Chapter 13

In 2017, the maximum retirement benefit is

$2,687 per month

Tax advantages of qualified retirement plan

1.) An immediate tax deduction for employers for their contributions to retirement funds 2.) No tax liability for the employee at the time of the employer deduction 3.) Tax-free investment returns from stocks, bonds, money markets, etc.

Medical and other insurance stands out as a target for cost control because

1.) Costs are high and growth in costs has been high, even in determined efforts to control the growth of costs 2.) Employers have many options for attacking costs and improving quality, and the Affordable Care Act makes these issues even more salient for employers

4 categories of workers' compensation benefits

1.) Disability income 2.) Medical care 3.) Death benefits 4.) Rehabilitative services

Advantages of flexible benefit plans

1.) Employees can gain a greater awareness and appreciation of what the employer provides them, particularly with plans that give them a lump sum to allocate to benefits 2.) By permitting employee choice, there should be a match between the benefits package and the employees' preferences 3.) Employers may achieve overall cost reductions in their benefits programs

The Vesting of employer-funded pension benefits must take place under one of 2 schedules

1.) Employers may choose to vest employees after five years; until that time, employers can provide zero vesting if they choose. 2.) Employers may vesting employees over a 3 to 7 year period, with at least 20% vesting in the 3rd year and each year thereafter

2 age related issues received attention under the Age Discrimination in Employment Act (ADEA) and Older Workers Benefit Protection Act (OWBPA)

1.) Employers must not discriminate workers over age 40 in the provision of pay or benefits 2.) Early retirement incentive programs need to meet the following standards to avoid legal liability: - The employee is not coerced to accept the incentive and retire - Accurate information is provided regarding options - The employee is given adequate time to make a decision

Unemployed workers are eligible for benefits if they

1.) Have a prior attachment to the workforce (minimum 52 weeks or 4 quarters of work) 2.) Are available for work 3.) Are actively seeking work 4.) Were not discharged for cause, did not quit voluntarily, and are not out of work because of a labor dispute

3 types of medical expenses covered in medical insurance

1.) Hospital expenses 2.) Surgical expenses 3.) Physicians' visits

2 types of insurance

1.) Medical insurance 2.) Disability insurance

Factors contributed to growth of benefits

1.) Several laws were passed as part of Franklin Roosevelt's new deal 2.) Wage and price controls instituted during WWII 3.) The tax treatment of benefits program is often more favorable fro employees than the tax treatment of wages and salaries 4.) Cost advantage to purchase insurance at a lower rate when in groups rather than individually 5. The growth of organized labor from 1930s to 1950s 6.) Employers may provide unique benefits to differentiate themselves

Employers change staffing practices to control benefits costs. A possible effect of the Fair Labor Standards Act (FLSA) regulations

1.) Since benefits costs are fixed, reducing benefits cost per hour by having employees work more hours 2.) Organizations will try to have their employees classified as exempt whenever possible 3.) The growth in part-time employment and the use of temporary workers 4.) Employers may be more likely to classify workers as independent contractors rather than employees, which eliminates the employer's obligation to provide legally required employee benefits

Drawbacks of cafeteria-style plans

1.) The administrative cost, especially in the initial design and start-up stages 2.) Adverse selection - employees choose benefits they expect to need the most

Factors affect the amount of income that will be available to an employee upon retirement

1.) The earlier the age at which investments are made, the longer returns can accumulate 2.) Different investments have different historical rates of return 3.) The need to counteract investment risk by diversification because stock and bond prices can be volatile in the short run

Several factors to consider when thinking about cost control strategies

1.) The larger the cost of a benefit category, the greater the opportunity for savings 2.) The growth trajectory of the benefit category is important: even if costs are currently acceptable, the rate of growth may result in serious costs in the future 3.) Cost containment efforts can work only if the employer has significant discretion in choosing how much to spend in a benefit category

The cost of Disability insurance to the employer is based on

1.) The nature of the occupations and the risk attached to each 2.) The state where work is located 3.) The employer's experience rating

Unique aspects of benefits

1.) The question of legal compliance 2.) Organizations offer them so commonly that they have come to be institutionalized 3.) Their complexity

Unemployment insurance major objectives

1.) To offset lost income during involuntary unemployment 2.) To help unemployed workers to find new jobs 3.) To provide an incentive to employers to stabilized employment 4. ) To preserve investments in worker skills by providing income during short-term layoffs (allow workers to return to their employer)

Unemployment insurance established by

1935 Social security act

Unemployment benefits are typically about

50% of a person's earnings and last for 26 weeks. Extended benefits for up to 13 weeks.

