Chapter 14

PROVIDING EMPLOYEE
BENEFITS

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• What Do I Need to Know?
LO 14-1 Discuss the importance of benefits as a part of employee
compensation.
LO 14-2 Summarize the types of employee benefits required by law.
LO 14-3 Describe the most common forms of paid leave.
LO 14-4 Identify the kinds of insurance benefits offered by employers.
LO 14-5 Define the types of retirement plans offered by employers.
LO 14-6 Describe how organizations use other benefits to match employees’
wants and needs.
LO 14-7 Explain how to choose the contents of an employee benefits package.
LO 14-8 Summarize the regulations affecting how employers design and
administer benefits programs.
LO 14-9 Discuss the importance of effectively communicating the nature and
value of benefits to employees.

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• The Role of Employee Benefits 1 of 2

• Benefits contribute to attracting, retaining, and

motivating employees.
• Help employers tailor their compensation to
kinds of employees they need
• Employees have come to expect that benefits
will help them maintain economic security.
• Benefits impose significant costs.

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• Figure 14.1 Benefits as a Percentage of Total
Compensation

Source: Bureau of Labor Statistics, “Employer Costs for Employee Compensation,” http://data.bls.gov, accessed June 6, 2016

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• The Role of Employee Benefits 2 of 2

• Certain benefits are required by law.

• Tax laws can make benefits favorable to
employees.
• Employers can get volume discounts on
insurance.
• Creative benefits packages make companies
more competitive.

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• Table 14.1 Benefits Required by Law

Benefit Employer Requirement

Social Security Flat payroll tax on employees and employers
Unemployment insurance Payroll tax on employers that depends on state
requirements and experience rating.
Workers’ compensation insurance Provide coverage according to state requirements.
Premiums depend on experience rating.
Family and medical leave Up to 12 weeks of unpaid leave for childbirth,
adoption, or serious illness.
Health care For employers with at least 50 employees, payment
of a fee to the federal government if the employer
does not meet conditions for providing health
insurance benefits.

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• Benefits Required by Law 1 of 8

Social Security
– Federal Old Age, Survivors, Disability and Health
Insurance (OASDHI) program (Social Security)
combines:
 Old age (retirement) insurance
 Survivor’s insurance
 Disability insurance
 Hospital insurance (Medicare Part A)
 Supplementary medical insurance (Medicare Part
B)

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• Benefits Required by Law 2 of 8

Social Security (continued)

– Employers and employees share Social Security cost
through a payroll tax. The percentage is set by law.
– In 2016, employers and employees each paid a tax of
7.65% on the first $118,500 of the employee’s
earnings. Of that, the majority goes to OASDI, and
2.9% of earnings go to Medicare (Part A)
– For earnings above $118,500, only the 2.9% for
Medicare is assessed, with half paid by the employer
and half paid by the employee.

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• Benefits Required by Law 3 of 8

Unemployment Insurance
– Federally mandated program administered by states
to minimize unemployment hardships
– Most funding comes from federal and state taxes on
employers.
– Size of unemployment tax imposed on each employer
depends on the employer’s experience rating
– Careful HR planning can minimize layoffs and keep
their experience rating favorable.

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• Benefits Required by Law 4 of 8

Unemployment Insurance continued

– To receive benefits, workers must meet four
conditions:
1. They meet requirements demonstrating they had been
employed.
2. They are available for work.
3. They are actively seeking work.
4. They were not discharged for cause, did not quit
voluntarily, and are not out of work because of a labor
dispute.

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• Benefits Required by Law 5 of 8

Workers’ Compensation
• State programs that provide benefits to workers who
suffer work-related injuries or illnesses, or to their
survivors.
• Operate under a principle of no-fault liability:
– Employee does not need to show that the employer was
grossly negligent in order to receive compensation.
– Employer is protected from lawsuits.

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• Benefits Required by Law 6 of 8

Workers’ Compensation (continued)

– Four major categories of benefits:
1. Disability income
2. Medical care
3. Death benefits
4. Rehabilitative benefits
– About 9 out of 10 U.S. workers are covered by state
workers’ compensation laws; amount of benefits
income varies among states.
– Generally it is two-thirds of the worker’s earnings
before the disability.
– Benefits are tax free.

