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Discretionary Benefits

What are the components of discretionary benefits? Provide two examples for each component of discretionary benefits and identify an organization that effectively includes those benefits in its benefits portfolio.
Today, discretionary benefits represent a significant fiscal cost to companies. As of March 2012, companies spent an average exceeding $13,000 per employee annually to provide discretionary benefits. For the same period, discretionary benefits accounted for as much as 21.5 percent of employers’ total payroll costs (i.e., the sum of core compensation and all employee benefits costs) (U.S. Bureau of Labor Statistics, 2012).

Discretionary benefits are offered at the will of company management. Unlike in well-designed pay-for-performance systems, employees view such discretionary benefits as paid vacation and holidays as an entitlement much like any of the legally required benefits. Employers have reinforced an entitlement mentality toward benefits because they usually award discretionary benefits regardless of employee performance. This module will review the fundamentals of company-sponsored retirement plan and health care insurance design.

It is essential to note that individuals may receive retirement benefits from as many as three sources. First, employer-sponsored retirement plans provide employees with income after they have met a minimum retirement age and have left the company. Second, the Social Security Old-Age, Survivors, and Disability Insurance (OASDI) program provides government-mandated retirement income to employees who have made sufficient contributions through payroll taxes. Third, individuals may use their initiative to take advantage of tax regulations that have created such retirement programs as individual retirement accounts (IRAs) and Roth IRAs. Companies establish retirement or pension plans following one of three design configurations: a defined benefit plan, a defined contribution plan, or hybrid plans that combine features of traditional defined benefit and defined contribution plans. Defined benefit plans guarantee retirement benefits specified in the plan document. This benefit usually is expressed in terms of a monthly sum equal to a percentage of a participant’s preretirement pay multiplied by the number of years he or she has worked for the employer. Defined contribution plans may require that employers and employees make annual contributions to retirement fund accounts established for each participating employee, based on a formula contained in the plan document.

In addition, tax incentives encourage companies to offer pension programs. Some of the Employee Retirement Income Security Act of 1974 (ERISA) Title I and Title II provisions set the minimum standards required to “qualify” pension plans for favorable tax treatment. Failure to meet any of the minimum standard provisions “disqualifies” pension plans for favorable tax treatment. Pension plans that meet these minimum standards are known as qualified plans. Nonqualified plans refer to pension plans that do not meet at least one of the minimum standard provisions; typically, highly paid employees benefit from participation in nonqualified plans.

This module will also discuss qualified plans and touch upon nonqualified plans on executive compensation. We will also explore the minimum standards that distinguish qualified plans from nonqualified plans and examine the features of alternative company-sponsored pension plans, including defined benefit plans, defined contribution plans, and hybrid plans.

Lastly, we will explore multiple laws that require employer participation in some employee benefits programs. For example, the Social Security programs (e.g., retirement and disability) most notably influence many people, and these are perhaps the most widely publicized legally required benefits in the United States. For years, there have been valid concerns that there will be insufficient funding to meet promised benefits. As time passes, these concerns are growing stronger.

References

Martocchio, J. L. (2015). Strategic compensation: A human resource management approach (8th ed.). Upper Saddle River, NJ: Prentice Hall.

U.S. Bureau of Labor Statistics. (2012). Employer costs for employee compensation – September 2012. Retrieved from www.bls.gov

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