Benefits administration is the task within a company of designing and managing employee benefits. This means the management of things like health insurance, pension contributions and paid time off. In this article, we explain what benefits administration is, explore the history of employee benefits, and set out eight tips when considering outsourcing employee benefits.
1. Benefits administration means strategy, processing and management with respect to employee benefits.
2. Employee benefits include common social contributions and insurances (e.g., health, disability and unemployment insurance), as well as paid time-off and fringe benefits. Some employee benefits are mandatory, while others are offered voluntarily by companies to attract staff.
3. Benefits administration can be outsourced to a third party through either a stand-alone solution, in conjunction with payroll processing, or through an Employer of Record solution. There are advantages to doing this both on an international and domestic level.
What is the Definition of Benefits Administration?
To understand what benefits administration involves, it is necessary to understand the concept of ’employee benefits’ itself.
It is often stated that one of the key distinguishing features of an employee is access to benefits, as well as financial compensation. By contrast, independent contractors are usually only rewarded financially as part of their engagement. Employee benefits include things like:
- Health and dental insurance;
- Disability insurance;
- Life insurance;
- Workers’ compensation;
- Paid sick leave;
- Paid annual leave;
- Paternity and maternity leave;
- Student loan contributions
- Retirement/Pension/Superannuation contributions (these have different names in different countries); and,
- So-called ‘fringe’ benefits such as a take-home vehicle, food and transport allowances, and free gym access;
- Flexible work policies and allowances (such as the ability to work remotely)
Sometimes employee benefits are thought to go beyond these benefits that are of a direct quantifiable cost to the employer to include other practices that employees find beneficial, such as flexibility in work hours or four-day weeks.
Some kinds of consideration are hard to define precisely with these categories. For example, it is common to treat the issuing of stock options as part of employee compensation, rather than an employee benefit.
As with financial compensation, every organization needs to have a strategy and mechanisms in place for managing benefits: This activity, benefits administration, sits alongside payroll and human resource management in the organization’s practices.
What is the History of Employee Benefits and Benefits Administration?
Benefits for workers pre-date the modern employer-employee relationship. In fact, they date back to at least ancient Rome where pensions were introduced for military service (Aerarium militare). After a compulsory period of service (20 years for regular service, 16 for service in the Prateorian Guard), soldiers received a guaranteed annual monetary income until death. This system, introduced by Augustus, replaced a prior system of awarding land in new colonies to retired military.¹
Alongside retirement pensions, state-funded pensions for disabled veterans and widows of soldiers became commonplace from the 17th century onwards.
Perhaps the first example of a modern employee benefits system — where private business employers are required to contribute — was introduced in Germany in the early 1880s. This system, introduced by the first German Chancellor Otto von Bismarck mandated employer and employee contributions for health insurance, disability insurance, retirement and workers’ compensation.²
Read more about how PEOs can help deliver compulsory and optional employee insurances as What is PEO Insurance?
Around the same time, private businesses in the US were beginning to voluntarily introduce employee benefits in the US: The American Express Company developed the first formal pension in 1875.³
In 1880 the Ohio and Pensylvania railroads introduced the first pension schemes with employer and employee contributions.
It would be fair to say that, as long as employee benefits have existed, there has been benefits administration: In ancient Rome military pensions were administered by three appointed former soldiers (praefecti aerarii militaris).
From the 20th century onwards benefits administration is best seen as a shared task of the payroll and HR departments: Payroll ensures that all benefits are accounted for in payments to staff: HR establishes policies for the negotiation and delivery of employee benefits.
In more recent decades, businesses have seen the advantage of outsourcing benefits administration. This has happened in tandem with payroll outsourcing: It is impossible to accurately calculate take-home pay without taking into account benefits like paid vacation and pension contributions.
Should You Outsource Benefits Administration?
A major business question or enterprises large and small is whether to outsource benefits administration (potentially alongside other employment solutions such as payroll outsourcing and Employer of Record services).
It is especially important for businesses to answer this question when considering international expansion.
