Employee benefits

BENEFITS

In the previous chapter we discussed the different types of incentive compensation plans that organizations use to motivate employees. As we noted, some of those plans provide for deferred payment of compensation, thereby serving as a source of retirement income. Because this deferment reduces the incentive value of these compensation plans, some companies classify profit sharing, stock ownership, and similar deferred incentive plans as employee benefits plans. Whether or not they offer these particular plans, virtually all employers provide a variety of benefits to supplement the cash wages or salaries paid to their employees. These benefits, some of which are required by law, must be con­sidered a part of their total compensation.
In this chapter we examine the characteristics of employee benefits programs. we will study the types of benefits required by law, the major discretionary benefits that em­ployers offer, the employee services provided, and the retirement programs in use.

 

Employee Benefits Programs

Employee benefits constitute an indirect form of compensation that is intended to improve the quality of work life for employees. In return, employers generally expect employees to be loyal to the organization and to be productive. Since em­ployees have come to expect an increasing number of benefits, the motivational value of these benefits depends on how the benefits program is designed and communicated. Once viewed as a gift from the employer, benefits are now con­sidered rights to which all employees are entitled, and they have become one of the fastest-growing areas of employment law and litigation. Many employers now have a professionally staffed division in the HR department to develop and man­age a wide variety of benefits and services.

Growth of Employee Benefits

Not until the 1920s were employee benefits offered by more than just a few em­ployers. Because these benefits were supplemental to the paycheck and were Of minor value, they were referred to initially as fringe benefits. From this rather meager beginning, benefits programs have expanded in terms of both the types of benefits offered and their cost.
Initially, employee benefits were introduced to promote and reward em­ployee loyalty and to discourage unionization. As unions acquired power during the 1930s, their leaders were able to use collective bargaining to obtain addi­tional benefits, along with higher wages. During World War II, a wage freeze fur­ther stimulated the growth of benefits. Wishing to retain their employees but prohibited by the freeze from raising wages, employers provided special induce­ments in the form of nonwage supplements such as pensions, paid vacations, sick leave, and health and life insurance. Interpretations by the National Labor Relations Board and the Supreme Court to the effect that employers were obli­gated to bargain for pensions were also major factors stimulating the growth of these particular benefits. Demands for supplemental unemployment insurance, company-paid medical insurance, and other benefits were soon to follow. Another factor in the growth of employee benefits was the exemption from personal income tax on benefits paid for by the employer.

Requirements for a Sound Benefits Program

Too often a particular benefit is provided because other employers are doing it, because someone in authority believes it is a good idea, or because there is union pressure. However, the contributions that benefits will make to the HR program depend on how much attention is paid to certain basic considerations.

Establishing Specific Objectives

Like any other component of the HR program, an employee benefits program should be based on specific objectives. The objectives an organization establishes will depend on many factors, including the size of the firm; its location, degree of unionization, and profitability; and industry patterns. Most important, these aims must be compatible with the philosophy and policies of the organization. The chief objectives of most benefits programs are to improve employee satisfac­tion, to meet employee health and security requirements, to attract and motivate employees, to reduce turnover, to keep the union out, and to maintain a favor­able competitive position. Further, these objectives must be considered within the framework of cost containment--a major issue in today’s programs.
Unless an organization has a flexible benefits plan (to be discussed later), a uniform package of benefits should be developed. This involves careful consider­ation of the various benefits that can be offered, the relative preference shown for each benefit by management and the employees, the estimated cost of each benefit, and the total amount of money available for the entire benefits package.

Allowing for Employee Input

Before a new benefit is introduced, the need for it should first be determined through consultation with employees. Many organizations establish committees composed of managers and employees to administer, interpret, and oversee their benefits policies. Opinion surveys are also used to obtain employee input. Having employees participate in designing benefits programs helps to ensure that man­agement is moving in the direction of satisfying employee wants. Pitney Bowes, Quaker Oats, Nike, and Solomon Brothers ask employees to help them improve benefit plans. The companies then ask teams to design a new benefit package that offers more choices without raising costs.

Modifying Employee Benefits

To serve their intended purpose, employee benefits programs must reflect the changes that are continually occurring within our society. Particularly signifi­cant are changes in the composition and lifestyles of the workforce. These changes make it necessary to develop new types of benefits to meet shifting needs.  For example, as we indicated in Chapter 2, the number of women in the workforce is continuing to grow. Which benefits are most valuable to them (and to men) will be determined largely by whether they have dependent children and whether they have a spouse who has benefit coverage.
Many benefits plans create an environment of disincentives for the young and single, limiting the organization’s ability to attract and retain such em­ployees. For example, many employers provide extra compensation in the form of dependent coverage to their workers with families, but the principle of equal pay for equal work suggests that all employees doing the same job should receive the same total compensation, regardless of family status. Similarly, the employer's contribution to the pension plan for a 30-year-old employee is approximately one-fourth the contribution for a 50-year-old employee for the same amount of pension commencing at age 65. This difference in funds spent on older workers in effect discriminates against the younger worker, although legally it is not re­garded as discriminatory.4 These examples illustrate the need for benefits pro­grams that take into account the differing needs of a variety of workers in order to attract a highly capable workforce.

Providing for Flexibility

To accommodate the individual needs of employees, there is a trend toward flex­ible benefits plans, also known as cafeteria plans. These plans enable individual employees to choose the benefits that are best suited to their particular needs. They also prevent certain benefits from being wasted on employees who have no need for them. Typically, employees are offered a basic or core benefits package of life and health insurance, sick leave, and vacation, plus a specified number of credits they may use to “buy”  whatever other benefits they need.
Benefits programs must be flexible enough to accommodate the constant flow of new legislation and IRS regulations that affect them. A number of benefits--consulting firms are available to help managers keep up with changes in all phases of the programs they oversee. There is also an abundance of computer software for processing employee benefits records that incorporates the latest legislative and regulatory changes.

