Because learning changes everything.

Chapter 13

Employee Benefits

Human Resource Management

Gaining A Competitive Advantage
THIRTEENTH EDITION
Raymond Noe, John Hollenbeck, Barry
Gerhart, Patrick Wright

© 2023 McGraw Hill, LLC. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw Hill, LLC.
 Learning Objectives
13-1 Discuss the growth in benefits costs and the underlying
reasons for that growth.
13-2 Explain the major provisions of employee benefits
programs.
13-3 Discuss how employee benefits in the United States
compare with those in other countries.
13-4 Describe the effects of benefits management on cost
and workforce quality.
13-5 Explain the importance of effectively communicating the
nature and value of benefits to employees.
13-6 Describe the regulatory constraints that affect the way
employee benefits are designed and administered.
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 Introduction
Benefits:
• Adds average 46.4% to every payroll dollar and accounts
for 31.7% of total compensation package.
• Benefits are unique because:
• More regulation of benefits than direct pay.
• Almost obligatory for employers to provide.
• Complex and hard to understand.

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 Figure 13.1 Growth of Employee Benefits,
Percentage of Wages and Salaries and of Total
Compensation, 1929 to 2020, Civilian Workers

SOURCE: Data through 1990, U.S. Chamber of Commerce Research Center, Employee Benefits 1990, Employee Benefits 1997, Employee
Benefits 2000 (Washington, DC: U.S. Chamber of Commerce, 1991, 1997, and 2000). Data from 1995 onward, “Employer Costs for Employee
Compensation,” www.bls.gov.

Access the text alternative for slide images.

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 Reasons for Benefits Growth 1

Factors Contributing to Growth:

• The Social Security Act and other legislation.
• Wage and price controls instituted during World War II.
• Tax treatment of benefits programs:
• Marginal tax rate.
• No employer taxes on most employee benefits.

LO 13-1
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 Table 13.1 Example of Marginal Tax Rates for
an Employee Salary of $80,000

TYPE TAX RATE

Federal 25.00%
State (New York) 6.09%
City (New York) 3.82%
Social Security 6.20%
Medicare 1.45%
Total tax rate 43%

NOTE: Local taxes (state, city, and property taxes) of up to $10,000 total are deductible on
the federal tax return, if itemizing deductions. In this case, the effective tax rate would be
40.08% (rather than 42.56%).

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 Reasons for Benefits Growth 2

Factors Contributing to Growth (continued)

• Cost advantage that groups typically realize over
individuals.
• Growth of organized labor from 1930s through 1950s.
• Unique benefits differentiate employers for current or
prospective employees.

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 Benefits Programs 1

Social Insurance (Legally Required):

• Social Security Act of 1935:
• Old-age insurance.
• Unemployment insurance.
• Survivor’s insurance (1939).
• Disability insurance (1956).
• Hospital insurance (Medicare Part A, 19 65).
• Supplementary medical insurance (Medicare Part B, 19 65) for the
elderly.

LO 13-2
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 Benefits Programs 2

Social Insurance (Legally Required) (continued)

• Social Security (continued)
• Covers more than 90% of U.S. employees.
• Begins at age 65 years and 6 months (full benefits) or age 62
(reduced benefits).
• May be free from state and federal taxes.
• Paid for with payroll tax.

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 Benefits Programs 3

Social Insurance (Legally Required) (continued)

• Unemployment insurance:
• Offsets lost income during involuntary unemployment.
• Helps unemployed workers find new jobs.
• Provides an incentive for employers to stabilize employment.
• Preserves investments in worker skills by providing income during
short-term layoffs.
• Financed through taxes on employers.
• Size of tax depends on employer’s experience rating.

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 Benefits Programs 4

Social Insurance (Legally Required) (continued)

• Unemployment insurance continued:
• Must have a prior attachment to the workforce.
• Must be available for work.
• Must be actively seeking work (including registering at local
unemployment office).
• Were not discharged for cause (such as willful misconduct), did not
quit voluntarily, and not out of work because of labor dispute.
• 50 percent of earnings for 26 weeks.

