MGT 352 Chapter 11 Slides

8/2/2019 MGT 352 Chapter 11 Slides

http://slidepdf.com/reader/full/mgt-352-chapter-11-slides 1/36

1

Chapter 11 – Employee Benefits

Recall the goals of compensation:To attract

To retain

To motivate

Which of these goals can benefits address?



2

Benefits costs

• 1929 – average benefits cost = 3% of payroll costs• Today – average benefits cost = 40% of total labor costs

Why the increase??

• 1929 – It wasn’t standard practice to pay benefits untilWWII when employers were put under wage/pricefreezes and could not increase employees pay (tocontrol inflation during the war)

Employers got around this by giving employees more benefits

(as a substitute for a wage increase)

• 1935-present – union influence

• 1960s-present – increase in benefits legislation



3

Benefits strategy

• Need to ask the question “why are we offering XYZbenefit?” Benefits mix – What should the overall benefits package look

like? Look at the labor market to determine the mix What do the employees look like that we are competing for?

High tech firms young computer geeks, low average tenure – what benefits would interest this group??

How diverse is the workforce? Different benefits will be attractive todifferent groups

Benefits amount – What percentage of total compensation willbenefits make up? Look at product market to determine theamount (we don’t want to pay more for our benefits than our direct competitors)



4

Providing for Flexibility

• Flexible Benefits Plans (Cafeteria Plans)Benefit plans that enable individual employees to

choose the benefits that are best suited to theirparticular needs.

A basic or core benefits package of life and healthinsurance, sick leave, and vacation ensures thatemployees have a minimum level of coverage.

Employees use “credits” to “buy” whatever other

benefits they need/want.



5

Flexible Benefits Plans: Advantages

• Employee advantages: Benefits are better matched to their individual needs (important

in a diversified workforce).

Employees gain a greater understanding of the benefits offered

to them and the costs incurred.

• Employer advantages:

Maximize the psychological value of their benefits program by

paying only for highly desired benefits.

Use benefits as a competitive advantage in the recruiting andretention of employees.



6

Flexible Benefits Plans: Disadvantages

• For employees:Poor employee benefits selection results in unwanted

financial costs bad benefits decision making

• For employers:

There are added costs to establishing andmaintaining the flexible plan.

Employees pick only the benefits they use whichincreases the cost to the employer



7

Legally Mandated Benefits

1. Social Security Insurance2. Unemployment Insurance

3. Workers Compensation Insurance

4. Family and Medical Leave



8

1. Social Security Insurance

Benefits paid are determined by anindividual’s life-time earnings

Provides long-term disability benefits

Social Security Act (1935)Payroll tax on both employees and employers

Old Age & Survivors Insurance

Must work 40 quarters (earning at least

$900) in an occupation covered by Act toqualify for benefits



9

Social Security Insurance

• Social security is funded by contributions by both the ER and the EE

6.20% tax of annual earnings on first $106,800 – provides income forretirees

Annual Max has been climbing sharply over the past decade:

1997 max annual earnings taxed = $65,400

2010 max = $106,800

1.45% tax on all income – provides Medicare benefits

Ee A’s 2010 income= $110,000 Ee B’s 2010 income = $1,000,000

A’s SS contribution = $6,200 B’s SS contribution = $6,200

A’s medicare contribution = $1595 B’s medicare contribution = $14,500



10

Social Security (continued)

• In order to be eligible to collect retirement income, youmust have worked 40 quarters (10 years)• Increasing age requirement for collecting SS retirement:Born before 1950, full benefits starting age 65 (62-64

– 80% benefits)

Born after 1950, full benefits start at age 66Born after 1960, full benefits start at age 67

• SS retirement income will provide about 30% of one’searnings in your final year of retirement -- What does this

suggest???

• Concern for the future of SS – baby boomers will beretiring at high numbers in the coming years



11

Social Security (continued)

• In the year 2000 = 3.4 working employees putting in toSS for every 1 retiree receiving benefits

Soon there will be closer to a 1 to 1 relationship

How is Congress addressing this issue?- increasing age requirements- increasing salary cap for SS tax- some discussion of having employees put SS moneyinto their own personal account

Why was the Social Security Act passed in the first place?



12

2. Unemployment Insurance

• Established by the SSA of 1935• Tax paid by employer only (based on the

employer’s “experience rating”)

• Provides temp income for people involuntarily

unemployed• Benefit is based on an employee’s recent

earnings.

• Involuntarily unemployed workers are eligible forup to 26 weeks of unemployment benefits.Unemployed workers are required to seek “suitable

employment.”



13

Unemployment Insurance (cont.)

