Human Resource Management Gaining a Competitive Advantage Chapter

Human Resource Management Gaining a Competitive Advantage Chapter 13 Employee Benefits Mc. Graw-Hill/Irwin Copyright © 2008 by The Mc. Graw-Hill Companies, All Rights Reserved. 1 -1

Reasons for Benefits Growth • Laws mandating benefits passed during and after the Great Depression • Wage and price controls instituted during WWII and labor shortages • The tax treatment of benefits programs • Large group v. individual insurance • Organized labor • Employer differentiation 13 -2

Social Security • Social Security includes provision for old-age insurance, unemployment insurance, survivors' insurance, disability insurance, hospital insurance, and supplementary medical insurance. • Social Security retirement benefits are free from federal tax and free from state tax in some states. • Currently, full benefits begin at age 65 or a reduced benefit can begin at age 62. • Both employers and employees are assessed a payroll tax. 13 -3

Unemployment Insurance • Unemployment insurance has the following objectives: – to offset lost income during involuntary unemployment, – to help unemployed workers find new jobs, – to provide an incentive for employers to stabilize employment, – to preserve investments in worker skills by providing workers with income during short-term layoffs. • Unemployed workers are eligible for benefits if they – have a prior attachment to the workforce, – are available for work, – are actively seeking work, – were not discharged for cause, did not quit voluntarily, and are not out of work because of a labor dispute. 13 -4

Workers’ Compensation • Workers' compensation laws cover jobrelated injuries and death. • The system is based on no-fault liability. • Approximately 90 percent of U. S. workers are covered. 13 -5

Private Group Insurance • Medical insurance tends to be the most important benefit for people. – The Consolidated Omnibus Budget Reconciliation Act (COBRA) requires employers to permit employees to extend their health insurance coverage at group rates for up to 36 months following a qualifying event, such as termination. 13 -6

Retirement Defined Benefit Plan • Guarantees a specified retirement benefit level to employees. • Insulates employees from investment risk, which is borne by the company. • PBGC guarantees basic retirement benefit in case of financial difficulties. • ERISA increased the fiduciary responsibilities of pension plan trustees, established vesting rights and portability provisions, and established the PBGC. Defined Contribution Plan • Does not promise employees a specific benefit level upon retirement. • Employers shift investment risk to the employee. • There is no need to calculate payments based on age and service. • Most prevalent in small companies. 13 -7

Cash Balance Plans • An employer sets up an individual account for each employee and contributes a percentage of the employee’s salary. • The account earns interest at a predefined rate. 13 -8

Funding, Communication, and Vesting Requirements • ERISA guarantees that employees, after working a certain number of years, earn the right to a pension upon retirement. – These are referred to as vesting rights. • Vesting schedules that may be used are as follows: – Employees are vested after five years of service. – Employers may vest employees over a three- to seven-year period, with at least 20 percent in the third year and each year thereafter. 13 -9

Family-Friendly Policies • To ease employees’ conflicts between work and nonwork, organizations may use family-friendly policies such as family leave policies and child care. • The Family and Medical Leave Act: – applies to organizations with 50 or more employees within a 75 -mile radius – applies to childbirth or adoption; care for a seriously ill child, spouse, or parent; or for an employee's own serious illness. – Employees are guaranteed the same or comparable job when they return to work. – Employees with less than a year of service or those who work less than 25 hours a week are not covered. 13 -10

Healthcare: Controlling Costs and Improving Quality • In the United States, health-care expenditures have gone from 5. 3 percent of the GNP in 1960 to 14 percent recently. • Attempts at cost control have come through employers, since most health care is provided through organizations. • A recent trend has been to shift costs to employees through the use of deductibles, coinsurance, exclusions and limitations, and maximum benefits. 13 -11

Healthcare: Controlling Costs and Improving Quality Health maintenance organizations (HMO) • focus on preventive care and outpatient treatment. • require employees to use only HMO services and providing benefits on a prepaid basis. • physicians and health-care workers paid a flat salary to reduce incentive of raising costs. Preferred provider organizations (PPOs) • have contract with employers and insurance companies, to provide care at reduced fees. • do not provide benefits on a prepaid basis. • employees often are not required to use just the PPOs. • tend to be less expensive than traditional health care but more expensive than HMOs. 13 -12

Flexible Benefit Plans • These plans permit employees to choose the types and amount of benefits that they want. • Advantages include: – employees can be more aware and appreciative of their benefits package – a better match between the package and the employee's needs, which improves satisfaction and retention – cost reductions are often achieved • Disadvantages include: – high administrative cost – adverse selection 13 -13

Flexible Spending Accounts • Permits pretax contributions to an employee account that can be drawn on to pay for uncovered health care expenses. • Funds must be spent during the year or they revert to the employer. • The major advantage is that take-home pay increases. 13 -14

General Regulatory Issues • Benefit plans must meet nondiscrimination rules and qualified plans. • Sex, age, and disability: – It is illegal for companies to require that women contribute more to a pension plan than men. – Employers cannot discriminate against employees over the age of 40 in terms of pay or benefits. – employees with disabilities have equal access to the same health insurance coverage as other employees. • Monitoring Future Benefits Obligations - The Financial Accounting Statement (FAS) 106 states that any benefits (excluding pensions) provided after retirement, cannot be funded on a pay-as-you-go basis. – They must be paid on an accrual basis. 13 -15