CMS2 Assignment 10: Employee Benefits - Key Feature of Total Rewards

An employer's share of health-care costs is contributed into one of six health-care systems:

(1) a community-based system, such as Blue Cross (2) a commercial insurance plan (3) self-insurance (4) a health maintenance organization (HMO) (5) a preferred provider organization (PPO) (6) a point-of-service plan (POS)

Employee Retirement Income Security Act (ERISA)

-Does not require that employers offer a pension plan, but if there is one it is rigidly controlled by ERISA provisions. These provisions were designed to achieve two goals: (1) to protect the interest of approximately 100 million active participants, and (2) to stimulate the growth of such plans. The actual success of ERISA in achieving these goals has been mixed at best.

Vesting

-refers to the length of time an employee must work for an employer before he or she is entitled to employer payments made into the pension plan. Any contributions made by the employee to a pension fund are immediately and irrevocably vested. The Economic Growth and Tax Relief Reconciliation Act of 2001 states that the employer's contribution must vest at least as quickly as one of the following two formulas: (1) full vesting after three years or (2) 20% after two years and 20% each year thereafter, resulting in full vesting after six years

Payment for Time Not Worked: Included within this category are several self-explanatory benefits:

1. Paid vacations and payments in lieu of vacation 2. Payments for holidays not worked 3. Paid sick leave 4. Other (payments for National Guard, Army, or other reserve duty; jury duty and voting pay allowances; payments for time lost due to death in the family or other personal reasons)

All workers except a few agricultural and domestic workers are currently covered by unemployment insurance (UI) laws. These covered workers (97% of the workforce), though, must still meet eligibility requirements to receive benefits:

1. You must meet the state requirements for wages earned or time worked during an established (one year) period of time referred to as a "base period". [ In most states, this is usually the first four out of the last five completed calendar quarters prior to the time that your claim is filed. ] 2. You must be determined to be unemployed through no fault of your own [determined under state law], and meet other eligibility requirements of state law.

Types of miscellaneous benefits that are provided through the employer-employee mechanism.

(a) Paid time off during working hours (b) Payment for time not worked (c) Child care (d) Elder care (e) Domestic partner benefits (f) Legal services insurance

Child care

A majority of employers offer dependent care flexible spending accounts. Other benefits take the form of resource and referral services, sick or emergency child-care programs and on-site day-care centers. Employers view the provision of child-care benefits as an important tool in the attraction and retention of employees.

contingent workers

Contingent work relationships include working through a temporary help agency, working for a contract company, working on call, and working as an independent contractor.

Describe employer-provided dental insurance.

Dental insurance is a standard inclusion for 90% of employers with more than 500 employees. In many respects, dental care coverage follows the model originated in health care plans. The dental equivalent of HMOs and PPOs is the standard delivery system. Dental insurance costs have not spiraled like other heath care costs. In part, these relatively modest costs can be attributed to stringent cost-control strategies. The excess supply of dentists in the United States also has helped keep costs competitive.

Benefits Under Social Security

Majority of benefits fall into 4 categories: (1) old-age or disability benefits (2) benefits for dependents of retired or disabled workers (3) benefits for surviving family members of a deceased worker (4) lump-sum death payments To qualify for these benefits, a worker must work in covered employment and earn a specified amount of money (about $780 today) for each quarter-year of coverage. 40 quarters of coverage will insure any worker for life. The amount received under the benefits varies, but in general it is tied to the amount contributed during eligibility quarters.

Payment for time not worked

This benefit generally includes vacation pay and pay in lieu of vacation, payments for holidays not worked, paid sick leave and other miscellaneous payments for armed forces duty, jury duty, voting pay allowances, payments for bereavement time or other personal reasons.

Paid time off during working hours

This benefit includes paid rest periods, lunch periods, washup time, travel time, clothes-change time and get-ready time.

Describe employer provided vision care coverage.

Employer-provided vision care dates back only to 1976 in a contract between the United States Auto Workers Union and the Big Three automakers. Since then, this benefit has spread to other auto-related industries, parts of the public sector and to other private employers. Most plans are noncontributory and usually cover partial costs of eye examination, lenses and frames.

Discuss the Employee Retirement Income Security Act (ERISA).

