Chapter 13 - Employee Benefits

The Five Most Highly Ranked Benefits Objectives for Employers

1. Increase employee productivity 2. Increase employee satisfaction 3. Increase employee loyalty 4. Attract employees 5. Help employees make better financial decisions

Consolidated Omnibus Budget Reconciliation Act (COBRA)

1985 act that requires employers to permit employees to extend their health insurance coverage at group rate for up to 36 months following a qualifying event, such as a layoff

Family and Medical Leave Act (FMLA)

1993; Requires employers with 50 or more workers to grant up to 12 weeks of unpaid leave a year to allow workers to take time off to help care for a new baby or an ill family member without fear of losing their jobs.

Average cost of benefits is about ___%for every payroll dollar and about ___% of total compensation package.

46.3% payroll, 31.6% of total compensation package

Health Maintenance Organization (HMO)

A health care plan that provides benefits on a prepaid basis for employees who are required to use only HMO medical service providers. focus on preventative care and outpatient treatment; pay physicians flat salary instead of fee-for-service system (physician's pay depends on number of patients seen)

Summary plan description (SPD)

A reporting requirement of the Employee Retirement Income Security Act (ERISA) that obligates employers to describe the plan's funding, eligibility requirements, risks, and so forth within 90 days after an employee has entered the plan.

Cash balance plans

All contributions come from the employer • Rate guaranteed in a defined benefit plan

LouAnn has retired and is receiving Social Security. Each year she can expect an increase in... A. Unemployment benefits B. Cost-of-living C. Disability benefits D. Tuition E. Retirement plans

B. Cost-of-living

Which of the following is a unique aspect of benefits? A. There is no question of legal compliance B. Organizations so typically offer them that they have become institutionalized C. It is less complex to understand the value of a dollar in benefits package than in a salary D. Medical and retirement plans are not part of benefits E. Benefits, unlike direct compensation, are never mandated by law

B. Organizations so typically offer them that they have become institutionalized

Which of the following is true about employee benefits? A. Government involvement in benefits decisions is minimal B. The impact of legal regulations on benefits is greater than that on direct compensation C. Understanding the value of a dollar in a benefit package is more complicated than understanding it in a salary D. The tax treatment of benefit programs is often less favorable for employees than is the tax treatment of wages and salaries E. Employees are always aware of the benefits available, as well as how to use them

B. The impact of legal regulations on benefits is greater than that on direct compensation

Staffing responses to control benefits cost growth

Benefits cost per hour can be reduced by having employees work more hours • Classify employees as exempt • Temporary workers • Independent contractors

Which of the following increased the fiduciary responsibilities of pension plan trustees and established vesting rights and portability provisions? A. Affordable Care Act B. Social Security Act C. Employee Retirement Income Security Act D. Consolidated Omnibus Budget Reconciliation Act E. National Labor Relations Act

C. Employee Retirement Income Security Act

Group insurance rates are typically lower than individual rates because... A. Risks cannot be pooled together in a group insurance B. Group insurance does not cover permanent disabilities C. Of economies of scale D. It is exempt from taxes E. Group insurance lacks guaranteed coverage

C. Of economies of scale

Which of the following is a major objective of the unemployment insurance program? A. To offset lost income during voluntary unemployment B. To help those currently working to find new jobs in other fields C. To provide an incentive for employees to stabilize employment D. To make up for lost income during a labor shortage E. To help employees find the right talent for reaching business goals

C. To provide an incentive for employees to stabilize employment

Cost Control

Cost of a benefit category • Growth trajectory of the benefit category • Cost of legally required benefits • Medical and other insurance are targets for cost control

Social Insurance (Legally Required) continued

Covers more than 90% of U.S. employees • Begins at age 65 years and 6 months (full benefits) or age 62 (reduced benefits) • May be free from state and federal taxes • Paid for with payroll tax

