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Introduction to the Human Resources Discipline of Employee Benefits


Employee benefits in the United States constitute a large, complex and ever-changing set of programs. They are either mandated by federal or state law (such as benefits like Social Security, unemployment insurance and workers' compensation) or are voluntarily provided by the employer to help attract, retain and motivate employees and to contribute to the organization's strategic objectives. Such voluntary benefits include retirement savings programs, disability income and paid time off. The distinction between mandated and voluntary benefits has become somewhat blurred in recent years, as the federal and state governments mandate requirements to all employers that once were voluntary (e.g., family and leave and state mandates to health insurance contracts). Health insurance has traditionally been a voluntary benefit, but under health care reform has become a mandated benefit (unless employers choose instead to pay a per-employee fee). See How to Design an Employee Benefits Program.

Another distinction exists between the private and public sectors. Public-sector employment practices, including benefits, have had somewhat of a separate development. Not-for-profit organizations, the "third sector," also are different in some respects. This discussion will focus primarily on the private sector.

Comprehensive information about the types of benefits U.S. employers offer to their employees is found in SHRM’s 2022 Employee Benefits survey.


Though the origins of employee benefits in the United States go back to the 19th century or earlier, as a mass phenomenon they are largely a post-World War II development. In 1949, the U.S. Supreme Court let stand a lower court ruling that pensions, and by extension other employee benefits, were a "mandatory subject of bargaining" under the National Labor Relations Act (Inland Steel v. NLRB). This ruling had the effect of reducing political pressure from organized labor and other groups to enhance government-provided retirement and health care benefits.

The 1950s and 1960s were a period of rapid development of retirement income and health insurance programs, as unionized employers responded to the demands of the then much stronger labor movement and as nonunion employers intent on remaining union-free followed suit. By the 1960s, employer-provided benefits had become a major component in the compensation package.

Other than the qualification provisions of the Internal Revenue Code (IRC) and some toothless reporting and disclosure requirements, benefits programs were virtually unregulated by the federal government. This changed in 1974 with the enactment of the Employee Retirement Income Security Act (ERISA), which was aimed most directly at traditional defined benefit (DB) pension plans but applicable as well to other employee welfare programs. Henceforth, private-sector employers that sponsored retirement income and health care benefits would be required to comply with the provisions of ERISA and the companion provisions of the IRC. Under ERISA and the various laws that followed, employee benefits became increasingly technical, legalistic and risky—which added to their cost.

No area in the employment relationship is as complex and subject to change as employee benefits. Every time Washington, D.C., or a state capital passes a new law or amends an old one, it adds to the demands on an employer's time and attention. This situation is unlikely to change.

The two most important aspects of the benefits package as measured by cost to the employer or perceived value to the employee are retirement income programs and health care benefits.

Retirement Income

The retirement income system of the United States is a combination of government, employer and individual programs often referred to as a "three-legged stool." Many employers offer employees assistance with retirement planning to help them with their choices.

Social Security

One leg is the Old-Age, Survivors, and Disability Insurance (OASDI) portion of the Social Security program. It is funded equally by a payroll tax on employees and employers and provides a DB pension for life based on contributions over the highest-paid 35 years of covered employment. Workers who become totally and permanently disabled are entitled to disability insurance benefits. Benefits levels are relatively modest, yet millions of elderly Americans rely on them for all or almost all of their income.

Employer-sponsored retirement plans

The second leg of the retirement income stool is an employer-provided plan. Private-sector employer-provided retirement income plans are regulated by the U.S. Department of Labor (DOL) and the Internal Revenue Service (IRS). State and local governments are precluded from passing laws and regulating private-sector pensions by "ERISA preemption." This provision is important to multistate employers with corporate pension plans. It would be disruptive to have to contend with assorted state-specific mandates (as employers now do in other areas of employee benefits).

Defined benefit plans

The DB plan or traditional pension is typically funded by the employer and is compliant with the participation, vesting, accrual and funding standards of ERISA and is insured by the Pension Benefit Guaranty Corporation (PBGC). See Designing and Administering Defined Benefit Retirement Plans.

Defined contribution plans

Since the mid-1980s, the number of traditional DB pension plans has declined drastically as they were replaced by defined contribution (DC) plans. In the private sector, the Section 401(k) plan allows the employee to defer a significant amount of pretax earnings—that may be fully or partially matched by the employer—into a personal account under the investment control of the participant. See Designing and Administering Defined Contribution Retirement Plans.

The public- and third-sector equivalents are the 403(b) plan, available to public-sector education and some nonprofit organizations, and the 457(b) plan, available to state and local governments and some nonprofits. In the public sector, the employer seldom matches the employee's contribution, and DC plans serve as a tax-favored savings arrangement that supplements the traditional pension plan.

In the private sector, DC plans often started as augmentations to the employer's traditional DB plan; however, they are now often the employer's only retirement plan. Many small and midsize employers have discontinued or frozen their DB pension plans and replaced them with 401(k) plans.