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• Benefits Required by Law 7 of 8

Workers’ Compensation (continued)

– Cost of workers’ compensation insurance depend on:
 Kinds of occupations involved
 State where company is located
 Employer’s experience rating
– Unfavorable experience ratings lead to higher
insurance premiums.

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• Benefits Required by Law 8 of 8

Family and Medical Leave Act (FMLA) of 1993

– Requires organizations with 50 or more employees to
provide up to 12 weeks of unpaid leave:
 After childbirth or adoption
 To care for a seriously ill family member
 For an employee’s own serious illness
– Employers must guarantee these employees same or
comparable job when they return to work.
– Pregnancy Discrimination Act

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• Test Your Knowledge 1 of 2
XYZ company has determined that they will have
to reduce their benefits costs to stay competitive.
Which of the following solutions is not a choice for
XYZ?
a) Eliminate health coverage
b) Reduce the percentage of employees’ Social
Security insurance they pay.
c) Reduce their unemployment insurance costs by
managing their workforce to avoid layoffs.
d) Institute a safety program to minimize worker’s
compensation costs.

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• Optional Benefits Programs 1 of 13

• Insurance
• Life and medical
• Health insurance for dependents and domestic partners
• Retirement plans
• Paid leave
• Vacations
• Holidays

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• Figure 14.2 Percentage of Full-Time Workers with Access to
Selected Benefit Programs

Source: Bureau of Labor Statistics, “Employee Benefi ts in the United States,

March 2015” news release, July 24, 2015, http://www.bls.gov.

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• Optional Benefits Programs 2 of 13
Paid Leave
– Most common: Vacations, holidays and sick leave
– Optional: Jury duty, funerals of family members, military
duty, voting or giving blood
– Paid holidays (10)
– Sick leave is often based on length of service.
– Personal days – days off for personal needs
– Floating holidays – paid holidays that vary from year to
year
– Paid time off – a pool of days to use as the employee
wants

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• Optional Benefits Programs 3 of 13
Group Insurance
Medical insurance • Additional coverage may
• 70% of all full-time employees include:
in U.S. receive medical benefits – Dental care
• Policies typically cover: – Vision care
– Hospital expenses – Birthing centers
– Surgical expenses – Prescription drug
– Visits to physicians programs
• Mental Health Parity and
Addiction Equity Act of 2008

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• Optional Benefits Programs 4 of 13

Medical Insurance
– Consolidated Omnibus Budget Reconciliation
Act (COBRA) of 1985
• Federal law that requires employers to permit
employees or their dependents to extend their health
insurance coverage at group rates for up to 36 months
following a qualifying event:
• Layoff
• Reduction in hours
• Employee’s death

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• Optional Benefits Programs 5 of 13

Six employer approaches to controlling health care

benefits costs:
1. Managed care
2. Health maintenance organizations (HMO)
3. Preferred provider organizations (PPO)
4. Flexible spending accounts
5. Consumer-driven health plans (CDHP)
6. Employee wellness programs (EWP)

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• Figure 14.3 Health Care Costs in Various Countries

Source: Organisation for Economic Co-operation and Development, “Health Expenditures and Financing,” OECD.Stat, 
http://stats.oecd.org, accessed June 6, 2016.
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• Optional Benefits Programs 6 of 13

Life Insurance
– Employers may provide life insurance to employees or
offer the opportunity to buy coverage at low group
rates.
– Term life insurance – if the employee dies during the
term of the policy, the employee’s beneficiaries receive
a death benefit payment.

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• Optional Benefits Programs 7 of 13

Short-Term Disability Long-Term Disability

Insurance Insurance
Insurance that pays a Insurance that pays a
percentage of a disabled percentage of a disabled
employee’s salary as employee’s salary after an
benefits to employee for six initial period and potentially
months or less. for rest of employee’s life.