ERISA does not require that employers offer a pension plan. But if a company decides to have one, ERISA provisions rigidly control it. These provisions were designed to achieve two goals—first, to protect the interest of 100 million active participants who are covered today by private retirement plans and second, to stimulate the growth of such plans. ERISA generally requires that employees be eligible for pension plans beginning at the age of 2l. Employers may require one year of service as a precondition for participation. The service requirement may be extended to two years if the pension plan offers full and immediate vesting. (Candidate Note: Text erroneously says three years.) The two concepts of vesting and portability under ERISA are sometimes confused but have very different meanings in practice. Vesting refers to the length of time an employee must work for an employer before he or she is entitled to employer payments made into the pension plan. The vesting concept has two components. First, any contributions made by the employee to a pension fund are immediately and irrevocably vested. The vesting right becomes questionable only with respect to the employer's contributions. As mandated by ERISA, and amended by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the employer's contribution must vest at least as quickly as one of the following two formulas. The first is full vesting after three years; or the second, 20% after two years and 20% each year thereafter until fully vesting in six years. The vesting schedule an employer uses often is a function of the demographic makeup of the workforce. An employer that experiences high turnover may wish to use the three-year service formula. By doing so, any employee with less than three years' service at time of termination receives no vested benefits. Or the employer may use the second schedule in the hopes that earlier benefits accrual will reduce undesired turnover. The strategy adopted is, therefore, dependent on organizational goals and workforce characteristics. Portability of pension benefits becomes an issue for employees moving to new organizations. Should pension assets accompany the transferring employee in some fashion? ERISA does not require mandatory portability of private pensions. On a voluntary basis, though, the employer may agree to let the employee's pension benefits transfer to the new employer. For an employer to permit portability, of course, the pension rights must be vested. (Candidate Note: It should be noted that EGTRRA instituted many changes expanding portability between various types of retirement plans.) Despite the wealth of constraints imposed by ERISA, the potential still exists for an organization to go bankrupt or in some way fail to meet its vested pension obligations. To protect individuals confronted by this problem, employers are required to pay insurance premiums to the Pension Benefit Guaranty Corporation (PBGC) established by ERISA if they sponsor a defined benefit type of retirement plan. In turn, PBGC guarantees payment of vested benefits to employees formerly covered by terminated defined benefit pension plans. (Candidate Note: The text does not clearly indicate the guarantees provided by PBGC only apply to defined benefit plans.)

Legal services insurance

Prepaid legal services insurance provides routine legal services such as divorce, real estate matters, wills, traffic violations and the like but exclude provisions covering felony crimes. Employees with legal problems either select legal counsel from a panel of lawyers selected by the firm or freely choose their own lawyers with claims reimbursed by an insurance carrier.

experience rating

Rating system in which insurance premiums vary directly with the number of claims filed. An experience rating is applied to unemployment insurance and workers' compensation and may be applied to commercial health insurance premiums. In a community rating system, insurance rates are based on the medical experience of the entire community.

What benefits does one receive under Social Security?

The majority of benefits under Social Security fall into four categories. These are: (1) Old age or disability benefits (2) Benefits for dependents of retired or disabled workers (3) Benefits for surviving family members of a deceased worker (4) Lump-sum death benefits. To qualify for these benefits, a worker must work in a covered employment and earn a specified amount of money, which is $1,200 in 2014 for each quarter-year of coverage. Forty quarters of coverage will insure any worker for life. The amount received under the four benefits categories varies but in general is tied to the amount contributed during the eligibility quarters.

In 1985 Congress enacted the Consolidated Omnibus Budget Reconciliation Act (COBRA) to ...

...provide current and former employees and their spouses and dependents with a temporary extension of group health insurance when coverage is lost due to qualifying events such as a layoff. All employers with 20 or more employees must comply with this act.

Explain workers' compensation as a legally required benefit.

The cost of workers' compensation is substantial. The cost of workplace injuries and illnesses, including medical treatment, wage replacement benefits and lost productivity, exceeds $58 billion a year. Workers' compensation is a form of no-fault insurance; that is, employees are eligible even if their actions caused the accident. This covers injuries and diseases that arise out of and, while in, the course of employment. Benefits are given for: (a) Medical care for work-related injuries, beginning right after the accident (b) Temporary disability benefits after a three- to seven-day waiting period (c) Permanent partial and permanent total disability benefits for lasting consequences of disabilities on the job (d) Survivor benefits (e) Rehabilitation and training in most states for those unable to return to their prior career. Some states provide "second-injury funds." These funds relieve an employer's liability when a preemployment injury combines with a work-related injury to produce a disability greater than that caused by the latter alone. State, not federal, laws cover workers' compensation. The primary difference across states is in benefits levels and costs.

Elder care

With life expectancy longer than ever before and the aging of the baby-boom generation, one benefit that will become increasingly important is elder-care assistance. Almost one-half of those companies offering child-care assistance to employees also offer elder-care assistance.

One of the most common employee benefits offered by organizations is some form of...

... life insurance. Typical coverage would be a group term insurance policy with a face value of one to two times the employee's annual salary. Most plan premiums are paid completely by the employer. Slightly over 30% include retiree coverage. Almost all companies make this benefit forfeitable at the time of departure from the company although the option to convert the coverage to individual insurance is available.

The 1993 Family and Medical Leave Act (FMLA) applies to...

...all employers having 50 or more employees and entitles all eligible employees to receive unpaid leave up to 12 weeks per year for specified family or medical reasons. To be eligible, an employee must have worked at least 1,250 hours for the employer during the previous 12-month period. Common reasons for leave under FMLA include caring for an ill family member or adopting a child.

A recent development in controlling health care costs is...

...consumer-directed health plans (CDHP). These plans, as the name implies, are designed to encourage individuals to shop around and compare prices and providers. They are low-premium plans with high deductibles and are linked to a personal savings account such as a health reimbursement arrangement (HRA) or a health savings account (HSA).

