Employee Benefit Plan Explained

Employers face a difficult and expensive task when it comes to managing employee benefits. Employers are required to provide benefits such as Social Security contributions, worker’s compensation insurance, and unemployment insurance. However, most benefits are voluntary and determined by the employer. Although benefits programs can vary widely, they typically include medical insurance, life insurance, disability insurance, retirement income plan benefits and paid-time-off benefits. The total compensation costs are affected by the benefits selection and design. Benefits can account for up to 40% of total compensation costs in some cases. Employers should have a well-thought out benefits plan that addresses both the employer’s needs and their objectives.

Top Employee Benefit Plans

Employees need to be able to understand the benefits in order for them to buy-in. Employer efforts to meet employees’ needs may not be successful without employee buy-in. Employers should share employee input in the benefits design process with employees. Let them know how it influenced the design of the benefits program. Without effective communication plans, the positive impact on employee retention, recruitment, and morale could be lost. Communication must go beyond the legal requirements. Although employers are required to communicate with employees in compliance with laws regarding disclosure of benefits plans, such a summary plan description, they should not be required to do so. Good benefits communication objectives should include:

Employee Benefit Plan Review

An employee can’t withdraw funds like a 401(k), plan. Instead, they can take their benefit as either a lifetime annuity, or in certain cases, a lump sum at a time defined by the plan’s rules.

Poor investment returns, faulty assumptions and calculations may lead to a funding shortfall. Employers are legally required to make up the difference by making a cash contribution.

Plan for Employee Benefits Defined

This type of plan, also known as qualified-benefit or pension plans, is called “defined benefits” because both employees and employers know the formula to calculate retirement benefits in advance and use it to determine and set the benefit. This fund is different than other retirement funds like retirement savings accounts where payout amounts are dependent on investment returns.

Defined benefit plans

This offers a pre-determined benefit that employees will receive at retirement. This type of plan is often valued by employees. Employers can contribute and deduct more annually in defined contribution plans than they can in defined benefit plans. However, defined benefit plans can be more complicated and more expensive to set up and maintain than other types.