Communicating Employee Benefits Information

The true measure of a successful benefits program is the degree of trust, understanding, and appreciation it earns from the employees. Employers should care­fully communicate information about complicated insurance and pension plans so that there will be no misunderstanding about what the plans will and will not provide.
The communication of employee benefits information improved signifi­cantly with passage of the Employee Retirement Income Security Act (ERISA) in 1974. The act requires that employees be informed about their pension and certain other benefits in a manner calculated to be understood by the average employee. A widely used method of communication is in-house publications, in­cluding employee benefits handbooks and organization newsletters. To ensure that employees are familiar with the benefits program, managers should be al­lowed sufficient time in new-hire orientation and other training classes to present information regarding benefits and to answer questions.
In addition to having general information, it is important for each employee to have a current statement of the status of her or his benefits. The usual means is the personalized computer-generated statement of benefits. As Highlights in HRM 1 shows, this statement prepared by Godwins Booke & Dickenson can be one of the best ways of slicing through a maze of benefit technicalities to provide concise data to employees about the status of their personal benefits.
Coopers & Lybrand offers a Benefits Information Line that allows employers to provide employees with instant access to a wide variety of benefits and HR information from any touch-tone telephone. Individual account information is available upon entering a personal identification number. Some employers sum­marize benefit information on a paycheck stub as a reminder to employees of their total compensation.
Computerized data also enable management to keep accurate records of the cost of each benefit. To assist employers with the administrative and communi­cation functions, the International Foundation of Employee Benefit Plans in Brookfield, Wisconsin, maintains an extensive library of employee benefits pub­lications. It also prepares publications on this subject. The foundation has an on­line database that members can use to get immediate, comprehensive responses to questions about employee benefits. In cooperation with the Wharton School at the University of Pennsylvania and with Dalhousie University in Canada, the foundation offers a college-level program leading to the Certified Employee Benefit Specialist (CEBS) designation.6

Concerns of Management

Managing an employee benefits program requires close attention to the many forces that must be kept in balance if the program is to succeed. Management must consider union demands, the benefits other employers are offering, tax con­sequences, rising costs, and legal ramifications. We will briefly examine the last two concerns.

(Insert HIGHLIGHTS IN HRM: A Personalized Statement of Benefits)

 

Rising Costs                      

According to a 1994 U.S. Chamber of Commerce study of 1,057 companies, the costs of employee benefits in that year averaged 41.3 percent of payroll, as shown in Figure 12-1. The average distribution of these benefits was $14,807 per em­ployee per year. Costs of benefits were higher in manufacturing than in nonman­ufacturing industries. Study Figure 12-1 to obtain an overview of the types of benefits to be discussed in this chapter.7
Since many benefits represent a fixed rather than a variable cost, manage­ment must decide whether or not it can afford this cost under less favorable eco­nomic conditions. If an organization is forced to discontinue a benefit, the negative effects of cutting it may outweigh any positive effects that may have ac­crued from providing it.
To minimize negative effects and avoid unnecessary expense, many employ­ers enlist the cooperation of employees in evaluating the importance of particu­lar benefits. Increasingly, employers are requiring employees to pay part of the costs of certain benefits, especially medical coverage. At all times, benefit plan administrators are expected to select vendors of benefit services who have the most to offer for the cost.

(Insert Figure 12-1: Employee Benefits, by Type of Benefit)

Besides the actual costs of employee benefits, there are costs of administer­ing them. The federal reporting requirements under ERISA require a considerable amount of paperwork for employers. In addition, new requirements, such as those mandated by the Consolidated Omnibus Budget Reconciliation Act of 1986; (COBRA), now require employers to make health coverage--at the same rate the employer would pay—available to employees, their spouses, and their dependents upon termination of employment, death, or divorce. Thus former employees and their families benefit by paying a lower premium for health coverage than is available to individual policyholders. While the former employee pays the premiums, employers have to establish procedures to collect premiums and to keep track of former employees and their dependents.
The cost of health care benefits is a concern to all employers. Private health insurance premiums increase every year. Saving money on health care is important, but employers must be careful to recognize the importance of health care plans to their workers. According to one consultant, “Employees are willing to go on strike rather than have their health benefits reduced.”

Legal Concerns

Benefits can become a source of union grievances, employee complaints, even legal actions. Food services, parking, and similar facilities can become a magnet for complaints. An extreme example may be lawsuits by employees over injuries in organization-sponsored recreational activities and during or following organi­zational social functions where alcohol is served.

 

Employee Benefits Required by Law

Legally required employee benefits constitute nearly a quarter of the benefits package that employers provide. These benefits include employer contributions to Social Security. unemployment insurance, workers’ compensation insurance, and state disability insurance. We will discuss all but the last of these benefits.

Social Security Insurance

Passed in 1935, the Social Security Act provides an insurance plan designed to protect covered individuals against loss of earnings resulting from various causes. These causes may include retirement, unemployment, disability, or, in the case of dependents, the death of the worker supporting them. Thus, as with any type of casualty insurance, Social Security does not pay off except in the case where a loss of income is actually incurred through loss of employment.
To be eligible for old-age and survivors’ insurance (OASI) as well as disabil­ity and unemployment insurance under the Social Security Act, an individual must have been engaged in employment covered by the act. Most employment in private enterprise, most types of self-employment, active military service after 1956, and employment in certain nonprofit organizations and governmental agencies are subject to coverage under the act.  Railroad workers and civil service employees who are covered by their own systems and some occupational groups, under certain conditions, are exempted from the act.
The Social Security program is supported by means of a tax levied against an employee’s earnings that must be matched by the employer in each pay period. The tax revenues are used to pay three major types of benefits: (1) old-age in­surance benefits, (2) disability benefits, and (3) survivors' insurance benefits. Because of the continual changes that result from legislation and administra­tive rulings, as well as the complexities of making determinations of an indi­vidual's rights under Social Security, we will describe these benefits only in general terms.
To qualify for old-age insurance benefits, a person must have reached retire­ment age and be fully insured. A fully insured person has earned forty credits--a maximum of four credits a year for ten years, based on annual earnings of $2,360 (a figure adjusted annually) or more. Having enough credits to be fully insured makes one eligible for retirement benefits, but it does not determine the amount. The amount of monthly Social Security retirement benefits is based on earnings, adjusted for inflation, over the years an individual is covered by Social Security.
To receive old-age insurance benefits, covered individuals must also meet the retirement earnings test. Persons under 70 years of age cannot be earning more than the established annual exempt amount through gainful employment with­out a reduction in benefits. This limitation on earnings does not include income from sources other than gainful employment, such as investments or pensions.
Social Security retirement benefits consist of those benefits that individu­als are entitled to receive in their own behalf, called the primary insurance amount, plus supplemental benefits for eligible dependents. There are also both minimum and maximum limits to the amount that individuals and their depen­dents can receive.
The Social Security program provides disability benefits to workers too se­verely disabled to engage in “substantial gainful work.” To be eligible for such benefits, however, an individual’s disability must have existed for at least six months and must be expected to continue for at least twelve months or be ex­pected to result in death. After receiving disability payments for twenty-four months, a disabled person receives Medicare protection. Those eligible for dis­ability benefits, furthermore, must have worked under Social Security long enough and recently enough before becoming disabled. Disability benefits, which include auxiliary benefits for dependents, are computed on the same basis as retirement benefits and are converted to retirement benefits when the individ­ual reaches the age of 65.
Survivors’ insurance benefits represent a form of life insurance paid to mem­bers of a deceased person’s family who meet the eligibility requirements. As with life insurance, the benefits that the survivors of a covered individual receive may greatly exceed their cost to this individual. Survivors’ benefits can be paid only if the deceased worker had credit for a certain amount of time spent in work cov­ered by Social Security. The exact amount of work credit needed depends on the worker’s age at death. Generally, older workers need more years of Social Secu­rity work credit than younger workers, but never more than forty credits. As with other benefits discussed earlier, the amount of benefit survivors receive is based on the worker's lifetime earnings in work covered by Social Security.
The United States has agreements with fourteen other countries to coordi­nate Social Security protection for people who work or have worked in those countries as well as in the United States. It helps those who, without an agree­ment, would not be eligible for Social Security benefits in one or both countries. It also helps people who would otherwise have to pay Social Security taxes to both countries on the same earnings. The agreements eliminate the double cov­erage so that taxes are paid to only one system. Agreements cover Social Secu­rity taxes and retirement, disability, and survivor insurance benefits. They do not cover benefits under the U.S. Medicare program or the Supplemental Secu­rity Income (SSI) Program.12

