c h a p t e r part four - compensating employees employee benefits 16

C h a p t e rC h a p t e r

PART FOUR - COMPENSATING EMPLOYEES

EmployeeBenefits

1616

McGraw-Hill/Irwin© 2004 The McGraw-Hill Companies, Inc. All

rights reserved. 16 - 2

Chapter 16 Overview

What Are Employee Benefits? Growth in Employee Benefits Legally Required Benefits Requirement-Related Benefits Insurance-Related Benefits Payment for Time Not Worked Other Benefits The Benefit Package Communicating the Benefit Package Employee Preferences among Benefits



What Are Employee Benefits?

Growth in Employee Benefits

Legally Required Benefits Social Security

Retirement Benefits under Social Security Disability Benefits Health Insurance Problems Facing Social Security

Unemployment Compensation Workers' Compensation



Table 16.1

Source: D. J. Thomsen, “Introducing Cafeteria Compensation in Your Company,” Personnel Journal, March 1977, p. 125. Reprinted with permission of Personnel Journal, Costa Mesa, CA. All rights reserved.

Accidental death, dismemberment Health maintenance organization fees Professional activities insurance Holidays (extra) Psychiatric servicesBirthdays (vacation) Home health care Recreation facilitiesBonus eligibility Hospital-surgical-medical insurance Resort facilitiesBusiness and professional Incentive growth fund Retirement gratuity memberships Interest-free loans Sabbatical leavesCash profit sharing Layoff pay SalaryClub memberships Legal, estate-planning, and other Salary continuationCommissions professional assistance Savings planCompany medical assistance Loans of company equipment Scholarships for dependentsCompany-provided automobile Long-term disability benefit Severance payCompany-provided housing Matching educational donations Shorter or flexible work weekCompany-provided or subsidized Nurseries Sickness and accident insurance travel Nursing-home care Social SecurityDay care centers Opportunity for travel Social service sabbaticalsDeferred bonus Outside medical services Split-dollar life insuranceDeferred compensation plan Paid attendance at business, State disability plansDeferred profit sharing professional, and other outside Stock appreciation rightsDental and eye care insurance meetings Stock bonus planDiscount on company products Parking facilities Stock option plans (qualified,Education costs Pension non-qualified, tandem)Educational activities (time off) Personal accident insurance Stock purchase planEmployment contract Personal counseling Survivors’ benefitsExecutive dining room Personal credit cards Tax assistanceFree checking account Personal expense accounts Training programsFree or subsidized lunches Physical examinations VacationsGroup automobile insurance Political activities (time off) WagesGroup homeowners’ insurance Price discount plan Weekly indemnity insuranceGroup life insurance Private office

Potential Employee Benefits



Table 16.2

LegallyRequired

Social security

Unemployment compensation

Workers compensation

State disability insurance

RetirementRelated

Pension fund

Annuity plan

Early retirement

Disability retirement

Retirement gratuity

InsuranceRelated

Medical insurance

Accident insurance

Life insurance

Disability insurance

Dental insurance

Survivor benefits

Examples of Common Benefits, by Major Category

Payment forTime Not Worked

Vacation

Holidays

Sick leave

Military leave

Election day

Birthdays

Funerals

Paid rest periods

Lunch periods

Wash-up time

Travel time

Other

Company discounts

Meals furnished by company

Moving expenses

Severance pay

Tuition refunds

Credit union

Company car

Legal services

Financial counseling

Recreation facilities



Table 16.3

Source: Based on figures from U. S. Chamber of Commerce Statistics and Research Center, The 2001 Employee Benefits Study (Washington, D. C.:U. S. Chamber of Commerce, 2001), p. 8.