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• Optional Benefits Programs 8 of 13

Retirement Plans
– About half of employees working in private business
sector have employer-sponsored retirement plans.
• Contributory plan - retirement plan funded by
contributions from employer and employee.
• Non-contributory plan - retirement plan funded entirely by
employer contributions.
• Defined benefit plan – pension plan that guarantees
a specified level of retirement income. Employer sets
up a pension fund to invest contributions. Such plans
must meet funding requirements of Employee
Retirement Income Security Act (ERISA) of 1974.

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• Figure 14.4 Sources of Income for Persons 65 and Older

Sources: Ke Bin Wu, “Sources of Income for Older Americans, 2012,” AARP Public Policy
Institute, fact sheet 296, December 2013, accessed at http://www.aarp.org.

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• Optional Benefits Programs 9 of 13

Employee Retirement Pension Benefit

Income Security Act Guarantee Corporation
(ERISA): (PBGC)
• federal law that increased • federal agency that
responsibility of pension insures retirement benefits
plan trustees to protect and guarantees retirees a
retirees, basic benefit if employer
• Established certain rights experiences financial
related to vesting and difficulties.
portability, and created
the Pension Benefit
Guarantee Corporation.

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• Optional Benefits Programs 10 of 13

Retirement Plans (continued)

– Defined contribution plan – the employer sets up an
individual account for each employee and specifies
the size of the investment into that account.
– Money purchase plans
– Profit-sharing and employee stock ownership plans
– Section 401(k) plans
– Cash balance plan –the employer sets up an
individual account for each employee and contributes
a percentage of the employee’s salary.

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• Figure 14.5 Value of Retirement Savings Invested at
Different Ages

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• Test Your Knowledge 2 of 2
Jakar does not know a lot about investing and
wants to ensure he has some retirement income
when he is old enough to retire. Agnes plans on
changing employers every few years and is
interested in investing her own money. Which plan
would be best for Jakar and Agnes, respectively?
a) Defined contribution; defined benefit
b) Contributory; defined benefit
c) Defined benefit; defined contribution
d) Defined contribution; non-contributory

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• Optional Benefits Programs 11 of 13
Government Requirements for Vesting and
Communication
Summary Plan
Vesting Rights Description
Guarantee that when Report that describes a
employees become pension plan’s funding,
participants in a pension eligibility requirements,
plan and work a specified risks, and other details.
number of years, they will • Employers also provide an
receive a pension at individual benefit statement
retirement age, regardless which describes
of whether they remained employee’s vested and
with the employer. unvested benefits.

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• Optional Benefits Programs 12 of 13

Family-Friendly Benefits
– Family leave
– Child care
– College savings
– Elder care

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• Optional Benefits Programs 13 of 13
Other Quality of Work-Life Benefits
• Subsidized cafeterias • Tuition reimbursement
• On-site health care • On-site fitness center
services • On-site dry cleaning
• Moving and relocation services
expenses • Dues for professional
• Employee discounts on organizations
products • Off-site company
• Employee buying service recreation area
• Pet services

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• Selecting Employee Benefits 1 of 4
The Organization’s Objectives
– Decisions about which benefits to offer should take
into account:
 Organization’s goals, objectives and budget
 Expectations of the organization’s current
employees and potential future recruits.
– An organization that does not offer expected benefits
will have difficulty attracting and keeping employees.

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• Table 14.2 An Organization’s Benefits
Objectives 1 of 2
• To establish and maintain an employee benefit program that is based primarily on the
employees’ needs for leisure time and on protection against the risks of old age, loss of
health, and loss of life.
• To establish and maintain an employee benefit program that complements the efforts of
employees on their own behalf.
• To evaluate the employee benefit plan annually for its effect on employee morale and
productivity, giving consideration to turnover, unfilled positions, attendance, employee’s
complaints, and employee’s opinions.
• To compare the employee benefit plan annually with that of other leading companies in
the same field and to maintain a benefit plan with an overall level of benefits based on
cost per employee that falls within the second quintile of these companies.
• To maintain a level of benefits for nonunion employees that represents the same level of
expenditures per employee as for union employees.
• To determine annually the costs of new, changed, and existing programs as percentages of
salaries and wages and to maintain these percentages as much as possible.

