Employee Benefits 530
Photo by: Cheryl Casey

Employee benefits are indirect means of compensating workers; employees receive these benefits above and beyond their wages. Unlike wages alone, benefits foster economic security and stability by insuring beneficiaries against uncertain events such as unemployment, illness, and injury. Furthermore, some benefit programs serve to protect the income and welfare of American families. A common distinction between direct forms of employee compensation, such as wages, and indirect compensation, or benefits, is that the former creates an employee's standard of living, whereas the latter protects that standard of living.

The range of employee benefits includes educational, employee incentive, family, government, health, lifestyle, recreational, retirement, savings, and transportation benefits. While some benefits—such as government sanctioned ones—are mandatory, others are supplementary or optional at the discretion of employers. The availability of these supplementary benefits— health insurance and pension coverage in particular—is dependent on a number of factors, but most importantly on the size of a company, according to Benefits Quarterly.

Toward the end of the 20th century, employee benefits evolved from defined-benefit programs to contribution-defined programs where employers relinquished some of the responsibility to employees. With defined-benefit programs, employers determine pensions by using standard formulas based on employees' salaries and years of service to figure the monthly amount employees receive. Contribution-defined programs, on the other hand, use similar formulas based on salaries and years of service, but they vary, depending how much money employees contribute to their retirement funds, such as 401(k) plans.

Due to the high cost of basic benefits such as health insurance and pensions, more employers opted for benefits with lower price tags, such as sports tickets, pet days, concierge services, health club memberships, and massages in the 1990s. For example, the percentage of U.S. workers with pension coverage dropped from 55 percent in 1979 to 51 percent in 1996, according to the Economist.


Rudimentary employee benefit programs were brought over from Europe and implemented in the colonies. In fact, one of the first recorded benefit programs in American history was the Plymouth Colony settlers' military retirement program, which was established in 1636. Subsequent benefit programs of note included: Gallatin Glassworks' profit sharing plan (1797); American Express Co.'s private employer pension plan (1875); Montgomery Ward's group health, life, and accident insurance program (1910); federal tax incentives to employers sponsoring pension plans (1921); and Baylor University Hospital's group hospitalization program (1929).

Despite the implementation of several different types of benefit programs in both the government and private sectors, employee benefits before the 1930s were negligible by current standards. The Great Depression, however, provided an impetus for the formation of more advanced and substantial social mechanisms that could provide economic stability. Of import were the retirement provisions of the Social Security program enacted at the federal level in 1935. Tax-favored status for compensation received by employees during sickness or injury was added in 1939.

After World War II, federal government initiatives caused a variety of benefits to become more popular with private-sector employers. For example, health-insurance premiums were made tax deductible to employers and became nontaxable to employees. As a result, health insurance and other benefits became extremely cost-effective forms of compensation in comparison to wages and salaries. Furthermore, tax-favored benefits became a popular bargaining tool for unions seeking to improve their total pay package. As living standards increased, moreover, people in industrialized nations began to view health insurance and other benefits as necessities, and even entitlements or individual rights.

Largely as a result of government policies, employee benefits in the public and private sectors exploded during the 1950s, 1960s, and 1970s. Government mandates required that employers supply their workers with benefits such as workers' compensation, Social Security, and Medicaid. And new tax laws goaded employers to offer a smorgasbord of optional benefits such as pension plans, life insurance, stock bonuses, dental care, child care, cafeteria plans, and many more. The proliferation of private-sector benefits ebbed during the late 1970s and 1980s, as the postwar U.S. economic expansion slowed and a new corporate cost-consciousness emerged. Nevertheless, by the late 1980s the federal government estimated that employee benefits represented about 36 percent, or $814 billion, of all wage and salary payments in the United States.


Employee benefits are any kind of compensation provided in a form other than direct wages and paid for in whole or in part by an employer, even those provided by a third party. Third-party benefits include those offered by the government, which disburses Social Security benefits that have been paid for by employers.

Benefits fall into ten principal categories based on their function: educational, employee incentive, family, government, health, lifestyle, recreational, retirement, savings, and transportation benefits (examples provided below). While some benefits are mandatory—those required by federal or state legislation—the majority are supplementary. With supplementary benefits, employers choose whether or not to offer them. Mandatory benefits provide economic security for employees who lack income as a result of unemployment, old age, disability, poor health, or other factors. Supplementary benefits not only serve as safety nets for employees, but also as incentives to attract employees and to encourage employee loyalty.