• Employers need to watch turnover rates andneed to layoff as these will increase thepremium the er will pay into the ins fund

• Individuals who may NOT collectunemployment:1. individuals who quit voluntarily

2. individuals discharged for “gross misconduct”

3. those who have refused an offer of suitable work4. ees on strike

5. self-employed individuals



14

3. Workers’ Compensation Insurance

• Workers’ Compensation Insurance Federal- or state-mandated insurance (funded by an

employer payroll tax)

Insurance defrays the loss of income and cost oftreatment due to work-related injuries or illness.

Employer paid premium (ee doesn’t contribute)

Insurance rate the employer pays based on:

The risk of injury or illness for an occupation

Each state’s level of benefits for injuries sustained byemployees varies.

The company’s frequency and severity of employeeinjuries (the company’s experience rating).



15

Why did we need WC Insurance?

• Injury is a cost of doing business Early employers – Master/apprentice

Industrial revolution – many workers under one roof, lesspersonal concern for individual employees

When ees would sustain injuries at work – ers were not helpingees pay for cost of injury

Courts at the time were pro-business – example doctrines usedby courts in the past:

1. Contributory negligence – if it could be proven that eecontributed 1% to his/her own injuries, ER not liable

2. Fellow-servant rule – if co-worker was a fault, ER not liable



16

4. Family and Medical Leave (FMLA; 1994)

1. An employer must grant an eligible employeeup to 12 workweeks of unpaid leave in a 12-month period for the following reasons:

What four situations are covered for taking this

leave??

2. Benefits continuation - employees on leaveretain their benefits

3. Job restoration – employees have the right toreturn to their job or an “equivalent job.”



17

Employer FMLA Policies

• Eligibility for leave: must have 12 months employment with

ER (need not be consecutive) and 1,250 hours during 12months prior to leave

• Leave may be taken intermittently

• Determining employees requirements to use accrued paidleave as part of FMLA – what leaves must be taken atsame time?

• 12 weeks leave; 4 weeks vacation – differential in time off?

• Payment of insurance premiums while on leave

• Defining the 12 month period – ERs have 4 options



18

Determining the FMLA 12-month period

• Recall that employees are entitled to 12 weeks leaveevery 12 month period…How do you define 12 months?

1. calendar year (Jan 1 – Dec 31)2. fixed year (either fiscal year or employee anniversary

date)3. 12 months forward from date of first FMLA leave4. Rolling 12 month period – measured from today back12 months

• Which of these options prevents “leave stacking”?

Leave stacking = taking 24 consecutive weeks off(the last 12 weeks of the previous 12 month periodand the first 12 weeks of the next 12 month period)



19

Determining the FMLA 12-month period

• Rolling 12 month = each time an ee takes FMLA leave, theremaining leave entitlement is any balance of the 12 weeks that hasnot been used in during the preceding 12 months

• Example: An employee requests FMLA leave for a serious health condition

in January 2003. The employee has taken 8 weeks of FMLAleave during the 12 months prior to this request (OCT, NOV,DEC 2002).

1. How much FLMA leave is the employee entitled to at this timeif the 12 month period is determined by the calendar year?

2. How much leave is the employee entitled to under the rolling12 month method?



12-month Calculation Method Notification

• Employees who do not receive clear notice ofcalculation method can use whatever methodprovides them with the most leave

• America West handbook stated “employees are

entitled to up to twelve calendar weeks ofunpaid FMLA leave within any 12 monthperiod”

• Courts ruled that this did not sufficientlycommunicate that AW used the rolling 12 monthmethod

20



California Family Rights Act

• Law went into effect July 2004

• Both provide 12 weeks leave for the 4 reasonswe discussed under FMLA

• Grants 6 weeks (of the 12 FMLA) as paid

• 100% employee funded (.6% of wages up to$83,389)

• Partial pay – receive approx 55% of pay (with a

weekly cap; 2005 cap was $840/week)• FMLA/CFRA leaves run concurrently

• CFRA gives rights to domestic partners (FMLAdoes not)

21



22

Discretionary (Voluntary) Benefits

• Includes all other possible benefits besides thefour discussed so far

We’ll focus on these voluntary benefits: 1. Health Insurance

2. Pension/retirement funds

3. Payment for time not worked



23

1. Health Insurance

• Represents 12.1% of employer payroll costs• $6,101 = average annual ER expense for

medical insurance per employee

• Cost of medical care has risen by 250% since1980

• How are organizations dealing with the increasein health care costs?



24

Health Care Legislation

• COBRA – Consolidated Omnibus BudgetReconcilation Act (1986)

Requires ERs to continue health care coverage toees and their dependents upon termination ofemployment for a specified period of time (18, 24, 36months)

Gives former ee and family insurance at a group rate

Former ee’s pay 103% of cost of group rate

Why was this law passed?



