Types of Employee Benefits


Everything you need to know about the types of employee benefits. Employers can offer a wide variety of benefits to their employees.

Benefits are designed to help employees meet basic needs they might not otherwise be able to meet on their own. For instance, the high cost of health insurance is often offset by employer contributions to the employee’s premium.

Employee benefits or indirect compensations are group membership rewards that provide security for employees and their family members.


Benefits are indirect financial and non- financial payments employees receive for continuing their employment with the company. They constitute an important part of every employee’s compensation.

The different types of employee benefits are:- 1. Legally-Required Payments or Mandated Benefits 2. Voluntary Benefit 3. Perks and 4. Fringe Benefits.

Types of Employee Benefits – Mandated Benefits, Voluntary Benefit, Perks and Fringe Benefits

Types of Employee Benefits – As Classified by the U.S. Chamber of Commerce: Legally-Required Payments or Mandated Benefits and Voluntary Benefit

Employee benefits or indirect compensations are group membership rewards that provide security for employees and their family members. Benefits are indirect financial and non- financial payments employees receive for continuing their employment with the company. They constitute an important part of every employee’s compensation.

Benefits and services are alternatively known as supplementary compensations, service programmes, non-wage payments, employee benefits and hidden payrolls. Generally, they are known as fringe benefits. In the broadest sense, such “fringes” can be constructed to include all expenditures designed to benefit employees over and above regular base pay and direct variable compensation related to output.


For the success of employee benefits and services programmes, the management should ensure the following:

(i) To provide employees meaningful choices of benefits that exactly matches their needs.

(ii) To keep the costs of these programmes under control.

(iii) To ensure that employees are fully informed regarding the various options of these benefits and services.


Various benefits provided to the employees may be classified on different basis.

U.S. Chamber of Commerce has classified employee benefits into two categories as follows:

(1) Legally-Required Payments or Mandated Benefits:

The federal and State Governments require various forms of legally required benefits to protect workers from the financial hardships of being out of work. They include Dearness Allowance, Social Security, Unemployment, Insurance, Worker’s Compensation and Family and Medical Leave. These benefits are so designed to give the workforce a basic level of security. The cost of legally required benefits to employers is quite high. They pay a tax on employee’s earnings for each of these required benefits.

a. Dearness Allowance:


According to Pension rule 50A, the pensioners and the family pensioners are granted Dearness Allowance against the price rise. During the reemployment under Central or State Government or Government undertaking or Autonomous body or Local Body, they are not eligible to draw D.A., in case D.A. is allowed in addition to fixed pay or time scale.

In other cases of reemployment D.A. is allowed subject to the limit of emoluments last drawn. D.A. is not allowed while the pensioner stays abroad and also in case of employees absorbed in public undertaking or bodies. If the pensioner stayed abroad without reemployment, he shall be eligible to draw D.A. on pension.

The Rates of Dearness Allowance:

(i) Prior to 1972 there was no element of D.A. on Pension. From 01.04.1972 there was a flat rate of D.A. to all the pensioners 01.04.1972 @ Rs.5; 01.04.1973 @ Rs.10 01.10.1973 @ Rs.15; 01.04.1974 @ Rs.20; 01.02.1975 @ Rs.28; 01.02.1976 @ RS.32; 01.04.1977 10 % subject to maximum of Rs.15 till 15.09.1977. Rs.10 for those retired prior to 01.06.1961 and Rs.5 after 01.06.1961; 01.04.1978 5% increase – minimum Rs.10, maximum Rs.25.


From 01.04.1979 to 30.09.1984 there were 28 instalments of D.A. paid to the pensioners at certain fixed rates for 13 slabs of pension amounts. From 01.10.1984 to date, the pensioners are paid D.A. at certain percentage of basic pension.

(ii) Dearness Allowance is calculated on the original pension without commutation.

(iii) Dearness Allowance is granted at certain percentage of basic pension and it is revised every 6 months from 01.07.1986 onwards based on cost of living index.

b. Social Security:

The measures of social security have introduced an element of stability and protection and reduce stresses and strains of an individual. The ILO defines social security as “the protection which society provides for its members through a series of public measures, against the economic and social distress that otherwise would be caused by the stoppage or substantial reduction of earnings resulting from sickness, maternity, employment injury, unemployment, invalidity, old age and death, the provision of medical care and the provision of subsidies for families with children”.

