of-network provider without a referral, a coinsurance payment is required.

    Exclusive provider organizations (EPOs) are restrictive in that only providers in the network may be used. No payment is made for out-of-network providers.

    Physician hospital organizations (PHOs) consist of hospital and physician practices that merge to market their services and negotiate with employer organizations.

Methods of funding health insurance include:

    Fully insured, in which a third-party carrier is paid premiums by the employer to cover medical costs and all related charges.

    Self-insured, in which the employer is funding the costs, assuming some or all of the risk as well as the role of the insurance company.

    Administrative-services-only, in which the employer assumes the risk, but hires an insurance company to administer the claims.

    Third-party administrator, in which the employer assumes the risk, but hires another company (not an insurance company) for claims administration.

    Employee Wellness is discussed in Chapter 29 (Risk Management).

Other Healthcare Options

Dental plans are offered with varying levels of coverage including preventative or restorative work such as fillings, or major restoration such as bridges and orthodontia.

    Vision care plans provide reduced costs for eye exams, contact lenses, and glasses.

    Prescription drug plans usually require a copayment and the use of generic drugs. Some plans specify the pharmacies where prearranged reduced costs are available.

    Alternative healthcare or nontraditional care, such as acupuncture or chiropractic, is now covered by some health plans.

    Health savings accounts (HSAs) combine a high-deductible health insurance plan with a tax-favored savings account. Money in the savings account is used to pay out-of-pocket medical expenses. It belongs to the employee and earns interest. Employees can make contributions on a pre-tax basis up to the annual contribution limit. The account balance is portable, meaning the employees can take it with them when they leave the organization. However, funds used for other-than-qualified medical expenses will be included in taxable income and subject to an additional 20-percent tax, which is waived if payment is made after age 65 or the individual becomes disabled or dies.

    Health reimbursement accounts (HRAs) are employer-provided accounts. The money can be used by the account holder or employee to pay for qualified medical expenses on a tax-free basis. Balances can be rolled over, subject to limitations, provided the employer continues to offer the program. Account balances do not earn interest.

    Appendix: Guidelines for Choosing a Benefits Broker.

Employee Assistance Programs

Employee assistance programs (EAPs) can help employees identify and resolve concerns related to health, marital, family, financial, substance abuse, legal, emotional, stress, workplace violence, or other personal issues that affect job performance. They also serve as a resource to management. They can be in-house programs or offered through an outside contractor.

Services that the EAP can offer include:

    Identification and referral, which assesses the nature of the problem and develops a plan of action, either a short-term problem resolution through the EAP provider or a referral to an appropriate healthcare professional or other community resource.

    Monitoring and follow-up services regarding progress.

    Crisis intervention to employees and eligible family members.

    Critical incident interventions, such as situations of workplace violence or when a staff member has been seriously injured or died.

    Training and consultation for managers regarding management referrals to the EAP for employees with job performance or behavioral/medical problems.

    Consultation regarding the design and implementation of policies and practices for EAP referral and use.

    Program promotion and education.

    Additional information can be found on the website of the Employee Assistance Professionals Association at www.eapassn.org.

    Employee Assistance Programs are also discussed in Chapter 29 (Risk Management).

Other Core Benefits

Section 125 (Cafeteria) Plans were named for Section 125 of the Revenue Act of 1978.

    Premium-only plans allow employees to pay their premiums for healthcare, dental care, life insurance, and disability coverage with pretax dollars.

    Flexible spending accounts allow employees to set aside money on a pretax basis to pay for dependent care or unreimbursed medical expenses. Money not used will be forfeited.

    Full cafeteria plans allow employees to choose from a menu of eligible qualified benefits, paying with benefit credits. Unused credits can often be cashed out.

Group-term life insurance provides benefits to dependents in the form a lump-sum payment to beneficiaries. The benefit may be a flat amount or a multiple of the employee’s salary. The employer usually pays the premium.

    Supplemental insurance may be available for an additional premium usually paid by the employee.

    Excess group-term life insurance, any life insurance in excess of $50,000, is viewed as imputed income by the IRS when the premiums are paid by the employer, and the employee pays taxes on it based on a table provided by the IRS.

Paid leave provides employees paid time off for various situations. Employers should look at industry and geographic practices in determining their leave policies.

    Holiday pay is typically provided for between six and 12 holidays each year.

    Vacation pay can typically be an earned or accrued benefit. There are legal and financial considerations for carrying vacation days forward and a cap on how many days can be carried over can be set.

    Paid-time-off banks combine many forms of paid leave into one bank allowing employees to use the time as they see fit to handle illnesses, personal needs, vacation, and other matters.

    Bereavement leave is provided to attend funeral and other services for close relatives.

Income replacement generally takes the form of:

    Sick leave, which is provided for employees to use when they are ill or needed to care for sick family members.

    Short-term disability coverage, which allows employees to receive a percentage of their wages (50–70 percent) generally after a waiting period and for up to six months. It is required by law in California, Hawaii, New Jersey, New York, Rhode Island, and Puerto Rico, and in the railroad industry.

