Employee Benefit Plan Design

Abstract

This article introduces and analyzes the history and significance of employee benefit plan design. The following sections, which provide an overview of the main types of employee benefit plans including retirement benefits, health benefits, and leave benefits and the history of employee benefit plans, will serve as the foundation for later discussions of employee benefit plan design. The issues associated with the costs of employee benefit plans and member education will be addressed.

Overview

Employee benefit plans are developed, designed, and implemented, in both the public and private sectors, by benefit managers, human resource directors, administrators, trustees, benefit or compensation plans consultants, accountants, actuaries, and attorneys. There are numerous categories of employee benefit plans available to many workers in the United States including retirement benefits, health benefits, life insurance benefits, severance benefits, and leave benefits. The federal government heavily regulates employee benefit plans. The US government, as part of its overall commitment to consumers, social welfare, and public safety and health, oversees benefit plan design compliance, reporting, and transparency requirements. The US Department of Labor (DOL), under the authority of laws passed throughout the twentieth century, administers the majority of regulations governing employee benefit plans. For example, the Employment Retirement Income Security Act (ERISA) established the parameters for retirement benefit plans; the Consolidated Omnibus Budget Reconciliation Act (COBRA) and other federal laws established the parameters for health benefit plans; and the Family and Medical Leave Act (FMLA) established the parameters of leave benefit plans.

The design of employee benefit plans has changed significantly since the 1970s. Reasons for the shift in employee benefit plan design include the shift in thinking from a paternalistic approach to managing employees to employee empowerment. In the contemporary employee benefits culture or environment of most organizations and institutions, employees are required to assume responsibility for making appropriate benefit plan choices. New employee empowerment benefit design plans include flex and defined contribution benefit plans. Employee benefit plans are increasingly managed through self-service benefits administration tools such as human resource information systems and consolidated benefits databases (Randolph, 1995).

This article introduces and analyzes the history and significance of employee benefit plan design. The following sections, which provide an overview of the main types of employee benefit plans and the history of employee benefit plans, will serve as the foundation for later discussions of employee benefit plan design. The issues associated with the costs of employee benefit plans and member education will be addressed.

Types of Employee Benefit Plans. The three main types of employee health plans discussed in this article, including retirement benefits, health benefits, and leave benefits, are all subject to government reporting requirements and standards of operation. The three types of employee benefit plans are generally regulated and enforced by different agencies.

Employee Health Plans. Employee health benefit plans generally include coverage such as the COBRA provision to provide some workers and their families with the right to continue their health coverage for a limited time after the loss of a job, including primary medical care, hospitalization coverage, mental health benefits, newborn and maternity health benefits, and cancer rights protections. Employee health plans, along with retirement plans, are regulated by the Employee Retirement Income Security Act (ERISA) of 1974, which sets minimum standards for most voluntarily established benefits plans in private industry to provide protection for individuals in these plans.

Employee Retirement & Savings Plans. There are two main types of retirement and savings plans including the defined benefit plans and defined contribution plans. Defined benefit plans promise a specified monthly benefit at retirement. Examples of the defined benefit plan include a profit sharing plan or stock bonus plan and a 401(k) plan. A 401(k) plan is a plan in which employees can elect to defer receiving a portion of their salary that is instead contributed on their behalf, before taxes, to the 401(k) plan. The defined contribution plan requires that the employee or the employer contribute to the employee's individual account under the plan, sometimes at a set rate. Examples of the defined contribution plan include a money purchase pension plan and an employee stock ownership plan (ESOP).

Employee Leave Plans. Employee leave benefits provide benefits, such as health care and salary, during an employee's approved leave from work. Common types of leave benefits include family and medical leave, funeral or bereavement leave, holidays, jury duty, voting, personal leave, sick leave, military leave, leave of absence, and vacations. Leave benefits, which are generally negotiated between employers and employees, are either required by law or voluntarily offered and paid by employers or plan sponsors. The Family Medical Leave Act (FMLA) of 1993 is one of the most influential forces shaping modern employee leave plans. The Family Medical Leave Act guarantees that eligible employees receive up to a total of twelve workweeks of unpaid leave during any twelve-month period for one or more of the following reasons: The birth and care of the newborn child of the employee; the placement with the employee of a son or daughter for adoption or foster care; to care for an immediate family member (spouse, child, or parent) with a serious health condition; or to take medical leave when the employee is unable to work because of a serious health condition.

