Designing and Administering Benefits

1. 12 Designing and Administering Benefits

2. Challenges • Understand the significance of employee benefits to both employers and employees. • Design a benefits package that supports the firm’s overall compensation strategy and other HRM policies. • Distinguish between a defined benefit retirement plan and a defined contribution retirement plan and recognize the situations in which each is most appropriate. • Explain how traditional health insurance plans and managed-care health insurance plans work and the advantages and disadvantages of each.

3. Challenges (cont.) • Develop cost-containment strategies for the different types of employee benefits. • Understand the administrative complexities of providing a full array of benefits to the work force and suggest ways to deliver benefits effectively. • Recognize the HR department’s key role in keeping accurate records of employee benefits and informing employees about their benefits.

4. Benefit Strategy Considerations • Mix of benefits • Amount (total cost) • Flexibility

5. How the Benefit Dollar Is Spent Medical and Medically Related Benefits 23.1% Payment for Time Not Worked 24% Life Insurance 1% Miscellaneous (discounts, educational assistance, etc.) 3.2% Legally Required 29.6% Retirement and Savings Plans 13.6% Paid Rest Periods 5.5%

6. Cost of Employee Benefits in the United States, 1929-1993 1993 41.0 33.8 1984 1975 30.0 21.5 1965 Year 17.0 1955 3.0 1929 0 5 10 15 20 25 30 35 40 45 Percent of Employer Payroll

7. Percentage of Employers Providing Selected Benefit Plans Medium and Large Private Firms1 1993 Small Private Firms2 1994 State and Local Governments3 1990 Health Insurance Retirement Plans Defined Benefit Plans Defined Contribution Plans Insurance Plans Life Insurance Long-term Disability Insurance Time-off Plans Paid Vacations Paid Holidays Paid Sick Leave Flexible Benefits Plans 76 50 57 87 43 95 89 56 13 64 15 38 62 22 86 80 50 4 87 91 9 87 30 66 73 94 5 1Firms employing 100 workers or more. 2Firms employing fewer than 100 workers. 3Data for 1990 are the most recent available.

8. Legally Required Benefits • Social Security • Retirement Income • Disability Income • Medicare • Survivor Benefits • Workers’ Compensation • Unemployment Insurance • Unpaid Leave

9. Social Security Benefits Benefit Eligibility Provisions Retirement income Disability income Medicare Survivor benefits • Age 65 (full benefits) • or • Age 62-64 (benefits reduced • up to 20%) • Totally and continuously • disabled for 5 months. • Disability should be expected • to last at least 12 months or • result in death. • Age 65 • or • Receiving Social Security • disability payments for • 24 months. • Family members of the • deceased person, including • widow or widower age 60 • or over, child or grandchild • under age 18, or dependent • parent age 62 or over. Monthly payments for life beginning at retirement. Average benefit provides about 30% of earnings prior to retirement. Monthly payments comparable to retirement benefits as long as totally disabled. Provisions for payments to dependents. Covers hospital expenses, nursing home and home health agency ex- penses, subject to a deductible payment. Medical expenses are covered, subject to monthly premium. Monthly payments related to the deceased worker’s primary Social Security retirement benefit.

10. Voluntary Benefits Health Insurance • Traditional Health Insurance • Health Maintenance Organizations (HMOs) • Preferred Provider Organizations (PPOs) • Health Insurance Coverage of Employees’ Partners • Retirement Benefits • Defined Benefit Plans • Defined Contribution Plans • 401(k) Plan • IRA • SEP • Profit-Sharing Keogh Plan • Hybrid Pension Plans

11. Voluntary Benefits (cont.) • Insurance Plans • Life Insurance • Long-Term Disability Insurance • Paid Time Off • Sick Leave • Vacations • Severance Pay • Holidays and Other Paid Time Off • Employee Services

12. A Comparison of Defined Contribution Retirement Plans Tax Break on Contributions/ Earnings Maximum Contribution Plan Available to Appropriate for 401(k) IRA SEP Profit- Sharing Keogh Employees of for-profit businesses Anyone with earned income The self-employed and employees of small businesses The self-employed and employees of unincorporated businesses Everyone who qualifies Those without company pension plans or who have put max. into co. plan Self-employed person who is a sole proprietor Small-business owner who is funding a plan for self and employees 15% of salary up to $10,500 in 2000 100% of salary up to $2,000; $4,000 if joint with spouse 15% of gross self- employment in- come or $30,000, whichever is less Same as SEP Yes/Yes Sometimes/ Yes Yes/Yes Yes/Yes

13. Personal Account versus Deferred Compensation Plan Deferred Compensation Plan Personal Account Salary Set Aside Annually ($100/mo.) Less Taxes (28%) Net Amount Invested Annually $1,200 336 864 $1,200 0 1,200 $141,761 $67,514 $57,266 $31,933 $18,128 $11,609 $1,251 $891 Account Value at the end of:

14. Annual Number of Vacation Days in Various Countries for Employees with One Year of Service Austria Canada France Japan Netherlands Spain United Kingdom

15. Selected Tax-Free or Tax-Preferred Employee Benefits or Services 1. Charitable contributions 2. Counseling * Financial * Legal * Psychiatric/psychological 3. Tax preparation 4. Education subsidies 5. Child adoption 6. Child care 7. Elder care 8. Subsidized food service 9. Discounts on merchandise 10. Physical awareness and fitness programs 11. Social and recreational opportunities 12. Parking 13. Transportation to and from work 14. Travel expenses * Car reimbursement * Tolls and parking * Food and entertainment reimbursement 15. Clothing reimbursement/ allowance 16. Tool reimbursement/allowance 17. Relocation expenses 18. Emergency loans 19. Credit union 20. Housing 21. Employee assistance programs 22. On-site health services 23. Credit unions

16. Selected Methods of Employee Benefits Communication Colorful Fliers or Newsletters Can be mailed to employees’ homes so they can read them at leisure. Payroll Stickers or Posters Stimulate employees’ curiosity, and are especially good for calling attention to an enrollment period. Wallet Cards Provide important numbers, such as a toll-free employee assistance program number. Audio-Visual Presentations Slides and videos that present concepts in an upbeat fashion can ensure that employees at different locations receive the same information.

17. Selected Methods of Employee Benefits Communication (cont.) Toll-Free Number Lets employees call to enroll in a benefits program or hear automated information about these programs 24 hours a day. Computer Software Package Allows employees to play “what-if” scenarios with their benefits. For example, they can determine the amount that will be deducted from their paychecks if they enroll in medical plan A as opposed to plan B, or how much money they would save by age 60 if they contribute 6% a year to the 401(k) plan. Benefits Web Sites Lets employees access information about their benefits from home, a hotel, or anywhere with an Internet connection.