Trends in Employee Benefits
BEYOND THE FRINGE, BENEFITS PLANS FOR TODAY'S WORKFORCE
Everyone has his or her own reasons for working, and pay usually is among the most important. Not surprisingly, though, many workers list other factors that are almost equally strong motivations. These can range from opportunities to grow or learn new skills to a sense of community and purpose to more tangible benefits, such as health insurance, flexible work schedules, and provisions for retirement.
BEYOND THE FRINGE
What were once popularly referred to as "fringe benefits" came into prominence during World War II. In the face of federal wage controls to curb inflation, employers began to offer benefits to attract, motivate, and retain employees. Eventually, these various benefits programs, instead of being on the fringe of a worker's compensation, became an expected and valuable part of a complete employment package.
Today the formal benefits programs offered to employees generally make up roughly one third of the average worker's total compensation, depending on the size, profitability, and philosophy of a given employer. When these programs are properly planned and promoted, they yield attractive advantages for both employees and employers.
Advantages to Employees
Most workers prefer receiving benefits as part of their overall compensation because certain benefits programs offer economic advantages that salary alone cannot. A pension plan, for example, guarantees income after retirement. Various insurance plans provide security for workers and their families in case of disability or death.
Programs such as these have the added feature of lower cost; negotiated group rates for insurance, for example, are almost always less expensive than individually purchased premiums. This feature is even more attractive if the employer picks up all or a portion of the premium.
Subject to certain limitations, many benefits such as employer-paid health insurance, life insurance, and child care do not count as taxable income to the employee. Still other benefits, such as money that an employer contributes toward a pension plan, are tax deferred. Because an employee does not pay income tax on the money until he or she receives it after retirement, the income likely will be taxed at a lower rate.
Fred Wish is a human resources consultant with more than twenty years of corporate experience in the financial services, health care, and publishing industries.
Advantages to Employers
Most employers understand that well-designed benefits programs that address the needs of employees can have a measurable effect on productivity. Moreover, an attractive benefits package, for the reasons outlined above, is a powerful recruiting tool for employers looking to hire and keep talented workers. Finally, benefits tend to reduce the pressure to raise salaries. Enhancing an existing program or adding a new benefit can accomplish the same business goals as increasing pay rates, but at a fraction of the cost to the employer.
Just as employees enjoy significant tax advantages from their participation in certain benefits plans, benefits offer tax breaks to employers as well. Subject to a number of conditions and limits, employers can claim a deduction for what they spend on employee health insurance, life insurance, certain retirement plans, and other benefits.
BENEFITS PLANS FOR TODAY'S WORKFORCE
Although the basic shape and intent of benefits programs have remained the same for the past twenty-five years or so, new developments and revisions to existing programs have occurred because of changes in the general business environment. Among the factors affecting benefits offerings are shifts in workforce demographics, new legislation, and the rising cost of medical care.
In the five decades from the early 1950s to the first years of the twenty-first century, the number of women in the workforce increased dramatically, leading to increased programs designed to help working mothers. In the early 1950s fewer than 30 percent of women worked outside the home. In 2004 nearly half of U.S. workers (46.8 percent) were women. Almost two thirds (62.2 percent) of women with children under six years of age were in the civilian labor force in 2004, a significant increase from 18 percent in the mid-1950s. This change has resulted in greater emphasis on day care, flexible work schedules, and leaves of absence to care for children.
Longer life spans and the number of baby boomers (people born in the years immediately following the end of World War II) approaching retirement age also will lead to changes in worker benefits. Employee pension plans will take on greater importance. Younger employees also will need a source—presumably through their employers—of affordable elder care and time off to care for aging parents.
Legislation passed during the 1990s, such as the Americans with Disabilities Act, the Family and Medical Leave Act, and the Health Insurance Portability and Accountability Act, placed additional pressure on benefits programs; some states also have passed similar legislation. Other statutory benefits programs provide a basic level of protection for nearly all American workers.
Social Security is a federal program funded by employer contributions and payroll deductions. Its intent is to provide a fixed monthly benefit for retirees age sixty-five and older, although benefits can begin earlier under certain circumstances, such as disability. The level of payment depends on the length of time the individual has worked.