History of Employee Benefits. Employee benefits became common in the United States during the early twentieth century. Twentieth-century labor and socioeconomic history is characterized, in part, by a switch in national perspective from individualism to interdependence. During the early twentieth century, the social safety net switched from private sector (family, charity, community) to public sector (social policies such as welfare). The government became a source for labor regulations, such as mandated employee benefits and safe working conditions, and social welfare provisions, such as public education, welfare payments, pensions, and social security for disadvantaged groups such as poor families, elderly, disabled and students (Amenta & Bonastia, 2001). Significant labor policy of the twentieth-century includes the Organic Act of the Department of Labor, National Labor Relations (Wagner) Act, the Labor-Management Relations Act (also referred to as the Taft-Hartley Act), and the Employee Retirement Income Security Act. America's system of labor oversight and regulation became increasingly complex throughout the twentieth century as the federal government simultaneously worked to protect the labor force and the interests of business.

In 1913, the Organic Act of the Department of Labor (Public Law 426-62) established the US Department of Labor (DOL) to administer and oversee a wide variety of laws and regulations concerning employment benefits. Public Law 426-62 states that the purpose of the Department of Labor shall be to foster, promote, and develop the welfare of the wage earners of the United States, to improve their working conditions, and to advance their opportunities for profitable employment.

In 1935, the National Labor Relations (Wagner) Act established the regulations governing labor relations of enterprises engaged in interstate commerce. The National Labor Relations Act established the National Labor Relations Board (NLRB) to protect labor's right to organize and bargain collectively through representatives of their own choice or to refrain from such activities. The National Labor Relations Board includes five presidentially-appointed members and thirty-three regional directors. This board determines proper bargaining units, conducts elections for union representation, and investigates charges of unfair labor practices by employers. Examples of unfair practices include interference, coercion, or restraint in labor's self-organizational rights; interference with the formation of labor unions; encouraging or discouraging membership in a union; and refusal to bargain collectively with a duly chosen employee representative.

The Labor-Management Relations Act. In 1947, the Labor-Management Relations Act (also referred to as the Taft-Hartley Act) (Public Law 29-141) was passed to accomplish the following goals and objectives:

• Promote the full flow of commerce.
• Prescribe the legitimate rights of both employees and employers in their relations affecting commerce.
• Provide orderly and peaceful procedures for preventing the interference by either with the legitimate rights of the other.
• Protect the rights of individual employees in their relations with labor organizations whose activities affect commerce.
• Define and proscribe practices on the part of labor and management that affect commerce and are inimical to the general welfare.
• Protect the rights of the public in connection with labor disputes affecting commerce.

The Labor-Management Relations Act significantly affected how employee benefit plans are designed and implemented. The Labor-Management Relations Act made fringe benefits part of collective bargaining and allowed tax-free employer contributions to employee benefit trust funds.

Employee Retirement Income Security Act. In 1974, the Employee Retirement Income Security Act (ERISA) was passed to protect the interests of participants and their beneficiaries in employee benefit plans. ERISA requires the following: Sponsors of private employee benefit plans must provide participants and beneficiaries with adequate information regarding their plans; individuals who manage plans must meet certain standards of conduct derived from the common law of trusts; and benefit plan administrators must meet standards for reporting to the government and disclosure to participants. ERISA includes civil enforcement provisions to protect plan funds and plan members.

The Employee Retirement Income Security Act is administered, overseen, and enforced by the Employee Benefits Security Administration (EBSA). Prior to 2003, the Employee Benefits Security Administration was known as the Pension and Welfare Benefits Administration (PWBA). The Employee Benefits Security Administration, a part of the Department of Labor, protects the integrity of pensions, health plans, and other employee benefits for 142 million American people (U.S. Dept. of Labor, n.d.). The Employee Benefits Security Administration operates to meet the following goals and provide the following services: Assist workers in getting the information they need to exercise their benefit rights; assist plan officials to understand the requirements of the relevant statutes in order to meet their legal responsibilities; develop policies and regulations that encourage the growth of employment-based benefits; and deter and correct violations of the relevant statutes through strong administrative, civil and criminal enforcement efforts to ensure workers receive promised benefits.

Applications

Employee Benefit Plan Design. Employee benefit plans have traditionally required extensive administrative resources and support. Firms have historically prioritized employee service in benefits administration over productivity. Benefits administrators, in traditional benefits environments, spend significant resources responding to routine requests. Traditional benefits offices and plans, characterized as paternalistic, began to change in the 1970s. The shift from paternalistic administration of employee benefits to employee-monitored administration of employee benefits occurred throughout the public and private sectors. The trend in employee empowerment in benefits administration coincided with society's call for increased transparency and accountability in public and private sector processes.