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 Benefits Programs 5

Social Insurance (Legally Required) (continued)

• Worker’s compensation:
• Covers job-related injuries and death.
• No-fault liability.
• Employers are immune from lawsuits.
• 90% of U.S. workers covered.

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 Benefits Programs 6

Social Insurance (Legally Required) (continued)

• Worker’s compensation continued:
• Four categories:
1. disability income,
2. medical care,
3. death benefits,
4. and rehabilitative services.
• Experience rating system provides incentive for employers to make
workplaces safer.
• Challenge to assess and manage workplace injuries.

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 Benefits Programs 7

Private Group Insurance:

• Medical insurance:
• Most important benefit.
• Consolidated Omnibus Budget Reconciliation Act (C OBRA).
• Disability insurance:
• Short term.
• Long term.

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 Benefits Programs 8

Retirement:
• Defined benefit:
• Pension Benefit Guaranty Corporation (P BGC).
• Employee Retirement Income Security Act (ERISA).
• Insulates employees from investment risk.

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 Benefits Programs 9

Retirement (continued)
• Defined contribution:
• Individual account for each employee with a guaranteed size of
contribution.
• Shift investment risk to employees.
• Money purchase plan.
• Profit- sharing plans.
• Employee stock ownership plans.
• Section 401(k) plans.
• Pension Protection Act (PPA) of 2006.

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 Figure 13.2 The Relationship of Retirement
Savings to Age When Savings Begins and Type
of Investment Portfolio
NOTE: Historical
rates of return, 1928–
2019: stocks (S&P
500), 9.4%; bonds
(10-year U.S.
Treasury Bond),
6.0%; cash (3-month
U.S. Treasury Bill),
3.3%.

Bonds and T. Bills: 19 28–2019," http://people.stern.nyu.edu/adamodar/New_Home_Page/datafile/histretSP.html;

Vanguard, "Vanguard Portfolio Allocation Models," https://investor.vanguard.com/investing/how-to-invest/model-
portfolio-allocation.

Access the text alternative for slide images.

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 Benefits Programs 10

Retirement (continued)
• Cash balance plans:
• All contributions come from employer.
• Rate guaranteed in a defined benefit plan.

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 Benefits Programs 11

Retirement (continued)
• Funding, communication, and vesting requirements:
• Employers required to make yearly contributions that cover future
obligations.
• Summary plan description (SPD).
• Vesting rights.
• Prevents companies from terminating employees and discourages
employee turnover.
• Early retirement programs.

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 Benefits Programs 12

Pay for Time Not Worked:

• Includes paid vacation, holidays, sick leave.
• No legal minimum in United States.

LO 13-3
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 Figure 13.3 Normal Annual Hours Worked
Relative to United States

SOURCE: Organization for Economic Cooperation and Development. Data for 2019,
http://stats.oecd.org. Labour, Subsection, Labour Force Statistics, accessed February 20, 2021.
Access the text alternative for slide images.

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 Benefits Programs 13

Family-Friendly Policies:
• Family leave:
• Family and Medical Leave Act.
• Paid family leave rare in the United States.
• Child care:
• Flexible work arrangements.

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 Table 13.5 The Five Most Highly Ranked
Benefits Objectives for Employers
Most Highly Ranked Benefits Objectives for Employees
1. Increase employee productivity.
2. Increase employee satisfaction.
3. Increase employee loyalty.
4. Attract employees.
5. Help employees make better financial decisions.

SOURCE: MetLife’s 15 Annual U.S. Employee Benefits Trends Study, 2017, https://benefittrends.metlife.com/ media/1382/2017-ebts-
report_0320_exp0518_v2.pdf.

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 Managing Benefits: Employer Objectives and
Strategies 1

Surveys and Benchmarking:

• Private consultants.
• U.S. Chamber of Commerce.
• Bureau of Labor Statistics.

LO 13-4
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 Figure 13.4 Employee Benefits Cost by
Category, Private-Sector Workers

SOURCE: U.S. Department of Labor, “Employer Costs for Employee Compensation— September 2018,”
December 14, 2018, News Release USDL-18-1941.

Access the text alternative for slide images.

