Because learning changes everything.

Chapter 13

Employee Benefits

Human Resource Management

Gaining A Competitive Advantage
THIRTEENTH EDITION
Raymond Noe, John Hollenbeck, Barry
Gerhart, Patrick Wright

© 2023 McGraw Hill, LLC. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw Hill, LLC.
 Learning Objectives
13-1 Discuss the growth in benefits costs and the underlying
reasons for that growth.
13-2 Explain the major provisions of employee benefits
programs.
13-3 Discuss how employee benefits in the United States
compare with those in other countries.
13-4 Describe the effects of benefits management on cost
and workforce quality.
13-5 Explain the importance of effectively communicating the
nature and value of benefits to employees.
13-6 Describe the regulatory constraints that affect the way
employee benefits are designed and administered.
© McGraw Hill, LLC 2
 Introduction
Benefits:
• Adds average 46.4% to every payroll dollar and accounts
for 31.7% of total compensation package.
• Benefits are unique because:
• More regulation of benefits than direct pay.
• Almost obligatory for employers to provide.
• Complex and hard to understand.

© McGraw Hill, LLC 3

 Figure 13.1 Growth of Employee Benefits,
Percentage of Wages and Salaries and of Total
Compensation, 1929 to 2020, Civilian Workers

SOURCE: Data through 1990, U.S. Chamber of Commerce Research Center, Employee Benefits 1990, Employee Benefits 1997, Employee
Benefits 2000 (Washington, DC: U.S. Chamber of Commerce, 1991, 1997, and 2000). Data from 1995 onward, “Employer Costs for Employee
Compensation,” www.bls.gov.

Access the text alternative for slide images.

© McGraw Hill, LLC 4

 Reasons for Benefits Growth 1

Factors Contributing to Growth:

• The Social Security Act and other legislation.
• Wage and price controls instituted during World War II.
• Tax treatment of benefits programs:
• Marginal tax rate.
• No employer taxes on most employee benefits.

LO 13-1
© McGraw Hill, LLC 5
 Table 13.1 Example of Marginal Tax Rates for
an Employee Salary of $80,000

TYPE TAX RATE

Federal 25.00%
State (New York) 6.09%
City (New York) 3.82%
Social Security 6.20%
Medicare 1.45%
Total tax rate 43%

NOTE: Local taxes (state, city, and property taxes) of up to $10,000 total are deductible on
the federal tax return, if itemizing deductions. In this case, the effective tax rate would be
40.08% (rather than 42.56%).

© McGraw Hill, LLC 6

 Reasons for Benefits Growth 2

Factors Contributing to Growth (continued)

• Cost advantage that groups typically realize over
individuals.
• Growth of organized labor from 1930s through 1950s.
• Unique benefits differentiate employers for current or
prospective employees.

© McGraw Hill, LLC 7

 Benefits Programs 1

Social Insurance (Legally Required):

• Social Security Act of 1935:
• Old-age insurance.
• Unemployment insurance.
• Survivor’s insurance (1939).
• Disability insurance (1956).
• Hospital insurance (Medicare Part A, 1965).
• Supplementary medical insurance (Medicare Part B, 1965) for the
elderly.

LO 13-2
© McGraw Hill, LLC 8
 Benefits Programs 2

Social Insurance (Legally Required) (continued)

• Social Security (continued)
• Covers more than 90% of U.S. employees.
• Begins at age 65 years and 6 months (full benefits) or age 62
(reduced benefits).
• May be free from state and federal taxes.
• Paid for with payroll tax.

© McGraw Hill, LLC 9

 Benefits Programs 3

Social Insurance (Legally Required) (continued)

• Unemployment insurance:
• Offsets lost income during involuntary unemployment.
• Helps unemployed workers find new jobs.
• Provides an incentive for employers to stabilize employment.
• Preserves investments in worker skills by providing income during
short-term layoffs.
• Financed through taxes on employers.
• Size of tax depends on employer’s experience rating.