Employers, acknowledging and responding to changes in demographics such as more working mothers and single parent households, began to rethink the traditional one size fits all benefits concept and designed a wider range of benefit plans to meet the needs of the increasingly heterogeneous work force. New benefit plan designs include flex plans and defined contribution benefit plans. The wider range of benefit plans and options has required employers or plan sponsors to serve as an information clearinghouse for employees. Employees are provided access to the information and tools required to process their benefit transactions. The technological components and advances of employee benefit plans and administration have increased efficiency and, in some cases, enrollment. The main front-end technology used in employee benefit plan administration includes telephone voice response systems, personal computer programs, and interactive multimedia kiosks. The main back-end technology used in employee benefit plan administration includes data warehousing, issue tracking, document imaging, and e-mail technologies (Randolph, 1995).

Incorporating Technology into Benefits Administration Systems. Organizations choose how much technology to incorporate into their benefits administration systems, and the type and range of benefit plans to offer, based on organizational resources and objectives, employee needs and circumstances, and government requirements. Organizations may adopt a pre-designed benefits package or plan or design a benefit plan customized to their organizations. When an organization decides to design their own employee benefit plan, they go through the following stages: Defining the benefit goals and drivers, developing responsive design options, finalizing plan designs that include those design options, and maintaining optimal plan design. Benefit plan designers consider variables such as member population, internal and external organizational changes, member perception of benefits, and stakeholder opinions. Input from stakeholders is a central part of the benefit plan design process. Key stakeholders are usually interviewed during the design process and asked questions such as the following: What principles should guide the design of benefits? How well positioned are our current benefit programs to support our future staffing needs? What additional benefits do you think the company should consider offering? Once the benefit designers have created the final design options, all designs must be evaluated against organizational and stakeholder goals.

In the twenty-first century, benefit plans are increasingly reworked and redesigned to meet the needs of organizations to remain competitive in the marketplace. In the retirement and savings benefit area, plan designs increasingly include a pension plan, savings plan, a financial planning benefit, life insurance, and long-term care insurance. In the area of health care benefits, plan designs increasingly include a point-of-service option, lower co-payments, service improvements, health care spending account, vision plan, sickness and disability coverage, adoption benefits, and domestic partner coverage (Eckhardt, 1998); same-sex spouse coverage has also expanded since all fifty states began legally recognizing same-sex marriages in 2015. Organizations are increasingly performing comprehensive benefit studies to assess the effectiveness of their benefit plan design. Total benefit packages are evaluated, along with individual plans, to ensure that the benefits are meeting the needs of plan members and that the plan is being administered in the most cost-effective way for the organization.

Three Types of Employee Benefit Plans. The three main types of employee benefit plans (retirement, leave, and health plans) vary in the ways and extents to which they have changed since the mid-twentieth century. Plan design has changed in response to government regulations, changing demographics of society, civil rights, globalizations, advances in technology, and more. The following example of the employee health benefit plan design is intended to illustrate the growing complexity of plan options. Health plans, in general, include different levels of plan cost sharing and different health care delivery models. Health plans generally include one or more of the following options: Complete freedom of provider choice with an indemnity plan; moderate freedom of choice with a preferred provider organization (PPO) network; restrictive freedom of choice with a point of service (POS) plan; and highly restricted care with health maintenance organization (HMOs).

In the area of employee health benefits, managed care plans are one of the most significant plan designs. The health maintenance organization is the main type of managed care option. The example of managed health care benefit plans illustrates how plan design affects the cost for plan sponsors and members, enrollment, and services. Traditional managed care employee benefit plans were standardized and offered little to no variation despite employee needs or circumstances. Traditional managed care benefit plan design considered variables such as deductible, coinsurance, out-of-pocket amounts, competitive practice, and employee perception. Contemporary managed care benefit plan design considers those variables as well as systems capabilities, strategic fit, provider requirements, and consistency of the logic supporting the plan design. Ultimately, benefit plan design must be evaluated from multiple perspectives including participant feedback, operational capabilities of the organizations, cost and utilization results, strategy of the plan sponsor, and government regulations (Havlin, 1995).

Issues

The Costs of Employee Benefits. According to the International Foundation of Employee Benefit Plans, few employees understand the costs associated with employee benefit plans. The International Foundation of Employee Benefit Plans, originally called the National Conference of Health and Welfare Plan Trustees and Administrators, was established in 1954. The International Foundation of Employee Benefit Plans, which encourages employers to engage in employee benefit plan education, believes that employee appreciation of and knowledge about benefits contributes to workplace productivity. To fully appreciate the employee benefits that they receive, employees must become familiar with their value.

