How do employee benefit plans work?


One of the most popular employee benefits is Gratuity. It is a part of the employee’s salary and paid as a lump-sum to him or her as gratitude by the employer.

Companies pay gratuity to their employees who have served five years of more in the company. There are two ways companies offer gratuity— pay from own funds or contact a life insurer and buy a group insurance scheme. Under a group plan, the employer has to pay annual premiums as per the insurer.

A lot of employers prefer to go the way of the group insurance policy. If you are an employer and interested in buying such a plan, here are a few details which can help you make an informed choice.  

  1. A group insurance requires the creation of a trust. Trustees are required to administer this particular scheme. One important point to remember is that the policyholder could be a trustee or the company employee himself/herself.
  2. For the Gratuity scheme, there need to be two payments. An initial contribution followed by annual contribution towards the scheme. The initial contribution is for any past service gratuity liability of the employer.
  3. Under the scheme, one can invest the contributions in investment funds. This aspect makes it different from a group term life insurance (due to the investment part).
  4. The policyholder can choose to invest in four funds: Conservative Fund, Balanced Fund, Growth Fund and Bond Fund.
  1. For these four funds, the investment mix can range between Government Securities, Corporate Bonds, Money market Instruments, and Equities.
  2. When an employee retires/moves on or passes away, the firm pays the gratuity amount by redeeming the units from the investment fund.

There are many firms selling group insurance in India. Due to its simplicity and many benefits; a lot of companies prefer to buy such plans. Ensure to conduct thorough research before buying such plans as an employer.