© McGraw Hill, LLC 10

 Benefits Programs 4

Social Insurance (Legally Required) (continued)

• Unemployment insurance continued:
• Must have a prior attachment to the workforce.
• Must be available for work.
• Must be actively seeking work (including registering at local
unemployment office).
• Were not discharged for cause (such as willful misconduct), did not
quit voluntarily, and not out of work because of labor dispute.
• 50 percent of earnings for 26 weeks.

© McGraw Hill, LLC 11

 Benefits Programs 5

Social Insurance (Legally Required) (continued)

• Worker’s compensation:
• Covers job-related injuries and death.
• No-fault liability.
• Employers are immune from lawsuits.
• 90% of U.S. workers covered.

© McGraw Hill, LLC 12

 Benefits Programs 6

Social Insurance (Legally Required) (continued)

• Worker’s compensation continued:
• Four categories:
1. disability income,
2. medical care,
3. death benefits,
4. and rehabilitative services.

• Experience rating system provides incentive for employers to make

workplaces safer.
• Challenge to assess and manage workplace injuries.

© McGraw Hill, LLC 13

 Benefits Programs 7

Private Group Insurance:

• Medical insurance:
• Most important benefit.
• Consolidated Omnibus Budget Reconciliation Act (COBRA).
• Disability insurance:
• Short term.
• Long term.

© McGraw Hill, LLC 14

 Benefits Programs 8

Retirement:
• Defined benefit:
• Pension Benefit Guaranty Corporation (PBGC).
• Employee Retirement Income Security Act (ERISA).
• Insulates employees from investment risk.

© McGraw Hill, LLC 15

 Benefits Programs 9

Retirement (continued)
• Defined contribution:
• Individual account for each employee with a guaranteed size of
contribution.
• Shift investment risk to employees.
• Money purchase plan.
• Profit- sharing plans.
• Employee stock ownership plans.
• Section 401(k) plans.
• Pension Protection Act (PPA) of 2006.

© McGraw Hill, LLC 16

 Figure 13.2 The Relationship of Retirement
Savings to Age When Savings Begins and Type
of Investment Portfolio
NOTE: Historical
rates of return, 1928–
2019: stocks (S&P
500), 9.4%; bonds
(10-year U.S.
Treasury Bond),
6.0%; cash (3-month
U.S. Treasury Bill),
3.3%.

Bonds and T. Bills: 1928–2019," http://people.stern.nyu.edu/adamodar/New_Home_Page/datafile/histretSP.html;

Vanguard, "Vanguard Portfolio Allocation Models," https://investor.vanguard.com/investing/how-to-invest/model-
portfolio-allocation.

Access the text alternative for slide images.

© McGraw Hill, LLC 17

 Benefits Programs 10

Retirement (continued)
• Cash balance plans:
• All contributions come from employer.
• Rate guaranteed in a defined benefit plan.

© McGraw Hill, LLC 18

 Benefits Programs 11

Retirement (continued)
• Funding, communication, and vesting requirements:
• Employers required to make yearly contributions that cover future
obligations.
• Summary plan description (SPD).
• Vesting rights.
• Prevents companies from terminating employees and discourages
employee turnover.
• Early retirement programs.

© McGraw Hill, LLC 19

 Benefits Programs 12

Pay for Time Not Worked:

• Includes paid vacation, holidays, sick leave.
• No legal minimum in United States.

LO 13-3
© McGraw Hill, LLC 20
 Figure 13.3 Normal Annual Hours Worked
Relative to United States

SOURCE: Organization for Economic Cooperation and Development. Data for 2019,
http://stats.oecd.org. Labour, Subsection, Labour Force Statistics, accessed February 20, 2021.
Access the text alternative for slide images.

© McGraw Hill, LLC 21

 Benefits Programs 13

Family-Friendly Policies:
• Family leave:
• Family and Medical Leave Act.
• Paid family leave rare in the United States.
• Child care:
• Flexible work arrangements.

