Benefits Overview

  1. Introduction
  2. Who is Eligible for Employee Benefits?
  3. Benefits Required by Law
  4. Voluntary Benefits
  5. Medical and Life Insurance Programs
  6. Cafeteria Plans
  7. Employee Welfare Benefit Plans
  8. Retirement and Deferred Compensation Plans
  9. Employee Stock Ownership Plans
  10. Reimbursement Programs
  11. Termination, Death or Retirement
  12. Reporting and Disclosure Requirements
  13. Frequently Asked Benefits Questions (FAQs)
  14. Forms and Checklists


This section provides an overview of and an introduction to the subject of employee benefits. Benefits are becoming a more important component of the total employee compensation package. This has become an increasingly important issue to employers, as benefits represent a significant portion of the overall compensation paid to employees. On average, employers spend between 20% to 33 % of payroll on employee benefits.

The full range of benefit programs is discussed in this section, including certain benefits that are required by law, including Social Security and workers’ compensation, as well as voluntary benefits—time-off benefits, such as leaves of absence, vacation and holiday pay; retirement benefits; health and related insurance benefits, and a variety of other miscellaneous benefits that may be provided by employers, including tuition assistance plans, referral bonus plans, adoption assistance plans, and club memberships.

The most common types of benefits coverage offered, include:

  • Group Medical Insurance;
  • Group Dental Insurance;
  • Group Life Insurance;
  • Disability Insurance;
  • Defined Contribution or 401(k) Plans;
  • Defined Benefit Pension Plans; and
  • Cafeteria (or Flex) Plans.

Who is Eligible for Employee Benefits?

Before approaching the subject of the employee benefits themselves, an employer must determine which of its “workers” are actually “employees” entitled to receive benefits. This determination is not always as simple as it may appear. Employers should be careful to determine which individuals are in fact employees. Independent contractors, for example, are not employees, unless the employer treats them as such—in the eyes of the law, not necessarily the employer! If the government (usually in the form of the Internal Revenue Service and/or the Department of Labor, Wage and Hour Division) can prove that the independent contractor is, in fact, an employee, then the employer will be required to provide the same level of benefits that it provides to other employees—and may be subject to interest and penalties, as well.

Many well-intentioned businesses have been caught in this trap: the Department of Labor can find evidence of an employer-employee relationship even in cases where the employer and the worker have entered into an Independent Contractor agreement! Several recent cases involving corporations who thought they were employing “freelancers” were found to have an employer-employee relationship. In one such case, the U.S. Court of appeals ruled that the workers were entitled to benefits as if they had been employees.

The IRS often uses a 20-factor “test” to determine if freelancers are in fact independent contractors or employees. The section on benefit eligibility discusses how to make the determination of whether your “hired help” are “employees” and thus which of them are entitled to the various benefits offered.

Benefits Required by Law

Employers must provide certain benefits to employees in compliance with federal and state laws. These benefits are commonly referred to as “statutory” or government-mandated benefits. They include:

  • Social Security and Medicare;
  • Workers’ compensation;
  • Short-term disability (in certain states);
  • Unemployment compensation;
  • Time off to vote;
  • Time off to serve as a juror if summoned by a court;
  • Time off for military duty;
  • Time off for family and medical leave purposes; and
  • Accommodation of religious observance

The section on government-mandated benefits discusses when employers are required to provide these benefits and which benefits are covered.

Voluntary Benefits

Many employers voluntarily provide employees with additional fringe benefits, that are not required by law. These can range from paid time off for vacations, sick days and holidays, to free parking and the like.

Many employers find that such benefits can enhance the total compensation package, while helping to balance its employees’ work-life requirements. Many of these initiatives help ensure that workers are more rested and relaxed—and therefore more productive. Employers also provide paid leave and similar benefits to help them attract and retain qualified workers with benefits that are comparable to those offered by other companies. Such benefits can often be more cost-effective than simply offering additional salary. The sections on cafeteria plans and other fringe benefits discuss the types of benefits that may be offered and the advantages and disadvantages of offering these programs.

Medical and Life Insurance Programs

One of the most popular employee benefits is health insurance. Along with salary and pension benefits, medical coverage is often one of the main factors that influence an individual’s decision to accept an employment offer. It is also one of the most costly benefits for employers to provide. Health insurance coverage has recently been in the limelight, due to the passage of the Affordable Care Act (commonly known as “Obamacare”).

The principal types of insurance programs offered by employers are basic health insurance (basic medical surgical/hospitalization), major medical insurance, term life insurance, and in some cases, whole life insurance. Employers may also offer dental and vision plans. In response to employers’ cost-control needs, insurance providers continue to offer new group health and major medical insurance products. Health Maintenance Organizations (HMOs), preferred provider organizations (PPOs) and other managed-care services are several ways to offer employees comprehensive medical coverage, while keeping a lid on costs.