 

Unemployment Insurance

Employees who have been working in employment covered by the Social Secu­rity Act and who are laid off may be eligible for up to twenty-six weeks of unem­ployment insurance benefits during their unemployment. Eligible persons must submit an application for unemployment compensation with their state employ­ment agency, register for available work, and be willing to accept any suitable employment that may be offered to them. However, the term “suitable” gives individuals considerable discretion in accepting or rejecting job offers.
The amount of compensation that workers are eligible to receive, which varies among states, is determined by their previous wage rate and previous period of employment. Funds for unemployment compensation are derived from a federal payroll tax based on the wages paid to each employee, up to an established maximum. The major portion of this tax is refunded to the individual states, which in turn operate their unemployment compensation programs in accor­dance with minimum standards prescribed by the federal government.

Workers' Compensation Insurance

Both state and federal workers’ compensation insurance is based on the theory that the cost of work-related accidents and illnesses should be considered one of the costs of doing business and should ultimately be passed on to the consumer. Individual employees should not be required to bear the cost of their treatment or loss of income, nor should they be subjected to complicated, delaying, and ex­pensive legal procedures.
In all states, except New Jersey, South Carolina, and Texas, workers’ com­pensation insurance is compulsory. When compulsory, every employer subject to it is required to comply with the law's provisions for the compensation of work-related injuries. The law is compulsory for the employee also. In the three states where it is elective, employers have the option of either accepting or rejecting the law. If they reject it, and suits are filed against them, they lose the customary common-law defenses: (1) assumed risk of employment, (2) negligence of a fellow employee, and (3) contributory negligence.13
Three methods of providing for workers' compensation coverage are commonly used. One method is for the state to operate an insurance system that em­ployers may join--in some states, are required to join. A second method is for the states to permit employers to insure with private companies. Third, in some states, employers may be certified by the commission handling workers' compen­sation to handle their own coverage without any type of insurance.
Workers' compensation laws typically provide that employees will be paid a disability benefit based on a percentage of their wages. Each state also specifies the length of the period of payment and usually indicates a maximum amount that may be paid. Benefits, which vary from state to state, are generally provided for four types of disability: (1) permanent partial disability, (2) permanent total disability, (3) temporary partial disability, and (4) temporary total disability. Disabilities may result from injuries or accidents, as well as from occupational diseases such as black lung, radiation illness, and asbestosis. Before any workers’ compensation claim will be allowed, though, the work relatedness of the disability must be established. Also, the evaluation of the claimant by a physician trained in occupational medicine is an essential part of the claim process.
In addition to the disability benefits, provision is made for payment of medical and hospitalization expenses up to certain limits, and in all states, death benefits are paid to survivors of the employee. Commissions are established to re­solve claims at little or no legal expense to the claimant.
Workers’ compensation costs have skyrocketed to the point where some em­ployers say they have laid off or postponed new hiring and expansion specifically because of “comp costs.”  The average cost of a compensation claim tripled in the period from 1982 to 1992. More recently, the direct cost of claims to U.S.  businesses has been around $70 billion annually. A Fortune 500 company can easily pay out $50 million to $100 million a year in comp claims. Swelling medical costs and benefits paid to workers are the major factors. In addition, there are more
disorders today that are harder to assess objectively, such as back pain. Then too, claims are sometimes made for ailments that may have little to do with the work­place, such as hearing loss, stress, and cancer.15
Insurance companies are making every effort to cut workers’ comp costs. Travelers, for example, hired more compensation claims employees in order to re­duce caseloads. They also added several hundred nurses to review claims. Orion Capital employs nurses, attorneys, and investigators to determine whether a pro­spective client--i.e., an employer--is committed to reducing costs. Continental Insurance uses ergonomists (see Chapter 4) to review tasks at businesses it in­sures and recommend changes to reduce work-related injuries. Efforts to reduce the fraudulent cases, which are estimated to compose 20 percent of all claims, have also increased.16
Steps that the HR department can take to control workers’ comp costs in­clude the following:

1.    Perform an audit to assess high-risk areas within a workplace.
2.    Prevent injuries by proper ergonomic design of the job, effective assessment of job candidates, and worker training.
3.    Provide quality medical care to injured employees by physicians with experience and preferably with training in occupational health.
4.    Reduce litigation by effective communication between the employer and the injured worker.
5.    Manage the care of an injured worker from time of injury until return to work. Keep a partially recovered employee at the worksite.17

To this point the discussion has focused on what is important to the employer and the insurance carrier. Managers and HR staff personnel should recognize that a workplace injury presents several problems to the injured worker-medical, financial, insurance, and employment security, and possibly legal problems. Injured employees are likely to feel isolated, and complain when they receive insufficient information about their rights and obligations. Coworkers and supervisors often fail to understand that many disabilities, such as back pain, do not show. There is also a tendency to “blame the victim.”  This can range from simple accusations of malingering, laziness, or dishonesty to sugges­tions of a mental disorder. An important step in developing a smoothly function­ing system for comp cases is for managers and professionals to consider the perspective of the injured worker and to provide the information and assistance needed in a positive, supportive manner.