© McGraw Hill, LLC 22

 Table 13.5 The Five Most Highly Ranked
Benefits Objectives for Employers
Most Highly Ranked Benefits Objectives for Employees
1. Increase employee productivity.
2. Increase employee satisfaction.
3. Increase employee loyalty.
4. Attract employees.
5. Help employees make better financial decisions.

SOURCE: MetLife’s 15 Annual U.S. Employee Benefits Trends Study, 2017, https://benefittrends.metlife.com/ media/1382/2017-ebts-
report_0320_exp0518_v2.pdf.

© McGraw Hill, LLC 23

 Managing Benefits: Employer Objectives and
Strategies 1

Surveys and Benchmarking:

• Private consultants.
• U.S. Chamber of Commerce.
• Bureau of Labor Statistics.

LO 13-4
© McGraw Hill, LLC 24
 Figure 13.4 Employee Benefits Cost by
Category, Private-Sector Workers

SOURCE: U.S. Department of Labor, “Employer Costs for Employee Compensation— September 2018,”
December 14, 2018, News Release USDL-18-1941.

Access the text alternative for slide images.

© McGraw Hill, LLC 25

 Managing Benefits: Employer Objectives and
Strategies 2

Cost Control:
• Cost of a benefit category.
• Growth trajectory of the benefit category.
• Cost of legally required benefits.
• Medical and other insurance are targets for cost control.

© McGraw Hill, LLC 26

 Managing Benefits: Employer Objectives and
Strategies 3

Cost Control (continued)

• Health care: controlling costs and improving quality.
• U.S. spends more on health care than other countries, most through
employers.
• Employers shift costs to employees through deductibles,
coinsurance, exclusions and limitations, and maximum benefits.
• Cost reductions.
• Use of alternative providers:
• Health maintenance organizations (HMOs), preferred
provider organizations (PPOs).
• Vary required employee contributions based on employee’s health
and risk factors.

© McGraw Hill, LLC 27

 Table 13.6 Health Care Costs and Outcomes
in Various Countries
INFANT HEALTH EXPENDITURES
LIFE EXPECTANCY MORTALITY AS A PERCENTAGE OF
COUNTRY AT BIRTH, FEMALE RATE (PER 1,000) GDP
Canada 84 5 11%
China 79 7 5
France 86 4 11
Germany 83 3 12
Japan 87 2 11
Korea 86 3 8
Mexico 78 13 6
Poland 82 4 6
United States 81 6 17

SOURCES: Organization for Economic Cooperation and Development, OECD Health Statistics 2020 and
Health Expenditure and Funding, www.OECD.org, accessed March 8, 2021.

© McGraw Hill, LLC 28

 Managing Benefits: Employer Objectives and
Strategies 4

Cost Control (continued)

• Health care: controlling costs and improving quality
(continued).
• Employee wellness programs (EWPs):
• Focus on changing behaviors on and off work time that could
lead to health problems.
• Preventive in nature.
• Passive or active.
• Financial wellness.

© McGraw Hill, LLC 29

 Managing Benefits: Employer Objectives and
Strategies 5

Cost Control (continued)

• Health care: controlling costs and improving quality
(continued).
• Health care costs and quality: ongoing challenges.
• Average annual premium for family coverage $19,616.
• Piecemeal programs may not work.
• Pareto group.
• Emphasis on monitoring health care quality.

© McGraw Hill, LLC 30

 Managing Benefits: Employer Objectives and
Strategies 6

Cost Control (continued)

• Staffing responses to control benefits cost growth:
• Overtime: employees work more hours.
• Classify employees as exempt status.
• Part-time workers.
• Hire temporary workers.
• Classify employees as independent contractors:
• Subject to IRS review.

© McGraw Hill, LLC 31

 Managing Benefits: Employer Objectives and
Strategies 7

Nature of the Workforce:

• Demographic factors impact types of benefits desired.
• Marketing research to determine employee preferences:
• What benefits are most important to you?
• If you could choose one new benefit, what would it be?
• If you were given X dollars for benefits, how would you spend it?