Unfortunately, Social Security cannot be considered an adequate source of retirement income, and it was never intended to be. If people do not have other means of generating income, they will struggle in later years to make ends meet. The larger number of people drawing money from the Social Security system due to increased longevity and the large baby boom population will continue to place pressure on the availability of Social Security funding. In 2006, the social security board of trustees projected that by 2017 the Social Security system will be paying out more than it is taking in and that social security trust funds will be exhausted by 2040. To help ease this strain on the system, in 1983 Congress ruled that the age at which retirees begin receiving full Social Security benefits would begin to rise in 2003. The required age was increased incrementally depending on year of birth; those who turned sixty-five in 2003 or 2004 had to wait only a few extra months past their birthday before beginning to collect full benefits. However, those born between 1943 and 1954 must wait until they are sixty-six, and those born in 1960 or later must wait until they are sixty-seven.
Congress is exploring other possible solutions to this dilemma, including paying benefits based on need, further increasing the age at which full benefits begin, and instituting voluntary programs that can provide for larger individual contributions.
All states have an unemployment program. Unemployment compensation provides a minimal level of income for people who lose their jobs involuntarily. The benefit is paid for a limited time, generally twenty-six weeks, to those who have worked for a specified period. Although eligibility requirements vary from state to state, people generally must be available for work and able to demonstrate that they are actively seeking employment. In addition, many states offer continued benefits to recipients while they participate in job retraining programs.
During periods of high unemployment, states offer thirteen to twenty weeks of extended benefits. However, some workers who qualify for regular benefits are not eligible for the extended program. Length of benefits and terms of eligibility vary by state.
The rules and levels of benefits regarding workers' compensation programs also vary by state, but they usually contain these common features: full payment of medical and rehabilitation costs for covered conditions, disability payments, and death benefits. These programs face the same economic pressures as others that have health care provisions, with costs threatening to outpace the ability to fund them.
Medical and Health Benefits
Medical insurance is what most people think of when they hear the word "benefits." It is such a common and expected part of a total employment package that many small businesses as well as large corporations offer it. Coverage under most employer-sponsored medical plans is available to the employee and his or her family. These plans traditionally cover most medical, hospital, and surgical expenses.
Types of Coverage
Most employers still offer conventional health care coverage through commercial insurance companies or not-for-profit agencies such as Blue Cross and Blue Shield. Conventional health insurance plans usually have two parts: basic medical coverage and major medical coverage. Basic coverage pays for most medical visits and other services up to a certain dollar limit. Major medical plans, designed to protect against large bills or catastrophic illness, take over when basic insurance runs out. They cover all medical costs, usually up to a certain lifetime amount.
Some employers offer complete, or "first dollar," coverage; others offer less generous plans. The most common plans offer no reimbursement unless an employee's medical costs exceed a set annual deductible ($200 to $300 is fairly typical), which comes out of the employee's pocket. Other plans, known as "coinsurance plans," pay a certain percentage (most commonly, 80 percent) of the employee's medical expenses, leaving the employee responsible for the rest. Many insurance plans incorporate a combination of deductible and coinsurance plans.
The costs of traditional plans are prohibitive for many employers. The 1990s saw the rise of health maintenance organizations (HMOs). HMOs provide comprehensive health care coverage to employers at a fixed rate, which make them a popular alternative to the traditional, or indemnity, plans. While HMOs are costeffective for employers, employee reaction to them has been mixed. Employee costs are generally less than with a traditional plan, but the restrictions on choices of physicians and hospitals is a source of dissatisfaction for some. In recent years there has been a decline in HMO enrollment. According to a report published in 2001, in the years between 1996 and 2001 HMO enrollment fell from 31 percent of employees to 23 percent. Many employers offered a variety of managed care arrangements to allow their employees a greater degree of flexibility in choosing coverage; during that same time period, enrollment in point of service (POS) and preferred provider organization (PPO) plans showed marked increases.
Some employers contract with HMOs or other organizations to provide preventive programs. These "wellness programs," as they are known, typically consist of health screenings such as cholesterol and blood pressure tests, weight loss or smoking cessation courses, and fitness training. Some large companies offer on-site exercise facilities. Companies are finding that a small investment in preventive health programs can reduce health insurance costs and costs associated with absenteeism.