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 Managing Benefits: Employer Objectives and
Strategies 2

Cost Control:
• Cost of a benefit category.
• Growth trajectory of the benefit category.
• Cost of legally required benefits.
• Medical and other insurance are targets for cost control.

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 Managing Benefits: Employer Objectives and
Strategies 3

Cost Control (continued)

• Health care: controlling costs and improving quality.
• U.S. spends more on health care than other countries, most
through employers.
• Employers shift costs to employees through deductibles,
coinsurance, exclusions and limitations, and maximum benefits.
• Cost reductions.
• Use of alternative providers:
• Health maintenance organizations (H MOs), preferred
provider organizations (PPOs).
• Vary required employee contributions based on employee’s health
and risk factors.

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 Table 13.6 Health Care Costs and Outcomes
in Various Countries
INFANT HEALTH EXPENDITURES
LIFE EXPECTANCY MORTALITY AS A PERCENTAGE OF
COUNTRY AT BIRTH, FEMALE RATE (PER 1,000) GDP
Canada 84 5 11%
China 79 7 5
France 86 4 11
Germany 83 3 12
Japan 87 2 11
Korea 86 3 8
Mexico 78 13 6
Poland 82 4 6
United States 81 6 17

SOURCES: Organization for Economic Cooperation and Development, OECD Health Statistics 2020
and Health Expenditure and Funding, www.OECD.org, accessed March 8, 2021.

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 Managing Benefits: Employer Objectives and
Strategies 4

Cost Control (continued)

• Health care: controlling costs and improving quality
(continued).
• Employee wellness programs (EWPs):
• Focus on changing behaviors on and off work time that could
lead to health problems.
• Preventive in nature.
• Passive or active.
• Financial wellness.

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 Managing Benefits: Employer Objectives and
Strategies 5

Cost Control (continued)

• Health care: controlling costs and improving quality
(continued).
• Health care costs and quality: ongoing challenges.
• Average annual premium for family coverage $19,616.
• Piecemeal programs may not work.
• Pareto group.
• Emphasis on monitoring health care quality.

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 Managing Benefits: Employer Objectives and
Strategies 6

Cost Control (continued)

• Staffing responses to control benefits cost growth:
• Overtime: employees work more hours.
• Classify employees as exempt status.
• Part-time workers.
• Hire temporary workers.
• Classify employees as independent contractors:
• Subject to IRS review.

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 Managing Benefits: Employer Objectives and
Strategies 7

Nature of the Workforce:

• Demographic factors impact types of benefits desired.
• Marketing research to determine employee preferences:
• What benefits are most important to you?
• If you could choose one new benefit, what would it be?
• If you were given X dollars for benefits, how would you spend it?

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 Managing Benefits: Employer Objectives and
Strategies 8

Communicating with Employees and Maximizing Benefits

Value:
• Employees typically underestimate value of their benefits.
• Organizations should communicate benefits information through:
• Written information.
• Online tools.

LO 13-5
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 Managing Benefits: Employer Objectives and
Strategies 9

Communicating with Employees and Maximizing Benefits

Value (continued)
• Flexible benefits plans:
• Permit employees to choose types and amounts of benefits:
• Employees gain greater awareness and appreciation.
• Better match between benefits and employee preferences.
• Overall cost reductions in benefits programs.
• May have high administrative costs.
• Adverse selection.

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 Managing Benefits: Employer Objectives and
Strategies 10

Communicating with Employees and Maximizing Benefits

Value (continued)
• Flexible spending accounts:
• Permits pretax contributions of up to $2,750 to an employee
account that can be drawn on to pay for uncovered health care
expenses.

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 Flexible Spending Accounts

NO FLEXIBLE FLEXIBLE
HYPOTHETICAL SPENDING CARE SPENDING CARE
EMPLOYEE ACCOUNT ACCOUNT
Salary portion $10,000 $10,000
Pretax dependent care
0 −3,000
contribution
Taxable salary 10,000 7,000
Tax (43%) −4,300 −3,010
After-tax cost of
−3,000 0
dependent care
Take-home pay $ 2,700 $3,990

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 General Regulatory Issues 1

Affordable Care Act:

• Penalties for not providing health benefits.
• Increases Medicare Hospital Insurance (Part A) payroll tax
on earnings for higher-income taxpayers.
• New tax on “Cadillac“ insurance plans provided by
employers.
• Dependent coverage until age 26.
• Wellness programs.

