Employee Benefits - A Perspectives

 Covid 19 is an extra ordinary situation arising due to spread of corona virus situations. As the virus is extremely agile and contagious many countries have taken a call for a complete lockdown of social, religious and business activities other than essential items. This has led to lot of uncertainties across business and the employees. Few of the uncertainties that looms with Covid 19 are

·        Stressed cash situations.

·        Economic activities at a screeching halt leading to Zero or no demands.

·        No certainty on when will the economic activities be normal and business houses can run with full strengths.

·        Employers have paid salaries but with no revenues it will be difficult to sustain beyond a point.

·        Employees are not sure on Job and lot of uncertainties are around on job cuts/salary cuts etc.

In these tough times its normal that your employees will get very uncertain about their prospects. However, as an employer it is important to take right measures and control so that your future business is not impacted. For any employee, the Employee Benefits are most important element beyond salary which helps them to have a futuristic approach and safety. It also increases employee Morale and productivity.

With the backdrop of the dynamic economic environment along with the rapidly evolving employee requirements, we believe it is essential to evaluate and perhaps redesign some of the benefits offered to employees keeping in mind their golden years ahead of them. At the end of the session we hope to capture key insights and have a blue print of the roadmap ahead vis-à-vis Retirement Benefits in India Insurance companies have always been partners to employers in creating various tools of retaining talents, few of the important ways an insurance companies help in employee benefits are

Few of the Products that help to cater employee long term need and safety of family by insurance company is as below.

GROUP TERM LIFE

GTL or Group Insurance is a very important tool to give a long-term protection to employees. It ensures employee’s family wellbeing despite an eventuality. It is one of the most important tool from social security perspectives.

The Insurance is applicable where there is a relationship established between the employer and the employee, where in the employee earns a salary from the employer for the services provided to the employer.

1)   Sole Proprietorship where the employee works ( other than the proprietor)

2)   Employees of the partnership firms

3)   Corporate employees or Any legal entity as the employer and its employees. All members of the scheme will be covered under a single policy that will be issued to the Master Policyholder.

?      The sum assured for each individual member shall be as proposed by the policyholder having reference to some justifiable factor and as agreed by the Company. The coverage selected may be: Uniform or Graded

?      Joint life option is available (for spouse only)

?      Under joint life cover, self and spouse will be covered and the death benefit will be paid in case of first death of either of the members

?      This is a one-year renewable contract and at the time of contract renewal, the insurer may renew or decline to renew the contract in accordance with Board approved underwriting norms. The premium and other terms and conditions will be reviewable yearly

 GTL IN LIEU EMPLOYEES’ DEPOSIT LINKED SCHEME

What is Employees Deposit Linked Insurance Scheme (EDLI), 1976?

Employees covered under the Employee's Provident Fund and Miscellaneous Provision Act, 1952 have to be provided life insurance cover under the Employee's Deposit Linked Insurance Scheme, 1976.

Under the EDLI scheme, the life insurance benefit is equal to the average balance to the credit of the deceased employee in the Provident Fund during the last 12 months, provided that where such balance exceeds Rs. 50,000/-, insurance cover is equal to Rs. 50,000/- plus 40 % of the amount more than Rs. 50,000/- subject to a maximum of Rs. 602000/-

The employer has to pay the PF office a premium at the rate of 0.5% of the basic salary (on a maximum salary of 15000/-). No premiums are payable by the employees.

In case of a claim, the PF Office settles the claim. 

GTL in lieu of EDLI Scheme:

Group Term Life Insurance in lieu of EDLI is approved by the Central Provident Fund Commissioner’s Office as a approved life insurance scheme in lieu of EDLI Scheme, 1976. The plan offers a uniform amount of coverage that can be chosen by the employer starting at a minimum of INR 362,000/- & maximum of INR 600,000.

The basic Life cover can also be enhanced by adding Accidental Death benefit.

Benefits to the Employer:

- Provides a very valuable benefit at an attractive benefit-to-premium ratio.

- Option for higher Insurance Cover

- Contribution is allowed as business expense.

- Easy to set up and administer.

- Claim settlement within 5 working days

Benefits to the Employees:

- In the event of untimely death of any group member, the full cover amount is paid to the nominee of the employee.

- The coverage is always higher than the existing EDLI scheme with PF

- The cover amount paid is tax – free in the hands of the nominee.

- The premiums paid by the company are not treated as perquisites in the hands of the Employees.

