Overall Employee Benefit Plans Concerns

Because employee benefits, as noted previously, provide such an important dimension of financial security in our society, some overall questions need to be asked to evaluate any existing or newly created employee benefit plan.

Employer and Employee Objectives

The design of any employee benefit plan must start with the objectives of the benefit plan from the standpoint of both employer and employee.

What Benefits Should Be Provided?

There should be clearly stated reasons or objectives for the type of benefits to be provided. Benefits provided both under governmental programs and by the individual employees also should be considered.

Who Should Be Covered Under the Benefit Plan?

Should only full-time employees be covered? What about retirees or dependents? What about survivors of deceased employees? These and a host of similar questions must be carefully evaluated. Of course, some of these issues depend on regulatory and legislative rules and regulations.

Should Employees Have Benefit Options?

This is becoming more and more of a crucial question under employee benefit plans because of the changing workforce. With the growth of flexible benefits or cafeteria plans, employee choice is on the increase. Even in nonflexible benefit plan situations, should some choices be given?

How Should Benefit Plans Be Financed?

Several important questions need to be answered in determining the approach to funding employer benefit plans. Should financing be entirely provided by the employer (a noncontributory approach) or on some shared basis by the employer and employee (a contributory approach)? If on a contributory basis, what percentage should each bear?

What funding method should be used? A wide range of possibilities exists, from a total insurance program to total self-funding with many options in between. Even when one of these options is selected, further questions still remain concerning the specific funding instrument to be used.

How Should the Benefit Plan Be Administered?

Should the firm itself administer the plan? Should an insurance carrier or other benefit plan provider do the administration? Should some outside organization such as a third-party administrator (TPA) do this work? Once the decision is made, the specific entity must be selected.

How Should the Benefit Plan Be Communicated?

The best employee benefit plan in existence may not achieve any of its desired objectives if it is improperly communicated to all affected parties. The communication of employee benefit plans has become increasingly important in recent years with the increased employee choice in several benefit areas and increased reporting and disclosure requirements. Effective communication and education of what benefit plans will and will not do is essential if employees are to rely on such plans to provide part of their financial security at all stages of their lives. Technology has provided many new options in this area.

Future of Employee Benefits

With the spate of legislation affecting certain aspects of employee benefit plans, the varying needs of today's changing workforce and the outsourcing of many benefit functions, some benefit experts believe there may be more changes than ever before. While certain new approaches and techniques may be utilized, employee benefit plans are woven into the fabric of our society in such a way that the basic character or importance of such plans will not be changed. With pressures to contain healthcare and retirement costs ever increasing, greater efficiencies in the benefits approach, more tailoring to individual needs in the growth of flexible benefits or cafeteria compensation plans, and other refinements will drive the employee benefits mechanism. While it seems certain that employee benefits will not grow as rapidly as they have in the past, their place is secure and there will continue to be a demand for people who are knowledgeable about all aspects of the design, funding, administration, and communication of employee benefits in order to make such plans more effective while helping to provide for the economic security of society at large.

Group Technique | Employee Benefit Plans

In many types of insurance programs, such as group life insurance and group health insurance, the group technique enables these coverages to be written as employee benefit plans. Unlike individual insurance, group insurance is based on a view of the group as a unit, rather than on the individual. Usually, individual insurance eligibility requirements are not required for group insurance written under an employee benefit plan. The concepts that make the group technique work are all designed to prevent "adverse selection"—that is, to reduce the possibility that less-healthy individuals may join a group or be a larger percentage of a group than anticipated because of the availability of insurance or other benefits.

Characteristics of the group technique of providing employee benefits include some or all of the following:

1.  Only certain groups eligible. While most groups qualify, this requirement is intended to make sure that the obtaining of insurance is incidental to the group seeking coverage. Thus, a group should not be formed solely for the purpose of obtaining insurance.

2.  Steady flow of lives through the group. The theory behind this concept is that younger individuals should come into the group while older individuals leave the group, thus maintaining a fairly constant mortality or morbidity ratio in the group. If the group does not maintain this "flow through the group" and the average age of the group increases substantially, costs could increase dramatically.

3.  Minimum number of persons in a group. A minimum number of persons, typically 10, must be in a group to be eligible for group benefits. However, this requirement has been liberalized to the point where two or three individuals in a group may obtain coverage. This minimum number provision is designed to prevent less-healthy lives from being a major part of the group and to spread the expenses of the benefits plan over a larger number of individuals.

4.  A minimum portion of the group must participate. Typically in group life and health insurance plans if the plan is noncontributory (i.e., solely paid for by the employer), 100 percent of eligible employees must be covered. If the plan is contributory (both employer and employee share the cost), 75 percent of the employees must participate. The rationale for this provision is also to reduce adverse selection and spread the expense of administration.

5.  Eligibility requirements. Frequently, eligibility requirements are imposed under group plans for the purpose, once again, of preventing adverse selection. A waiting or eligibility period may be used for certain benefits. Also, if employees do not join when eligible and want to enroll at a later date, some form of medical information may be required.