The concept of social security is essentially related to the high ideals of human dignity and social justice. The formation of ILO in 1919 to promote social justice through- (i) international standards (ii) technical assistance and guidance and (iii) co-operation with other international organizations, provided the impetus and direction needed by most countries.

To be eligible for full social security benefits, a person must have worked 40 quarter year periods which equals 10 years of total employment. In India, over the years a number of legislative measures have been adopted to ensure benefits to employees of industrial undertaking under the scheme of social security.

The Social Security Act of 1935 created a system of retirement benefits. It also includes income for disabled, survivors of deceased workers and health care for the aged through the Medicare Program. Employers are required to share equally with employees the cost of old age and disability insurance. They pay the full cost of unemployment schemes. Social Security Program is increasingly being accepted as useful and necessary instruments for the protection and stability of the company.

Defined benefits plans may be either funded or unfunded. In a funded plan, contribution from the employer and sometimes also from plan members are invested in a fund towards meeting the benefits. The future returns on the investments and the future benefits to be paid are not known in advance, so there is no guarantee that a given level of contributions will be enough to meet the benefits.

Typically, the contributions to be paid are regularly reviewed in a valuation of the plans’ assets and liabilities, carried out actually. In many countries such as USA, UK and Australia, most private benefit plans are funded, because Governments there provides tax incentives to funded plans.

In an unfunded plan, no funds are set aside. The benefits to be paid are met immediately by contributions to the plan. In some countries, such as Germany, Austria and Sweden, company run retirement plans are often unfunded.

Unemployment Assistant Schemes:

The Social Security Act of 1935, established unemployment insurance to provide temporary income for people during periods of involuntary unemployment. In some states, the Governments have undertaken to provide work to the unemployed persons so that they may earn their living and in such cases, financial assistance is given if the Government is unable to provide employment.

These are known as employment guarantee schemes. The Central Government has also introduced a variety of schemes to provide employment to the unemployed youths so as to relieve them of the hardships due to unemployment. These include National Rural Employment Programme, Rural Labour Employment Guarantee Program and the Jawahar Rozgar Yojna.

c. Worker’s Compensation:

The Principal of worker’s compensation makes the employer liable to pay compensation for personal injury caused by accident in course of employment. It is the first social security measure which ensures relief for workmen and their dependents in case of accident in course of employment and resulting in death or disablement of workmen.

The Commissioner of Workmen’s Compensation must be notified of the accident resulting in the death of an employee within 7 days of the date of accident. The amount of compensation is equal to 40% of the monthly wages of the deceased workman, multiplied by the relevant factor; or an amount of Rs.20,000/-, whichever is more, where death results from injury.

If the employer does not pay the compensation within one month from the date it falls due, the Commissioner may order recovery of not only the amount of arrears but also a simple interest at the rate of six percent per annum on the amount due. If there is no justification for the delay in the opinion of the Commissioner, an additional sum not exceeding 50 percent of such amount may be recovered from the employer by way of penalty.

d. Family and Medical Leave:

The employees are entitled to medical attendance and treatment either under the contributory Health services scheme or under the Medical Attendance and Treatment rules which provide for reimbursement of the expenditure incurred on medical attendance and Treatment of the employees themselves as well as the members of their families. The employees are entitled to earned leave on full pay for 30 days and half pay leave for 20 days per year. Earned leave can be accumulated upto 240 days. Half day leave can be commuted into full pay leave on medical grounds up to a maximum of 240 days during one’s service.

2. Voluntary Benefit:

Retirement benefits, rest periods, vacations, medical care, compensation for injuries and disablement, subsidized food and housing, educational and cultural facilities, payment on life insurance, cafeterias (flexible compensation), maintenance of canteens, assistance to co-operative societies are some of the benefits voluntarily offered by employers.

1. Retirement Benefits:

These benefits are provided by good employers, even before compulsion through legislation. There benefits generally consist of providing schemes for pension fund, provident fund and gratuity.

Many retirement plans have some form of disability retirement benefits. These plans often have some service and age requirement. It is an arrangement to provide people with an income or pension during retirement, when they are no longer earning a steady income from employment.