© McGraw Hill, LLC 32

 Managing Benefits: Employer Objectives and
Strategies 8

Communicating with Employees and Maximizing Benefits

Value:
• Employees typically underestimate value of their benefits.
• Organizations should communicate benefits information through:
• Written information.
• Online tools.

LO 13-5
© McGraw Hill, LLC 33
 Managing Benefits: Employer Objectives and
Strategies 9

Communicating with Employees and Maximizing Benefits

Value (continued)
• Flexible benefits plans:
• Permit employees to choose types and amounts of benefits:
• Employees gain greater awareness and appreciation.
• Better match between benefits and employee preferences.
• Overall cost reductions in benefits programs.
• May have high administrative costs.
• Adverse selection.

© McGraw Hill, LLC 34

 Managing Benefits: Employer Objectives and
Strategies 10

Communicating with Employees and Maximizing Benefits

Value (continued)
• Flexible spending accounts:
• Permits pretax contributions of up to $2,750 to an employee
account that can be drawn on to pay for uncovered health care
expenses.

© McGraw Hill, LLC 35

 Flexible Spending Accounts

NO FLEXIBLE FLEXIBLE
HYPOTHETICAL SPENDING CARE SPENDING CARE
EMPLOYEE ACCOUNT ACCOUNT
Salary portion $10,000 $10,000
Pretax dependent care
0 −3,000
contribution
Taxable salary 10,000 7,000
Tax (43%) −4,300 −3,010
After-tax cost of
−3,000 0
dependent care
Take-home pay $ 2,700 $3,990

© McGraw Hill, LLC 36

 General Regulatory Issues 1

Affordable Care Act:

• Penalties for not providing health benefits.
• Increases Medicare Hospital Insurance (Part A) payroll tax
on earnings for higher-income taxpayers.
• New tax on “Cadillac“ insurance plans provided by
employers.
• Dependent coverage until age 26.
• Wellness programs.

LO 13-6
© McGraw Hill, LLC 37
 General Regulatory Issues 2

Nondiscrimination Rules, Qualified Plans, and Tax

Treatment:
• Qualified plan:
• Receives more favorable tax treatment.
• Each benefit area has different rules.

© McGraw Hill, LLC 38

 General Regulatory Issues 3

Sex, Age, and Disability:

• Supreme Court declared it illegal for employers to require
women to contribute more to a defined benefit plan than
men.
• Age Discrimination in Employment Act (ADEA) and the
Older Workers Benefit Protection Act (OWBPA).
• Americans with Disabilities Act (ADA).

© McGraw Hill, LLC 39

 General Regulatory Issues 4

Monitoring Future Benefits Obligations:

• Financial Accounting Statement (FAS) 106.
• Some companies charging insurance premiums to
employees and retirees or ending retiree benefits.
• Decline of pension plans in the United States:
• Pension Benefit Guaranty Corporation increases employers’
premium.
• Society of Actuaries increased life expectancy rates.

© McGraw Hill, LLC 40

 Employee Benefits
in the Philippines

© McGraw Hill, LLC 41

 Employee Benefits in the Philippines
• The labor laws in the Philippines are administered by the
Department of Labor and Employment.

• The Philippines employee benefits all depend on which of the

four kinds of employment arrangements is underway: regular,
project-based, seasonal, and casual employment.

1. Statutory and Common Employee Benefits

2. Company Initiated Benefits

© McGraw Hill, LLC 42

 Statutory and Common Employee
Benefits
• Statutory benefits, also known as mandatory benefits, are
entitlements that employers are obligated by law to provide to
their employees.
• Common examples include benefits like paid annual leave,
parental leave, worker's compensation insurance, and paid
sick leave.