If you are considering (or already planning) expanding your enterprise into other countries, you will need to consider whether you intend on having employees based in that country. While there may be a temptation to engage independent contractors in order to avoid paying employee benefits, this is risky. In many jurisdictions, independent contractors may be re-classified by the tax authorities as de facto employees and leave you liable for a range of taxes and other liabilities. To find out more about engaging independent contractors, see What Are the Advantages and Disadvantages of Using International Contractors?
If you do decide to engage employees, you will need to have benefits administration set up for that particular country to ensure full compliance with mandatory employee benefits. The cost of employee benefits, and administering those benefits, can be a significant cost of expansion. In addition to any legal requirements, you will need to consider:
- Benefits that are not legally required, but are standard practice in that country;
- Benefits that may not be standard practice but enable you to recruit the best staff. In one study, 60 percent of employees reported that they would were likely to take a job with lower pay, but better benefits.
Businesses can also benefit from outsourcing benefits administration domestically (as well as internationally): The complexity of modern employee benefits systems means that outsourcing employee benefits administration is often more efficient and cost-effective than a business carrying out the function itself.
8 Tips for Outsourcing Benefits Administration Internationally
So, how can you best optimize your employee benefits and benefits administration in your expansion into a new country?
Frequently asked questions
First, the business needs to come up with a strategy for employee benefits within the organization. This will take into account legal requirements in that jurisdiction, as well as benchmarking with competitors.
Second, the business needs to consider how responsibility for benefits will be delegated: Will it be integrated within an existing payroll department, or will it be outsourced to a third party?
Third, the business needs to integrate management of benefits into its payroll processing, and put in place a mechanism for regular review of those benefits and their distribution.
The benefits administrator is the individual or business unit in the enterprise with overall responsibility for the distribution of benefits. The benefits administrator is usually part of the broader Human Resources function.
Employment is a contractual relationship: Whether or not there is a written contract in place, there is an agreement from one party (the employee) to enter into the other party’s service, in return for consideration (material rewards).
Those material rewards take the form of financial compensation, as well as employee benefits. We might see employee benefits as all consideration that is not received directly in a monetary sum. This might include, for example:
- health, life, disability and unemployment insurance
- workers compensation
- pension schemes
- paid vacation
- fringe benefits (such as use of a company car)
- sick leave.
The outsourcing of benefits administration usually (but not always) happens in conjunction with outsourcing payroll.
A third party company processes all employee benefits on an assigned schedule, just as they process payroll on behalf of that client.
Often it makes sense to outsource benefits administration as part of a broader Employer of Record or PEO solution, in which case the third party will have a broader remit for benefits: They can add a client company’s new employees to existing plans, negotiate better deals, peg benefits more accurately to competitor benefits packages.
Any business that is taking on employees (rather than independent contractors) needs to carefully consider how it will manage employee benefits. As a business, this means you need to:
- Work out a package of employee benefits based on legal requirements, what is standard in that market, and what your competitors are offering;
- Work out how benefits will be appropriately managed of administered.
We recommend, in considering how to implement benefits administration in your global expansion, you give serious thought a range of matters, including thorough market research, the possibility of engaging a global PEO and the overall cost of benefit packages (including any tax impacts).
Horizons provide a range of solutions for international benefits administration, depending on the needs of your enterprise. This includes specialist recruitment support and ongoing outsourcing and global PEO solutions.
¹ Klonoski, R. (2016). Defining Employee Benefits: A Managerial Perspective. International Journal of Human Resource Studies, 6(2), 52-72.
² Danzon, P. M. (1976). From Bismarck to Woodcock: The “Irrational” Pursuit of National Health Insurance: Comment. The Journal of Law & Economics, 19 (2), 365-369. http://dx.doi.org/10.1086/466875
³ Norton, R. (1953). The Controller and Pension Plans. The Accounting Review, 28(2), 170-176. Retrieved July 26, 2021, from http://www.jstor.org/stable/242123