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Module Objectives

Readings

Activities and Evaluations

Employee Benefits

Employee Benefits are a component of total compensation on top of pay, provided to employees and
paid whole or in part by the employer. Life insurance, pension plans, workers compensation, vacations,
etc. are examples of benefits typically included in the employee package. While employee satisfaction
with benefits is associated with job satisfaction there is not a lot of available data concerning specific
payoffs.

Why the Growth in Employee Benefit Plans?

Government Impetus

Three benefits are mandated by the provincial or federal government:

 Worker’s Compensation Provincial);

 Employment Insurance (Federal); and

 Canada/Quebec pension plans (Federal/Que).

Other laws are affected by the above such as the Income Tax Act, Human Rights Acts, and Pension
Benefits Acts.

Unions

Unions have fought for the introduction of new benefits and the improvement of current plans including
pattern pension plans, supplementary unemployment compensation and extended vacation plans.

Employer Impetus

Employers have also increased benefits to try to improve satisfaction and productivity. Rest breaks were
added to decrease mistakes and accidents in production. Many benefits were added to improve the
perception of the employer by the employees.

Momentum of Cost Effectiveness of Benefits

Employee Benefits are cost effective in three situations:

1. Most benefits are not taxable to avoid tax implications;

2. Many group-based benefits, like health and life insurance can be purchased at lower rates for
worker groups and for individuals;

3. Benefit premiums and pension contributions are tax deductible up to certain limits.

The Value of Employee Benefits

Employees expect benefits as part of their total compensation, but take them for granted and do not
know their true value.

Employees do have preferences in what types of benefits they want BUT when asked what benefits they
receive they often can’t list them. When asked what the value of the benefits are, they often
undervalue them.

Benefit Planning

Questions to ask during Benefit Planning and Design

 What is the role that Benefits play in Total Compensation? Is it to attract employees or to reduce
turnover?

 Are the benefits externally competitive and is the cost justified?

 Are the benefits adequate from a financial liability viewpoint?

Four Major Administration Issues arise in setting up a package:

1. Who should be covered?:

1. Probationary employees?

2. Dependents?

3. Retirees?

4. Survivor benefits?

5. Disabilities?

6. Should coverage continue during layoffs?

7. Are benefits only for full-time employees?

2. How much choice should an employee be given? In Flexible Benefits Plans, the employee is able
to choose benefits that are of most valuable to them.

3. How will the benefits plan be financed?

1. Non-contributory (employer pays cost);

2. Contributory (where costs are shared between employee and employer; where the
employee pays the cost of some benefits or where the employer pays the cost of some
benefits (such as LTD premiums);

3. Employee financed (The employee pays total cost for some benefits.

4. Finally, it is critical to ensure compliance with legislation and regulations where the company
operates.

Factors Affecting Planning

1. Relationship to Total Compensation Cost: the company decides if the money spent on benefits
could be better spent elsewhere

2. Costs Relative to Benefits: evaluating present and future costs of benefits determines if the
organization can afford to maintain the current level of that benefit. This is especially true of
health insurance benefits that have been difficult to maintain without increasing premium costs
(required contribution by employees)

3. Competitor Offerings: benefits must be considered relative to the competition to maintain

4. Role of Benefits in Attraction, Retention and Motivation: There is little actual evidence that
benefits attract, retain, motivate, or impact job satisfaction or productivity. The exception is
stock options which do have retention value.

5. Legal Requirements: Employers must ensure their benefits meet legal requirements such as
vesting (the waiting period for the employer paid portion of pension benefits to become
available to an employee upon termination).

6. Absolute and Relative Costs: The absolute and relative costs of an entire Benefits package must
be determined in order to compare the costs of the total compensation plan with the
competition.

Individual Needs or Perceived Fairness

Perceived unfairness can result from an employee’s perception that his/her personal needs (such as age:
pension plan) are not being met or that he/she is not receiving benefits competitors are offering.

Administration of the Benefits Plan

There are three main functions in administering a benefits plan:

1. Communication

Best Method is producing an Employee Benefits Handbook. The Handbook needs to be accompanied by
group meetings and videos. One on one meetings with an administrator are also valuable, as are
intranet and internet postings of the plan details. Details must be complete, clear and free of complex
jargon.
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2. Claims Processing

 A Claims Processor determines if the claim is valid. Approximately 10% of claims are denied.

 When a determination is made concerning the employee eligibility;

 If eligibility requirements are approved, the payment level is determined.

