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CHARACTERISTICS OF EMPLOYEE BENEFITS

Overview: This chapter examines both the required benefits that employers must provide, including

Social Security, unemployment insurance and Workers' Compensation, as well as the discretionary

employer-provided benefits, such as retirement plans, insurance programs and time off.

INTRODUCTION

Employee benefits consist of a large number of diverse organizational reward offerings. This diversity

makes it difficult to categorize and discuss the characteristics of benefits in general, since each one

needs to be dealt with independently. In fact, benefits administration has become a specialized

function within organizations that requires specific training and experience.1This field is changing so

rapidly that there will undoubtedly be further changes by the time that you read this material.

CONSIDERATIONS IN BENEFIT ANALYSES

Although it is hard to distinguish commonalities among benefits, there are a number of factors that

need to be considered when discussing any benefit. Those to be examined briefly here are purpose,

legal requirements, contributions, and cost.

Purpose

The central purpose of benefits in the employment exchange is to foster membership and continuity of

employment. From the employee's perspective security is a major theme in benefits. Many

organizations talk of social concern and the fact that they would not want to see their employees be

without insurance protection or suffer in their retirement. The major overall aim of benefits from the

employer's standpoint is membership, but some other advantages can occur from granting benefits. In

order for employees to concentrate on performing well, they must be able to concentrate upon their

job. Having protection from uncertainty provides this ability to concentrate. Benefits provide security

in three areas: age, unemployment, and health (sickness or accident).

But security is an after-the-fact type of protection. There are also benefits that employers provide with

the expectation that their provision will improve or maintain the current level of performance of the

employee. These benefits are largely in the form of time off (which is expected to help the employee

recuperate or reduce fatigue on the job), programs to improve the health of the employee, and

programs to improve the employee's future worth to the organization, such as educational

reimbursement.

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Legal requirements

Laws affect benefits in two ways: through requiring the employer to provide the benefit, and by

monitoring and directing the way in which the benefit is offered and administered.

First, federal regulations state that employers must provide employees with a series of benefits, as a

price of hiring employees. These may or may not be considered benefits by employees, but they are a

definite wage cost. These benefits include Social Security, Unemployment Insurance, and Workers'

Compensation. All three are based upon laws passed decades ago, but changes both in the law and in

society make them problematic today. This chapter begins with a discussion of these required

benefits.

Second, other laws regulate the way benefits are offered and administered. Employers are not required

to offer these benefits but when they do certain laws apply to the way they are structured. ERISA is

probably the best example, but many tax laws and codes apply to benefits. These laws will be

discussed as the benefit to which they apply is covered.

Contributions and Cost

The costs of providing a benefit are a major consideration. Most benefit administrators can show that

the benefits are cost-effective by the savings that they can attain through proper administration of the

particular benefits.

Consideration must be given to who should pay for the benefits, or more likely, how much each

partner to the employment exchange should contribute to the cost of the benefit. To the degree that the

employee pays for the benefit, the employer cannot claim it as his or her contribution to the

employment exchange. There are good reasons to share the costs of particular benefits. The employee

sees the benefit more clearly as a part of the employment exchange when costs are shared, and the

employee has a larger and more direct stake in keeping benefit costs down when both parties are

contributing to the cost of the benefit.

The rising cost of benefits is illustrated in the graph in Figure given below. Overall the cost of benefits

has risen substantially year after year. The main force behind this has clearly been the rise in the cost

of health benefits.

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Fig-Employment Cost Index, private industry, 12-month percent change, total benefits and health

benefits.

Source: Bureau of Labor Statistics, National Compensation Survey,

http://www.bls.gov/ect/sp/echealth.pdf202.691.6199, April 30, 2010

(Insurance brokers joke of the amount of time spent discussing group life, vision, dental, long-term

disability, accidental death and disability, employee assistance, etc. when medical premiums take 80%

of an organization's elective benefit dollars and provide insurance agents 80% of their income.)

TYPES OF BENEFITS

Although there is no set way of classifying benefits, ERI has been surveying and reporting on benefits

for many years and uses the five categories of benefits shown in Figure 2.

Type of Benefit

1. Legally required payments (employer's share only)a.

Old-age, survivors, disability, and health insurance (FICAtaxes)

b. Unemployment compensationc. Workers' Compensation (including estimated cost of self-

insured)

d. Railroad retirement tax, railroad unemployment and cashsickness insurance, state sickness benefits insurance, etc.

2. Retirement plan, insurance, and other agreed-upon payments(employer's share only)

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a. Retirement plan premiums and retirement plan payments notcovered by insurance-type plan (net)

b. Life insurance premiums; death benefits; hospital, surgical,medical, and major medical insurance premiums, vision, dental,

etc. (net)

c. Salary continuation or long-term disabilityd. Dental insurance premiumse. Discounts on goods and services purchased from company by

employees

f. Employee meals furnished by companyg. Miscellaneous payments (compensation payments in excess of

legal requirements, separation or termination pay allowances,

moving expenses, etc.)

3. Paid rest periods, lunch periods, wash-up time, travel time, clothes-change time, get-ready time, etc.

4. Payments for time not workeda. Paid vacations and payments in lieu of vacationb. Payments for holidays not workedc. Paid sick leaved. Payments for National Guard (or army or other reserve duty);

jury, witness, and voting pay allowances; payments for time lost

due to death in family or other personal reasons, etc.

5. Other itemsa. Profit-sharing paymentsb. Contributions to employee thrift plansc. Christmas or other special bonuses, service awards, suggestion

awards, etc.

d. Employee education expenditures (tuition refunds, etc.)e. Special wage payments ordered by courts, payments to union

stewards, etc.

f. Employee assistance programs (drug recovery, alcohol, etc.)g. Gainsharing