Social security program covered

90% of US employees

Worker's compensation laws covered

90% of US employees

Defined benefit plan

A retirement benefit level to employees based on a combination of years of service and age as well as the employee's earnings level. Insulate employees from investment risk and borne by the company

Cash balance plan

A retirement plan consists of individual accounts, as in a 401(k) plan, but all the contributions come from the employer

Employees with disabilities must have equal access to whatever health insurance coverage the employer provides other employees.

Americans with Disabilities Act (ADA) in 1992

Can have important consequences for the types of benefits employees want

Basic demographic factors such as age and sex

Behavioral consequences of Social Security benefits

Because legally mandated, employers do not have discretion in designing this benefit, and social security affect employees' retirement decision

Long term disability insurance

Covering the person for life

Preferred in smaller companies, to avoid long-term obligations or younger companies

Defined contribution plan

Have greater portability (ease of transfer) across employers

Defined contribution plans (like 401k)

Summary plan description (SPD)

Describes the plan's funding, eligibility requirements, risks, and so forth

Tax free

Disability income

Defined contribution plans

Do not promise a specific benefit level for employees upon retirement. An individual account is set up for each employee with a guaranteed size of contribution. Investment risk to employees

Affordable Care Act in 2010

Does not require employers to provide health benefits but impose penalties on larger employers (with 50 or more full time workers or full time equivalents (FTE) that do not provide insurance or provide coverage that is unaffordable. When buying insurance on their own in a health insurance exchange. Increases the Medicare hospital insurance (part A) payroll tax on earnings for higher income taxpayers. Requires plans and issuers that offer dependent coverage to make the coverage available until a child reaches the age of 26. Applies o both married and unmarried children. Wellness programs rewards to up o 30% to employees. Encourage small employers to establish wellness programs

Does not require organization to have pension plans

ERISA

aim at specific health risks such as high blood pressure, high cholesterol levels, smoking and obesity

Employee Wellness Programs

Money purchase stems from the fact that

Employees often use the money to purchase an annuity rather that taking it as a lump sum

Pension protection act allows employers to

Enroll workers in their 401(k) plan automatically and to increase a worker's 401(k) contribution automatically to coincide with a raise or a work anniversary

Employees with less than 1 year of service or who work less than 25 hours per week or who are among the 10% higher paid are not covered of

Family and Medical Leave Act

Employee Wellness Programs (EWP)

Focus on changing behaviors both on and off work time that could lead to future health problems. Preventive. Attempt to manage health care costs and workers' compensation cost.

Preferred provider organizations (PPOs)

Groups of health care providers that contract with employers, insurance companies, and so forth to provide health care at a reduced fee. They do not provide benefits on a prepaid basis and employers are not required to use the preferred providers.

Different types of wellness centers

Health education programs Fitness facility Outreach and follow-up model

Alternative health care provider

Health maintenance organizations (HMOs) Preferred provider organizations (PPOs)

5 most highly ranked benefits objectives for employers

Increase employee productivity Increase employee satisfaction Increase employee loyalty Attract employees Help employees make better financial decisions

Advantage of flexible spending accounts

Increase take-home pay that results from pretax payment of health and dependent care expenses

Preferred provider organizations

Less expensive than traditional delivery systems but more expensive than HMO's

Most important benefits to the average person

Medical benefits

According to U.S Department of Labor's Employee Benefits Security Administration, ERISA requires that employers

Meet fiduciary responsibilities by: 1.) Acting solely in the interest of plan participants in managing the retirement plan 2.) Carrying out management duties prudently, following plan documents 3.) Diversifying plan investments 4.) Playing only reasonable plan expenses