Flexible Spending Accounts
A large number of employers also offer a way for their employees to afford medical expenses that are not covered by their health insurance plans. These flexible spending accounts allow employees to have deductions made on a pre-tax basis from their paychecks. While the IRS puts no limit on the deduction amount, most companies set the limit somewhere between $2,500 and $5,000. During the year, as employees incur non-reimbursable medical expenses such as deductibles, charges for elective surgery, mileage, and the like, they can draw on the flexible spending account. The tax advantages of arrangements such as these can be significant. The major drawback to the plan has been that tax rules dictate that any funds left in the account at the end of the year are forfeited, which requires advanced planning and realistic anticipation of expenses on the employee's part.
However, a new type of plan approved by the IRS in 2002, health reimbursement arrangements (HRAs), offered an attractive alternative to flexible spending accounts. In an HRA an employer funds an account for the employee's medical expenses. Any funds not used in the account may be rolled over from year to year. If the funds in the account are exhausted, the employee generally must pay for medical expenses until a deductible is met, after which time the employer covers the majority of medical costs, generally 80 percent or 90 percent.
Adjusting to Higher Health Care Costs
The difficult economy has created a challenge for employers, who face balancing the need to provide competitive health care coverage with the need to contain costs. In addition to instituting alternatives such as PPO or POS plans, some employers concerned with watching costs encourage employees to seek less costly forms of health care. Some require mandatory second opinions, shorter hospitalizations, and a greater reliance on outpatient surgery in order to provide an attractive level of coverage that still meets budgetary requirements. Overall, rising health care costs have translated to higher contributions for employees. According to the National Coalition on Health Care, insurance premiums increased by 10 percent in 2005. This increase was nearly three times the rate of inflation. The annual family health plan premium averaged $10,800.
Federal Health Care Legislation
In the past, Americans who lost their jobs and their insurance had little choice: They could either buy prohibitively expensive private insurance, if eligible, or they could cross their fingers and hope that neither they nor their families became ill or injured. Existing medical problems of employees or family members often were not covered under a new employer's plan.
Two major pieces of federal legislation were enacted to lessen the economic effect of these problems. In 1985 the Consolidated Omnibus Budget Reconciliation Act (COBRA) required employers to continue an employee's existing level of health care coverage for up to eighteen months (three years in some cases) after the employment relationship ended. Under COBRA, employers may charge their former employees 102 percent of the total premium, but in most situations that group rate is cheaper than individual coverage. However, only 7 percent of the unemployed can afford to pay for COBRA health insurance, since premiums average almost $700 a month for family coverage. The Health Insurance Portability and Accountability Act (HIPAA) of 1996 guarantees workers with existing health insurance uninterrupted coverage when they change jobs. It also sets a limit on how long employers can exclude coverage for preexisting conditions. Unfortunately for employers and employees alike, federal regulations pertaining to HIPAA have been slow to materialize, and there is still much guesswork involved when it comes to applying HIPAA provisions in a practical manner.
Individual states have passed their own laws pertaining to health insurance for lower wage earners, and the Federal Balanced Budget Act of 1997, along with supporting legislation, contains health care provisions that extend beyond the workplace.
Disability and Life Insurance
After health insurance, the two most common types of insurance that employers offer are disability and life insurance. To provide interim income when an employee becomes ill or injured, many employers offer disability insurance, which may be employer-paid, employee-paid, or shared. Disability coverage is private insurance, as distinguished from Social Security disability or workers' compensation coverage. A typical disability plan, when combined with any statutory insurance such as Social Security disability or workers' compensation for which the employee qualifies, pays about 60 percent to 65 percent of base salary until the employee is medically able to return to work. For extended disability periods of six months or more, employers may also offer long-term coverage, either as an extension of the basic plan or as an added option.
Life insurance is generally offered as either a free or low-cost coverage. Under a standard arrangement, the designated beneficiary receives one or two times the employee's annual salary upon the latter's death. Popular variations include optional coverage for dependents and the ability to purchase additional levels of coverage. At these levels, employees may be responsible for paying tax on a portion of the life insurance premium. One innovative approach is for employers to purchase insurance for their workers and maintain rights to a portion of the death benefit. These company-owned insurance policies are offered on a voluntary basis and can help provide an extra level of protection at no cost to the employee.