• In the Philippines, employers must pay a monthly contribution

to the following funds:
1. SSS
2. Philhealth (Health Insurance)
3. PAG-IBIG or Home Development Mutual Fund (HDMF)
© McGraw Hill, LLC 43
 Social Security System (SSS)
• This state-run insurance program offers benefits under the
Social Security and Employees' Compensation (EC) Programs

• The Social Security Commission administers the program. It is a

body made of representatives from the government,
employers, and employees.

• Social insurance covers private-sector employees, self-

employed workers, as well as household workers. A spouse of
the insured person is also entitled to receive social benefits
under this scheme.

© McGraw Hill, LLC 44

 Social Security System (SSS)
For Regular Employers and Employees

• For Employers (ER) and Employees (EE) contributing at an MSC

of P20,000 and below: Additional monthly SSS contributions
range from P40 to P200, which will be paid by the employer
only.
• For ER and EE contributing at the maximum MSC of P30,000:
The additional amount of monthly SSS contributions is P950,
with P225 coming from the employee and P725 from the
employer.

© McGraw Hill, LLC 45

© McGraw Hill, LLC 46
 Social Security System (SSS)
• The benefits include:
a) Maternity Pay
b) Sickness Pay
c) Pensions
d) Disability Benefits
e) Salary Loan
f) Life Insurance
g) Funeral Grants
• The contribution depends on the salary bracket of the employee.
In general, the employer (ER) is responsible for contributing
7.37% of the total contribution, and the employee is responsible
for 3.36%.
© McGraw Hill, LLC 47
 PhilHealth (Health Insurance)
• PhilHealth is the name of the health insurance plan in place for
private employees in the Philippines. As of 2021, the monthly
contribution rate for the health insurance program is 3.5% of
the employee's basic salary. The monthly contribution is
equally divided between employee and employer. PHP 10,000
is the salary minimum and PHP 70,000 is the salary ceiling.

• PhilHealth covers inpatient benefits, outpatient benefits, Z

benefits, and SDG benefits (explained below):
• Z benefits are offered to the patients who need prolonged hospitalization
and more expensive treatment
• SDG benefits include treatment packages for malaria, HIV-AIDS,
tuberculosis, animal bites, and others diseases

© McGraw Hill, LLC 48

 PhilHealth (Health Insurance)
Philhealth Contribution Table in 2023

• Philhealth members will still follow the premium rate of 4% in

accordance with the Universal Health Care law and Philhealth
Circular on premium contribution schedule.
• PhilHealth will now collect premiums from direct contributors
using the 4% instead of the supposed increase of 4.5%
contributions rate; and will follow the P80,000 instead of the
P90,000 ceiling set for 2023.

© McGraw Hill, LLC 49

 PhilHealth (Health Insurance)
Philhealth Contribution Table in 2023

© McGraw Hill, LLC 50

 Home Development Mutual Fund
(HDMF)
• The HDMF, also known as Pag-IBIG fund, provides housing
loans. It also offers financial assistance to Filipinos to enable
them to afford decent housing.

• Workers who earn less than PHP 1,500 a month contribute 1%

of their salary to the Pag-IBIG fund. Workers who earn more
contribute 2% of their monthly salary. Employers have to
contribute 2% regardless of the salary bracket of the employee.

• The highest contribution to HDMF fund should not exceed PHP

200 in total (PHP 100 for employees and PHP 100 for
employers).

© McGraw Hill, LLC 51

 Home Development Mutual Fund
(HDMF)

© McGraw Hill, LLC 52

 13-month pay entitlement

• 13 month pay, or the colloquially named “13 month salary” is a

statutory requirement that employers must provide to certain
employees.
• All non-management employees in the Philippines are entitled
to receive 13th-month pay. This extra month of salary must be
released by 24 December. Some employees opt to receive the
payment into two installments — in May and December.
• Employees who have worked for at least one month for an
employer are entitled to receive the 13th-month pay. This is
paid pro rata for those who work less than the year.
• Employers need to file a compliance report by 15 January of the
following year to confirm payment has been made.

