Valuation of Fringe Benefits

Employers provide employees with a variety of benefits as part of an employee's total compensation package. Typical fringe benefits offered by employers include heath insurance and retirement plans. Health insurance coverage may include medical, dental, prescription and vision care. Likewise, retirement plans could consist of a pension plan (defined benefit or defined contribution) and/or 401(k) plan. The importance of fringe benefits in relation to an employee's earnings warrants that they be properly valued in tort litigation.

Forensic economists value a worker's fringe benefit package based on either the employer's cost for the benefits or the replacement cost assuming the worker was to secure the identical benefits, privately. When a choice is possible, the replacement cost is the preferred measure of calculating the economic loss of benefits. The intention is to make the claimant "whole" in the post-judgment situation. When the economic value of lost benefits has been determined, it may be valued separately or converted to a percentage of earnings.

Valuation Pitfalls

There are several pitfalls that, if not avoided, could result in a significant overstatement or understatement of fringe benefits.

#  Wage vs. Non-Wage Benefits

It is important to differentiate between wage and other fringe benefits when valuing an employee's fringe benefit package. Wage benefits include vacation pay, sick pay and bonuses. Because these wage components are normally reflected in an employee's gross earnings (i.e., W-2 Wage and Tax Statement) it would be double-counting to again include them as a component of fringe benefits.

#  Past vs. Future Years

A damages report authored by a forensic economist, or trial testimony by an economist, necessarily must refer to past losses (from the date of the incident to the present), and future losses (continuing losses in future years). By its very nature, insurance only has value prospectively, i.e., individuals obtain insurance in order to cope with some future potentiality. Thus, it would not be logical to count the value of lost insurance as past of past fringe benefits. However, an individual's out-of-pocket expenses which would have been covered by insurance in past years are considered a loss. In addition, premiums associated with COBRA benefits or the purchase of a private health insurance policy are a loss in past years to the extent such costs exceed the employee-paid portion of premiums associated with an employer's plan. Likewise, assuming the individual is alive, the loss of long-term disability and life insurance are only considered in future years. 

#  Retirement Plans

As action subject to a tort claim such as an accident or wrongful discharge often impacts pension benefits. An individual's participation in a retirement plan often requires separate analysis. Some of the key issues in valuing a defined-benefit pension plan's payout are years of service, normal retirement date (usually age 65), and whether the plan offers early retirement or disability options. 

To properly assess the impact of an injury on a worker's retirement benefits we must first determine the amount of retirement benefits that the individual would have received at retirement absent the underlying incident. This will involve review of the pension plan guidelines to project the future benefit payable, assuming continued employment and ongoing salary increases. The associated retirement benefits are then projected from the date of retirement through the worker's statistical date of death, taking into account annual cost-of-living adjustments, if applicable. This income steam must be reduced by the actual/current benefits being received as a result of the incident. If there are no current benefits, then the individual may still be eligible to collect a vested monthly benefit beginning on their normal date of retirement (usually age 65). Again, such income is projected through the recipient's statistical date of death.

#  Union Workers

Typically, union workers receive a broad array of fringe benefits. Such benefits are funded by the employer at the stated hourly amount provided in the union's wage and benefits schedules. Our experience reveals that in some instances (i.e., iron workers), a union worker's fringe benefits may equate to 60% to 70% of gross earnings. Union workers often enjoy a pension plan and an annuity plan. In addition, many unions do not require premiums from their membership for health insurance costs (referred to as the Welfare Fund).

A common error made in valuing a union member's benefit package is the inclusion of pension benefits and medical benefits at the employer's hourly contribution rate. When quantifying a loss of pension benefits on behalf of a union worker we generally compute an estimated loss pursuant to the specific pension plan's guidelines (as mentioned above). We note that retirement benefits eventually paid to retirees have no direct correlation to the hourly contributions previously made on the member's behalf, as they are calculated based on a defined benefit formula. In contrast, annuity benefits are typically based on defined contributions, and have a high correlation to the hourly contribution rate. Finally, contributions made by employers to a union Welfare Fund have no correlation to the value of the health insurance received by the union membership. Generally, the value of health insurance is established based on its replacement cost in the open market. 

#  Employer FICA Contribution

Social Security provides retirement benefits, disability payments, and survivor payments to a family when a breadwinner is injured or dies. The inclusion of legally-required employer Social Security contributions as a component of an employee's fringe benefit losses is problematic. Inclusion implies that, but for the underlying event, the claimant's employer would have made increased contributions on his behalf. But it would be a error not to account for the higher Social Security taxes that would have been deducted from the incremental earnings. Furthermore, treatment of the employer's Social Security contribution as a pension contribution is inconsistent with the pay-as-you-go structure of the Social Security program by which the employer's contribution pays for current retirement benefits. 

For these reasons we recommend excluding Employer FICA contributions from consideration when valuing a worker's fringe benefit package.

#  Young Individuals

In cases involving the premature death or impairment of a young child there is no work experience available to assist in the valuation of fringe benefits. In such cases we often rely upon national data published by the Bureau of Labor Statistics to develop an estimate of likely fringe benefits. 

We encourage you to take advantage of our gratis consultation by phone to discuss this subject or any other aspects of a case you may be handling.

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