 

Leaves without Pay

Most employers grant leaves of absence to their employees for personal reasons. These leaves are usually taken without pay, but also without loss of seniority or benefits. An unpaid leave may be granted for a variety of reasons, including ex­tended illness, illness in the family, pregnancy, the birth or adoption of a child, educational or political activities, and social service activities.
As growing numbers of women entered the workforce and remained there after having children, the issue of leaves became increasingly important. Several states granted pregnant employees preferential treatment, while other states en­acted laws mandating that employees be given leaves for any type of disability. Other states have enacted laws that require employers to grant leaves for pater­nity, child adoption, or serious illness in the family.19 The Family and Medical Leave Act (FMLA) was passed and became effective on August 5, 1993. The federal legislation preempts state laws only if the state law is less generous to em­ployees. More generous state requirements remain intact.
The FMLA applies to employers having fifty or more employees during twenty or more calendar workweeks in the current or preceding year. It requires the employer to provide up to twelve weeks of unpaid, job-protected leave to eli­gible employees for certain family and medical reasons. The specific reasons for taking leave are listed on the federally required poster reproduced in Highlights in HRM 2. In studying the poster, note the other important stipulations, such as enforcement and unlawful acts, which are of direct concern to managers.
Like many laws pertaining to HRM, the FMLA is simple in principle but re­quires revising policies and procedures for compliance. This law affects an orga­nization's benefits program in several of its provisions: It mandates continuation of medical coverage, it prohibits loss of accrued benefits, it provides for restora­tion of benefits after leave, it permits substitution of paid leave and vacation dur­ing leave, it makes communication and notice compulsory, and it prohibits waiver of benefits.21
It is apparent that employees as a group will benefit from FMLA at critical times in their lives. Supporters say that it will especially help today’s “sandwich generation”--baby boomers born from 1946 to 1964--as they enter middle age and rear children while simultaneously caring for aging parents.22 Temporary-help firms expect to profit from FLMA by providing workers to fill in for perma­nent employees who take time off to care for relatives. The temp agencies are prepared to provide temporary managers and executives as well as clerical help.23

 

Discretionary Major Employee Benefits

Employee benefits may be categorized in different ways. In Figure 12-1 we saw the categories of benefits that have been used by the U.S. Chamber of Commerce in studies of benefits since 1951. In the discussion that follows, we will use a somewhat different but compatible grouping of benefits to highlight the impor­tant issues and trends in managing an employee benefits program.

Health Care Benefits
The benefits that receive the most attention from employers today because of sharply rising costs and employee concern are health care benefits. In the past, health insurance plans covered only medical, surgical, and hospital expenses. Today employers are under pressure to include prescription drugs as well as dental, optical, and mental health care benefits in the package they offer their workers.

(Insert HIGHLIGHTS IN HRM: “Your Rights”: Another Federally Required Poster)

 

Escalating Costs

According to a U.S. Chamber of Commerce study, medical and medically related benefit costs (employer's share) average 11.1 percent of payroll costs. The Cham­ber reports that from 1980 to 1993 the employer cost of providing medical and dental insurance increased by 254 percent. The main reason for the increase is that the cost of medical care has risen more than twice the increase in CPI for all items. Health insurance premiums paid by employers increased more than 50 percent faster than medical care costs, compounding the problems facing employers.24
The growth in health care costs is attributed to a number of factors, includ­ing federal legislation, changes in Medicare pricing, the greater need for health care by an aging population, the costs of technological advances in medicine, skyrocketing malpractice insurance rates, rising costs of health care labor, and overuse of costly health care services.

 

Cost Containment

The approaches used to contain the costs of health care benefits include reduc­tions in coverage, increased deductibles or copayments, and increased coordina­tion of benefits to make sure the same expense is not paid by more than one insurance reimbursement. Other cost-containment efforts involve alternatives to traditional medical care: the use of health maintenance organizations and preferred providers, incentives for outpatient surgery and testing, and mandatory second opinions for surgical procedures. Employee assistance programs and wellness programs may also allow an organization to cut the costs of its health care benefits.
Health maintenance organizations (HMOs) are organizations of physi­cians and other health care professionals that provide a wide range of services to subscribers and their dependents on a prepaid basis. As a result of the fed­eral HMO Act of 1973, most employers with health insurance plans must offer an HMO as a voluntary option. At first HMO premiums were higher than traditional plans, but traditional medical insurance premiums have in­creased so much that HMOs are now used as a way to contain the costs of em­ployee health care. Because they must provide all covered services for a fixed dollar amount, HMOs generally emphasize preventive care and early interven­tion. Most of the approximately 700 HMOs in the United States are patterned after the one first established in California by industrialist Henry Kaiser, which bears his name.
Preferred provider organizations have also helped to contain costs. The pre­ferred provider organization (PPO) is a hospital or group of physicians who es­tablish an organization that guarantees lower costs to the employer. The employer reciprocates by steering workers to the PPO. In an effort to have more control over medical costs, many insurance companies have become active in organizing PPOs. Since employees and the federal government will continue
push for improved health care, employers will find it necessary to have an active program for cost containment.25

Other Health Benefits

Dental care insurance as an employee benefit has grown very rapidly in the past two decades. Dental plans are designed to help pay for dental care costs and to encourage employees to receive regular dental attention. Like medical plans, dental care plans may be operated by insurance companies1 dental service corpo­rations, those administering Blue Cross/Blue Shield plans, HMOs, and groups of dental care providers. Typically, the insurance pays a portion of the charges, and the subscriber pays the remainder.
Optical care insurance is another, relatively new benefit that many employ­ers are offering. Coverage can include visual examinations and a percentage of the costs of lenses and frames.

Payment for Time Not Worked

The “payment for time not worked” category of benefits includes paid vacations, bonuses given in lieu of paid vacations, payments for holidays not worked, paid sick leave, military and jury duty, and payments for absence due to a death in the family or other personal reasons.  As Figure 12-1 showed, these benefits ac­count for the largest portion of payroll costs--10.4 percent.

Vacations with Pay

It is generally agreed that vacations are essential to the well-being of an em­ployee. Eligibility for vacations varies by industry, locale, and organization size. To qualify for longer vacations of three, four, or five weeks, one may expect to work for seven, fifteen, and twenty years, respectively.
As shown in Figure 12-2, European professional and managerial personnel tend to receive more vacation time than do their U.S., Canadian, and Japanese counterparts. Although most countries have government mandates for employers to guarantee vacation time to workers, the United States and United Kingdom do not.

Paid Holidays

Both hourly and salaried workers can usually expect to be paid for ten holidays a year. The type of business tends to influence both the number and observance of holidays. Virtually all employers in the United States, however, observe and pay their employees for New Year’s Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. Many employers give workers an additional two or three personal days off.

(Insert Figure 12-2: Vacation Days: A Global Look)

Sick Leave

There are several ways in which employees may be compensated during periods when they are unable to work because of illness or injury. Most public employees, as well as many in private firms, particularly in white-collar jobs, receive a set number of sick-leave days each year to cover such absences. Where permitted, sick leave that employees do not use can be accumulated to cover prolonged ab­sences. Accumulated vacation leave may sometimes be used as a source of income when sick-leave benefits have been exhausted. Group insurance that provides income protection during a long-term disability is also becoming more common. As discussed earlier in the chapter, income lost during absences resulting from job-related injuries may be reimbursed, at least partially, through workers’ com­pensation insurance.