Retirement plans may be set up by employers, insurance companies, the Government or other institutions such as employer associations or trade unions. Retirement plans may be contributory plans, meaning they are funded by contributions from the employer and employee or non-contributory plans, meaning all the contribution come from the employer.

Retirement benefits include:

(a) Provident Fund

(b) Pension

(c) Deposit-linked insurance

(d) Gratuity

(e) Medical benefit.

Types of Qualified Retirement Plans:

What is a Qualified Retirement Plan?

It is a Retirement Plan maintained by an Employer that provides retirement income to employees and/or results in the deferral of income by employees for periods extending generally to the end of employment.

The employer is afforded favourable tax treatment (i.e., a deduction) for contributions made to the Plan assuming they fall within the prescribed IRS limits and the Plan meets all of the “qualification requirements” under the Internal Revenue Code.

Why Should a Company Adopt a Qualified Retirement Plan?

A Qualified Retirement Plan is one of the best tax shelters available. The company is allowed current tax deductions for its contributions to the plan and the employee pays no tax on monies contributed to the Plan until a distribution is made. Also, earnings from investments made with the Plan funds accumulate tax free. Thus, long term employees (i.e., usually key employees) can accumulate large sums of money through the tax free buildup of capital.

There are also non-tax reasons for adopting a qualified Plan. They attract good employees, reduce employee turnover; increase employee incentive and accumulate funds for retirement.

What are the Basic Types of Qualified Retirement Plans?

Qualified Retirement Plan fall into two categories:

I. Defined Contribution Plans and

II. Defined Benefit Plans.

I. Defined Contribution Plans (DC Plans):

DC Plans are retirement Plans that provide for an “individual account” for each participant. The ultimate retirement benefit that each participant receives is dependent largely on two variables; the amount of employer contributions or forfeitures allocated to the account and the investment experience of the fund (earnings, gains/losses, expenses, etc.) There is no guaranteed retirement benefit (i.e. no “Defined Benefit”).

DC Plans include the following:

A defined contribution Plan specifies what contribution the employee and employer will make to the employees’ retirement or savings fund. It will provide a payout at retirement that is dependent upon the amount of money contributed and the performance of the investment vehicles utilized. There are many kinds of defined contribution plan. They are-

Deferred Profit Sharing and Employee Stock Ownership Plan:

It is a defined contribution employee benefit that allows employees to become owners of stock in the company they work for. It is equity based deferred compensation plan. There are several features that make ESOPs unique as compared to other employee benefit plans. In an ESOP, the organization’s distributes shares of stock to its employees by placing the stock into a trust managed on the employees’ behalf.

Employees receive regular reports on the value of their stock and when they leave the organization, they may sell the stock to the organization of (if it is a publicly traded company) on the open market. It is required by law to invest primarily in the securities of the sponsoring employer.

How does ESOP Works?

(i) The ESOP operates through a trust, set up by the company that accepts tax deductible contributions from the company to purchase company stock.

(ii) The contributions made by the company are distributed to individual employee’s accounts within the trust.

(iii) The amount of stock each individual received may vary according to pre-established formulas based on salary, service, or position.

(iv) The employees may cash out after vesting in the program or when they leave the company. The amount they may cash out may depend on the vesting requirements.

(v) When an ESOP employee who has at least ten years of participation in the ESOP reaches the age 55, he or she must be given the option of diversifying his/her ESOP account up to 25% of the value. This option continues until the age of sixty, at which time the employee has a onetime option to diversify upto 50% of his/her account. This requirement is applicable to ESOP shares allocated to employees accounts after December 31st, 1986.

(vi) Employees receive the vested portion of their accounts at termination, disability, death, or retirement. These distributions may be made in a lump sum or in instalments over a period of years. If employees become disabled or die, they or their beneficiaries receive the vested portion of their ESOP right away.


(i) Capital Appreciation – Companies sell some or all of their equity to employees and by doing so, converts corporate and personal taxes into tax-free capital appreciation. This allows the owner to sell 100% of his or her company to get money out tax-free and still maintain control of the company.

(ii) Incentive Based Retirement – It provides a cost-effective plan to motivate employees.

