Benefits are group membership rewards that provide security for employees and their families. Benefits cost companies about $19,947 per year for the average employee. The cost of employee benefits has increased dramatically in recent years. Although benefits programs are usually centrally controlled in organizations, managers need to be familiar with them so they can counsel employees, recruit job applicants, and make effective managerial decisions.

The design of a benefits package should be aligned with the business’s overall compensation strategy. The benefits strategy requires making choices in three areas: (1) benefits mix, (2) benefits amount, and (3) flexibility of benefits.

The four benefits that almost all employers must provide are Social Security, workers’ compensation, unemployment insurance, and unpaid family and medical leave. These benefits form the core of an employee’s benefits package. All other employer-provided benefits are designed to either complement or augment the legally required benefits.

Businesses often provide five types of voluntary benefits to their employees: (1) Health insurance provides health care for workers and their families. The major types of health insurance plans are traditional health insurance, health maintenance organizations (HMOs), and preferred provider organizations (PPOs). (2) Retirement benefits consist of deferred compensation set aside for an employee’s retirement. Funds for retirement benefits can come from employer contributions, employee contributions, or a combination of the two. The Employee Retirement Income Security Act (ERISA) is the major law governing the management of retirement benefits. There are two main types of retirement benefit plans: defined benefit plans and defined contribution plans. In a defined benefit plan, the employer promises to provide a specified amount of retirement income to an employee. A defined contribution plan requires employees to share with their employer some of the risk of and responsibility for managing their retirement assets. The most popular defined contribution plans are 401(k) plans, individual retirement accounts (IRAs), simplified employee pension plans (SEPs), and profit-sharing Keogh plans. (3) Insurance plans protect employees or their survivors from financial disaster in the case of untimely death, accidents that result in disabilities, and serious illnesses. Two kinds of insurance likely to be included in a benefits package are life insurance and long-term disability insurance. (4) Paid time off, which gives employees a break to pursue leisure activities or take care of personal and civic duties, includes sick leave, vacations, severance pay, holidays, and other paid time off. (5) Employee services consist of a cluster of tax-free or tax-preferred services that employers provide to improve the quality of their employees’ work or personal life. One of the most valued employee services is child-care benefits.

Two important issues involving benefits administration are the use of flexible benefits and communicating benefits to employees. Although the benefits administration is likely to be performed by an HR benefits specialist, managers need to understand their companies’ benefits package well enough to help communicate benefits to their employees and keep records.