25

Health Care Legislation

• HIPAA – Health Insurance Portability andAccountability Act (1996) Deals with pre-existing health conditions (labor market friction)

If you acquired an illness/health problem while working for ER A,then you want to take a new job at ER B, ER B’s health planwould not cover your medical expenses for the pre-existingcondition

Law provides coverage of the condition by the new ER

If an ee has been treated for the condition within 6 months of the

new job, the new ER’s heath plan must cover it; If an ee has notbeen treated for the pre-existing condition within 6 months priorto switching jobs, ee can only be denied coverage for a 1 yearperiod



26

2. Pension/Retirement Plans

• The number of people age 65 and older tripled to about34 million between 1940 and 1995.

• According to U.S. census projections, people age 65 andolder are expected to number 86 million by 2050.

• Eight baby boomers turn 50 every ten minutes.

• In 1940, a 65-year-old had a normal life expectancy of12.7 more years. Currently, it is about 17 more years.



27

Types of Pension Plans

• Defined-benefit planThe amount an employee is to receive upon

retirement is specifically stated up front

Employer is making a promise to its employees that it

will pay you X dollars a monthThis benefit is typically determined by a formula

based on factors such as: Years of service

Earnings your last year of employment Age upon retiring (see example handout)



28

Types of Pension Plans

• Defined-contribution planThe amount an employer and employee contributes

to the pension fund is specified.

The amount the employee will receive uponretirement will depend on the amount of money thathas accumulated in that ee’s retirement fund (andhow well the fund was invested by the ee)

Example – 401(k) plans Employees have contributions taken out of their pay via

payroll deductions Employers may match a portion of employee savings.

(usually .50 for every $1 the ee contributes)



29

Differences between DB and DC Plans

• Who assumes the risk (ER or EE)?Defined benefit plan?

Defined contribution plan?

• Which plan would be easier for ER toforecast costs?Defined benefit or defined contribution?

• Which plan provides a benefit that is moreeasily communicated to the employee?Defined benefit or defined contribution?



30

Federal Regulation of Pension Plans

• Employee Retirement Income Security Act(ERISA).

Private pension plans are subject to ERISAregulations; provides standards and controls for

pension plans: 1. Communication standard

2. Minimum funding standards

3. Vesting standards



31

ERISA Provisions

• 1. Communication standard Benefits information must be communicated in a way that the

“average” employee could understand

In-house publications (employee handbooks and organizationalnewsletters)

Group meeting and training classes

Bulletin boards

Payroll inserts/pay stub messages

Additionally, HR professionals must be careful not to giveadvice, guide, or counsel ees in benefits selection – onlyprovide information upon which employees can make informeddecisions



32

A Personalized Statement Of Benefits Costs



33

ERISA Provisions

•2. Funding Standard Prior to ERISA, there was a high pension plan forfeiture rate

ERs would go out of business and retirees and retirement fundswould disappear or ERs did not put enough money away tocover future promised retirement income

ERs must put aside a certain amount of money each year tofund the plan

Must pay insurance (Pension Benefit Guaranty Corporation) toprotect the plan (approx $20 per ee) – the PBGC protects theretirement incomes of nearly 44.3 million American workers inmore than 31,000 private defined benefit pension plans.



34

ERISA Provisions

• 3. Vesting Refers to the rights that an employee has to the benefits (upon

retirement) that have accrued in the pension fund Specifically addresses the money put into the retirement fund

by the ER – when can you call the ER’s contribution to your account, your money?

You always have the right to the money you contribute to yourretirement

ERISA requires that plans must provide that employees will havevested rights in their accrued benefits after certain minimum-years-of-service requirements have been met (100% vestedafter 5 years OR 20% after 3 years, 20% each additional year

until 100% vested).

Is vesting the same thing as portability?



35

3. Payment for Time Not Worked

Sick leave

Severance pay Paid holidays

Vacations with pay

Time NotWorked



36

Payment for time not worked

• Paid holidays

Typically ERs pay for around 10 holidays for employees/year

• Severance pay Why would employer offer this payment to the ee?

• Paid vacations Average # of vacation days for 1 year service in US = 10 days

- Setting the vacation schedule (when you may take it) istypically done by seniority

• Sick leave Additional paid time off to be used for illness Unlike vacation time, sick leave typically can accrue over time –

why is this useful? Some companies are moving away from separate vacation and

sick leaves and lumping together into Paid Time Off banks

(PTO)

MGT 352 Chapter 11 Slides

Documents