LO 13-6
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 General Regulatory Issues 2

Nondiscrimination Rules, Qualified Plans, and Tax Treatment:

• Qualified plan:
• Receives more favorable tax treatment.
• Each benefit area has different rules.

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 General Regulatory Issues 3

Sex, Age, and Disability:

• Supreme Court declared it illegal for employers to require
women to contribute more to a defined benefit plan than
men.
• Age Discrimination in Employment Act (ADEA) and the
Older Workers Benefit Protection Act (OWBPA).
• Americans with Disabilities Act (ADA).

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 General Regulatory Issues 4

Monitoring Future Benefits Obligations:

• Financial Accounting Statement (FAS) 106.
• Some companies charging insurance premiums to
employees and retirees or ending retiree benefits.
• Decline of pension plans in the United States:
• Pension Benefit Guaranty Corporation increases employers’
premium.
• Society of Actuaries increased life expectancy rates.

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 Employee Benefits
in the Philippines

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 Employee Benefits in the Philippines
• The labor laws in the Philippines are administered by the
Department of Labor and Employment.

• The Philippines employee benefits all depend on which of the

four kinds of employment arrangements is underway: regular,
project-based, seasonal, and casual employment.

1. Statutory and Common Employee Benefits

2. Company Initiated Benefits

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 Statutory and Common Employee
Benefits
• Statutory benefits, also known as mandatory benefits, are
entitlements that employers are obligated by law to provide to
their employees.
• Common examples include benefits like paid annual leave,
parental leave, worker's compensation insurance, and paid
sick leave.

• In the Philippines, employers must pay a monthly contribution

to the following funds:
1. SSS
2. Philhealth (Health Insurance)
3. PAG-IBIG or Home Development Mutual Fund (HDMF)
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 Social Security System (SSS)
• This state-run insurance program offers benefits under the
Social Security and Employees' Compensation (EC) Programs

• The Social Security Commission administers the program. It is a

body made of representatives from the government, employers,
and employees.

• Social insurance covers private-sector employees, self-employed

workers, as well as household workers. A spouse of the insured
person is also entitled to receive social benefits under this
scheme.

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 Social Security System (SSS)
• The benefits include:
a) Maternity Pay
b) Sickness Pay
c) Pensions
d) Disability Benefits
e) Salary Loan
f) Life Insurance
g) Funeral Grants
• The contribution depends on the salary bracket of the employee.
In general, the employer (ER) is responsible for contributing
7.37% of the total contribution, and the employee is responsible
for 3.36%.
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 PhilHealth (Health Insurance)
• PhilHealth is the name of the health insurance plan in place for
private employees in the Philippines. As of 2021, the monthly
contribution rate for the health insurance program is 3.5%
of the employee's basic salary. The monthly contribution is
equally divided between employee and employer. PHP 10,000
is the salary minimum and PHP 70,000 is the salary ceiling.

• PhilHealth covers inpatient benefits, outpatient benefits, Z

benefits, and SDG benefits (explained below):
• Z benefits are offered to the patients who need prolonged hospitalization
and more expensive treatment
• SDG benefits include treatment packages for malaria, HIV-AIDS,
tuberculosis, animal bites, and others diseases

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 Home Development Mutual Fund
(HDMF)
• The HDMF, also known as Pag-IBIG fund, provides housing
loans. It also offers financial assistance to Filipinos to enable
them to afford decent housing.

• Workers who earn less than PHP 1,500 a month contribute 1%

of their salary to the Pag-IBIG fund. Workers who earn more
contribute 2% of their monthly salary. Employers have to
contribute 2% regardless of the salary bracket of the employee.

• The highest contribution to HDMF fund should not exceed PHP

200 in total (PHP 100 for employees and PHP 100 for
employers).

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© McGraw Hill, LLC 48
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© 2023 McGraw Hill, LLC. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw Hill, LLC.