Severance Pay

A one-time payment is sometimes given to employees who are being terminated. Known as severance pay, itmay cover only a few days’ wages or wages forseveral months, usually depending on the employee’s length of service. Employers that are downsizing often use severance pay as a means of lessening the negative ef­fects of unexpected termination on employees.

Supplemental Unemployment Benefits

While not required by law, in some industries unemployment compensation is augmented by supplemental unemployment benefits (SUBs), which are financed by the employer. These plans enable an employee who is laid off to draw, in addi­tion to state unemployment compensation, weekly benefits from the employer that are paid from a fund created for this purpose. Many SUB plans in recent years have been liberalized to permit employees to receive weekly benefits when the length of their workweek is reduced and to receive a lump-sum payment if their employment is terminated permanently. The amount of benefits is deter­mined by length of service and wage rate. Employer liability under the plan is limited to the amount of money accumulated within the fund from employer contributions based on the total hours of work performed by employees.

Life Insurance

One of the oldest and most popular employee benefits is group term life insur­ance, which provides death benefits to beneficiaries and may also provide acci­dental death and dismemberment benefits. It is nearly universal in the United States, with over $4.24 trillion worth of employee and dependent coverage under group life insurance in force at the end of 1992. Group protection amounted to forty percent of life insurance in force in the United States at the end of 1992.

Retirement Programs

Retirement is an important part of life and requires sufficient and careful prepa­ration. In convincing job applicants that theirs is a good organization to work for, employers usually emphasize the retirement benefits that can be expected af­ter a certain number of years of employment. As we observed earlier in the chap­ter, each employee is typically given a annual personalized statement of benefits that contains information about projected retirement income from pensions, So­cial Security, and employee investment plans.

Retirement Policies

 

Prior to 1979, employers were permitted to determine the age (usually 65) at which their employees would be required to retire. A 1978 amendment to the Age Discrimination in Employment Act of 1967 prohibited mandatory retire­ment under the age of 70 in private employment and at any age in federal em­ployment. A 1986 amendment removed the ceiling age of 70 and prohibits age-based employment discrimination for ages 40 and older. Despite the law’s pro­vision for continued employment, there have not been an overwhelming number of older persons who remain on the job. In fact, a growing number of workers are retiring before age 65. Others choose partial retirement or work part-time for a period preceding complete retirement.
To avoid layoffs, particularly of more recently hired members of protected classes, and to reduce salary and benefit costs, employers often encourage early retirement. Encouragement comes in the form of increased pension benefits for several years or cash bonuses, sometimes referred to as the silver handshake. The cost of these retirement incentives can frequently be offset by the lower compen­sation paid to replacements and/or by a reduction in the workforce.
The major factors affecting the decision to retire early are the individual’s personal financial condition and health and the extent to which he or she re­ceives satisfaction from the work. Attractive pension benefits, possibilities of fu­ture layoffs, and inability to meet the demands of their jobs are also among the reasons workers choose to retire early.

Preretirement Programs

While most people eagerly anticipate retirement, many are bitterly disappointed once they reach this stage of life. Employers may offer preretirement planning programs to help make employees aware of the kinds of adjustments they may need to make when they retire. These adjustments may include learning to live on a reduced, fixed income and having to cope with the problems of lost prestige, family problems, and idleness that retirement may create.
Preretirement programs typically include seminars and workshops that include lectures, videos, and printed materials. Topics covered include pen­sion plans, health insurance coverage, Social Security and Medicare, personal financial planning, wellness and lifestyles, and adjustment to retirement. The numerous publications of the American Association of Retired Persons (AARP), including its popular magazine, Modern Maturity, are valuable sources of information.
The National Council on Aging has developed a retirement planning pro­gram for employers. Atlantic Richfield, Travelers Insurance, and Alcoa are among the more than seventy-five organizations using this program. In many communities, hospitals are developing resource centers for health and retirement planning. To help older workers get used to the idea of retirement, some organi­zations experiment with retirement rehearsal. Polaroid, for example, offers em­ployees an opportunity to try out retirement through an unpaid three-month leave program. They also offer a program that permits employees to gradually cut their hours before retirement. Employees are paid only for hours worked, but they receive full medical insurance and prorated pension credits. Most experts agree that pre-retirement planning is a much-needed, cost-effective employee benefit.28

Pension Plans

Originally, pensions were based on a reward philosophy, which viewed pensions primarily as a way to retain personnel by rewarding them for staying with the or­ganization until they retired. Those employees who quit or who were terminated before retirement were not considered deserving of such rewards. Because of the vesting requirements negotiated into most union contracts and more recently re­quired by law, pensions are now based on an earnings philosophy. This philosophy regards a pension as deferred income that employees accumulate during their working lives and that belongs to them after a specified number of years of ser­vice, whether or not they remain with the employer until retirement.
Since the passage of the Social Security Act in 1935, pension plans have been used to supplement the floor of protection provided by Social Security. The majority of private pension plans and a significant number of public plans inte­grate their benefits with Social Security benefits.
The decision whether or not to offer a pension plan is up to the employer. In 1950, 25 percent of the nation’s privately employed, full-time workers were cov­ered by traditional employer-financed pension plans. Today 47 percent of the workforce is covered by traditional pensions, 401(k) plans, and other savings plans. There has been a decrease in the percentage of men with pension plans because of corporate downsizings and fewer unionized manufacturing jobs. How­ever, because so many more women are working today, the share of women with their own coverage has increased greatly.29