(iii) Tax Advantage – It enables tax advantage purchasing of stock of a retiring company owner. With this purpose, a company owner may sell their shares to the ESOP and incur no taxable gain on the sale. A company owner can sell all or some of the company to the employees cost free. It has been found that owners who sell 30% or more of their company to an ESOP are allowed to “roll-over” and proceeds into their securities and defer taxation on the gain.

(iv) Reduction of Tax Liability – A company can reduce to corporate income taxes and increase its cash flow and net worth by simply issuing treasury stock or newly issued stock to its ESOP.


(i) Defection – If the ESOP is used to finance the companies’ growth, the cash flow benefits must be weighed against the rate of dilution.

(ii) Fiduciary liability – The committee members of the plan are deemed to be fiduciaries and can be held liable if they knowingly participate in improper transactions.

(iii) Liquidity – If the value of the stock appreciates substantially, the ESOP and/or the company may not have sufficient funds to repurchase stock, upon employees’ retirement.

(iv) Stock Performance – If the value of the company does not increase, the employees may feel that the ESOP is less attractive than a Profit sharing plan. In an extreme case, if the company fails, the employees will lose their benefits to the extent that the ESOP is not diversified in other investments.

(a) Money Purchase Plan – The employer specifies a level of annual contributions that are invested and when the employee retires, he or she is entitled to receive the amount of the contributions plus the investment earning.

(b) 401 (K) Plan – It is a defined contribution plan in which employees may defer income upto a maximum amount allowed. Employees contribute a percentage of their earnings and employers may make matching contributions. The amount employees contribute is not taxed as part of their income until they receive it from the plan. Its matching feature makes it attractive to both employers and employees.

Employees’ benefit by accumulating tax-deferred retirement funds, employers benefit by reducing their risk, since there is no payment required when the employee leaves or retires. Usually, employees are free to decide individually how they wish to invest their funds.

(c) Hybrid Plan – It is a desired approach to retirement plan. It is a cash balance plan, with elements of both defined benefit and defined contribution plan that have notional balances in hypothetical accounts where, typically, each year the plan administrator will contribute an amount equal to a certain percentage of each participant’s salary.

There is a switch from traditional benefit plans to cash balance plan, as it is more generous to young employees who will have many years ahead to earn interest.

II. Defined Benefit Plans (DB Plans):

DB Plans are retirement Plans other than “individual account Plans”. In other words…… any Plan that is not a Defined Contribution Plan usually is a Defined Benefit Plan. In a Defined Benefit Plan the ultimate retirement benefit is stated (i.e.- “definitely determinable”). The benefit is based on the Plan formula, your salary, and in most cases, the number of years of service you work for the employer.

The ultimate benefit is called the “retirement benefit” and the amount/portion of that benefit that you have earned at any point in time is called your “accrued benefit”. In most cases…you will only earn your full retirement benefit (i.e.- fully accrue your benefit) if you continue your employment until the “normal retirement age” stated in Plan document.

If a Plan is classified as a Defined Benefit Plan the following is true:

(a) Retirement benefits are geared to the Plan Formulas not to contributions

(b) It is not an individual account plan

(c) The annual employer contribution, is actuarially determined

(d) Some benefits may be insured by the PBGC.

A primary difference between the “Defined Contribution Plans” like the 401(k) Plan or Profit Sharing Plan and a “Defined Benefit Plan” is that the investment risk under a “Defined Contribution” Plan lies with the employee participant and the investment risk, under the “Defined Benefit Plan” lies with the employer sponsor.

The “Defined Benefit” Plan defines and promises a specific benefit at some point in the future. This defined benefit is provided typically at the retirement of the employee participant. For example, a typical benefit may be a monthly income starting at age 65 equal to 50% of the employee’s average salary over the last three years of work.

The employer is required to contribute, and may deduct, whatever amount is actually necessary to assure the benefit is funded, which places the investment risk with the employer, not the participant. If the investments do not perform as projected, the employer may have more to contribute in the future.

Benefit accrual tends-to reward long-term service, and because with older employees there is less time for assets to accumulate to fund the benefit, contributions for older employees generally are much higher than younger employees. Thus, older business owners, seeking large contributions often favour defined benefit plans.

For aging management groups who have little chance to save for retirement, a defined benefit plan is an excellent way to make up for lost time. A defined benefit plan provides the only way for companies to make annual tax-deductible contributions for their employees in excess of $41,000 or 100% of pay [the maximum for “defined contribution” plans].