Many large employers have shifted from a traditional DB plan to a cash-balance (CB) plan, which has many of the advantages of a DC plan for the employer. Both frozen and cash-balance plans are counted as DB plans, thus masking the full extent of the shift. 

Small employer plans

A number of other arrangements are available to small employers. They include the simplified employee pension (SEP), and the savings investment match plan for employees (SIMPLE). A significant number of employers in unionized industries and their employees participate in multiemployer pension (MEP) plans. They are covered by ERISA but operate under different rules and PBGC termination insurance arrangements.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act was passed in December 2019 and allows unaffiliated employers to offer their workers a 401(k) through a multiple employer plan (MEP), with eased compliance requirements.


Achieving a Better Life Experience (ABLE) accounts came on the scene in 2014 and allow for qualified individuals with disabilities to save for disability-related expenses and retirement tax free. The individual, the employer, family members, friends and others may contribute.  

Individual savings

The third leg of the retirement income stool is individual savings. Employers can provide employees with financial and retirement planning education to help them reduce financial stress by keeping within a budget and by accumulating savings for retirement, their children's college education and other needs. See Employers Feel More Responsible for Employees' Financial Wellness and 6 Ways to Measure the Success of Financial Wellness Efforts.   

Health Care Benefits

The employer's role in the area of health care benefits is largely that of a consumer who selects the benefits to be offered and pays all or most of the cost. The choices have changed drastically over the years and include conventional fee-for-service arrangements to an array of managed care plans (e.g., health maintenance organizations or HMOs, preferred provider organizations or PPOs, point of service or POS).

The salient feature of health benefits management is how to cope with the ever-increasing cost. As health care costs have increased, the federal government has found ways to transfer some of its costs to the health care providers. That approach has put the hospitals and other providers under cost pressure. They have in turn transferred the cost to the other big payer, the employers, through higher premiums for health insurance plans. The employers have shifted some of that cost to the employees through deductibles, co-payments, co-insurance, and reducing dependent and retiree coverage. The employees have responded by putting pressure on their elected officials to fix the problem. See Medical Plan Costs Expected to See Bigger Rise in 2023.

Health Care Reform Law

The 2010 Patient Protection and Affordable Care Act (PPACA or more commonly the ACA) is a comprehensive overhaul of the U.S. health care system. The ACA requires employers with 50 or more full-time employees to choose between providing health care insurance that meets government-mandated essential health care benefits standards to 95 percent of their employees, or paying a fee annually for each full-time employee working 30 or more hours per week.

The plan calls for the federal government to provide tax credit subsidies to qualifying individuals and families who meet certain criteria and who purchased insurance through the exchanges, and to penalize employers if their employees receive subsidies (with a safe harbor that applies if the employee portion of the self-only premium for the employer's lowest-cost plan that provides minimum value does not exceed 8.39 percent (in 2024) of the employee's current W-2 wages from the employer). To stay up-to-date with information and ongoing legal challenges to this complex legislation see our Health Care Benefits Resource Hub Page for news and other tools.

Health Care Continuation

For most Americans, health care benefits are a function of employment. In the past, when an employment relationship terminated, health benefits ceased. Even when the individual found another job quickly, most health plans had a waiting period and pre-existing condition exclusions. The premium on an individual health insurance policy is more expensive than on an employer's group plan. This was a major problem for many former employees, especially if they or their dependents had medical problems.

Congress addressed the problem with the health care continuation provisions under The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA). A former employee may continue his or her coverage in the employer's health plan at up to 102 percent of the group rate for up to 18 months following a "qualifying event" (such as loss of employment or reduction of hours). Covered dependents may do the same for up to 36 months after the death of the covered employee or after divorce or legal separation, or in the case of children "aging out" of the plan. COBRA eligibility usually ends when the beneficiary gains coverage under another health plan or becomes covered by Medicare.

The employer has important notification and record-keeping responsibilities under COBRA. Although most terminated employees and their dependents do not exercise their COBRA rights, the employer must properly notify them of those rights. Failure to do so may extend eligibility indefinitely. See How to Administer COBRA.

Flexible Benefits

Until about 1980, employee benefits were structured on the traditional one-income, two-parent-with-children family. With the increase in the number of women in the workforce, the growth of nontraditional family structures, the emergence of the idea that "choice" is good and the rapidly rising cost of benefits to the employer came a shift toward letting the employee choose some of the benefits he or she would have. During the 1980s and 1990s, a complex development occurred that resulted in what we now call "flexible benefits," "cafeteria plans" or "Section 125 plans."

Section 125 of the IRC allows the employer to establish an arrangement under which employees have some discretion over their benefits packages. Section 125 has some basic rules, to the effect that the plan must be in writing, that the benefits may cover only employees and dependents, that the benefits must be elected in advance and the election be irrevocable for one year, and that the plan may not discriminate in favor of highly compensated employees. See Understanding Section 125 Cafeteria Plans.