6.  Maximum limits for any one person. In certain cases, maximum limits on the amount of life or health benefits may be imposed to prevent the possibility of excessive amounts of coverage for any particular unhealthy individual.

7.  Automatic determination of benefits. To prevent unhealthy lives in a group from obtaining an extremely large amount of a particular benefit or benefits, coverage is determined for all individuals in the group on an automatic basis. This basis may be determined by an employee's salary, service, or position, may be a flat amount for all employees, or may be a combination of these factors.

8.  A central and efficient administrative agency. To keep expenses to a minimum and to handle the mechanics of the benefit plan, a central and efficient administrative agency is necessary for the successful operation of an employee benefit plan. An employer is an almost ideal unit because it maintains the payroll and other employee information needed in meeting appropriate tax and record-keeping requirements.

Over the years many of the requirements just described have been liberalized as providers of employee benefits have gained experience in handling group employee benefits, and because of the competitive environment. Nevertheless, the basic group selection technique is important in understanding why employee benefits can work on a group basis and how any problems that exist might be corrected.

Reasons For The Growth Of Employee Benefit Plans

Numerous reasons exist why employee benefit plans have evolved from a fringe benefit to a major component of financial security today. They arise from external forces as well as the desire of employers and employees to achieve certain goals and objectives.

Business Reasons

A multitude of business reasons explain why employee benefit plans were established and why they have expanded greatly. Employers want to attract and hold capable employees. Having employee benefit plans in place helps to serve this objective. Also, in many cases an employer's competition has certain benefit plans and, therefore, it is necessary to have equal or better plans to retain current employees. Moreover, employers hope that corporate efficiency, productivity, and improved employee morale will be fostered by good benefit plans. Concerns for employees' welfare and social objectives also encouraged employers to provide benefits.

Collective Bargaining

Labor unions, through the collective bargaining process, have had a major impact on the growth of employee benefit plans. The Labor Management Relations Act (LMRA), which is administered by the National Labor Relations Board (NLRB), requires good-faith collective bargaining over wages, hours, and other terms and conditions of employment. A notable event occurred in 1948 when the NLRB ruled that the meaning of the term wages includes a pension plan, and this position was upheld in the landmark case of Inland Steel Co. v. National Labor Relations Board in the same year. Shortly thereafter, in 1949, the good-faith bargaining requirements were held to include a group health and accident plan (W.W. Cross & Co. v. National Labor Relations Board). As a result of these two decisions, it was clearly established that the LMRA provisions applied to both retirement and welfare benefit plans, and their subsequent growth has been substantial.

The LMRA, or Taft-Hartley Act, as it is commonly known, has also played significant roles in the development of employee benefit plans. Along with the Internal Revenue Code (IRC), it established the distinction between retirement benefits and welfare benefits. Additionally, the statute sets forth the basic regulatory framework under which both of these major categories of benefits are to be jointly administered with the collective bargaining process. As such, it is the legislative basis on which jointly trusteed benefit plans are founded.

Favorable Tax Legislation

Over the years the tax laws have favored employee benefit plans. Such preferential tax legislation has greatly encouraged the development of employee benefit plans as well as helped to shape their design, because many plans seek to maximize the tax treatment or tax consequences of various employee benefit plans. The main tax benefits of employee benefit plans are as follows: (1) most contributions to employee benefit plans by employers are deductible as long as they are reasonable business expenses; (2) contributions from employers within certain limits on behalf of employees are generally not considered income to employees; and (3) on certain types of retirement and capital accumulation plans, assets set aside to fund such plans accumulate tax-free until distributed. Some additional tax benefits may be available when such distributions are made. All in all, favorable tax legislation has had great impact on the development and expansion of employee benefit plans.

Efficiency of the Employee Benefits Approach

The bringing together after the industrial revolution of employees and employers in cities and in business firms made it possible for the employee benefits concept to flourish by covering many employees under one contract. The simplicity and convenience of providing coverage to people through their place of employment made sense from many standpoints. Employee benefits providers and suppliers, such as insurance companies, banks and various types of health organizations all found the marketing of such benefits through the employer to be a cost-effective and administratively efficient channel of distribution.

Other Factors

Many other factors have contributed to the growth of employee benefit plans. One such factor was the imposition of limitations on the size of wage increases granted during World War II and the Korean War. While wages were frozen, employee benefits were not. As a result, compensation of employees could effectively be increased by provision of larger benefits. The result was a major expansion of employee benefits during these two periods.

Some have argued that various legislative action over the years has encouraged employee benefit plans not only through providing favorable tax treatment but also by the government's "moral suasion" that, if such benefit plans were not established voluntarily by employers and employees, additional governmental programs might result. 


Also, allowing employee benefits to be integrated with governmental benefits has enhanced the private employee benefit approach by taking into consideration benefits provided by governmental plans in benefit plan design.

Development of the group approach to certain employee benefits has helped expand the employee benefit mechanism. The techniques inherent in the group selection process made it possible for employers to provide benefits that previously could only be provided on an individual basis, with coverage often determined by medical selection.