Important feature of the unemployment insurance program

No state imposes the same tax on every employer

The most important provision of Social Security Act of 1935

Old age insurance and unemployment insurance

Defined benefit plans are most generous to

Older employees with many years of service

Does not guarantee health care benefits

PBGC

Employee Wellness Program are either

Passive or active

Old people other sources of income

Pensions (17%) Earnings from asses (11 %) Earnings (34%) Other sources (3%)

Flexible benefit plans (flex plans or cafeteria-style plans)

Permit employees to choose the types and amounts fo benefits they want for themselves

401(k) plans

Permit employees to defer compensation on a pretax basis

Flexible spending account

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

Family-friendly policies

Policies that help balance work and family such as family leave policies and child care

Survey information on benefits packages is available from

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

Also often used as retirement vehicles

Profit sharing plans and employee stock ownership plans

Short term disability insurance

Provide benefits for 6 months or less

Pension Benefit Guaranty Corporation (PBGC)

Provide some protection of benefits in the event of severe financial difficulties that force the company to terminate or reduce employee benefits

The most important issue in benefits management

Providing quality medical benefits while controlling costs

Increasing retiree health care costs let some companies to

Require white collar employees and retirees to pay insurance premiums and to increase copayments and deductibles

Financial Accounting Statement (FAS) 106 in 1993 Issued by the financial standard boards

Required that any benefits (excluding pension) provided after retirement can no longer be funded on a pay as you go basis. They must be paid on an accrual basis.

Pension Protection Act (PPA) of 2006

Requires defined contribution plans holding publicly traded to provide employees with 1.) The opportunity to divest employer securities and 2.) At least 3 investment options other than employer securities

Pregnancy Discrimination Act of 1978

Requires employers that offers disability plans to treat pregnancy as they would any other disability

Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985

Requires employers to permit employees to extend their health insurance coverage at group rates for up to 36 months following a qualifying event such as termination, a reduction in hours that leads to the loss of health insurance, death, and other events.

Since 1993, the Family and Medical Leave Act

Requires organizations with 50 or more employees within a 75 mile radius to provide as much as: 1.) 12 weeks of unpaid leave after childbirth or adoption. 2.) To care for a seriously ill child, spouse, or parent 3.) Or for an employee's own serious illness

Medical tourism

Seinding patients to other countries where medical procedures can be done much more cheaply

2 types of disability coverage

Short term and long term disability insurance

1.) The social security act and other legislation established legally - required benefits ____________ and modified the tax structure to make other benefits mandatory ___________

Social Security retirement system Worker's compensation & unemployment insurance

Largest single component of the elderly's overall retirement income

Social security (35%)

Employees must receive within 90 days after entering a plan

Summary plan description (SPD)

Social Security Act was amended to add

Survivor's insurance (1939) Disability insurance (1956) Hospital insurance (medicare part A, 1965) Supplementary medical insurance for the elderly (medicare part B, 1965)

Established by the Employee Retirement Income Security Act (ERISA) of 1974

The PBGC guarantees a basic benefit for employees who were eligible for pensions at the time of termination

Marginal tax rate

The percentage of additional earnings that goes to taxes

Protects individuals, and not all women outlive all men

Title VII

One way to combine the advantages of defined benefit plans and defined contribution plans is

To use a cash balance plan

Taxed as ordinary income

Unemployment benefits

ERISA guarantees employees that when they become participants in a pension plan and work a specified minimum number of years, they earn a right to a pension upon retirement

Vesting rights

Cover job-related injuries and death

Workers' compensation laws

Cash balance plans are most generous to

Young employees who will have many years ahead in which to earn interest

Franklin Roosevelt's New Deal

a legislative program aimed at buffering people from the devastating effects of the Great Depression

Social security retirement for fully insured workers begin at

age 65 years & 6 months (full benefits) or age 62 (w/ permanent reduction) for those born in 1940

The full retirement now is

age 67 for those born in 1960 or later

Employer contributions on disability insurance

are taxed

Other benefits that employers may offer in medical insurance

dental care, vision care, birthing centers, and prescription drug

Health maintenance organizations (HMOs)

differ from more traditional providers by focusing on preventive care and outpatient treatment, requiring employees to use only HMO services, and providing benefits on a prepaid basis

OASDHI program

federal Old age, Survivors, Disability, and Health Insurance

Employee contributions on disability insurance

have no federal tax

Qualified plans must meet

nondiscrimination rules