Shelby has been laid off due to downsizing. She is worried about her health coverage as she has just found out she is pregnant. The HR benefits specialist tells her that she can continue to pay for health coverage for up to 36 months due to which law? A. Affordable Care Act (ACA) B. Americans with Disability Act (ADA) C. Employee Retirement Income Security Act (ERISA) D. Consolidated Omnibus Budget Reconciliation Act (COBRA) E. Equal Employment Opportunity Commission (EEOC)

D. COBRA

Workers are eligible for unemployment benefits if they... A. Voluntarily quit their job B. Are out of work due to a labor dispute C. Were discharged for willful misconduct D. Have worked for at least one year E. Are not actively seeking work

D. Have worked for at least one year

Nature of the Workforce

Demographic factors impact types of benefits desired

Worker's Compensation continued

Disability income • Medical care • Death benefits • Rehabilitative services

Affordable Care Act (ACA)

Does not require employers to provide health benefits, does impose penalties in some cases on larger employers that do not provide insurance to their workers or that provide coverage that is unaffordable • Increases the Medicare Hospital Insurance (Part A) payroll tax on earnings for higher-income taxpayers • New tax on so-called "Cadillac" insurance plans provided by employers • Dependent coverage until age 26 • Wellness programs

Which of the following is a reason for the growth of benefits as a method of employee compensation? A. The tax treatment of benefits programs is less favorable for employees than the tax treatment of wages and salaries B. People prefer a dollar in cash over a dollar's worth of any specific commodity C. The legislation passed during the Great Depression was not conducive to benefits D. Benefits are covered by wage and price controls E. Groups of employees can typically receive a cost advantage over individuals

E. Groups of employees can typically receive a cost advantage over individuals

Which of the following is true about Social Security as a benefits program? A. It does not cover unemployment insurance B. It is the only plan that requires no employee to meet any eligibility criteria C. It covers mostly railroad and federal, state, and local government employees D. It does not require minimum earnings to be fully insured E. It is entirely free from federal tax

E. It is entirely free from federal tax

Communicating With Employees and Maximizing Benefits Value

Employees and job applicants typically underestimate the value of their benefits • Organizations spend little time communicating about benefits and costs • Written information • Online tools

Funding, communication, and vesting requirements

Employers are required to make yearly contributions that are sufficient to cover future obligations • Summary plan description • Vesting rights

Medical insurance and disability insurance programs are legally required. TRUE OR FALSE?

FALSE

Family-Friendly Policies

Family leave • Family and Medical Leave Act • Child care • Vouchers or discounts • Child care near worksites

Employee wellness programs

Focus on changing behaviors both on and off work time that could eventually lead to future health problems • Preventive in nature • Passive or active

Health care: controlling costs and improving quality continued

Health care costs and quality: Ongoing challenges • Average annual premium for family coverage $18,142 • Piecemeal programs may not work • Pareto group

Cost Control continued

Health care: controlling costs and improving quality • U.S. spends more on health care than any other country in the world, most through employers • Employers can shift costs to employees through deductibles, coinsurance, exclusions and limitations, and maximum benefits. • Cost reductions • HMOs and PPOs

Pay for Time Not Worked

Includes paid vacation, holidays, sick leave • No legal minimum in the U.S

Worker's Compensation

Job-related injuries and death • No-fault liability • Employers immune from lawsuits • 90% of U.S. workers covered

Private Group Insurance

Medical insurance • Consolidated Omnibus Budget Reconciliation Act (COBRA) • Disability insurance • Short term • Long term

Benefits are unique because:

More regulation of benefits than direct pay • Almost obligatory for employers to provide • Complex for employees to understand • Employees may not even be aware of benefits available to them

Unemployment insurance continued

Must have a prior attachment to the workforce • Must be available for work • Must be actively seeking work (including registering at the local unemployment office) • Were not discharged for cause (such as willful misconduct), did not quit voluntarily, and are not out of work because of a labor dispute

