Typical employee benefit package
Employee benefits are just as much a part of compensation as salary. Some organisations place a higher emphasis on benefits and less on direct earnings, while others offer fewer benefits and higher pay.
Placing a value on benefits, such as health insurance, depends on the individual employee and her personal or family needs. This is why employer-provided benefits can vary so much.
Starting with the Tax Reform Act of 1986, standards for employee benefits began changing significantly as did the rules for making enrolment changes. These changes impacted income and payroll taxes. Today's benefits packages tend to be enhanced in terms of options, but reduced in what employers are willing to pay for benefits coverage.
Recent legislation to reform health care might have an impact on what employers provide for benefits as well as costs and possibly taxation of benefits. However, it is too soon to determine what employers will do as a result.
Types of Plans
Typical benefit plan options include:
Medical Insurance: Options of multiple providers as well as coverage options (single, employee plus spouse or partner, or family coverage).
Dental Insurance: Options for coverage mirror medical but generally offer fewer provider options.
Life Insurance: Many employers offer some basic coverage paid for by the employer with options to supplement basic coverage for life and/or accident coverage.
Disability Insurance: Some employers must provide (depending on state) some form of disability; others offer it as an option for employees to purchase.
Flexible Spending Accounts: Employer (or a provider) manages employee contributions to health care or dependent care spending accounts that allow the employee to put money away, tax free, to spend on medical or child care expenses. Some employers match contributions, but this version is not typical.
Paid leave: acation and/or sick time are common benefits, but the amount and schedule of accrual varies greatly from employer to employer. Some plans pay the employee for unused vacation, which can be subject to State laws, while others do not.
Savings Plans: Different industry sectors have various options such as 401(k), 403(b), 457, and other deferred compensation plans. Most allow the employee to avoid taxes on money invested in savings plans that grow until retirement and are taxed when withdrawn. Many employers provide a company match to these plans to encourage saving for retirement and as a substitute for pension plans.
Many employers will offer what is sometimes referred to as "Cafeteria Plans" where employees receive an amount of money to spend for benefits and they can select those plans that make the most sense for the employee. Some plans allow excess cash to be paid to the employee if they don't use it all.
Examples: One employee may need to cover their family for medical insurance, but have their own life insurance plan not purchased through their employer. Money saved by not taking the life insurance can be used to pay for health coverage. Another employee might be single and have few coverage needs, so he can have the excess allocation placed into a 401(k) savings or paid in cash.
Pension Plans, once common to many employers, were funded by the employer and invested to grow the funds that would be later used to pay retirees after certain age and service levels were met.
Recent trends have been to substitute savings plans with an employer match for traditional pensions. Employees benefit because they carry the savings with them if they terminate employment; employers benefit because they don't have to guarantee results as the employees manages their own investments.
Health benefit costs have been rising above cost of living standards and many employers are asking employees to contribute more of the cost then ever before. Expect to see this continue along with reduction of certain benefits such as pensions.
Look for employers to get more creative with how benefit options are offered, such as Cafeteria Plans, which limit employer costs and force the employee to make decisions on which benefits to buy with their employer dollars.
Another area of change is to pay for non-standard benefits such as health club memberships, legal fees or allowing employees to purchase mass-transit tickets with pre-tax dollars.
The future may also bring taxation of benefits, which was one of the goals of the tax reform act of 1986. The bill was modified to remove some of the taxes, but the intent was to treat benefits as compensation and therefore taxable.