For example, the following are the maximum contributions for 2004 that are tax deductible for defined benefit plans and defined contribution plans.

However, because of the required funding costs, and potential growing funding liability for older employees, the number of defined benefit plans has dropped over the past decade. As the baby boom of employees is growing older and becoming more transitory in employment, larger employers have steered away from defined benefit plans to employee participatory plans such as 401 (k) plans.

2. Rest Period:

It is the time which allows workers some physical and mental diversion from their work. It is particularly popular among office job having heavy exertion or high repetition. These rest periods are however not free to the employer. The absolute cost to US employers for 20 minute rest period permitted to every employee in a day would exceed $62 billion a year. In case of adult workers in a factory, the period of work must be so fixed each day that no period shall exceed 5 hours, with an interval for rest of at least half an hour.

3. Vacations:

Paid vacations vary from 15 days to 30 days in a year. These are given to the employee to provide a break to refresh him. The number of paid employee vacation days varies from employer to employer. The common trend is to relate the length of vacation to the length of tenure and job classification in the organization. For example, after six months’ service with the organization, an employee may be eligible for one weeks’ vacation, after a year, two weeks, after five years, three weeks, after 10 or more years, four weeks.

If the individual is an executive, the vacation time is usually doubled. In contrast to normal paid vacation, the extended vacation is made available to employees every five to seven years, depending on the terms of the negotiation. It was found that vacations develop employee loyalty.

4. Sick Leave:

It provides an employee pay when he is out of work due to illness. It is allocated on the basis of so many days a year, accrued on a cumulative basis, or expanded years of service with the organization.

Sick leave pay causes difficulty for many employees. The problem is that while many employees use their sick days only when they are legitimately sick, others use sick leave as extensions to vacations, whether they are sick or not. Employer has tried several tactics to overcome the problem. They used to repurchase unused sick leave at the end of the year by paying their employees equivalent sum of amount.

Some organizations provide their employees with accident insurance to cover loss of income brought about by a long-term illness or disability. The range of payment is normally between 40-60 percent of an individual’s weekly wage or salary. In case of permanent disability, coverage may include benefits up to the normal retirement age when pension benefits will be available to provide financial security.

5. Holidays:

There are certain days in the year stipulated as paid holidays. Most organizations define these days to include Christmas, New Years, Labour Day, Thanks giving day, on which the employees are paid and they do not have to work. These holidays are usually nine to eleven in number regardless of the employees’ length of service. In India, Independence Day, Republic Day, Gandhi Jayanti, Deepawali, Dusshera, Holi, Id, Christmas, Guru-nanak Jayanti, Mahaveer Jayanti are gazetted holidays.

6. Leave of Absence:

This covers leave of absence for which pay is provided. This category includes absence for education leave, jury duty or military service Educational leaves are the usual province of managers or management trainees. There are some organizations like IBM and Xerox which permits employees to take a paid six-month or one-year leave in order to engage in community service i.e., Sabbatical leave. Also those employees who are active in their union are frequently given periods of time off each week, with pay, engaged in union administrative activities.

7. Housing Services:

These services includes company-owned housing projects and subsidized housing with the high cost of housing or high risk in ownership, some organizations are building homes and rental units for a selected group of their employees. This service is mainly provided to attract and retain potential employees. Top executives in some organizations are provided free housing as they are required to do considerable entertaining and recreation activities.

8. Cultural Activities:

There are certain activities provided to employees for their overall growth and to broaden the organizations’ interest. They are free tickets to plays or operas, use of company library, club membership, organize athlete’s events, arrange football and hockey tournaments, and provide picnics for their workers and employees. The cost of such benefits is usually minimal, yet they provide an opportunity for the employee’s to grow and develop. It not only increases employee loyalty and interest but also strengthens employer employee relationships.

9. Disability Income:

For people who become disabled, a monthly income comparable to retirement benefits is provided by social security. An individual must meet the requirements of disability insurance status to obtain disability benefits.

Types of Employee Benefits – 2 Main Types: Perks and Fringe Benefits

Employers can offer a wide variety of benefits to their employees. Benefits are designed to help employees meet basic needs they might not otherwise be able to meet on their own. For instance, the high cost of health insurance is often offset by employer contributions to the employee’s premium.

