Employee Benefits

Overview

In the United States, federal and state laws, as well as private agreements between employers and employees, determine the level of benefits that employers provide to their employees. These benefits achieve many purposes including offering economic security to employees (e.g., retirement benefits) or promoting employee well-being and reducing absenteeism (e.g., health insurance).

Benefits Required by Federal Law

Federal law imposes a number of obligations on employers. Some touch on employee time off for voting, serving jury duty or dealing with family or medical issues. Others require employee participation in workers compensation, unemployment, and disability insurance programs. Depending on the individual benefit, the cost or premium may be paid by the employer, employee or both parties.

The Family and Medical Leave Act (FMLA) requires employers to provide their employees with up to 12 weeks of unpaid leave to take care of certain family and medical needs, such as a birth or serious health condition. Once the leave ends, the employer must allow the employee to return to the same or equivalent job. The Act does not require the employee to take the 12 weeks of leave all at once.

Both employers and employees must pay a Federal Insurance Contributions Act (FICA) tax, which the government uses to pay Medicare and Social Security benefits for retirees, the disabled, and children of deceased workers. Ordinarily, the employer and employee each pay half of the total FICA obligation. However, self-employed workers must pay the entire FICA tax themselves.

Social Security provides basic support for former workers and their dependents. Nearly all workers must contribute to Social Security through payroll deductions. The amount of benefits a former employee receives depends on how long the employee paid Social Security taxes, how much the employee paid in Social Security taxes and the age when the employee will first start collecting Social Security benefits.

The federal government offers health insurance for the elderly and disabled through the Medicare program. Medicare pays for health care of nearly all Americans over age 65, as well as those receiving disability benefits and those with serious kidney problems.

Voluntary Employee Benefits

Many employers offer medical, dental and vision coverage, as well as paid time off to their employees. Paid time off can include paid holidays, paid vacation time, as well as paid sick leave. Additional benefits that employers commonly offer include life insurance, child care, tuition reimbursement, legal services plans, employee stock ownership, and funeral or bereavement leave. Offering such benefits helps employers attract and retain workers.

Retirement Plans

Retirement plans generally come in two different formats: defined contribution and defined benefit. In a defined contribution plan, the employer will contribute a set amount to an employee's own retirement account, such as by matching a portion of an employee's own 401(k) contribution or by sharing a portion of the employer's profits. Employees are responsible for their own investment choices.

In a defined benefit plan, the employer promises the employee a set benefit amount upon retirement, which is usually based on the length of an employee's service with the company as well as the wages received. A traditional pension is an example of a defined contributed plan. For such plans, the employer is responsible for investing the pension funds.

The Employee Retirement Income Security Act of 1974 (ERISA) regulates employee benefit plans, as well as health plans. ERISA mainly applies to private retirement plans, but almost all employee benefit plans are subject to some provisions of the Act. ERISA therefore affects millions of Americans who are covered by employee benefit programs.

Health Benefits

An employer may also choose to provide employees and former employees with health benefits, which may take a wide variety of forms and provide varying amounts of benefits. The most common is some form of managed care, including a health maintenance organization (HMO), Preferred Provider Organization (PPO), or Point of Service (POS), which controls access to health care for individuals.

A business may obtain a group plan for its employees from a health insurance company and offer participation in the plan to its employees, their spouses and dependents. An employee may have to pay part of the cost the business incurs to obtain the insurance. Some states mandate certain healthcare benefits so that if an employer offers a healthcare plan, it has to include certain types of coverage.

The Consolidated Omnibus Reconciliation Act (COBRA) allows former employees and their dependents to maintain their health insurance coverage for up to 18 months after an employee leaves or has been terminated. To receive these benefits, the former employee may have to pay the full insurance premium as well as an additional 2% surcharge to cover administrative costs.