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The Employee Benefits Environment

Over the past hundred years, significant, pervasive, and comprehensive changes in the field of employee benefits have occurred. Shifts in society, technology, politics, economy, business, and management have all contributed to these changes.

Changes in Society

With the advent of the industrial revolution, while businesses remained primarily self-sufficient and family owned, there was a movement from small, rural, agricultural enterprises to craft-based enterprises. In this environment, workers who were not relatives of the owners were rarely employed.

Further changes occurred with the introduction of manufacturing. Work-seekers moved from rural environments to urban. Gone were familial protections available in rural settings. Most workers’—and their families’—living needs had to be purchased.

Moreover, the safety nets commonly found in rural settings did not exist in this environment; workers required a voice, and they demanded better working conditions as well as job security benefits. Owners were now dependent on these workers—many of whom were skilled craftsman—whose efforts directly tied to the success of their employers. The voice of employees, with regard to their working conditions, increased alongside their skills and knowledge. In other words, because employers needed these skilled workers, the demands increased.

New employers found that they were required to provide benefits to improve their workers’ living conditions; therefore, employee benefits became an official and equal part of employee compensation systems, instead of a fringe that was dependent purely on goodwill and generosity of the employer. In this way, the industrial revolution ushered in an era of improved living conditions, increased life expectancies, and an enhanced quality of life for the workforce.

Along with these changes in the workplace, there was a growing clamor from religious and philanthropic entities, which challenged employers to further improve the lives of the working class. This resulted in demands for healthcare protections and other social insurance schema. Directly alongside this, employers also noticed pressure for similar protections from politicians whose constituents were either older people or the unemployed. As a reaction to these continued pressures, and also to avoid governmental interventions, employers opted to introduce these protection benefits themselves.

Changes in Management

With these significant changes occurring in the social environment, the field of management was also directly affected. Management as a specific science/art evolved, and there was a priority shift from simple process efficiency to worker effectiveness. Employers’ benevolent concerns for their workers increased, irrespective of whether their motives were altruistic or simply an attempt to ward off governmental intervention. What began as a concern over employee welfare evolved into workforce demands. Unions played a large part in this transformation. Some employers began providing pension benefits in an attempt to streamline, or else reduce, their workforces. This also happened as a result of mechanical advances and the ensuing specialization of labor.

Within this environment, companies started to engage welfare workers, who were chartered to examine and monitor the quality of life in the workplace and to make improvements wherever needed. These welfare workers delved into alleviating concerns for worker health and sickness, among others. However, some of these welfare activities were considered intrusions and were, in many cases, inappropriate.

Welfare workers were then transformed into personnel officers, who were given the tasks of testing, hiring, training, and adequately compensating employees. This revamped concern for the human being in the workplace, however, was not enough to satisfy the social movement. Employee benefits as a discipline had yet to appear ubiquitously during this period.

Eventually, the government decided to intervene, and so we saw the introduction of massive social legislation. With these laws, alongside growing demands from unions for medical coverage and pension plans, the landscape of employer-employee relations was changed forever. Within the context of these changes, employee benefits, as a structured offering, came into being.

In the human relations era, the field of human resources management became prominent, further evolving management philosophy. Human resources professionals became advocates for both employer and employee interests. The “human side of the enterprise”3 was considered a pivotal factor in a business’s success. These advocates recommended newer, more effective benefit programs for workers. They argued that the introduction of such programs would enhance employee job satisfaction, thus increasing productivity.

Changes in the Legal Environment

One major reason why employee benefits have become such a significant part of the compensation structure is the evolution of the legal environment. Political, social, and economic pressures morphed into legal protection through the passage of many landmark laws that dictated the incidence and the terms and conditions of mandated benefits. Business, labor concerns, and technological innovations all added to the impetus to provide job security and protection.

Between 1900 and 1950, most of the major legally imposed workplace employee benefits were enacted. These major legislative efforts culminated into the Social Security Act of 1935. In the realm of wage and hour laws, both the Walsh-Healy Act of 1936 and the Fair Labor Standards Act of 1938 saw the light of day. By 1950, minimum wage laws had been put in place; further, unemployment and workers’ compensation laws were enacted in most states. Social Security benefits were being paid; private pension plans and insurance coverage were also being demanded in union negotiation.

