Chapter 7

Managing Employee
Benefits

1
 Learning Objectives
After studying this chapter, you should be able to:
1. To identify the types of benefits
2. To discuss the difference types of retirement benefits
3. To identify the health-care benefits
4. To identify the financial benefits
5. The know the important of the administration benefits

2
3
 The Role of Employee Benefits
❑ As a part of the total compensation paid to employees, benefits serve
functions similar to pay.
❑ Benefits contribute to attracting, retaining, and motivating employees.
❑ Benefit also helps employers tailor their compensation to the kinds of
employees they need.
❑ Different employees look for different types of benefits
❑ Benefits packages are more complex than pay structures, so benefits
are harder for employees to understand and appreciate
❑ Even if employers spend large sums on benefits, if employees do not
understand how to use them or why they are valuable, the cost of the
benefits will be largely wasted.
❑ Employers need to communicate effectively so that the benefits
succeed in motivating employees

4
 The Role of Employee Benefits (Cont.)
❑ Like other forms of compensation, benefits impose
significant costs.
❑ On average, out of every dollar spent on compensation,
more than 30 cents goes to benefits.
❑ However, several forces have made benefits a
significant part of compensation packages.
❑ One is that laws require employers to provide certain
benefits, such as contributions to Social Security and
unemployment insurance.

5
 Benefits Required by Law
❑ The federal and state governments require various forms of
social insurance to protect workers from the financial
hardships of being out of work
❑ Social Security provides support for retired workers,
unemployment insurance assists laid-off workers, and
workers’ compensation insurance provides benefits and
services to workers injured on the job.
❑ Example: Employers must also provide unpaid leave for
certain family and medical needs (required by Laws)

6
Benefits Required by Law (Cont.)

7
 Fringe Benefits

❑ Strategic Perspectives on Benefits

❑Benefits absorb social costs for health care and
retirement.
❑Benefits influence employee decisions about
employers (e.g., recruitment and retirement).
❑Benefits are increasingly seen as entitlements.
❑Benefit costs are about 40% of total payroll costs.

8
 Benefit and HR Strategy

❑ Benefit
❑ An indirect reward given to an employee or group of
employees for organizational membership

9
 Benefit Needs Analysis
A comprehensive look at all aspects of benefit:
❑ How much total compensation?
❑ What part of total compensation should benefits
comprise?
❑ What expense levels are acceptable for each benefits?
❑ Which employees should get which benefits?
❑ What are we getting in return for the benefits?
❑ How will offering benefits affects turnover, recruiting
and retention of employees?
❑ How flexible should the benefits package be?
10
Types of Benefits

11
 B. Retirement Security Benefits
❑ Retirements and Age Discrimination
❑Age Discrimination in Employment Act (ADEA) 1967
protects those 40 years old and older from workplace
discrimination.
❑ Social Security Act of 1935
❑Established a system of old age, industrial accidents
survivor’s, disability, and retirement benefits.
❑Federal payroll tax on both the employer and the
employee.
❑Benefit payments are based on employee’s lifetime
earnings.

12
 Pension Plans
❑ Pension Plans
❑ Type of retirement plan where employers promise to pay a defined
benefit to employees for life after they retire. Not all employers
offer pensions, but government organizations usually do
❑ Traditional Benefit Plans
❑ Defined-benefit plans
❑ Employees are promised a definite pension amount based on
age and length of service.
❑ Defined-contribution plans
❑ Employer makes an annual payment to an employee’s account.
❑ Benefit pay-out is determined by the financial performance of
the employee’s retirement.
❑ Cash balance Plan
❑ A cash balance pension plan is a type of retirement savings
account that has an option for payment as a lifetime annuity.

13
Pension Plan Concepts

14
Individual Retirement Options

15
 Individual Retirement Options
1. Individual Retirement Accounts (IRAs)
❑ Type of tax-deferred or tax-free retirement account that individuals can
open at many financial institutions.