The sections on health insurance and life insurance discuss many of these programs, as well as the tax and legal issues involved in providing these plans.

Cafeteria Plans

In order to allow employees to purchase the benefits that they most value, some employers choose to establish flexible benefit or cafeteria plans. With a cafeteria plan, employees are allocated an “allowance”—a specific dollar amount for premium payments—towards the purchase of benefits, and are offered an array of benefit options from which to choose. Some of these programs are also called “voucher” plans. The increased flexibility afforded both employers and employees, has the potential for tailoring compensation packages to attract and retain employees in different life circumstances. It also helps employers avoid wasteful expenditures.

Employee Welfare Benefit Plans

Cafeteria plans generally offer any or all of the following to plan participants or their beneficiaries:

  • Medical, surgical, or hospital care.
  • Accident, disability, or death benefits.
  • Vacation and sick leave benefits.
  • Severance pay.
  • Apprenticeship or training programs.
  • Day care.
  • Scholarships and tuition reimbursement.
  • Prepaid legal services.

The section on cafeteria plans discusses many of these programs, as well as the tax and legal issues involved in providing these plans.

Retirement and Deferred Compensation Plans

Retirement and deferred compensation plans consistently rank among the most important benefits to most employees—comparable to the status afforded medical benefits. And, they become more important in the case of key executives and business owners, and even in the rank-and-file, as they begin to approach retirement.

Pension and profit sharing plans are probably the most popular retirement plans, and are often encountered as part of a union’s collective bargaining package. 401(k) plans are a popular option, when the benefits of IRA are not available to them.

Pension plans place their emphasis on providing benefits after retirement—rather than current salary—based on some form of income payable periodically. Pension plans may also provide ancillary benefits payable upon death, disability, or other termination of employment (apart from retirement). Most pension plans are funded by employers but some, such as 401(k) plans, also include employee contributions. Pension plans and most other “tax qualified” deferred compensation arrangements are subject to complex rules under the Employee Retirement Income Security Act (ERISA). ERISA applies to all employers engaged in commerce, with the exception of churches and federal, state, and local government employers. The Department of Labor (DOL) enforces ERISA.

Employee Stock Ownership Plans

Companies that issue stock may set aside stock for employees instead of cash. These employee stock ownership plans (ESOPs), give employees a share in the profits they help to create, thus giving them incentive to work harder—and smarter. Various wage/salary and stock compensation packages are available. ESOPs, Incentive Stock Options (ISOs) and other compensation plans that are tied to company stock have gained much popularity in recent years, especially with growing companies. These plans, however, are subject to various rules and regulations—which may cause some reluctance on the part of the business owners.

Reimbursement Programs

Employers may offer a variety of expense reimbursement programs. One popular expense that is often reimbursed is the moving expense. Many employers reimburse employees who are required to relocate in the course of their employment. Some employers also reimburse newly-hired employees for the costs of relocation, depending on their job level and the arrangements negotiated between the company and employee. Even if the employer does not reimburse the employee for expenses incurred in such a move, the employee may be allowed a moving expense deduction for tax purposes.

Termination, Death or Retirement

One of the foremost concerns, especially among older workers, is providing income continuation and medical coverage for themselves and their families after they retire or die. The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) is the federal medical continuation statute.

Under COBRA, employees and their eligible dependents who are covered under an employer’s group health insurance plan must be given the opportunity to elect to continue as members of this plan (at their own expense) for certain time periods, if coverage is lost as a result of the occurrence of a “qualifying event.” The requirements for COBRA continuation of benefits are discussed in the health insurance and employee termination sections.

See also the section on Health Care Reform.

Reporting and Disclosure Requirements

Depending on the particular benefit plan, there is an array of documentation that may be required to be supplied to active plan participants, former employees, beneficiaries, and various government agencies. HR Gear includes a library of several hundred forms and checklists that employers and employees can use for intra-company communications, government reporting and record-keeping. The forms are designed to be downloaded, filled-in and used as is; or they can be imported into your word-processing program to be customized for your particular situation or printed out on your company letterhead.

Frequently Asked Benefits Questions (FAQs)

  1. Who is eligible for employee benefits?
  2. Are any benefits required by law?
  3. What types of “voluntary” benefits are available?
  4. Are there any special requirements for health and life insurance plans?
  5. What is a cafeteria or flex plan?
  6. What are the benefits and drawbacks of a 401(k) plan?
  7. When do the COBRA continuation of benefits rules apply?

Forms and Checklists – The Business Tools you need. Developed by leading HR experts.