Under the umbrella of religious and philanthropic interests, certain groups sought to influence employers to elevate workers’ living conditions. There was talk of universal healthcare, disability protection, and old-age benefits. The question arose, however: Who should be responsible for providing this protection, the government (state or federal) or the employers? This debate continues to this day. Consider, for example, all the debate that accompanied the passage of “Obamacare” and still went on after the law was passed.

These discussions and associated demands introduced the concept of an employer’s social responsibility. Businesses, concerned about rising costs and equally declining profits, opposed these impositions. However, politicians—spurred on by the elderly, the disabled, and the unemployed in their constituency—continued to pressure their legislators. Thus, fearing intervention and mandates, employers were forced into providing these adequate benefits to their employees.

Thanks to these initiatives, a legal frame was constructed for employee benefits, which covered the following:

  • Workers’ compensation: designed to provide protection in the case of job-related injuries and accidents
  • Social Security: old-age protection financed jointly by employers and employees, with the government insuring its continuation
  • Unemployment insurance: maintaining the living standards of the unemployed workforce

Note that these legislations were contentious, and they remain so even in the most recent political environments. Public policy debates on these laws remain as loud as they were when they were first discussed and put into practice. This legislative framework is now directly bumping into escalating costs.

Because of the forces previously described, as well as the fact that the U.S. political consensus differed from Europe, workers’ benefits were financed by a number of sources: both the state and federal governments, private employers, and the individual employee, in what is known as the three-legged stool approach. The U.S. government provides Social Security, Medicare, Medicaid, and unemployment benefits. These first two programs are financed by both the employer and the employee, while private employers provide healthcare, disability, and retirement benefits.

Employers typically finance these programs, or else co-finance them with their employees. Employers also receive tax incentives when certain benefits are offered. Individual employees maintain their own insurance coverage for certain losses, and they pay for these from their own resources.

Tax Legislation

Within a legal context, tax legislation has also played an important role in the increase of employee benefit plans in organizations. This legislation has favored these plans, and has provided some impetus to their development by making the following:

  • Company contributions to employee benefit plans deductible
  • Contributions made by the employer, on behalf of the employee, nontaxable income for the employee
  • Retirement contributions made by the employer, on behalf of the employee, untaxed until the employee receives benefit distributions

These tax-favorable consequences have contributed to the development of employee benefits, inasmuch as the design of these plans attempt to maximize tax advantages.

Recent Changes and Trends

Particular changes in the development of employee benefits have taken place over the past 15 years or so, which have been triggered by the ever-increasing costs of providing said benefits. Along with increasing costs, many additional changes have occurred in the legislative environment in the form of more laws, regulations, accounting rules, and both internal and external control requirements. Furthermore, during this period, Human Resources departments—the ultimate custodians of employee benefit plans—have seen major budget cuts; the theme is “doing more for less.”

Due to these pressures, employers have been required to shift some of their costs to providing competitive benefits to their workers, seeking to make them more informed consumers with regard to these benefits plans. In a sense, this has transferred some of the responsibility of managing benefits to the employees themselves (as discussed later in this chapter).

As such, it can be seen that the administration of employee benefits has grown, and continues to grow, steadily more complex, which has created a growing importance in the need for management focus.

This focus becomes critical when one realizes that effective management of these programs can facilitate cost control and, at the same time, assist with efforts in the areas of improving productivity, the management of risks, and the improvement of employee satisfaction.

Further, this complexity has created the need to bring more skills and talents, from various professional disciplines, to the table, including the following:

  • Accountants
  • Actuaries
  • Attorneys
  • Benefits consultants
  • Benefits personnel
  • Compensation and reward specialists
  • Group insurance specialists
  • HR specialists
  • Insurance agents and regulators
  • Investment specialists
  • Plan administrators
  • Trust officers

The fact that these extremely varied professions bring different perspectives to bear on the subject of employee benefits has led to a need for a common language for communication, analysis, and synthesis. This common language, and thus a common understanding, can be facilitated only through the languages of business: accounting and finance.

Also relevant are recent changes in the operating environment. First, there has been an increase in the incidence of new benefit options. In the past, a typical program would involve medical benefits, group life insurance, accidental death and dismemberment benefits, retirement benefits (either a defined benefit plan or a defined contribution plan), and various time-off benefits.

We will now explore some recent changes in the working environment that currently have had a major impact on the design of employee benefits programs.