Based on the book Employee Benefits: Plain and Simple, the major benefits included in each category are listed below:


Benefits are an important means of meeting employees' needs and wants. Employers frequently use optional or supplementary benefits as incentives to promote employee longevity, by attracting and keeping good workers. However, the primary role of employee benefits is to provide various types of income protection to groups of workers lacking income. Such income protection offers individual security and societal economic stability. Five principal types of income protection delivered by benefits are: (1) disability income replacement, (2) medical expense reimbursement, (3) retirement income replacement, (4) involuntary unemployment income replacement, and (5) replacement income for survivors. Different mandatory and voluntary elements of each of these categories are often combined to deliver a benefit package to a group of workers that complements the resources and goals of the organization supplying the benefits.


Benefits that provide disability income replacement include government programs such as Social Security and workers' compensation. The bulk of these benefits are mandatory, although numerous supplementary plans, most of which are tax favored, exist. Most organizations seek to assemble a disability package that will provide adequate safeguards, yet not act as a disincentive to return to work. A common objective is long-term income reimbursement of 60 percent of pay, which is preceded by higher levels of reimbursement, often as much as 100 percent during the first six months of disability. Long-term disability pay typically ends at retirement age (when pension payments begin), or when the worker recovers or finds another job. In addition, supplementary benefits such as disability insurance helps employees weather periods without pay due to disabilities not covered by government programs.

Other disability related incentives may include sick pay, including cash awards for unused sick days at the end of the year. Employers may vary the quality of their disability package with different copayment options, limits on payments for voluntary coverage, and extended coverage for related health insurance, life insurance, and medical benefits related to the disability.


Medical expense reimbursements are one of the most expensive and important of supplementary benefits. The two primary types of voluntary medical coverage options are fee-for-service plans and prepaid plans. In addition to voluntary plans, government-backed health-care plans, such as Medicare and Medicaid, serve as safety nets to furnish medical coverage to select groups of society and to those least able to afford other types of health insurance. In the early 1990s, about 67 percent of all full- and part time employees received medical coverage, according to the U.S. Bureau of Labor Statistics. About half of these employees were covered by employer paid individual insurance policies.

Under traditional fee-for-service plans, the insurer pays the insured directly for any hospital or physician costs for which the insured is covered. Under a prepaid plan, insurance companies arrange to pay health care providers for any service for which an enrollee has coverage. The insurer effectively agrees to provide the insured with health-care services, rather than reimbursement dollars. Prepaid plans offer the advantages of lower costs, which results in reduced administrative expenses and a greater emphasis on cost control. The most common type of prepaid plan is the health maintenance organization.

Most plans cover basic costs related to: hospitalization, including room and board, drugs, and emergency-room care; professional care, such as physician visits; and surgery, including any procedures performed by surgeons, radiologists, or other specialists. More comprehensive plans provide greater coverage, especially of miscellaneous services not encompassed in basic plans, such as medical appliances and psychiatric care. The most inclusive plans eliminate deductible and coinsurance requirements, and may even cover dental, vision, or hearing care.

There are several specific methods that companies can use to vary the level of voluntary benefits provided in their medical benefit packages. For instance, employers may offer a high-deductible coverage plan as a way of lowering the cost of a plan (the deductible is the amount of initial costs covered by the insured before reimbursement begins). Likewise, different levels of coinsurance and copayments are usually available. For example, a beneficiary may be required to cover 10 percent of all costs incurred after the deductible amount up to a total of $100,000 (for a total payment by the insured of $10,000). A more expensive plan may reduce the beneficiary's share of those costs to 5 percent, or even zero. The total limit on insurer payments can also be adjusted: an individual lifetime maximum of $250,000 to $1 million is common.

Auxiliary medical-related employee benefits include wellness programs that teach and encourage exercise, weight control, how to stop smoking, and similar health benefits. Many companies also provide financial incentives for workers who achieve specific health-related goals, such as a certain height-to-weight ratio.


Companies provide retirement-related employee benefits through three avenues: Social Security, pension plans, and individual savings. Social Security mandates that workers and employers jointly fund an account that is managed by the federal government. The combined contribution totals about 15 percent of a worker's total salary. The money is placed in the fund, and most of it is invested in interest-paying securities and bonds backed by the government. The government pays benefits to beneficiaries when they reach retirement age. The amount of expected benefits varies by age, with younger contributors expected to receive at least a meager portion of their and their employer's total contribution. Approximately 50 million people receive Social Security benefits, while 135 million workers pump money into the program through wage deductions.