3. Employers are increasingly looking for Cost Containment opportunities including:

 Probationary periods (waiting a specified period of time to extend benefits to a new employee);

 Benefit maximums (for example: limiting disability income payment to a maximum percentage
of income);

 Coinsurance (for example: premiums are shared by employer/ee;

 Deductibles (for example: a specified dollar amount paid by the employee before a claim is
paid;

 Coordination of benefits; is the reduction of any claim amount paid by a spouse’s plan;

 Administering/Delivery cost containment(for example: seeking competitive bids for program

 Denying claims for pre-existing conditions;

 Creating programs that encourage wellness;

 Outsourcing benefits administration

Benefits

Benefits that are Legally Required

1. CPP/QPP

2. Employment Insurance

3. Workers’ Compensation

4. Government-sponsored healthcare plans

5. Breaks, vacations and leaves

Canada/Quebec Pension Plan is a government-sponsored plan designed to replace employment income

Employment Insurance (EI): provides workers with temporary income replacement as a result of
employment interruptions due to work shortages, sickness, non-occupational accidents, maternity
leave, parental or adoption leave or compassionate care leave. Not payable with the employee is
terminated for just cause or quits without a good reason.
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Supplementary Unemployment Benefits (SUB) and Worksharing Programs are voluntary, self-insured
employer plans to complement benefits received under the EI plan. Maternity, parental, and
compassionate care SUB plans can supplement up to 100 percent of earnings.

Pension Plans provide income at retirement as compensation for current work; also a security motive
and tax advantage has fostered growth of company pensions through either a defined benefit or defined
contribution pension plan.

 A Defined Benefit Plan agrees to provide a specific benefit level of retirement income that may
increase with years of seniority financed by actuarial formula.

 A Defined Contribution Plan requires specific contributions by the employer but the final
benefit is unknown and depends on investment success.

Pension Legislation: Most provinces and the federal government have pension legislation regarding
pension benefits and the Income Tax Act provides for employer and employee tax deductions up to a
certain limit.

Life Insurance: is a common employee benefit that typically pays out one or two times the employee’s
annual salary and premiums are usually paid by the employer. Some plans have additional life insurance
on an optional employee-paid basis. Other benefit plans provide retirees life insurance at little or no
cost. Other types include AD and D and Dependent Life insurance.

Medical Insurance: Employer-sponsored medical insurance provides coverage for expenses not payable
under the mandatory legislated plans such as medications and prescription drugs which can represent
up to 75% of employer medical costs in Canada. Control of costs is obtained through deductibles,
coinsurance rates, maximum benefits and coordination of benefits. Promoting of preventative health
programs and wellness programs can bear future results and lower medical insurance costs.

Dental Insurance: These plans often cover the full cost of checkups and fillings; and a percentage of
major restorative work (50 to 80 percent). The benefits payable are usually linked to the dental fee
guide in each province.

Vision Care: These plans can cover all or part of the costs of eye exams, lenses, frames and contact
lenses.

Income Security Plans include:

 STD; Short Term Disability plans: are employer-sponsored plans that provide a continuous
income of all or part of an employee’s income when an employee is absent from work due to
illness or an injury that is not work-related.

 Sick Leave plans: are employer-sponsored plans that cover a number of sick days paid per
month or per year per employee

 LTD; Long Term Disability plans: cover income protection from long term illness or injury that is
not work related. The term begins after 26 weeks of disability.

Pay for time not worked includes;

 Paid rest periods, lunch periods, washup times, clothes-change times; get-ready time benefits;
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 Paid vacations;

 Paid holidays (statutory and other);

 Jury duty, bereavement leave, paid personal leave, etc.

Employee Assistance Plans: Provide confidential counselling for employees; employer-sponsored for
personal problems including addiction, stress and mental health

Other Benefits include Childcare Services (facilities or funds) and Eldercare Services (specialist assistance
provided for employees)

Additional Resources

Canadian Payroll Association (Benefits): Searchable information on pension and benefits

Summary

1. Employee Benefits have been increasing in cost for the last 50 years and now constitute
approximately 40 percent of payroll

2. Key issues in benefit planning are:

1. The role of benefits in attracting/retaining employees;

2. External equity as compared to other organizations;

3. The ability of benefits to meet the needs of employees;

4. Ensuring cost effectiveness;

3. Key questions include: Who should be included in the plans? What level of flexibility should be
offered? What combination of employee-employer cost sharing is best?

4. The three issues in administration are: benefit communication, claims processing, and cost
containment.

5. The three legally required benefits are: CPP/QPP; Workers’ Compensation; and Employment
Insurance.

6. In a defined benefit (DB) plan the employer agrees to provide a specific level of retirement
pension, the exact cost of which is unknown. DB plans use an actuarially determined benefits
formula. In a defined contribution (DC) plan the employer agrees to provide specific
contributions to a pension plan, but the success of the investments dictates the final benefit.
Therefore the final benefit is unknown.

7. The two strategies to control medical costs are:-motivating employees to change their demand
for health care through changes in the design or administration of the plan; OR the promotion of
preventive health programs.
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