The following is a compilation of these newer benefits being offered by various organizations:

  • Healthcare benefits
  • Health savings accounts
  • Healthcare premium flexible spending accounts
  • Health-reimbursement arrangements
  • Point-of-service (POS) plans
  • Acupressure/acupuncture medical coverage
  • Experimental/elective drug coverage
  • Gender reassignment surgery coverage

More and more, we find that healthcare benefits are being provided to additional classes of employees, such as the following:

  • Same-sex domestic partners
  • Opposite-sex domestic partners
  • Nondependent children
  • Foster children
  • Part-time employees
  • Dependent grandchildren

Carrying on with our review of the newer forms of employee benefits, we find the following:

  • Preventive health and welfare
  • Health and lifestyle coaching
  • Wellness programs
  • 24-hour nurse hotlines
  • Smoking cessation programs
  • Health fairs
  • Fitness center benefits
  • On-site fitness centers
  • Nutrition counseling
  • On-site fitness classes
  • On-site medical clinics
  • Healthcare premium discounting for annual healthcare risk assessments
  • Healthcare premium discounting for avoiding tobacco products
  • Rewards or bonuses for completing certain health and wellness programs

This plethora of preventative health and wellness benefits attest to employers taking aggressive, direct, and indirect actions to reverse the tide of escalating costs for providing healthcare benefits. Employers today are searching for more ways to develop and maintain a productive and engaged workforce by providing services that assist their employees in maintaining both their physical and mental health.

Continuing with our review of new benefits, we find the following:

  • Leave benefits

    • Paid time-off plans, combining traditional vacation time, sick leave, and personal days into one comprehensive plan
    • Paid personal days
    • Paid family leave
    • Paid time-off for volunteering
    • Paid adoption leave
    • Unpaid sabbatical programs
  • Family friendly benefits

    • Adoption assistance
    • Dependent care flexible spending accounts
    • Childcare referral services
    • 529 plans
    • Elder care referral services
  • Flexible working benefits

    • Telecommuting
    • Flextime
    • Compressed workweek
    • Job sharing
    • Break arrangements
    • Mealtime flex
    • Shift flexibility
  • Retirement benefits

    • Supplemental executive retirement plans
    • Cash balance pension plans
    • Roth 401(k) plans
  • Financial benefits

    • Employee referral bonuses
    • Full flexible benefits
    • Credit counseling services
    • Payroll advances
    • Spot bonuses
    • Financial advising services

Note that the environment of employee benefits is constantly in flux. Continuing changes in the business environment can affect the design and planning of benefits. An individual company can control some changes, but not all.

Companies facing financial challenges are often forced to cut employee benefits provisions or ask employees to share in more of the costs of providing these benefits. Legal changes can also affect the composition of these plans. Mergers and acquisitions often dictate changes to benefits plans, as well.

Legal changes are often constant. Recent changes have affected qualified versus nonqualified plan definitions. Further, legal changes can affect the tax provisions that affect benefit plans. They also can affect plan language and disclosure requirements. Above all, there is a great deal of uncertainty as to how the Patient Protection and Affordable Care Act (PPACA) might affect benefits planning going forward from 2014.

A company’s financial environment also has a major impact on designing employee benefits. If times are favorable, companies might introduce new, attractive features to their benefits program to attract and retain high-caliber employees; however, if times are unfavorable, benefit provisions are often cut, or employees are asked to bear more of the costs.

In a merger and acquisition situation, a line item-by-line item comparison of is made of each of the benefits programs for the companies involved in the transaction. Based on these findings, the new company’s management will adopt the best of both plans’ provisions, or they may decide to come up with new provisions entirely. The key is to decide on provisions that would be welcomed by employees during the often trying times following the merger or the acquisition.

When companies realize that workforce characteristics are undergoing changes due to societal shifts, benefit plan provisions are often changed. The needs of younger employees often differ significantly as compared to the needs of their elders. Lifestyle benefits, in particular, have become a much-discussed topic in recent years.

In addition to monetary compensation and a healthy, positive work environment, employee benefits have become a key component of human capital strategies in most companies. Recent surveys of employee attitudes on a wide range of workplace issues have shown that a significant percentage of employees want better benefits. It is interesting to note that younger employees who are entering, or are already in, the workforce are more focused on this particular issue than their predecessors. Whether this is because fewer companies are offering comprehensive benefits packages or because of higher expectations in the recent generations of employees is unclear; nonetheless, these challenges remain issues of concern for employers going forward.

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