Pension plans are primarily financed by employers. Unlike the Social Security fund, funds created by private employers are subject to strict government controls designed to ensure their long-term existence. The two major categories of pension funds are defined benefit and defined contribution. Defined-benefit programs represent the traditional approach where workers are assured a determined income level (given expected Social Security disbursements) at retirement. The company finances the worker's account and manages the investments. In contrast, defined-contribution plans utilize investment techniques such as stock and bond purchases with an amount of money defined by the employer. Companies make regular contributions to workers' accounts through those different instruments, and may also integrate employee contributions. The employee simply receives the value of the contributions, with interest, at retirement. The obvious benefits are deferred taxes and flexibility in comparison to defined-benefit programs.

Other pension-related programs include profit-sharing pensions, money purchase pensions, 401(k) pensions, and target-benefit pensions. 401(k) programs receive contributions from both employers and employees—employers generally match employee contributions. These programs allow the beneficiary to determine how much to save annually and they shelter employee savings from taxes until money is drawn from them. Furthermore, employees have the option of receiving monthly payments or lump sums after retirement with 401(k)s.

The third type of retirement benefit offered by many employers is supplementary individual savings plans. These plans include various tax favored savings such as individual retirement accounts (IRAs) and investment options. Employers may also provide retirement benefits such as retirement counseling, credit unions, investment counseling, and sponsorship of retiree clubs and organizations.


Most employers choose to offer some form of protection against involuntary termination as a benefit to employees. In addition, termination benefits are required under various circumstances by collective bargaining agreements and state and federal laws. The Federal Unemployment Tax Act, for example, regulates taxes collected and sets minimum limits on unemployment benefits for all 50 states. The law, however, allows states to determine their own specific policies within the guidelines of the act. Unemployed people may receive roughly 35 percent of their weekly wages for a minimum of 26 weeks.

A common unemployment benefit provided by employers is severance pay, which may take the form of a lump sum or continuing payments. In addition, some industries provide supplemental unemployment pay plans. These are employer-funded accounts designed to ensure adequate and regular payments to workers, usually members of labor unions, during periods of inactivity.

Because of the increase in employee layoffs caused by corporate restructuring during the 1980s and 1990s, many companies have initiated benefit plans that help their terminated workers find new jobs. These programs help workers to develop new skills, learn job-seeking techniques, relocate to new regions, and pay for professional outplacement assistance. At the executive level, some workers receive "golden parachutes," or similar severance packages. These benefits ensure that if the executive is terminated as a result of a hostile takeover or some other unforeseen event, he or she will receive a preset sum or allowance.


Like disability compensation, benefits for the survivors of deceased employees are comprised primarily of mandatory Social Security and workers' compensation benefits. Eligibility for such mandatory benefits is determined by factors such as age, marital status, and parental responsibilities. In addition, however, a plethora of different privately financed benefits are available for employer, most of which have a tax favored status. Most plans are set up to make payments to a beneficiary designated by the employee. Payment levels are usually contingent on the cause of death. For example, survivors of a worker killed while on the job would likely receive much more than survivors of an employee who died at home or on vacation. A common survivorship benefit is some form of term life insurance that takes advantage of tax preferences and exemptions. Those plans often allow employees to contribute, thus significantly raising the expected payoff at death.

SEE ALSO : Employee Stock Options and Ownership ; Family Leave

[ Dave Mote ,

updated by Karl Heil ]


Briggs, Virginia L., Michael G. Kushner, and Michael J. Schinabeck. Employee Benefits Dictionary: An Annotated Compendium of Frequently Used Terms. Washington: Bureau of National Affairs, 1992.

Foster, Ronald M., Jr. The Manager's Guide to Employee Benefits. New York: Facts on File, 1986.

Fundamentals of Employee Benefit Programs. 5th ed. Washington: Employee Benefit Research Institute, 1996.

Gomez-Mejia, Luis R., ed. Compensation and Benefits. Washington: Bureau of National Affairs, 1989.

Jenks, James M., and Brian L. P. Zevnik. Employee Benefits: Plain and Simple. New York: Collier Books, 1993.

Lichtenstein, Jules H. "Factors Affecting Pension and Health Benefits Availability in Small and Large Businesses." Benefits Quarterly 14, no. I (winter 1998): 55 + .

"Unto Those that Have Shall Be Given." Economist, 21 December 1996,91.

Williams, Stephen J., and Sandra J. Guerra. Health Care Services in the 1990s. New York: Praeger Publishers, 1991.

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