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• Table 14.2 An Organization’s Benefits
Objectives 2 of 2
• To self-fund benefits to the extent that a long-run cost savings can be expected for the
firm and catastrophic losses can be avoided.
• To coordinate all benefits with social insurance programs to which the company makes
payments.
• To provide benefits on a noncontributory basis except for dependent coverage, for which
employees should pay a portion of the cost.
• To maintain continual communications with all employees concerning benefit programs.

Source: Adapted from B.T. Beam Jr. and J.J. McFadden, Employee Benefits, 3rd edition. Copyright © 1992 by Dearborn Financial Publishing, Inc. Published by Dearborn
Financial Publishing, Inc., Chicago. All rights reserved.

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• Selecting Employee Benefits 2 of 4

Employee Expectations and Values

• Employees expect to receive benefits that are legally
required and widely available.
• They value benefits they are likely to use.
• Value differs from one employee to another.

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• Selecting Employee Benefits 3 of 4

Organizations can address Cafeteria-style plan: a

differences in employees’ benefits plan that offers
needs and empower their employees a set of
employees by offering alternatives from which they
flexible benefits plans in can choose the types and
place of a single benefits amounts of benefits they
package for all employees. want.

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• Selecting Employee Benefits 4 of 4

Benefits’ Costs
– Ways to save money
1. Shift from traditional health insurance to PPOs and CDHPs.
2. Shift more of the cost to employees.
3. Exclude or limit coverage for certain types of claims.
4. Learn which providers and treatments deliver the best
value.

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• Legal Requirements for Employee Benefits 1 of 3

Tax Treatment of Benefits

– More favorable tax treatment of benefits classified as
qualified plans
• Employees may immediately take a tax deduction for the
funds they contribute to the plans
• Plan must meet certain requirements

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• Legal Requirements for Employee Benefits 2 of 3

Antidiscrimination Laws
– Intended to provide equal employment opportunity
without regard to race, sex, age, disability, and
several other protected categories
– Pregnancy Discrimination Act
– Age Discrimination in Employment Act (ADEA)
– Older Workers Benefit Protection Act of 1990
– Americans with Disabilities Act

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• Legal Requirements for Employee Benefits 3 of 3

Accounting Requirements
– Financial Accounting Standards Board (FASB)
• Ensure that financial statements are a true picture of the
company’s financial status
• Employers must set aside the funds they expect to need for
benefits to be paid after retirement

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• Communicating Benefits to Employees

• Organizations must communicate benefits

information to employees.
• It is difficult for employees and job applicants to
understand the value of their benefits, so
companies must help.

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• Summary 1 of 4
• Like pay, benefits help employers attract, retain, and
motivate employees.
• Employees expect at least a minimum level of benefits,
and providing more than minimum helps an organization
compete in the labor market.
• Benefits are also a significant expense, but employers
provide benefits because employees value them and
many benefits are required by law.

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• Summary 2 of 4
• Employers must contribute to Social Security through a
payroll tax shared by employers and employees.
• Employers must also pay federal and state taxes for
unemployment insurance.
• State laws require that employers purchase workers’
compensation insurance.
• Major categories of paid leave are vacations, holidays,
and sick leave.

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• Summary 3 of 4
• Medical insurance is one of the most valued employee
benefits.
• To manage costs of health insurance, many
organizations offer coverage through a health
maintenance organization or preferred provider
organization, or they may offer flexible spending
accounts.
• Retirement plans may be contributory or noncontributory
and defined benefit plans or defined contribution plans.

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• Summary 4 of 4
• Employers have responded to work-family role conflicts
by offering family-friendly benefits.
• In deciding contents of a benefits package,
organizations need to establish objectives and select
benefits that support those objectives.
• Organizations should also consider employees’
expectations and values.
• Employers must comply with numerous laws and
regulations affecting how they design and administer
benefits programs.

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