Flexible Benefits Plans

Permit employees to choose the types and amounts of benefits they want • Employees can gain a greater awareness and appreciation • Should be a better match • Overall cost reductions in benefits programs • May have high administrative costs • Adverse selection

Flexible Spending Accounts

Permits pretax contributions of up to $2,600 to an employee account that can be drawn on to pay for uncovered health care expenses

Surveys and Benchmarking

Private consultants • U.S. Chamber of Commerce • Bureau of Labor Statistics

Money purchase plan

Profit- sharing plans • Employee stock ownership plans • Section 401(k) plans • Pension Protection Act (PPA) of 2006

Nondiscrimination Rules, Qualified Plans, and Tax Treatment

Qualified plan • Receives more favorable tax treatment • Each benefit area has different rules

Social Insurance (Legally Required)

Social Security • Unemployment insurance • Survivor's insurance (1939) • Disability insurance (1956) • Hospital insurance (Medicare Part A, 1965) • Supplementary medical insurance (Medicare Part B, 1965) for the elderly

Financial Accounting Statement (FAS) 106 [Monitoring Future Benefits Obligations]

Some companies are charging insurance premiums to employees and retirees or ending retiree benefits • Pension Benefit Guaranty Corporation

In contrast to Social Security retirement benefits, unemployment benefits are taxed as ordinary income. TRUE OR FALSE?

TRUE

Employee Retirement Income Security Act (ERISA) - Retirement [DEFINED BENEFIT]

The 1974 act that increased the fiduciary responsibilities of pension plan trustees, established vesting rights, and portability provisions, and established the PBGC.

Factors Contributing to Growth

The Social Security Act and other legislation • Wage and price controls instituted during World War II • Tax treatment of benefits programs • Marginal tax rate • No employer taxes on most employee benefits

Sex, Age, and Disability

The Supreme Court declared it illegal for employers to require women to contribute more to a defined benefit plan than men • Age Discrimination in Employment Act (ADEA) and the Older Workers Benefit Protection Act (OWBPA) • Americans with Disabilities Act (ADA)

Pension Benefit Guaranty Corporation (PBGC) - Retirement [DEFINED BENEFIT]

The agency that guarantees to pay employees a basic retirement benefit in the event that financial difficulties force a company to terminate or reduce employee pension benefit

Financial Accounting Statement (FAS) 106

The rule issued by the Financial Accounting Standards Board in 1993 requiring companies to fund benefits provided after retirement on an accrual rather than a pay-as-you-go basis and to enter these future cost obligations on their financial statements.

Unemployment insurance (Social Insurance (Legally Required) continued))

To offset lost income during involuntary unemployment • To help unemployed workers find new jobs • To provide an incentive for employers to stabilize employment • To preserve investments in worker skills by providing income during short-term layoffs • Financed through taxes on employers • Size of tax depends on the employer's experience rating

Marketing research

What benefits are most important to you? • If you could choose one new benefit, what would it be? • If you were given x dollars for benefits, how would you spend it?

Preferred Provider Organization (PPO)

group of healthcare providers that provide services to a specific group, often at a reduced rate employees not required to use preferred providers; less expensive than traditional delivery system but more expensive than HMO

Defined contribution plan

individual account is set up for each employee with guaranteed size of contribution - shift investment risk to employees and present fewer administrative challenges

Defined benefit plan

plan that guarantees (defines) specific retirement benefit level to employees based typically on combination of years of service and age as well as on the employee's earnings level (e.g. 3-5 highest earning years)

Cash balance plan

retirement plan in which the employer sets up an individual account for each employee and contributes a percentage of the employee's salary; the account earns interest at a predefined rate

Marginal tax rate

the percentage of each additional dollar of income that goes to the tax

Factors Contributing to Growth continued

• Cost advantage that groups typically realize over individuals • Growth of organized labor from the 1930s through the 1950s • Unique benefits are a means of differentiating employers in the eyes of current or prospective employees