Wages 62.5¢

Legally required benefits (employer’s share only) 8.7¢

Retirement related 7.3¢

Insurance related 10.5¢

Payment for time not worked 9.4¢

Other 1.3¢

Total 99.7¢

Benefits Expenditures Out of the Payroll Dollar,by Major Categories



Figure 16.1

Source: U. S. Chamber of Commerce Survey Research Center, Employee Benefits (Washington, D. C.: Chamber of Commerce of the United States, 1997), p. 41; U. S. Chamber of Commerce Statistics and Research Center, The 2001 Employee Benefits Study (Washington, D. C.: U. S. Chamber of Commerce, 2001), p. 11.

Total Employee Benefits as aPercentage of Payroll, 1956-2001



Table 16.4

Percentage Paid Maximum MaximumYear by Employee Taxable Pay Tax1978 6.05% $17,700 $1,071 * As of 2002,1979 6.13 22,900 1,404 1.45% (of the1980 6.13 25,900 1,588 total 7.65%)1981 6.65 29,700 1,975 going to1982 6.70 32,400 2,171 Medicare was1983 6.70 35,700 2,392 not limited by1984 7.00 37,800 2,646 a maximum1985 7.05 39,600 2,792 taxable pay. In1986 7.15 42,000 3,003 prior years, this 1987 7.15 43,800 3,132 portion had been 1988 7.51 45,000 3,380 limited to an1989 7.51 48,000 3,605 amount1990 7.65 51,300 3,924 somewhat1991 7.65 53,200 4,070 higher than1992 7.65 55,500 4,246 the maximum1993 7.65 57,600 4,406 taxable pay for 1994 7.65 60,600 4,636 * the remaining1995 7.65 61,200 4,682 * 6.20%.1996 7.65 62,700 4,797 * Information1997 7.65 65,400 5,003 * accessed1998 7.65 68,400 5,233 * September1999 7.65 72,600 5,554 * 13, 2002, at2000 7.65 76,200 4,724.40 http://ssa-cust2001 7.65 80,400 4,984.80 help.ssa.gov2002 7.65 84,900 5,263.80

Changes in Social Security Costs, 1978-99



Table 16.5

1. Widow or widower at age 65, or age 60 if reduced benefits are chosen.

2. Widow or widower at any age, if caring for a child of the deceased. The child must be entitled to social security and be either disabled or under 18.

3. Disabled widow or widower 50 to 59 (at age 60 becomes eligible in above-mentioned widow or widower category).

4. Unmarried children under 18, or within two months following their 19th birthday for full-time students in high school, and those 18 or over who became disabled before reaching 22.

5. Dependent parents 62 or older.

6. Divorced wife if she is not married and is (1) caring for a child who is under 18 or disabled and who is entitled to social security benefits or (2) age 62 and was married to the deceased for 10 years.

Dependents Eligible for Retirement Benefitsin the Event of Death of a Covered Employee



Table 16.6

Source: Russell L. Greenman and Eric J. Schmertz, Personnel Administration and the Law, 2nd ed. (Washington, D. C.: Bureau of NationalAffairs, 1979), pp. 190-91. Copyright © 1979 by The Bureau of National Affairs, Inc. Reprinted with permission.

Accidents in which the employee does not lose time from work

Accidents in which the employees loses time from work

Temporary partial disability

Permanent partial or total disability

Death

Occupational diseases

Noncrippling physical impairments, such as deafness

Impairments suffered at employer-sanctioned events, such as social events or during travel related to organization business

Injuries or disabilities attributable to an employer’s gross negligence

Job-Connected InjuriesUsually Covered by Workers’ Compensation



Requirement-Related Benefits Pension Plans

Pension Rights Defined-Benefit Plans Defined-Contribution Plans

ERlSA and Related Acts Mandatory Retirement Early Retirement

Employees Not Covered by Pension Plans Preretirement Planning

Insurance-Related Benefits Health Insurance Dental Insurance Life Insurance Accident and Disability Insurance








Table 16.7

Source: Adapted from D. G. Carlson, “Responding to the Pension Reform Law,” Harvard Business Review, November-December 1974, p. 134.