Types of Pension Plans

There are two major ways to categorize pension plans: (1) according to contribu­tions made by the employer and (2) according to the amount of pension benefits to be paid. In a contributory plan, contributions to a pension plan are made jointly by employees and employers. In a noncontributory plan, the contributions are made solely by the employer. Most of the plans existing in privately held organi­zations are noncontributory, whereas those in government are contributory plans.
When pension plans are classified by the amount of pension benefits to be paid, there are two basic types: the defined-benefit plan and the defined-contribution plan. Under a defined-benefit plan, the amount an employee is to receive upon retirement is specifically set forth. This amount is usually based on the employee’s years of service, average earnings during a specific period of time, and age at time of retirement. While a variety of formulas exist for determining pension benefits, the one used most often is based on the employee’s average earnings (usually over a three- to five-year period immediately preceding retire­ment), multiplied by the number of years of service with the organization. A deduction is then made for each year the retiree is under age 65. As noted earlier, pension benefits are usually integrated with Social Security benefits.
A defined-contribution plan establishes the basis on which an employer will contribute to the pension fund. The contributions may be made through profit sharing, thrift plans, matches of employee contributions, employer-sponsored Individual Retirement Accounts (IRAs), and various other means. The amount of benefits employees receive on retirement is determined by the funds accumulated in their account at the time of retirement and what retirement benefits (usually an annuity) these funds will purchase. These plans do not offer the benefit-security predictability of a defined-benefit plan. However, even under defined-benefit plans, retirees may not receive the benefits promised them if the plan is not adequately funded.
The use of traditional defined-benefit plans, with their fixed payouts, is in decline. Defined-benefit plans are less popular with employers because they cost more and because they require compliance with complicated government rules. Some experts, however, believe that employers may want to consider returning to defined-benefit plans, which allow for flexibility in plan design such as opening paths for the advancement of younger employees while enabling older workers to retire.
The most significant change in pension coverage is the tremendous growth of tax-deferred 401(k) savings plans, which are named after section 401(k) of the Internal Revenue Code. Today even small firms often offer 401(k) savings plans. Also known as the salary-reduction plan, the 401(k) plan allows employees to save through payroll deduction--and possibly to have their contributions matched by the employer. Employees’ current taxable income is reduced by the
amount of the contribution, and income taxes on these funds and their earnings are deferred until after retirement.  For the majority of such plans, full vesting comes within five years. Once vested, participants who leave the job can roll over their account into a qualified plan such as another employer’s 401(k) plan or an Individual Retirement Account (IRA).  Highlights in HRM 3 shows how employees can increase their retirement savings using a 401(k) plan.

(Insert HIGHLIGHTS IN HRM: Maximizing Employee Savings with a 401(K) Plan)
1

Federal Regulation of Pension Plans

Private pension plans are subject to federal regulation under the Employee Re­tirement Income Security Act (ERISA).34 Although the act does not require employers  to establish a pension plan, it provides certain standards and controls for pension plans. It requires minimum funding standards to ensure that benefits will be available when an employee retires. It also requires that the soundness of the actuarial assumptions on which the funding is based be certified by an actuary at least every three years. Of special concern to the individual employee is the matter of vesting.
           Vesting is a guarantee of accrued benefits to participants at retirement age, regardless of their employment status at that time. Vested benefits that have been earned by an employee cannot be revoked by an employer. Under ERISA, all pension plans must provide that employees will have vested rights in their ac­crued benefits after certain minimum-years-of-service requirements have been met. However, employers can pay out a departing employee’s vested benefits if the present value of the benefit is small.
Three government agencies administer ERISA: the Internal Revenue Ser­vice (IRS), the Department of Labor, and the Pension Benefit Guaranty Corpo­ration (PBGC). The IRS is concerned primarily with qualified retirement plans-those that offer employers and employees favorable income tax treat­ment under a special section of the tax law. The Department of Labor’s main re­sponsibility is to protect participants’ rights.
About 40 million of the 76 million covered workers have their pensions in­sured by the federal government’s Pension Benefit Guaranty Corporation. Pen­sions in workplaces with fewer than twenty-five employees are not covered. The PBGC ensures that if a plan is terminated, guaranteed minimum benefits are paid to participants. The PBGC is supported by premiums paid by employers. It has become apparent, however, that employer contributions are inadequate to cover the increased use of Chapter 11 bankruptcy, which passes pension liabili­ties of firms on to the PBGC.
In 1984 the Retirement Equity Act (REA) amended ERISA.35 REA is in­tended to provide greater equity under private pension plans for workers and their spouses by taking into account changes in work patterns, the status of mar­riage as an economic partnership, and the substantial contributions made by both spouses. All qualified pension plans are affected by the act, which brought major changes in eligibility and vesting provisions, parental leave, spouse sur­vivor benefits, assignments of benefits in divorce cases, and other areas. If an employee declines to elect survivors’ benefits, the employer is required to inform prospective beneficiaries of this fact. The Deficit Reduction Act of 1984 has had a significant impact on employee benefits, such as pension and group insurance plans, in determining what is taxable and nontaxable to employees.36

 

Pension Portability

A weakness in most traditional pension plans is that they lack the portability to enable employees who change employment to maintain equity in a single pension. Before ERISA, unions sought to address this problem by encouraging  multiple-employer plans that covered the employees of two or more unrelated organizations in accordance with a collective bargaining agreement. Such plans are governed by employer and union representatives who constitute the board of trustees. Multiple-employer plans tend to be found in industries where the typical company has too few employees to justify an individual plan. They are also found more frequently in industries where there is seasonal or irregular employment. Manufacturing industries where these plans exist include printing, furniture, leather, and metalworking. They are also used in such nonmanufacturing industries as mining, construction, transport, entertainment, and private higher education.
Employees also have the opportunity to establish their own IRAs as a source of personal retirement benefits. Originally, Congress encouraged the use of  IRAs by permitting an employee to shelter from income tax the amount contributed to an IRA, but the Tax Reform Act of 1986 curtailed or eliminated deductible IRA contributions for most employees covered by employer-sponsored pension plans.

Pension Funds

Pension funds may be administered through either a trusteed or an insured plan. In a trusteed pension plan, pension contributions are placed in a trust fund. The investment and administration of the fund are handled by trustees appointed by the employer or, if the employees are unionized, by either the employer or the union. Contributions to an insured pension plan are used to purchase insurance annuities. The responsibility for administering these funds rests with the insur­ance company providing the annuities.
Private and public pension funds constitute the largest pool of investment capital in the world, with over $4 trillion in assets. Still, one cannot be compla­cent about the future. Social Security will be stretched thin as baby boomers age, and some private pensions may be vulnerable to poorly performing invest­ments. It should also be noted that the pension funds of some organizations are not adequate to cover their obligations.37 Such deficiencies present legal and ethical problems that must be addressed.
Current pension fund difficulties have been caused in part by the fact that the wages on which pension benefits are based today drastically exceed the wages on which pension fund contributions were based in earlier years. Further­more, those drawing pensions are living beyond the life expectancies on which their pension benefits were calculated.
While fund managers are supposed to invest funds where the return will be most profitable, employees often demand a greater voice in determining where pension funds will be invested. There is also a movement to have more pension funds diverted to investments that employees consider “socially desirable,” such as in home mortgages, health centers, child care centers, hospitals, and similar investments in areas where members live. Any policy of investing in socially de­sirable projects must give consideration to the provisions of ERISA, which re­quires that fiduciaries (fund managers) act solely in the interest of the participants and beneficiaries for the exclusive purpose of providing benefits. The act does, however, permit a consideration of incidental features of invest­ments, provided they are equal in economic terms.