    Long-term disability coverage, which provides continued coverage to disabled employees when short-term disability ends and can last from two years until age 65.

Employers may also offer:

    Transportation assistance.

    Tuition reimbursement.

    Prepaid legal insurance plans.

    Childcare and eldercare services.

Retirement Plans

Deferred compensation provides employees with income at a future time for work performed now. In order to provide tax-deferred income in the present, the plans must be qualified or meet certain characteristics under the Employee Retirement Income Security Act (ERISA). These plans are attractive because they help with recruitment and retention of employees, provide retirement income for workers, and provide tax deferrals for all plan participants.

Qualified plans under ERISA must:

    Be in writing and be communicated to employees.

    Be established for the exclusive benefit of employees/beneficiaries.

    Satisfy rules concerning eligibility, vesting, and funding.

    Not favor officers, shareholders, or highly compensated employees.

There are two types of qualified retirement plans: defined benefit plans and defined contribution plans.

Defined Benefit Plans

In traditional defined benefit plans, the employer generally funds the plan (makes all the contributions) and bears the risk. There may be provisions for employee contributions in addition to the employer’s contribution. The benefit amount received is based on a pre-determined formula.

    Defined benefit plans are insured by the Pension Benefit Guaranty Corporation, discussed in Chapter 20 (The Legal Landscape of Employee Benefits).

Types of defined benefit plans include:

    Flat dollar formula, which pays a set dollar amount for each year of service.

    Career-average formula, which bases the benefit on the average earnings during employment with the organization.

    Final-pay formula, which bases the benefit on the average earnings during a specified number of years, such as the last five years or the three highest-paid consecutive years.

    Cash-balance plan, which defines the benefit by using a hypothetical account which receives a pay credit based on a set rate, such as five percent of salary, and earned interest. The accounts are portable meaning employees may take it with them if they leave. At retirement, employees receive either a lifetime annuity or a lump sum.

Defined Contribution Plans

Defined contribution plans rely on contributions from the employees and employers into individual retirement accounts. Benefits are determined by fund performance.

Organizations may also offer nonqualified (or excessive) deferred plans to provide additional benefits to key executives. They do not receive favorable tax treatment under ERISA, nor are they protected by the PBGC. Employees can defer reporting income and the plans are not subject to the limits placed on qualified plans. Employer contributions are not deductible.

Types of defined contribution plans include:

    Profit sharing, in which employers make contributions from the company’s profits.

    Money purchase, in which the employer makes a contribution based on a fixed percentage of eligible employees compensation, whether or not the company made a profit.

    Employee Stock Ownership Plans (ESOPs), in which the employer makes contributions of cash or stock to a tax-deductible trust in the employees’ names.

    401(k) plans, in which employees can make a tax-deferred contribution up to the limits established by the Economic Growth and Tax Relief Reconciliation Act (EGTRRA). Employers may make contributions as well, the limit of which is the same for profit sharing plans. 401(k) plans were established by the Revenue Act of 1978.

Other Tax-Deferred Retirement Plans

    Individual Retirement Accounts (IRAs), to which yearly contributions can be made. They may or may not be taxable, depending on whether the employee is covered by a retirement plan.

    Roth IRAs, which provide tax-free income growth. Contributions are not tax-deferred.

    Simplified employee pension for self-employed individuals and very small businesses.

    Savings Incentive Match Plan for Employees (SIMPLE), generally for small businesses. They can be 401(k) plans or IRAs.

    403(b) for tax exempt organizations.

    457 plans for employees of states and certain tax-exempt electrical cooperatives.

Communicating Benefits Information

Practically, benefits are not valuable unless employees know about and use them. Ongoing communication helps in making choices that meet individual needs.

There are a number of ways to communicate with employees about their benefits, including:

    In-person group meetings.

    Benefits fairs.

    One-on-one meetings.

    Emails, conference calls, and webinars.

    Company intranet or website with internally prepared benefit material.

    Online interactive tools.

    1-800 number to “Benefits Advisor.”

    Communications personalized to the individual employee.

    Personalized total compensation statements.

    Required communications regarding benefits are discussed in Chapter 20 (The Legal Landscape of Employee Benefits).

Most suppliers of healthcare and financial services offer online tools to help educate employees about how to best use their benefits. In addition, emerging tools such as blogs, videos, social media, and mobile access can be incorporated into a communication program. However, don’t forget paperwork, which can be more effective than emails. By sending communications to an employee’s home, family members also get the message. Using brief printed communications to direct the recipients to an online resource can get vital information to employees and their families while still lowering printing and mailing costs.

Discussion Questions

1.    What is your organization doing to address benefit costs, especially healthcare? Are these strategies working?

2.    What strategies can an organization use to promote greater employee participation in retirement plans?

3.    What can organizations do to promote wellness for their employees?

4.    What is your organization doing to communicate with its employees about benefits? Is it effective?

5.    What are the advantages to outsourcing benefits administration? What experiences can you share? What lessons have you learned?