- The cover is available to all the employees covered under EDLI Scheme of the PF Authorities without insisting upon any medical evidence.

EMPLOYEES’ GROUP GRATUITY SCHEME

Payment of Gratuity Act, 1972:

The payment of a gratuity to employees upon cessation of service is a statutory obligation imposed on employers by the Payment of Gratuity Act, 1972. In terms of the Act, gratuity is payable to an employee on the termination of his employment after he has rendered continuous service for not less than 5 years (a) on his superannuation or (b) on his retirement or resignation or (c) on his death or disablement due to accident or disease (completion of 5 years is not, however, necessary for payment of gratuity in case of death or disablement). The gratuity is to be calculated at the rate of 15/26th of a month’s wages for every completed year of service or part thereof in excess of six months, subject to a maximum of INR.3,50,000/-.

Effective 24th May 2010, the gratuity limit has been revised from INR 3,50,000/- to INR 10,00,000/-. A circular to this effect has been attached alongwith for your reference (Annexure I). The same has been further revised to 20 Lacs on 29th March 2018.

Nature of the liability:

The amount of gratuity payable depends upon the terminal salary of the employee and the number of years of service completed by him. Since the liability keeps on increasing with the completion of every year of service and with the grant of every increase in salary, sound financial principles demand that necessary funds are set apart in advance year after while the liability is accruing. Otherwise, it may happen that too many employees with large gratuity entitlement leave service in some future year or years, when large additional funds will have to be found for disbursement of the gratuity.

Therefore, the method of pay-as-you-go is likely to prove troublesome to the employer, in the future year(s).

Disadvantages of following a Pay-as-you-Go method of Gratuity Payments can thus be highlighted as follows:

1. The P&L Account of the company reflects an inflated picture of the Profits/Losses of the company. In years where there are no or minimal gratuity payments sue to death/resignation/termination etc. the profits are overstated whereas in years where the payout is high, the same is understated.
2. Funds are not earmarked for the purpose of gratuity payouts, thereby, putting strain on the company funds incase of winding up/dissolution of the company or incase there are several separations in any particular year(s), as gratuity is a statutorily payable to the employees.
3. Company funds kept idle lose out on the opportunity of earning any interest, which the insurer would otherwise pay to the fund if deployed with them.
4. There is no component of Future Service Gratuity that is provideable to the employees of the company.

Advantages of funding Gratuity with Insurer:

1. Funding takes into account the exponential nature of gratuity liabilities and builds up a fund from the onset to meet liabilities arising due to normal retirements and also expected early withdrawals. (refer graph “Cost of Funded vs. Unfunded Scheme” for illustration)
2. Upon separation from the employer, the gratuity benefits are payable from the running account with the insurer, as per scheme rules. Thus, payments to the fund are smooth and regular over time, thus allowing the company to plan its gratuity cost. There is no strain on the company funds in any particular year(s)(refer graph “Cost of Funded vs. Unfunded Scheme” for illustration)
3. Income tax advantages accrue to the employer when funded with an insurer (have been illustrated on Page 3) – The initial & annual contributions made by the employer are allowed as deduction in full in computation of business income.
4. Future Service Gratuity component ensures that the employees’ loss of income due to untimely death is covered as it provides with a lumpsum payment to the deceased’s family. The cost of running such a scheme is minimal.
5. When well communicated to the employees, it works as a employee loyalty scheme

The following graph illustrates the expected cost (as a percentage of a sample annual salary bill) of the gratuity policy (i.e. the funded scheme vs. an unfunded scheme, over time.)

In the above example we have assumed an annual contribution rate of 6% of the annual wage bill.

From the above, we can identify the following characteristics:

 i.           Initially, the cost of the funded scheme is greater than the cost of the unfunded scheme. The situation is reversed in later years. i.e. the unfunded scheme grows to be more costly than the funded scheme.

 ii.           The cost of the funded scheme is smooth and predictable over time; thus allowing for planning, whereas the cost of the unfunded scheme is erratic.

                             iii.           Money kept aside now for future liabilities.

Example of Future Service Gratuity calculation:

Employee Basic Salary at Retirement: 30,000

Age at Death: 30 years

Retirement Age: 60 Years

Years completed: 5 years (assuming he joined at the age of 25 years)

Gratuity payable on death (without FSL cover) = 86,538

Gratuity payable on death (with FSL cover) = 5,19,230

 EMPLOYEES’ SUPERANNUTION SCHEME

Need for Superannuation Scheme:

As an employer the company is currently contributing 12% of each employee's salary into the (EPF) Employees Provident Fund Scheme.