Major Provisions of ERISA

SubjectEligibility

Vesting*

Funding

Plan termination insurance

Fiduciary responsibility

ProvisionsProhibited plans from establishing eligibility requirements of more than one year of service, or an age greater than 25, whichever is later.Established new minimum standards; employer has three choices:a.100% vesting after 10 years of service.b.25% after 5 years of service, grading up to 100% after 15 years.c.50% vesting when age and service (if the employee has at least 5 years

of service) equal 45, grading up to 100% vesting 5 years later.Required the employer to fund annually the full cost for current benefit accruals and amortize past-service benefit liabilities over 30 years for new plans and 40 years for existing plans.Established a government insurance fund to insure vested insurance pension benefits up to the lesser of $750 a month or 100% of the employee’s average wages during highest-paid five years of employment; the employer pays an annual premium of $1 per participant and is liable for any insurance benefits paid up to 30% of the company’s net worth.Established the “prudent man” rule as the basic standard of fiduciary responsibility; prohibits various transactions between fiduciaries and parties-in-interest; prohibits investment of more than 10% of pension plan assets in the employer’s securities.

*These requirements were changed by subsequent legislation. (Continued)



Table 16.7 (concluded)

SubjectPortability

Individual retirement accounts (IRAs)

Reporting and disclosure

Lump-sum distributions

Limits on contributions and benefits

Major Provisions of ERISA

ProvisionsPermitted an employee leaving a company to make a tax-free transfer of the assets behind his vested pension benefits (if the employer agrees) or of his vested profit-sharing or savings plan funds to an individual retirement account.

Provided a vehicle for transfers as noted above and permits employees of private or public employers that do not have qualified retirement plans to deduct 15% of compensation, up to $1,500, each year for contributions to a personal retirement fund.Earnings on the fund are not taxable until distributed.

Required the employer to provide employees with a comprehensive booklet describing plan provisions and to report annually to the Secretary of Labor on various operating and financial details of the plan.

Changed the tax rules to provide capital gains treatment on pre-1974 amounts and to tax post–1973 amounts as ordinary income, but as the employee’s only income and spread over 10 years.

Limited benefits payable from defined-benefit pension plans to the lesser of $75,000 a year or 100% of average annual cash compensation during the employee’s three highest paid years of service.Limited annual additions to employee profit-sharing accounts to the lesser of $25,000 or 25% of the employee’s compensation that year.



Table 16.8

Source: Stephen P. Kurash and Gene F. Fasoldt, “An Outline of Changes Required by the New Retirement Equity Act,” Personnel Journal, November 1984, pp. 80-84.

Major Provisions of the Retirement Equity Act

Employees must be allowed to participate in a plan that qualifies for special tax treatment no later than age 21 with one year of service (previously, it was age 25 with one year of service).

Vesting credit must be awarded for years of service beginning at age 18 (previously, service before age 22 could be ignored in most plans).

For both vesting and participation purposes, as many as 501 hours of service must be awarded to any employee on maternity or paternity leave.

An election to waive spouse survivor benefits must be made in writing by both the participant and spouse and witnessed by a plan representative or notary public.



Payment for Time Not Worked Paid Holidays and Paid Vacations

Other Benefits

The Benefit Package

Communicating the Benefit Package

Employee Preferences among Benefits Flexible-Benefit Plans

Why Are Flexible Plans Attractive? Problems with Flexible Plans Tax Implications of Flexible Plans


Other Benefits

The Benefit Package





Other Benefits

The Benefit Package





Other Benefits

The Benefit Package






Figure 16.2

Source: Adapted form J. C. Claypool and J. P. Cargemi, “The Annual Employee Earnings and Benefits Letter,” Personnel Journal, July 1980, p. 564.

Sample Employee Earnings and Benefits Letter




Other Benefits

The Benefit Package






QuestionsQuestions

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