Although the rules for pension plans vary widely from employer to employer, the intent is the same: to give an incentive to employees who make a long-term commitment to their workplace by providing them with a post-retirement income. Most pension plans require that employees work a certain number of years (generally five) before they are entitled to a pension. At this point the worker is considered vested in his or her pension, which means he or she has irrevocable ownership in the eventual benefit. Because the tenure of an employee in U.S. business is a median four years, a great number of workers never reach a point where they qualify for a pension.
Employers do not have to offer pension plans. However, the Employee Retirement Income Security Act of 1976 (ERISA) regulates pension plans to ensure that they are managed appropriately and that their members receive adequate information about how the funds are run. It also sets limits on annual contributions to both types of plans available: "defined benefit plans" and "defined contribution plans."
Defined Benefit Plans
Defined benefit plans specify the amount of money an employee will receive at retirement. For most plans, this amount is based on the employee's years of service and average salary before retirement, although there are several combinations of rules that an employer may institute to calculate the benefit. One popular variation is the coordination of benefits with Social Security, which helps reduce the amount the employer contributes to the pension plan while still meeting the obligation to employees.
Defined Contribution Plans
With defined contribution plans, there is no fixed amount of money the employee receives as a retirement benefit. Instead, the employee, and often the employer, contributes money to a fund that is used for investments in stocks or other securities. The eventual payout for employees depends on how well the investments have done. As the economy went into high gear in the mid-1990s, these plans became increasingly popular. While participation in defined benefit plans declined, the percentage of workers in defined contribution plans grew from 42 percent in 1999 to 50 percent in 2004.
Among the more common types of defined contribution plans is the "money purchase plan." In this plan, the employer contributes a fixed amount to the fund, and employees may add their own contributions.
In "thrift" and 401(k) plans, the employee makes the fixed contribution, and the employer may match it in whole or in part. A 401(k) plan (or 403(b) plan, a similar option many nonprofit organizations offer their employees) is also known as a salary deferral plan because employee contributions are made on a pretax basis, with distribution and tax liability normally deferred until the employee reaches 59½ years of age.
As an addendum to, or in lieu of, these plans, a large number of employers offer plans in which the contribution is tied to the financial performance of the company. The most popular forms of this arrangement are the profit sharing plan and the employee stock ownership plan.
Despite the range and flexibility of these programs, employees should keep in mind that such plans and available Social Security benefits will provide only a portion of the income needed for a comfortable retirement. To form a complete retirement package, an employee should make an effort to supplement these benefits with individual savings and investments.
Other Financial Benefits
Many companies offer performance-based incentives to employees. These benefits are more commonly in the form of cash, but travel or automobiles at the high end or more modest enticements, such as electronic equipment, artwork, or sports gear, have also been used. Instead of merely recognizing an individual's contribution, a trend that developed in the 1990s among employers was to reward team effort with bonuses in one form or another for a group of workers. Some of these rewards were based on a formal agreement regarding the achievement of some specific goal, whereas others are discretionary in nature—the occasional "pat on the back" for a job well done.
Many employers use signing bonuses to attract employees. The College Journal reported that in 2005, the average signing for a recent MBA was $17,428. This recruiting tool was once limited to upper-level managers and executives; however, during the tight labor market of the mid- to late-1990s bonuses were offered to employees in other positions as well. The practice of offering signing bonuses is becoming less common, however. A recent study found only 13 percent of management-level employees received signing bonuses in 2005.
Tuition reimbursement programs are meant to encourage employees to continue their educations. These programs were common among large private employers in the late 1990s, but in recent years many companies were forced to reduce or suspend them for economic reasons. Tuition assistance is often included in collective bargaining agreements for public-sector employees, particularly contracts that cover teachers.
Although child care—and particularly employer-sponsored day care centers—is a much sought after benefit, all but the largest employers find it prohibitively expensive to offer a comprehensive program. As a more affordable alternative, some employers offer flexible spending accounts for child care. These programs cost the employer very little; the employee pays regular amounts into the account and then draws on it as needed to meet child care expenses.