Employers spend significant financial and human capital resources on benefit plan coverage and administration. For example, in September 2017, employee benefit costs accounted for 37.4 percent of employers' compensation costs (Employer costs, 2017). In June 2014, private sector employee benefit costs averaged 30.2 percent of payroll. The employee benefit costs for small companies (with up to ninety-nine employees) averaged 26.4 percent of payroll (BLS, 2014). The employee benefit costs averaged 33.3 percent for large companies (one hundred or more workers) and 35.2 percent for very large companies (five hundred or more workers). Few employees realize that, in 2014, private-sector employees received approximately $9.09 per hour of employee benefits over and above their earned wages.

The example of health care benefit plans illustrates the connection between plan costs and efforts and directions in benefits design and administration. Employers, in 2010, spent an average of $3.35 per employee hour on health care–related benefits (Kaiser Family Foundation, 2011). In September 2017, employers spent an average of $5.65 per hour worked on health insurance for employees (Employer costs, 2017). Employers, also referred to as plan sponsors, are increasingly offering healthy lifestyle and wellness programs to their employees to promote healthy lifestyle choices and potentially reduce health care plan costs.

Ultimately, employees who understand the true costs and expenses associated with employer-sponsored benefits plans may appreciate the financial commitment made by their employers and be more willing to share the cost of benefits through personalized annual benefit statements. Useful strategies for communicating to employees the costs associated with benefit plans include communicating on an ongoing basis; conducting individual and group informational meetings; deploying a wide variety of methods to communicate with employees such as e-mail, automated telephone messages, intranet dashboards, and payroll pamphlets; and celebrating National Employee Benefits Day on April 2nd. National Employee Benefits Day was established in 2004 to commemorate the International Foundation's 50th anniversary. National Employee Benefits Day is intended as a day for both plan participants and plan sponsors to renew their commitment to benefits education. The International Foundation of Employee Benefit Plans advises employers to periodically measure the effectiveness of benefits communication by conducting surveys and focus groups.

Conclusion

In the final analysis, employee benefit plan design reflects the needs and laws of the society at the time in which it is developed. Modern plan design, with a wide range of plan designs and an employee self-service slant, reflects the ubiquitous place of technology in society and the heterogeneous nature of the workforce. Employee benefit plan design will likely continue to evolve as organizations adjust to transnational operations and multinational workforces.

Terms & Concepts

401(k) Plan: A plan in which employees can elect to defer receiving a portion of their salary which is instead contributed on their behalf, before taxes, to the 401(k) plan.

Benefits Administrator: An individual in an organization, typically in the human resource management function, whose responsibility it is to administer the employee benefits program.

Employee Benefits: A collection of nonwage compensation elements, including but not limited to, income protection, services and income supplements for employees, provided in whole or in part by employer payments.

Employee Retirement Income Security Act: The federal legislation that governs the administration and design of employer pension, health and welfare plans.

Employee Stock Ownership Plan: A savings plan in which the investments are primarily in employer stock.

Family Medical Leave Act: A law which guarantees that eligible employees receive up to a total of 12 workweeks of unpaid leave during any 12-month period for one or more of the following reasons: The birth and care of the newborn child of the employee; the placement with the employee of a son or daughter for adoption or foster care; to care for an immediate family member (spouse, child, or parent) with a serious health condition; or to take medical leave when the employee is unable to work because of a serious health condition.

Money Purchase Pension Plan: A savings plan that requires fixed annual contributions from the employer to the employee's individual account.

Plan Member: Any employee or former employee of an employer, member or former member of an employee organization, sole proprietor, or partner in a partnership who is or may become eligible to receive a benefit of any type from an employee benefit plan.

Plan Sponsor: The party that establishes and maintains the benefits plan.

Retirement Benefits: A series of regular payments, usually for life, payable monthly or at other specified intervals.

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Suggested Reading

Ahsan, S. (2017). Cyber security concerns for employee benefit plans. 401K Advisor, 24(9), 1–3. Retrieved January 4, 2018 from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=124919398&site=ehost-live&scope=site

Blair, D., & Malynn, B. (2006). Solving the dependent definition dilemma in employee benefit plans. Benefits Law Journal, 19, 38–49. Retrieved June 25, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=20651556&site=ehost-live

Davis, D. (2007). Employment issues for employee benefit plans. Journal of Pension Benefits: Issues in Administration, 14, 68–69. Retrieved June 25, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=25046544&site=ehost-live

Hanrahan, W., & Golumbic, L. (2006). ERISA benefits litigation: Who can be sued? Benefits Law Journal, 19, 20–31. Retrieved June 25, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=20651566&site=ehost-live

Howe, N. (2014). How the millennial generation is transforming employee benefits. Benefits Quarterly, 30, 8–14. Retrieved November 10, 2014 from EBSCO online database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=96305451