Jan 19, 2008


No one factor can be singled out as the reason for the substantial growth in employee benefits. Rather, this growth has resulted from a combination of factors, including industrialization, the influence of organized labor, wage controls, cost advantages, tax advantages, inflation, and legislation.

During the 19th century, the United States made the transition from an agrarian economy to one characterized by increasing industrialization and urbanization. The economic consequences of death, sickness, accidents, and old age became more significant as individuals began to depend more on monetary wages than on self-reliance and family ties to meet their basic needs. As a result, some employers began to provide retirement, death, and medical benefits to their employees. While benevolence may have influenced the decision to provide such benefits, the principal reason was probably the realization by employers that it was in their own best interest to do so. Not only did such benefits improve morale and productivity, they also reduced employee turnover and the expenses associated with it.

While some of the earlier benefits were paid directly by employers, the development of group insurance enabled these benefits to be funded by systematic payments to an insurance company. As group insurance became more common, employers were faced with adopting new or better plans to remain competitive in attracting and keeping employees. This competitiveness in employee benefits continues to exist.

Industrialization has also led to more benefits, such as Social Security, Medicare, unemployment insurance, and workers' compensation insurance, being provided by government.

Influence of Organized Labor
Since a Supreme Court ruling in 1949, there has been no question about the right of labor unions to negotiate legally for retirement and insurance plans. Although union pressures prior to that time had frequently resulted in the establishment or broadening of employee benefit plans, this ruling strengthened the influence of labor unions.

Labor unions have also influenced benefits for nonunion employees. Some employers provide generous benefit plans in an effort to discourage their employees from unionizing. In addition, employers with both union and nonunion employees often provide the same benefits for the nonunion employees as are stipulated in the union contracts.

Wage Controls
Employee benefit plans grew substantially during World War II and the Korean War when wage freezes were in effect. Although wages were frozen, no restrictions were imposed on employee benefits. Therefore, employee benefits became an important factor in attracting and retaining employees in labor markets characterized by little unemployment. When wage controls were instituted in the early 1970s, however, no unusual growth took place in employee benefit plans because the duration of the controls was relatively short and the unemployment rate was higher than in previous years.

Cost Advantages
Because of the economics associated with group underwriting and administration, benefits can usually be obtained at a lower cost through group arrangements than through separate contracts purchased by individual employees.

Tax Advantages
The Internal Revenue Code also provides favorable tax treatment to employer contributions for certain types of employee benefits. The employer may deduct the contributions as usual business expenses, and, within limits, employees will often have no taxable income that results from employer contributions on their behalf. In addition, payments received from some types of employee benefit plans may be received tax free by employees, even if provided by employer contributions. Benefits from other types of plans may not result in taxable income until payments are actually received. Nevertheless, it should be noted here that the types of employee benefits with the most favorable tax treatment also tend to be the most prevalent.

Inflation also affects employee benefits. When benefit levels are related to employees' wages, the level and cost of these benefits will increase as wages increase; when benefit levels are stated as fixed amounts, inflation results in employee pressure for increases. For most employers, the total cost of benefit programs has been increasing at a rate faster than wages, primarily because of the skyrocketing increase in the cost of providing medical expense benefits.

Most states have traditionally limited the types of groups that are eligible for group insurance benefits. In addition, the types, and possibly the amounts, of coverage that could be written were also subject to restrictions. In recent years, the majority of these states have liberalized their laws and have allowed more group insurance coverage to be available to an increasing variety of groups.

The federal government and many states also have passed legislation mandating that certain benefits be included in group insurance contracts or that existing benefits be broadened. Examples include legislation requiring benefits for maternity, alcoholism, and drug abuse. These increased benefits have also increased the cost of providing group insurance coverage.


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