 

Employee Services

Employee services provided by employers are generally not included in the bene­fit cost data compiled by the U.S. Chamber of Commerce. However, services, like other benefits, also represent a cost to the employer. The utility that em­ployees and employers derive from them, however, can far exceed their cost. In recent years new types of services are being offered to make life at work more re­warding and to enhance the well-being of employees.

 

Employee Assistance Programs

 

To help workers cope with a wide variety of problems that interfere with the way they perform their jobs, organizations have developed employee assistance pro. grams. An employee assistance program (EAP) typically provides diagnosis, counseling, and referral for advice or treatment when necessary for problems related to alcohol or drug abuse, emotional difficulties, and financial or family dif­ficulties. (EAPs will be discussed in detail in Chapter 13.) The main intent is to help employees solve their personal problems or at least to prevent problems from turning into crises that affect their ability to work productively. To handle crises, many EAPs offer twenty-four-hour hot lines.38

Counseling Services

An important part of an EAP is the counseling services it provides to employees. While most organizations expect managers to counsel subordinates, some em­ployees may have problems that require the services of professional counselors. Most organizations refer such individuals to outside counseling services such as family counseling services, marriage counselors, and mental health clinics. Some organizations have a clinical psychologist, counselor, or comparable specialist on staff, to whom employees may be referred. The methods used by professionals to counsel employees will be described in detail in Chapter 15. Managers should not only understand these methods but should develop some proficiency in using them.

Educational Assistance Plans

One of the benefits most frequently mentioned in literature for employees is the educational assistance plan. The primary purpose of this plan is to help employees keep up to date with advances in their fields and to help them get ahead in the organization. Usually the employer covers the costs of tuition and fees1 while the employee is required to pay for books, meals, transportation, and other expenses.

Child Care

The increased employment of women with dependent children has created an unprecedented demand for child care arrangements. In the past, working parents had to make their own arrangements with sitters or with nursery schools for pre­school children. Today benefits may include financial assistance, alternative work schedules, family leave, and on-site child care centers. On-site or near-site child centers are the most visible, prestigious, and desired solution.39
Hoffman-LaRoche has a center only one block from its Nutley, New Jersey, plant. The facility has several classrooms and uses innovative teaching methods. Among other companies that offer child care at the work site are Fel-Pro, Merck, Syntex, Baptist Hospital of Miami, and Ben & Jerry’s Homemade Ice Cream.40 According to Beth Wallace of B&J’s, many employee-parents have expressed the importance of having their children near them with quality child care. B&J bases its fee schedules on family income, with a specified cap on the charges.41
The most common child care benefit offered by employers is the dependent-care spending account. With this account, a portion of a worker’s pay before taxes is set aside for caring for a dependent. Child care is “the new benefit of the 1990s,” according to the president of America West Airlines. “It is a critical need that companies that can afford it will meet because it is the right thing to do. Even companies that have limited means may be forced to support child care from a competitive standpoint, to attract, retain, and motivate personnel.”

Elder Care

Responsibility for the care of aging parents and other relatives is another fact of life for increasing numbers of employees. The term elder care, as used in the con­text of employment, refers to the circumstance where an employee provides care to an elderly relative while remaining actively at work. The majority of care-givers are women.
Many experts believe the worries and distractions caused by elder care can be more damaging to productivity than child care problems. It is estimated that caregivers typically are absent 1.5 times more often than other employees who do not have this responsibility. But only 43 percent of 1,026 employers surveyed by Hewitt Associates (benefits consultants in Lincolnshire, Illinois) offer elder care benefits compared with 74 percent offering some kind of child care assistance.43
Some of the organizations that were among the first to provide elder care assistance are Marriott Corporation, American Security Bank, Pepsi, Pitney Bowes, Florida Power & Light, and Mobil Corporation. Elder care counseling, educational fairs and seminars, and distribution of printed resource material are the types of assistance offered in their programs.44 More recently employers have banded together for better elder care. The Partnership for Elder Care--a consor­tium of American Express Company, J. P. Morgan, and Philip Morris Company--and other companies use the resources of the New York City Department of Aging, a public information and agingsupport agency. Corporate funding helps tailor programs to employee needs.
AT&T has given grants to community organizations to recruit, train, and manage elder care volunteers where its employees live and work. Travelers Cor­poration is part of a consortium of Connecticut employers that trains family care workers and shares with employees the cost of three days’ in-home care for fam­ily emergencies.45 Interest in and demand for elder care programs will increase dramatically when baby boomers are in their early fifties, when they will be managing organizations and experiencing elder care problems with their own parents.46

 

Other Services

The variety of benefits and services that employers offer today could not have been imagined a few years ago. Some are fairly standard, and we will cover them briefly. Some are unique and obviously grew out of specific concerns, needs, and interests. Among the more unique benefits are $3 haircuts at Worthington In­dustries, $2,000 for earning a college degree at H. B. Fuller, four tickets to every game for employees of the Los Angeles Dodgers, and unlimited paid sick leave at Leo Burnett and Syntex. These examples represent only a few of the possibilities for benefits that go beyond those typically offered.47

 

Food Services

Vending machines represent the most prevalent form of food service program (87 percent of organizations), with cafeterias second (57 percent), according to a survey of organizational subscribers to Personnel Journal. Coffee trucks and lunch wagons rank third (15 percent). A few companies--Hewitt Associates, J. P. Mor­gan, and Northwestern Mutual Life even provide a free lunch.48 Most employers (81 percent) contract with an outside firm. Although $4.5 billion is spent on em­ployee food service, only 51 percent of the organizations indicated that a man­ager was employed to oversee this function. The HR department manages the program in 43 percent of the organizations; in 32 percent of the organizations, it has the responsibility for one or more decisions in this area.49
The HR staff's participation in food service arrangements would appear to provide it with an excellent opportunity to upgrade the quality of food service. A major problem with vending machines is that they often do not include the most nutritious types of foods. Quality nutrition is a key component of an organization’s wellness program, a topic to be discussed in the next chapter.

On-Site Health Services
                                               
Most of the larger organizations provide some form of on-site health services. The extent of these services varies considerably, but they are generally designed to handle minor illnesses and injuries. They may also include alcohol- and drug-abuse referral services, in-house counseling programs, and wellness clinics. will discuss these and related programs in detail in the next chapter.

Legal Services

One of the fastest-growing employee benefits is the prepaid legal service plan. There are two general types: access plans and comprehensive plans. Access plans provide free telephone or office consultation, document review, and discounts on legal fees for more complex matters. Comprehensive plans cover other services such as representation in divorce cases, real estate transactions, and civil and criminal trials.

Financial Planning

One of the newer benefits is financial planning. As yet offered primarily to execu­tives and middle-level managers, it is likely to become available to more em­ployees through flexible benefits programs. Such programs cover investments, tax planning and management, estate planning, and related topics.

