CEBS - GBA 1
Explain the arguments related to flexibility in the design of an employee benefit plan as related to the functional approach of employee benefit planning
One argument is that the more flexibility an employee has the more likely they are to select a plan that meets their needs / goals. The opposing argument is that flexibility goes against the functional approach as employees might not understand the coverages they need and go uncovered in some important areas
Explain how POS plans are a hybrid of HMO and PPO Plans
POS plans are a hybrid as they offer both in and out of network benefits. There might be a PCP requirement in some POS plans that are not in PPO plans.
From an employee benefit perspective, what is the most important type or pure risk to cover?
Personal risks... personal risks are losses that directly impact a person's life or health
Explain the concepts of physical hazard, moral hazard, and morale hazard (37)
Physical hazard: a physical condition (such as defective wiring) that increases the possibility of a loss.. Morale Hazard: when dishonesty or character trait increases the chances of a loss (ex: arson), Morale hazard: carelessness or indifference that individuals have because they are covered by insurance and protected against loss.
How is the possibility of catastrophic losses generally handled by employee benefit plans?
Policy limitations, reinsurance, and restrictions on groups
In addition to business reasons, collective bargaining activity, favorable tax legislation and the efficiency of the employee benefits approach, other factors have enhanced the appeal of employee benefits. Summarize some of these factors
Price controls during WW2 and Korean War froze wages but allowed additional increases for employee benefits. Also, the idea that the government might mandate certain benefits.
Explain the nature of property and legal liability risks
Property risks involve potential losses to a the value of one's property (fire. earthquake etc.) Legal liability risks involves losses resulting from negligent or wrongful actions
The categories of persons that a firm may want to include in its employee benefit coverages are:
1) Active full-time employees 2) Dependents of active full-time employees 3) Retired former employees 4) Dependents of retired former employees 5) Disabled employees and their dependents 6) Surviving dependents of deceased employees 7) Terminated employees and their dependents 8) employees and their dependents who are temporarily separated from the employer's service such as military duty, leaves of absences, strikes, etc. 9) Individuals other than full-time employees (part-time employees etc.)
Identify and describe three types of total compensation/benefits policies that employers may adopt:
1) Average compensation/benefits policies follow the generally prevailing compensation/benefits level in a firm's industry or community or both 2) High compensation/benefits policies attempt to attract higher levels of management, technical, and general employee talent 3) Low compensation/benefits policies are lower than average and more modest in scale
Explain how the use of length of service, probationary periods, may very with respect to protection-oriented benefits and accumulation oriented benefits (27-28)
Protection oriented benefits consist of medical expense benefits etc. have short probationary periods because of the need for immediate coverage of the employees and their dependents. Accumulation orientated benefits (pension plans, profit sharing etc) have longer probationary periods as they are viewed as a reward
identify the steps used in applying the functional approach to employee benefit plan design, review, and revision: (17-18)
1) Classify employee (and dependent) needs or objectives into logical functional categories 2) Classify the categories of persons the employer may want to protect 3) Analyze the benefits presently available under the plan in terms of functional categories of needs or objectives, categories of persons the employer may want to benefit, and regulatory requirements and possibly mandated coverages 4) Determine any gaps in benefits, overlapping of benefits, or both, provided from all sources under the plan 5) Consider recommendations for changes in the employer's present employee benefit plan to meet any gaps, estimate the cost or saving from each recommendation, 6) Evaluate alternative methods for financing or securing the benefits previously recommended, 7) Consider cost saving techniques in connection with the recommended benefits or existing benefits, 8) Decide upon the appropriate benefits, methods of financing and sources of benefits as a result of the preceding analyses 9) Implement the changes 10) Communicate benefit changes to employees 11) Communicate benefit changes to employees 12) Periodically reevaluate the employee benefit plan
What health care coverage and insurance reforms were enacted by the Patient Protection and Affordable Care Act (ACA)
1) Expansion of eligibility for medical benefits under the federal government's program for low-income, financially needy individuals 2) Prohibition against denial of insurance for physical or mental illness conditions that existed before coverage began 3) Restrictions on variations in premium rates by insurers and tax credits/subsidies for low income individuals 4) Establishment of marketplace exchanges to make available standardized medical plans 5) Group insurance mandates having direct impact on employer-sponsored health plans
Categories that fall under the broad view of employee benefits
1) Legally required benefits (social security etc) 2) Payments for time not worked 3) Employers share of medical and medically related benefits 4) Employers share of retirement and savings plan payments 5) Misc. benefits
Summarize three major federal tax advantages associated with employee benefit plans
1) Most contributions to employee benefit plans are tax deductible 2) Within certain limits, these employer contributions are generally not considered income to employees 3) In certain types of retirement and capital allocation plans, benefits accumulate tax-free to the employee until distributed
List the Questions that should be addressed in setting benefits objectives:
1) What benefits should be provided? 2) Who should be covered by the benefit plans? 3) Should employees have benefit options? 4) How should the benefit plan be financed? 5) How should the benefit plan be administered? 6) How should the benefit plan be communicated?
