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.