© McGraw Hill, LLC 53

 Service Incentive Leave

• Employers in the Philippines are obligated to grant five days of

paid leave to every employee who has worked for at least one
year. This can be used either as sick leave or vacation leave.

© McGraw Hill, LLC 54

 Sick Leave

• Insured employees are entitled to receive at least 90% of their

average daily wage if they get hospitalized or incapacitated at
home for at least three days. The three-day waiting period does
not apply to the cases of injuries and acute diseases.
• Employees who are ill are eligible to receive 90% of their
average daily salary for up to 120 days in a year. However, the
employee cannot claim this benefit for more than 240 days for
the same illness. To be eligible, the employee must have
contributed to the Social Security System for at least three
months in the prior 12 months.
• Employers are responsible for paying sickness benefits to their
employees which can then be reimbursed from the SSS.

© McGraw Hill, LLC 55

 Maternity and Paternity Leave
• Republic Act No. 11210: An Act Increasing the Maternity Leave
Period to One Hundred Five (105) Days for Female Workers with
an Option to Extend for an Additional Thirty (30) Days Without
Pay, and Granting an Additional Fifteen (15) Days for Solo Mothers,
and for Other Purposes.

• Paternity leave benefits are leave credits extended to married

male employees “for purpose of enabling him to effectively lend
support to his wife in her period of recovery and/or in the nursing
of the newly-born child (Sec. 3, R.A. 8187).
• The benefit consists of seven (7) days of leave credits with full pay.
This is seven calendar days, and not working days.
• Applies to first four (4) deliveries of the male employee’s legal
wife.
© McGraw Hill, LLC 56
 Solo Parent Leave

• Solo parent leave benefits are leave credits extended to covered

employees who are solo parents, and who may want to use
them whenever they take a leave from work to perform
parental duties, so that they may remain paid during such
absence from work. The benefits applies to all solo parents.
• The benefits consists of seven (7) working days of leave credits
with full pay.

© McGraw Hill, LLC 57

 Gynecological Leave for Women

© McGraw Hill, LLC 58

 Gynecological Leave for Women

© McGraw Hill, LLC 59

 Bereavement Leave

• Under this Act, employees in the private and public sectors shall
be entitled to a bereavement leave of ten (10) days with full pay
following the death of an employee’s immediate family member
in order to grieve, attend to or make arrangement for the
funeral.

© McGraw Hill, LLC 60

 Retirement Pay, Private Sector (R.A. 7641)

• Retirement pay is an additional pay provided to a covered

employee who is retiring.
• In the private sector, the ½ month pay in retirement pay is
equivalent to 22.5 days. Retirement pay requires at least five (5)
years of service.
• Retirement is optional at sixty (60), while mandatory at sixty-
five (65) years old.

© McGraw Hill, LLC 61

 Retirement Pay, Private Sector (R.A. 7641)

© McGraw Hill, LLC 62

 Retirement Pay, Private Sector (R.A. 7641)

© McGraw Hill, LLC 63

 Supplemental Benefits to attract top talents
• Companies often offer additional benefits in addition to those
that are mandatory according to local employment law.
• If you develop and offer a globally competitive benefits package
to Filipino talent, you’ll put your business in the right position to
land a critical candidate over a competitor. Even better – an
equitable compensation plan will maintain morale, harmony,
and motivation for any globally distributed team (a critical
factor for employee retention rates).

© McGraw Hill, LLC 64

 Supplemental Benefits to attract top talents
• Competitive Salary
• Additional Paid Leaves
• Expanded Parental Leave
• Mid-year bonus
• Health Insurance
• Group Life Insurance
• Group Personal Accident Insurance
• Mental Health and Wellness
• Flexible Benefits
• Flexible work arrangement

© McGraw Hill, LLC 65

 Because learning changes everything. ®

www.mheducation.com

© 2023 McGraw Hill, LLC. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw Hill, LLC.