Briefly summarize the methods that can be used for handling risk (39-42)
1) avoidance : Avoidance means that you avoid the risk altogether. You can't break your leg skiing if you don't go skiing 2) Control: Reducing the risk of something.. ex: reducing your risk of a heart attack by giving up smoking 3) Retention: Retention is the risk is assumed and paid for by the person suffering the loss or taking responsibility for the loss 4) Transfer: Concept in which one switches the financial risk or burden to another party 5) Insurance: when the financial burden of a risk is transferred to an insurance company
Describe the characteristics of an ideal insurable risk from the standpoint of an insurance company (45-50)
1) large number of homogeneous risks 2) the loss should be both verifiable and measurable 3) the loss should not be catastrophic in nature 4) The chance of loss should be subject to calculation 5) the premium should be reasonable and economically feasible 6) the loss should be accidental and unintentional from the point of the insured
Describe the types of employee needs and exposures to loss that may be covered under employee benefit plan:
1) medical expenses 2) losses due to employee disability (short or long term) 3) Losses resulting from current or formal employee death 4) Retirement needs of employees 5) Capital accumulation goals 5) Needs arising from unemployment 6) Needs for financial counseling or coaching 7) Losses resulting from property and liability exposures 8) Needs for dependent care assistance 9) Needs for educational assistance 10) Needs for custodial care expenses (long-term care) for employees or their dependents 11) Other employee benefit needs or goals
How does pure risk differ from speculative risk? (37-38)
Pure Risk involves situations where only two alternatives are possible - either the risk will happen and a financial loss takes place, or there is not financial hardship as the risk does not take place. Speculative risk is different as there are three outcomes 1) A loss 2) no loss 3) gain. One example is buying stock
Describe the characteristics of of the group technique that such coverages as life and health insurance to be written by employee benefit plans my minimizing the risk of adverse selection
1) only certain people are eligible 2) steady flow of lives through the group 3) Minimum number of people in the group 4) minimum amount of people need to participate 5) Eligibility requirements are imposed on the group 6) maximum limits on the amount of benefits may be imposed 7)
Managed behavioral healthcare organization (MBHO)
A corporate entity to which a health plan may outsource the management of mental health services for its subscribers. This entity assumes the financial risks and benefits of managing treatment budgets and authorization for access to mental health services.
Copay
A fixed amount that individuals pay for a covered health care service
How does the industry in which a firm is operating impact the its total compensation philosophy and employee benefits approach? (16)
A larger, well-established firm in a mature industry may take a relatively liberal approach towards meeting the benefits needs and desires of employees. Developing firms, or growth industries with considerable current needs for capital, rely heavily on short-term incentive forms of compensation. Further, industries that are highly competitive, subject to cyclical changes, or in a depressed state may not be willing to spend more on additional employee benefit costs
Describe the relationship of peril and hazard to risk:
Risk is defined as uncertainty regarding the possibility of a loss.. Peril: the cause of a loss. Such things as fires, floods, thefts, etc. Hazard: is a condition that increases the probability that a peril will occur or tends to increase the severity of the loss when a peril occurs
Discuss the concept of risk within the concept of employee benefit planning: (36)
Risk is the context means uncertainty with respect to possible losses. it refers to inability to determine the actual number and value of claims a benefit plan will have to meet
What distinguishes self funding from the insurance method of financing employee benefit plans?
Self-funding means that an organization retains the risk as opposed to an insurance company taking on the risk in exchange for a premium.
What is the starting point in the design of any employee benefit plan?
Setting overall objectives from the standpoint of both the employer and the employees. Thus, there should be a meaningful and well-reasoned rationale for any and every employee benefit plan.
What elements of its compensation system should an employer seek to balance in designing a total compensation package?
An employer should seek to balance various elements of its compensation system including basic cash wages and salary, current incentive compensation, longer-term incentive plans and so-called employee benefits to help meet the needs and desires of employees.
Explain the significance of the Taft Harley Act in employee benefit planning
The Labor-Management Relations Act, also called the Taft-Harley Act sets forth the framework for good-faith collective bargaining over wages, hours, conditions, and terms of employment for employee benefits. The act, along with the internal revenue code (IRC), established the distinction between retirement and welfare benefits. It also provides the regulatory framework for admin of these benefits in a collective bargaining agreement. As such, it is the legislative basis on which jointly trusteed benefit plans are founded
Deductible
The amount paid by individuals during a plan year before health insurance kicks in
Define the concept of managed care (227)
The concept of managed care is wherein insurance carriers have a role in steering health services and care while prepaying some portion of health care services. The managed care model, in the form of health maintenance organizations (HMOs) and their spin offs all but replaced traditional indemnity plans
Explain the principle of indemnification (42-43)
The fact that insurance is used to make the victims of losses whole reflects the principle of indemnification on which insurance is structured
What is the functional approach to employee benefit planning?