2. 401(k) and 403 (b) Plans

❑ A 401(k) is a retirement plan offered mostly by for-profit companies to
assist employees in saving for retirement.
❑ Non-profits, including schools, hospitals, and religious groups, offer
their employees 403(b) retirement accounts

3. Keogh Plans
❑ retirement plan that can be set up by self-employed individuals and those
who work for them.

16
 Controlling Health-Care Benefits Costs

❑ Co-Payment
❑Employees are required to pay a portion of the
cost of both insurance premiums and medical care.
❑ Defined Contribution Plans for Health Benefits
❑Employer provides a set amount that the employee
may spend on health-care coverage benefits.

17
 Controlling Health-Care Benefits Costs (Cont.)
❑ Managed Care
❑ Approaches that monitor and reduce medical costs using
restrictions and market system alternatives.
❑ Managing two major aspects of healthcare: cost and
quality.
❑ Preferred Provider Organization (PPO)
❑ A health-care provider that contract with an employer
group to provide health-care services to employees at a
competitive rate.
❑ Health Maintenance Organization (HMO)
❑ A managed care plan that provides services for a fixed
period on a prepaid basis.

18
 Health-Care Legislation
❑ Consolidated Omnibus Budget Reconciliation Act
(COBRA) Provisions
❑ Former employees, their spouses, and eligible
dependents are covered for 18 to 36 months
❑ Up to 100% of group premium costs paid by the former
employee.
❑ The Health Insurance Portability and Accountability Act of
1996 (HIPPA) Provisions
❑ Allows employees to switch their health insurance plan
from one company to another, regardless of pre-existing
health conditions.
❑ Health plans must continue to cover sick employees.

19
Overview of COBRA Provisions

20
 Health-Care Legislation

❑ Health Insurance Portability and Accountability Act

(HIPAA) of 1996
❑ Allows employees to switch their health insurance plan from
one company to another, regardless of pre-existing health
conditions.
❑ Requires employers to provide privacy notices to employees
and to not disclose of health information without
authorization.
❑ Flexible Spending Accounts
❑ Benefits plans that allow employees to contribute pre-tax
dollars to fund certain additional benefits.

21
 Other Important Health Care Legislation
❑ Mental Health Parity and Addiction Equity Act
❑ Requires employers to provide “equal and fair” health care
coverage to those individuals adversely affected by mental
disorders and substance abuse problems.
❑ Children’s Health Insurance Program Reauthorization Act of 2009
❑ Gives states the opportunity to provide financial assistance for
the defraying of costs associated with employer-based health
care programs to:
❑ children of low-income families or
❑ individuals below the age of 19 who are entitled to receive
Medicare.

22
 Other Benefits
Credit Unions
Purchase
Discounts Stock
Investment
Family-Care Relocation
Benefits Expenses

Family- Benefits Life,

Oriented Disability,
Benefits Legal
Insurances

Social and Educational

Recreational Assistance

23
 C. Common Types Financial Benefits

INSURANCE EDUCATIONAL
ASISTANCE
❑ Health
❑ Life ❑ Tuition aid
❑ Disability ❑ Trade Training
❑ Long-term Care ❑ Professional;
❑ Legal certificates
❑ Learning materials
FINANCIAL SERVICES

❑ Credit union
❑ Purchase discounts
❑ Thrift/saving plans
❑ Financial Planning
❑ Relocation assistance
24
 Benefits Administration
❑ Benefits Communication
❑Benefits Statements
❑Annual “personal statement of benefits” that
translates the benefits into dollars to show their
worth.
❑HRIS and Benefits Communication
❑HRIS information allows employees to obtain
benefits information on-line.

25
Typical Division of HR Responsibilities:
Benefits Administration

26
 Flexible Benefits
❑ Flexible Benefit Plan
❑ A plan (flex or cafeteria) that allows employees to select
the benefits they prefer from groups of benefits
established by the employer.
❑ Flexible Spending Accounts
❑ An account that allows employees to contribute pre-tax
dollars to buy additional benefits (e.g., life insurance).
❑ Problems with Flexible Plans
❑ Inappropriate benefits package choices
❑ Adverse selection and use of specific benefits by higher-
risk employees

27
28