 

Housing and Moving Expenses

The days of “company houses” are now past, except in mining or logging opera­tions, construction projects in remote areas, and the armed forces. However, a variety of housing services is usually provided in nearly all organizations that move employees from one office or plant to another in connection with a trans­fer or plant relocation. These services may include helping employees find living quarters, paying for travel and moving expenses, and protecting transferred em­ployees from loss when selling their homes.

 

Transportation Pooling

Daily transportation to and from work is often a major concern of employees. The result may be considerable time and energy devoted to organizing car pools and scrambling for parking spaces. Many employers, like the Arizona Public Ser­vice Company and RCA in Bloomington, Indiana, attempt to ease conditions by offering transportation in vans. Employer-organized van pooling is common among private and public organizations with operations in metropolitan areas. Many employers report that tardiness and absenteeism are reduced by van pooling.

 

Purchasing Assistance

Organizations may use various methods to assist their employees in purchasing merchandise more conveniently and at a discount. Retailers often offer their em­ployees a discount on purchases made at the store. Most firms sell their own prod­ucts at a discount to their employees, and in some instances they procure certain items from other manufacturers that they then offer to employees at a discount.

Credit Unions

Credit unions exist in many organizations to serve the financial needs of em­ployees. They offer a variety of deposits as well as other banking services and make loans to their members. Although the employer may provide office space and a payroll deduction service, credit unions are operated by the employees un­der federal and state legislation and supervision. At the end of October 1994 there were 12,619 credit unions in the United States with 66.9 million members and combined assets of $300 billion. In almost all credit unions, deposits are in­sured up to $100,000 per account by the National Credit Union Share Insurance Fund, a U.S. government agency.50

 

Recreational and Social Services

Many organizations offer some type of sports program in which personnel may participate on a voluntary basis. Bowling, softball, golf, baseball, and tennis are quite often included in an intramural program. In addition to intramurals, many organizations have teams that represent them in competitions with other local organizations. Memberships or discount on membership fees at health clubs and fitness centers are also popular offerings. (See Chapter 13.)
Many social functions are organized for employees and their families. Em­ployees should have a major part in planning if these functions are to be success­ful. However, the employer should retain control of all events associated with the organization because of possible legal liability. For example, in Florida and California employers may be held liable for injuries to third persons caused by an employee’s actions arising within the course and scope of employment. Thus acci­dents occurring while an employee is driving to or from an employer-sponsored event that the employee was encouraged to attend could trigger liability for an employer.51

 

Awards

Awards are often used to recognize productivity, special contributions, and ser­vice to an organization. Typically they are presented by top management at special meetings, banquets, and other functions where the honored employees will receive wide recognition. While cash awards are usually given for cost saving suggestions from employees, a noncash gift is often a more appropriate way to recognize special achievement. For example, travel has emerged as an important part of many sales incentive programs. An all-expense-paid trip for two to Paris is likely to be a unique and more memorable experience than a cash gift. An ex­tensive discussion of awards is included in Chapter 14.

 

SUMMARY

Since the 1930s benefit programs have expanded in terms of types of benefit offered and their costs, so that today’s employees receive a sizable portion of their compensation in the form of benefits. Initially, employers offered benefits to discourage unionization, but as the unions became stronger they were able to obtain additional benefits. Prohibited from raising wages during and after World War II, employers found that they could retain their employees by provid­ing benefits. Now benefits are an established and integral part of the total com­pensation package. In order to have a sound benefits program there are certain basic considerations. it is essential that a program be based on specific objectives that are compatible with organizational philosophy and policies as well as afford­able. Through committees and surveys a benefit package can be developed to meet employees’ needs. Through the use of flexible benefit plans, employees are able to choose those benefits that are best suited for their individual needs. An important factor in how employees view the program is the full communication of benefits information through meetings, printed material, and annual person­alized statements of benefits.
According to a 1994 study, the costs of employee benefits in that year averaged 41.3 per cent of payroll or $14,807 per employee. Since many of the benefits represent a fixed cost, management must pay close attention in assuming more benefit expense. Increasingly, employers are requiring employees to pay part of the costs of certain benefits. Employers also shop for benefit services that are competitively priced.
Nearly a quarter of the benefits package that employers provide is legally re­quired. These benefits include employer contributions to Social Security, unem­ployment insurance, workers' compensation insurance, and state disability insurance. Social Security taxes collected from employers and employees are used to pay three major types of benefits: (1) old-age insurance benefits, (2) dis­ability benefits, and (3) survivors' insurance benefits.
The cost of health care programs has become the major concern in the area of employee benefits. Several approaches are used to contain health care costs, including reduction in coverage, increased coordination of benefits, increased deductible or copayments, use of health maintenance and preferred provider or­ganizations, incentives for outpatient surgery and testing, and mandatory second opinions where surgery is indicated. Employee assistance programs and wellness programs may also contribute to cutting the costs of health care benefits.
Included in the category of benefits that involve payments for time not worked are vacations with pay, paid holidays, sick leave, and severance pay. In most countries, other than the United States and the United Kingdom, the government mandates that the employer guarantee vacation time to workers. The typical practice in the United States is to give twenty days' vacation leave and ten holidays. In addition to vacation time, most employees, particularly in white-collar jobs, receive a set number of sick-leave days. A one-time payment of sever­ance pay may be given to employees who are being terminated.
Prior to 1979 employers were permitted to determine the age (usually 65) at which their employees would be required to retire. While there is now no ceiling, a growing number of workers choose to retire before age 65. Many employers provide incentives for early retirement in the form of increased pension benefits or cash bonuses. Some organizations provide preretirement programs that may in­clude seminars, workshops and informational materials The National Council on Aging, the American Association of Retired Persons, and many other organi­zations are available to assist both employers and employees in preretirement activities.
Whether or not to offer a pension plan is the employers’ prerogative. How­ever, once a plan is established it is then subject to federal regulation under ERISA to ensure that benefits will be available when an employee retires. While there are two types of plans available--defined benefit and defined contribu­tion--most employers now opt for the latter. The amount an employee receives upon retirement is based on years of service, average earnings, and age at time of retirement. Pension benefits are typically integrated with Social Security bene­fits. One of the most significant trends is the growth of 401(k) salary reduction plans. Pension funds may be administered through either a trusteed or an insur­ance plan. While ERISA requires that funds be invested where the return will be the greatest, employees often demand a voice in determining where funds will be invested.
The types of service benefits that employers typically provide include em­ployee assistance programs, counseling services, educational assistance plans, child care, and elder care. Other benefits are food services, on-site health ser­vices, prepaid legal services, financial planning, housing and moving, transpor­tation pooling, purchase assistance, credit unions, social and recreational services, and awards.