Employee services are employee benefits, but they are a more specific form of employee benefit that employers offer to help instill loyalty among their workers. Small business owners must decide which benefits and services to offer employees. With limited resources, some can offset expensive benefits with less expensive employee services.

Type # 1. Perks:

Perks, as defined, are to encourage the employee to walk with his/her head lifted with smartness so as to motivate him/her and provide him/her the opportunities to earn more or to enhance his/her loyalty to the organization by way of awards for continuing to work for the company.

These are aimed at social justice, balancing the cost of living, letting an employee to perform better and be comfortable at the workplace. What is usually considered under these issues is detailed below.

a. Perks for Social Justice:

In a society, an employee has to maintain the standard of living and be able to project his/her worth and position. Therefore he/she must get a fair opportunity to earn and enjoy facilities, and be rewarded for being associated with that organization.

These perks are:

i. Over time payment for extra effort beyond duty hours

ii. Annual bonus for having been with the organization and being part of their annual earnings

iii. Special allowance for specific duty other than specified in the job description of the job he/she has been appointed to

iv. Retaining allowance

v. Unemployment/disability/accident compensation.

b. Perks for Balancing the Cost of Living:

To reduce the extra burden on the employees and to provide them reasonable real wage/salary, the allowances as listed below help them balance the cost of living:

i. Credit/cooperation store facilities

ii. Conveyance allowance

iii. Clothing or uniform allowance

iv. Site or works allowance

v. HRA and CCA allowances

vi. Subsidised meals.

c. Perks for Improving Effectiveness:

Similarly, to increase their willing to do more work with pride, some of the perks as listed below motivate them:

i. Reimbursement of mobile phones

ii. Travelling and dearness allowance if they go out of the workplace

iii. Target allowance or productivity awards

iv. Sponsoring Training and Development Programmes.

Type # 2. Fringe Benefits:

Fringe Benefits are marginal extra earnings to make workers feel comfortable at the workplace or to perform their duty. However, they vary according to the management’s HR policy and objectives regarding, how to hire, maintain and retain the knowledge bank of the company.

The most commonly offered fringe benefits are considered below:

i. To secure employment

ii. To protect the health of employees

iii. To provide old age/retirement benefits

iv. To recognise an individual.

i. To Secure Employment:

Every employee in any organization does have a feeling of insecurity of job, especially in the private sector. To eliminate this fear, the management offers some commitments and payments which can take care of this concern.

Benefits under this head cover:

a. Notice period payment

b. Unemployment Insurance by the company to provide earnings even after death or disability

c. Payment against the notice period to ensure earnings before an employee gets another job

d. Payments for holiday, vacation period and medical leave period

e. Call back pay and lay off pay to ensure some part of future liabilities

f. Sufficient money at the time of retrenchment, if the need arises

g. Contribution for provident fund.

ii. To Protect the Health of the Employees:

Health protection is a statutory responsibility of the organization or institution/ corporation, and any human being may need extra to meet the unexpected expenditure on health maintenance for oneself and his/her family.

Therefore, such benefits cover:

a. Group Insurance and accidental insurance to be paid by the company

b. Hospitalization and Subsidised medical facilities or reimbursements

c. Sick benefits, maternity benefits

d. Medi-claim and life insurance payments by the company.

iii. To Provide for Old Age and Retirement:

After having spent one’s golden youth in any organization, the employee needs protection against future liabilities or old age benefits.

Benefits under this head cover:

a. Gratuity and pension payment after retirement

b. Employer’s contribution for provident fund

c. Old age free counselling and assistance

d. Medical assistance after retirement

e. Travelling concessions after retirement

f. Jobs to heirs of the deceased employee.

iv. To Recognize an Individual:

Recognition of any employee is the best form of non-monetary payment and is an instrument to encourage him/her by appreciating his/her contributions. Even some cash award may make an employee feel better. Therefore, additional monetary or non-monetary awards are also considered to recognize an individual for his/ her appreciable jobs or efforts.

Benefits under this head cover:

a. Anniversary awards

b. Attendance bonus

c. Educational facilities for children

d. Free housing and transport

e. Income tax aids/free legal services

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