But is it sufficient to provide an adequate retirement income for your employees?

The answer to this question is unfortunately NO. There are two main reasons:-

Firstly, employees have the option to withdraw assets from the Provident Fund on a regular basis to meet ongoing lifestyle expenses. Most of your employees will reach retirement age with an inadequate balance to purchase an income stream to provide them a reasonable income on retirement.

The second reason is that employees are now retiring younger but are living longer. Therefore the capital they need to buy an income stream is much greater than ever before, and this increase in life expectancy will continue to grow making this gap even greater.

Types of Superannuation Scheme:

It is primarily of two types: Defined Benefit (DB) & Defined Contribution (DC)

Under the DB scheme, the benefit which the employee shall receive post his retirement is fixed in advance (say a % of his last drawn salary), so, if the superannuation rules of the company state that the employee will get 30% of his last drawn basic salary as his pension amount, then his benefit on retirement has been defined in advance.

Under the DC scheme, the employer decides what % to contribute to the superannuation fund in the name of the member/employee right from the person's joining. Thus the employee/company may decide to contribute an 8% or a 10% depending on what it deems fit. It might also be the case the co. might decide to make a higher contribution for an employee who has stayed with the co. for more than 10 yrs and less for an employee who has stayed with the co. for say 5 years. It can hence be used as a retention tool.

The Superannuation Scheme can thus be contributory (employer & employee both contribute) or non-contributory (only employer contributes).

How is the scheme maintained by the insurer?

Under a superannuation scheme, each employee's/member's account is maintained separately with the life insurance co., stating what is the contributions made to that account (say X) and the amount of interest earned on the same (say Y).

On his retirement, out of the total accumulated amount in his account (i.e. X + Y), he can commute 1/3 rd of the total accumulation (this commuted amount is tax free) and the balance 2/3 rd can be used to purchase annuities/monthly pensions (taxed at the pensioner's income-tax bracket).

What are the stages in Superannuation?

This scheme functions in three stages:

1. Contribution stage: the employer decides on the contribution % & whether the scheme will be contributory or non-contributory

2. Accumulation stage: the life insurance co. acts as the fund manager & manages the employees accumulation

3. Payout stage: the life insurance co. makes the pension payout to the individual members. Pension amount will depend on the amount accumulated in each individual employee’s kitty.

 EMPLOYEES’ LEAVE ENCASHMENT SCHEME

Need for Leave Encashment Scheme:

As an acknowledgement of an employee’s loyalty, the employer may choose to offer them leave encashment benefits. Leave encashment is the amount payable for the employee’s accumulated leave period, depending upon the leaves to his credit and his salary at the time of termination of employment. This amount may be paid to the employees (or to their dependents) on retirement, death or disability.

Leave encashment liabilities’ increase over time, with the increase in an employee’s years of service and salary. Such leave encashment could be a huge liability to the company.

An effective and well-managed Group Leave Encashment Plan will help reduce the financial strain on the employer by helping them systematically fund their leave encashment liabilities payable to employees.

According to the Accounting Standard (AS-15) of January, 1995 and amended Section 209 (3) of Companies Act, 1957, it has become necessary for employers to provide for the liability of leave encashment facility available to employee in the annual books of accounts.

Steps required for setting up a Gratuity/Superannuation/

Leave Encashment Fund

1. Company/ Trustee should pass a resolution in a Board Meeting to the effect of starting the Fund with insurer.
2. Trust Deed & Rules to be drafted for setting up of a Trust Fund with insurer.
3. Make an application to Commissioner of Income Tax for seeking exemption.
4. Open a Bank Account in the name of the Trust. 

EMPLOYEES’ WELFARE SCHEME

Insurance companies can help setting up various other employee benefit schemes and benevolent funds For example

·        Post Retirement Medical Benefit Fund to take care of extra ordinary expenses of Medicals post retirements.

·        Benevolent Schemes for unprecedented issues like Critical Illness, Death/Job Loss due to COVID or any other such issues.

·        Endowment Schemes designed for long term savings at almost nil cost.

·        Long term retentions schemes and benefits.

Insurance Companies thus can be a savior to corporates and employers and help them create various schemes which will in long term help and retain employees and in situations like this will help to give a morale boost.

Please feel free to write to me [email protected] or speak to me at 9818698235