Wellness Benefits

As health care costs continue to increase, employers and employees are searching for ways to keep these costs under control and as manageable as possible. Preventive health and wellness benefits are designed to help maintain or improve employees' behavior to achieve better health and to reduce health risks. By warding off health problems or lowering their incidence among employees, organizations hope to save on long-term health costs. See How to Establish and Design a Wellness Program.

Overall well-being programs are also being focused on now, which address financial security and emotional health and resilience. See Wellness Programs Show Modest Benefits, as Efforts Pivot to 'Well-Being' and Employers Are Poised to Expand Mental Health Coverage in 2023.


To attract and retain valued employees, many employers voluntarily offer some combination of paid and unpaid time off, including vacation leave, sick leave, personal leave, holiday leave and bereavement leave. See How to Develop and Administer Paid Leave Programs. The following sample policies illustrate various types of paid time off and how they are administered:


Sample Vacation Policy

Sample Sick Leave Policy

Unlimited Paid Leave Policy

Paid Family and Medical Leave Policy

Holiday Pay Policy

Bereavement Leave Policy

Family and Medical Leave

In 1993, Congress passed the Family and Medical Leave Act (FMLA). It allows employees of an employer with 50 or more employees up to 12 weeks of unpaid leave per year (which may be taken intermittently). Family and medical leave may be used for a serious health condition of a spouse or child, the employee's own health problem, or that of the employee's parent, the birth or adoption of a child, or becoming a foster parent. See SHRM's Family and Medical Leave Act resource page for more information related to the act.

The FMLA also includes two special military family leave entitlements: a) to permit an eligible employee who is the spouse, son, daughter, parent or next of kin of a current service member with a serious injury or illness incurred in the line of duty on active duty to take up to 26 workweeks of FMLA leave during a single 12-month period to care for the service member (military caregiver leave); and b) to allow an eligible employee whose spouse, son, daughter or parent is a member of the National Guard or Reserves to take up to 12 workweeks of leave for qualifying exigencies arising out of the military member's active duty or call to active duty in support of a contingency operation (qualifying exigency leave). See DOL Fact Sheet: Final Rule to Implement Statutory Amendments to the Family and Medical leave Act Military Family Leave Provisions

The FMLA provides only unpaid leave, which many employees cannot afford to take. There is pressure on Congress to provide some measure of paid leave. A number of states already have such programs.

Several states and cities require paid sick leave to be offered to employees. Employers should check state and local laws to assess compliance obligations. Use SHRM's Multistate Law Comparison Tool to check various leave laws in each state.

The Uniformed Services Employment and Reemployment Rights Act (USERRA)

USERRA requires all employers to allow time off, job reinstatement, and benefits continuation up to 24 months for employees serving in the military. See How to Administer Military Leave Benefits Under USERRA.

Workers' Compensation

Workers' compensation laws and programs are state-specific, and therefore vary from state to state. However, they all pay medical, rehabilitation, death and burial benefits, and partial wage loss indemnification to employees who experience on-the-job injury or illness.

Workers' compensation protects the employer as well as the employee. If the employer has coverage from a private insurer or state fund or is self-insured (the requirements vary among the states), its liability for on-the-job accidents is limited to the cost of providing the insurance. Claimants are limited to the statutory benefits provided by the insurer. The quid pro quo of workers' compensation is that employers accept responsibility for workplace accidents as a cost of production and that employees forego their right to sue, and the possibility of a larger recovery, for certain and timely medical and wage loss benefits. See How to Administer a Workers' Compensation Claim.

Unemployment Insurance

Unemployment compensation in the United States is a creation of the Social Security Act of 1935. The federal government required that the states set up a program that met certain standards, or the government would do it for them. By 1936, all states had complied. See Managing Unemployment Compensation Costs and Caseload.

Although variation occurs from state to state, most state programs look a lot alike. They typically pay wage-replacement benefits of two-thirds of the claimant's pay up to a specified maximum (which varies greatly from state to state) for up to 26 weeks. Under the Federal Unemployment Tax Act the program is financed by a payroll tax on employers that is subject to experience rating. Funds are deposited with the federal government, and part of the tax is allocated to Washington, D.C., for administrative expenses and to pay for extended benefits during periods of high unemployment.  

Educational Assistance

An educational assistance program is an employee benefit in which an employer pays for an employee's educational expenses, provides tuition reductions or scholarship grants to an employee's spouse or dependent children or offers student loan repayment assistance. If certain requirements are satisfied, the amount paid, reimbursed or credited toward tuition by the employer is tax deductible for the employer and not taxable income for the employee, making it a win-win program for both parties. See Designing and Managing Educational Assistance Programs.

Other Benefits

Employers offer a wide variety of other benefits, each of which presents its own opportunities and challenges with respect to planning, funding, administering and evaluating. For related articles and resources, see SHRM's Benefits page and the following:

Managing Adoption Assistance Benefits

Managing Employee Assistance Programs

Managing Disability Benefits