The functional approach is essentially is the application of a systematic method of analysis to an employer's total employee benefit program (12-13)
Coinsurance
The individuals's share of the costs of a covered healthcare service calculated as a percentage
Explain how the concept of replacement ratio can be used by firms for setting benefit levels of retirement and disability plans (26)
The retirement income objective might be expressed in terms of some estimated final-pay of an employee, or so-called replacement ratio. A replacement ratio is a rule of thumb that estimates what percentage of a person's pre-retirement income will be needed to maintain their lifestyle at retirement.
Pharmaceutical Benefit Managers (PBM)
These entities are third-party admins who are contracted by plan sponsors process prescriptions claims and reimburse pharmacies
Describe the basic features of an indemnity plan (227)
They are traditional fee for service plans plans where they pay a percentage for a cost of treatment
Broad View of Employee Benefits
Any from of compensation other than direct wages. Includes government mandated plans and private plans (Social Security, paid vacation and pension plans)
Narrow View of Employee Benefits
Any type of plan sponsored or initiated unilaterally or jointly by employers and employees and engaged in providing benefits that result from the employment relationship and that are not underwritten or paid directly by government
Which risk-handling alternative is the only one that is mutually exclusive of the others? Why?
Avoidance, when you avoid a risk there are no losses so there is no need for the other risk handling techniques
Describe the special considerations given to care designated as preventive care
Treatments that are considered preventive care are covered under health plans without having deductible, copayment, and coinsurance
what is underwriting?
Uniform process by which insurance select and classify applicants for insurance
Define the terms "allowed amount" and "usual customary or reasonable (UCB) fee (231)
Used by health plans to determine the maximum they will pay for a particular service
Compare the compensation/service orientated philosophy and the needs orientated benefit philosophy: (16)
With the compensation/service oriented benefit philosophy, employee benefits are related to compensation, service, or both. The needs orientated benefit philosophy tends to focus on the needs of employees and their dependents.
Do employee benefit plans cover property and legal liability risks?
Yes, (legal plans etc), but personal risk is much more common with employee benefit plans
Compare the insurance mechanism with gambling.
insurance is a mechanism for handling risk, whereas gambling creates a risk that didn't previously exist
What is the law of large numbers?
the greater the number of exposures, the more closely will the actual results approach the probable results that are expected from an infinite number of exposures
What is adverse selection? (50)
when people join insurance who are more likely to submit insurance claims are seeking insurance more often than preferred risks.
Describe the reasons the functional approach is considered to be an appropriate approach for the effective planning, designing, and administration of employee benefits
Employee benefits are a significant element of total employee compensation and are a tax-effective way of compensating employees, employee benefits are a large portion of labor cost for employees, in the past employee benefits were on a piecemeal basis and not a coordinated effort, a systematic approach allows benefit plan to be current, competitive, and in compliance. Finally the functional approach allows benefits to be integrated properly with each other
Why is the employee benefit mechanism an effective and efficient way of providing insurance coverage?
Employment based insurance is convenient for employees. They don't need to search for individual coverage and it is often less expensive. Providers and suppliers find it easier to communicate and market employee benefits through an employer
What are the three types of saving options that are coupled with HDHP?
Flexible Spending Accounts (FSA), Health reimbursement arrangements (HRA), and Health savings account (HSA)
Characteristics of FSA
Funds can be used for deductibles, copays, medication, and other healthcare related out-of-pocket costs. - The employer owns the account — if you leave the company, you can't take the account with you. - All money deposited is untaxed.
HRAs
HRAs are employer funded accounts established to pay health care expenses as determined by the employer from the IRS qualified listing
What impact have labor unions historically had in employee benefits?
In 1948 when the National Labor Relations Board (NLRB) ruled in the Inland Steel Case the duty to bargain in good faith over wages. Then, in the W.W. Cross & Co Case, NLRB ruled that wages include a health and accident plan
What has been the impact on parity legislation on mental health (ma) and substance abuse (sa) benefits?
In the past, there were much lower benefits for MA and SA. However, this has changed with many smaller legislations and then nationwide with the Affordable Care Act
Definition of insurance
Insurance is the pooling of fortuitous losses by transfer of such risks to insurers, who agree to indemnify insureds for such losses, to provide other pecuniary benefits on their occurrence, or to render services connected with the risk
State the advantages and disadvantages of using insurance to fund an employee benefit plan: (44-45)
Known Premium, outside administration, financial backing, cost management, and economy are pros. Possible additional costs and potential low employee satisfaction are the cons
What benefits are excluded when the term employee benefits is defined in a narrow sense?
Legally mandated benefits - Social security, medicare, unemployment etc.
Describe the impact of making a plan contributory on employee participation
Making a plan contributory will have an impact on how well a plan meets the needs of employees as a whole. Moreover, if a plan is contributory it may create employee relations problems.
HSAs
Newest Tax advantaged options that are combined with HDHP. Unused amounts at the end of the year are automatically rolled over into the following plan year