is an employee pension plan where each employee has their own individual plan but it is set up and administered as a group plan by the
employer or the union. The contributions are made through payroll before income tax
is deducted and the earnings of the plan accumulate on a tax
Mandatory Employer-Related Costs – MERC’s (Employment Insurance, Can- ada/Quebec Pension Plan, Workers’ Compensation, and Vacation Pay) plus remaining benefits can range from 12% to 40% or more of payroll costs. Due to the substantial expense, benefits need to be seriously considered for their impact on compensation costs and whether monies spent can be put to better use. (Milkovich 2005 215)
Evaluating employee benefits requires taking into account that they are part of the total compensation package and ensuring that to be externally competitive, benefits offered to employees must be relative to those of other organizations in the sector. Moreover, assessing the culture of the organization and implement- ing benefits that meet employee needs while discarding those that are not as relevant will help contain costs associated with benefits. For example, a young, childless workforce will probably not value expensive life insurance.
Another consideration is looking at the longer-term outcome of implementing particular benefit plans. For example, while there is a trend toward employer- funded workplace wellness programs, many organizations do not see the value of adding more expenses to healthcare. However, research demonstrates that there can be a significant return on investment from programs such as smoking cessation, weight loss, nutrition, and stress management, resulting in a healthier, more productive workforce.
Organizations are moving away from defined-benefit plans with uncontrolled risks to defined contribution plans that give employees choice and limit the organizations’ risks. With the increasing life expectancy, defined-benefit plans may become a source of unforeseen costs to the organization; the funds that were allocated to the pension fund may not be sufficient to meet the obligations of the plan.
Controlling Health Care Costs
To control health care costs, organizations are taking measures such as employ- ee-directed health plans.12 In such plans, an amount of money is allocated for each employee to pay for all or a portion of their health care expenses. Infor- mation regarding the cost and quality of health care services along with online access to their account enables them to track their expenses and progress toward meeting their deductibles.
The rising cost of benefits was identified as a major issue by 57% of the respond- ents in a 2004 Compensation Trends and Projections Survey.13 Furthermore, 95% of the respondents in a 60-Second Survey in May 2004 expressed a med- ium or high level of concern about rising pension and benefits costs. This trend in rising costs is expected to continue for a least a decade.
Milkovich (2005) advocates that administrators should control benefit expenses with a wide-ranging, cost-centered approach. Administrators should negotiate benefits on a cost rather than package basis so that they are less likely to be locked into escalating costs that become progressively more difficult to control. He also suggests that organizations review their benefit systems for cost containment possibilities. The most prevalent practices include setting probationary periods 12 Ibid
before employees can receive benefits, limiting maximum payment levels, in- stituting co-insurance payments by employees, implementing or increasing de- ductibles, coordinating benefits among spouses or lowering administrative costs through competitive outsourcing.
Outsourcing is the biggest recent trend in benefits cost containment. Contract- ing with outside services to administer their benefits programs allows greater centralization, consistency, and control of costs and benefits.
Ideas on Cost Containment 14
1. Evaluate existing underwriting and explore financing through employee contributions.
2. Maintain a long-term relationship with insurers.
3. Assess whether brokers are providing services worth their costs.15 Under the Canadian Life and Health Insurance Association Disclosure Guidelines (2005), brokers are required to disclose to clients exactly how they are compensated.
4. Audit claims to find errors and trends.
5. Ensure that employee, spousal and dependent information is
sufficiently current so that benefits can be coordinated with a view to savings.
6. Adopt a workplace wellness campaign to generate returns in the form of a better employer-employee relationship and lower some health- related costs.
7. Review deductibles so that employees pay a more significant share of costs.
8. Cap dispensing fee reimbursement so that employees will either shop at lower-cost pharmacies or share in costs.
9. Introduce co-payments, limit reimbursement amounts and/or have employees share the costs of premiums to lower costs to employer and educate employees.
It would be worthy to note that although many of these measures are cost ef- fective, they also have downsides for employees. For example, long probationary periods can mean that employees don’t get dental work done until they can do it under a benefits plan. By then, the dental problems could have led to absentee- ism and to more extensive measures at a higher cost.
Benefit costs can sometimes be controlled without a major effect on employee benefits. Some organizations will group together with others for reasons of economy of scale and a greater ability to negotiate with insurers. Joining plans provided by Industry Associations, Chambers of Commerce and Boards of Trade can be a good way to achieve these efficiencies. And, associations within industries are not the only option. Some groups within local areas establish health insurance networks.
14Linda Clay, “Facing Off Against Culture of Entitlement,” Canadian HR Reporter, September 10,
2007, Dec. 2007 www.canadianhrreporter.com/search/default.asp?submit=Go&txtKeyword=Linda+Clay
15Canadian Life and Health Insurance Association Disclosure Guidelines (2005), Dec. 2007
www.advocis.ca/content/programs/advocacy/Advisor_Disclosure_Ref-Doc.pdf