Programs such as these aid the parent-employee in several ways. Because the payments are made via payroll deduction, they provide a "painless" way of budgeting for child care expenses. In addition, almost all such programs offer significant tax advantages because the contribution is taken on a pre-tax basis, which reduces gross income and, as a result, the amount of income tax owed. The same caution applies to these plans as to the flexible spending accounts for non-reimbursable funds left in the account at the end of the year are forfeited.
Employee Counseling and Professional Services
Employee assistance programs (EAPs) came into prominence in the 1980s and offer confidential counseling by referring employees with personal or workr-elated problems to mental health professionals. Although most people think of EAPs as dealing primarily with alcohol or drug dependencies, they also assist with counseling on financial or legal difficulties that interfere with on-the-job performance. These services may be offered through an in-house health department or contracted to an outside professional organization. Employers view counseling as a relatively inexpensive way to prevent health and work-related problems. Well-run EAPs can result in increased productivity, fewer legal bills, and higher morale.
Some employers also offer other professional services to employees at little or no cost. These may include services such as tax consulting or investment and pre-retirement counseling.
Most employees are accustomed to receiving a number of paid holidays and some vacation or personal days. In addition, most employees are entitled to a certain amount of paid sick leave.
Companies with fifty or more employees within a certain geographic radius are subject to the Family and Medical Leave Act (FMLA), signed into law in 1993. The FMLA requires employers to allow workers to take up to twelve weeks of unpaid leave during any twelve-month period to care for their families. This leave may be used for caring for a newborn, a child who has just been adopted, or any close relative who is suffering from a serious health condition. Employees may also use it to receive treatment for serious medical conditions that prevent them from performing their jobs. Under FMLA, workers must be reinstated in their jobs or equivalent positions (with equal benefits and pay) when they return to work. Several states have enacted similar legislation that acts in concert with FMLA to provide additional protection for employees.
Alternate Work Schedules
Flexible work schedules, often called "flextime," have become an increasingly popular benefit, especially in two-career families. Under a flextime policy, employees work a set number of hours, but they may do so on a schedule other than the standard nine-to-five workday. They may, for example, come in early and leave early, work four ten-hour days, or work weekends in order to add days to their vacation.
Telecommuting has become another popular, low-cost benefit that can work to the advantage of employer and employee. With the availability of computers and fax machines, along with easy access to the Internet, jobs that do not require an employee to be physically present in the office are on the rise.
Despite the advantages, employers must apply their telecommuting policies carefully. Telecommuting employees may feel alienated from the rest of the workforce. Those who find it difficult to work without supervision may see their productivity suffer. In addition, the technical proficiency required to be a successful telecommuter may mean additional training for the employee (and additional expense for the employer).
In many families, both the husband and the wife have full-time jobs that offer health insurance plans, life insurance plans, and other benefits for themselves and their children. Rather than getting some of the same benefits from both employers, many couples prefer to choose which benefits they will receive. Employers, who benefit from the favorable tax treatment afforded these "cafeteria" plans, or flexible benefit plans, have responded to this need.
Originally, cafeteria plans offered only limited choices in health coverage. However, today's plans have evolved into comprehensive programs. For example, under some plans, employees can trade vacation days for disability insurance or prepaid legal services. They may choose to forgo all benefits and take cash payments instead. Congress has given cafeteria plans favorable tax status to encourage their use and development.
Adjusting to Changing Times
The American workplace has seen sweeping economic changes over the past two decades. The period from 1991 to 2001 was the longest period of growth in United States history. The economic downturn that followed hit Americans hard—by June 2003 the unemployment rate was 6.4 percent, the highest since the early 1990s. The jobless percentage then began a slow but steady decline, however, and was down to 4.7 percent by April 2006.
Rising health care costs have been another area of increasing concern. In 2004 national health expenditures rose 7.9 percent over the previous year, more than three times the rate of inflation. In 2004 the total spending on health expenditures was $1.9 trillion, or $6,280 per person in the United States.
To a degree, new legislation and negotiated collective bargaining agreements mandated some changes in benefits programs in the past decade. For the most part, however, changes have arisen out of business necessities. The economic climate has forced employers to institute unpopular changes, such as increasing medical premiums and eliminating or reducing "non-essential" benefits. Ultimately, all employers will face the challenge of finding ways to develop, and to pay for, new benefits that meet workers' needs.
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