Workers' Compensation

A form of no-fault insurance (employees are eligible even if their actions caused the accident) Covers injuries and diseases that arise out of, and while in the course of, employment. Benefits are given for: 1. Medical care for work-related injuries, beginning right after the accident. 2. Temporary disability benefits after a 3-7 day waiting period. 3. Permanent partial and permanent total disability benefits for lasting consequences of disabilities on the job. 4. Survivor benefits. 5. Rehabilitation and training in most states, for those unable to return to their prior career. Some states provide "second-injury funds." These funds relieve an employer's liability when a pre-employment injury combines with a work-related injury to produce a disability greater than that caused by the latter alone. Covered by state, not federal, laws.

Briefly describe short- and long-term disability income insurance programs

A number of benefit options provide some form of protection for worker disability. For example, workers' compensation covers disabilities that are work-related. Also, Social Security has provisions for disability income to those who qualify. Beyond these two legally required sources, though, there are two private sources of disability income. These are employee salary continuation plans and long-term disability plans. Many companies have some form of salary continuation plan that pays out varying levels of income depending on duration of illness. At one extreme is short-term illness covered by employer sick leave policy and typically reimbursed at a level equal to 100% of salary. The most prevalent practice is to provide paid time off (PTO) rather than sick days. This reduces the need for companies to "police" whether employees are indeed sick and allows employees more flexibility in life planning. After such benefits run out, short-term disability benefits become operative. The benefit level typically is about 60% of salary and covers temporary disability. Generally, long-term disability is underwritten by insurance firms and provides 60-70% of predisability pay for a period varying between two years and life.

Briefly describe each of the six systems into which an employer may contribute money to provide health care coverage for its employees.

An employer's share of health care costs is contributed into one of six systems. These six systems are: (1) A community-based system (2) A commercial insurance plan (3) Self-insurance (4) A health maintenance organization (HMO) (5) A preferred provider organization (PPO) (6) A point-of-service plan (POS). Of these six, plans one through three operate in a similar fashion. However, two major distinctions exist. The first distinction is in the manner payments are made. The second distinction is in the way costs of medical benefits are determined. (Candidate Note: This characterization of health care delivery systems oversimplifies somewhat confusing delivery systems with funding approaches. For instance, several of the delivery systems can be funded using a self-insured approach.) As a fourth delivery system, health maintenance organizations offer comprehensive benefits for a fixed fee. Health maintenance organizations offer routine medical services at a specific site. Employees make prepayments in exchange for guaranteed health care services on demand. Preferred provider organizations represent a variation on health care delivery in which there is a direct contractual relationship between and among employers, health care providers and third-party payers. An employer is able to select certain providers who agree to provide price discounts and submit to strict utilization controls. In turn, the employer influences employees to use the preferred providers through financial incentives. Finally, a point-of-service plan is a hybrid plan combining HMO and PPO benefits. The point-of-service plan permits an individual to choose which plan to seek treatment from at the time that services are needed. The HMO component of the POS plan requires office visits to an assigned primary care physician, with the alternative to receive treatment through the PPO component. The PPO component does not require the individual to first contact the primary care physician but requires that in-network physicians are used. When POS plan participants receive all of their care from physicians in the network, they are fully covered, as they would be under a traditional HMO.

Explain the basics of a defined contribution plan.

Defined contribution plans require specific contributions by an employer, but the final benefit received by employees is unknown, depending on the investment success of those charged with administering the pension fund. There are three popular forms of defined contribution plans. A 401(k) plan is a savings plan in which employees are allowed to defer pretax income. Employers typically match employee savings at a rate of 50 cents on the dollar. The dollar limits for this type of plan move upward with changes in the consumer price index. The second type of plan is an employee stock ownership plan (ESOP). In a basic ESOP a company makes a tax-deductible contribution of stock shares or cash to a trust. The trust then allocates company stock or stock bought with cash contributions to participating employee accounts. The amount allocated is based on employee earnings. When an ESOP is used as a pension vehicle, the employees receive cash at retirement based upon the stock value at that time. ESOPs have one major disadvantage that limits their utility for pension accumulations. Many employees are reluctant to bet most of their future retirement income on just one investment source. If the company's stock takes a downturn, the result can be catastrophic for employees approaching retirement age. Despite this disadvantage, ESOPs continue to be utilized for retirement savings. Finally, profit sharing also can be considered a defined contribution pension plan if the distribution of profits is delayed until retirement.

Domestic partner benefits

Domestic partner benefits have been offered voluntarily by employers to an employee's unmarried partner, whether of the same sex or opposite sex. The major reasons motivating organizations to provide domestic partner benefits include fairness to all employees and the market competition and diversity that are evident in many of today's tight labor markets. However, since the Supreme Court ruling struck down a key part of the Defense of Marriage Act (DOMA), all employers offering spousal benefits are now required to provide same-sex domestic partner benefits to gay or lesbian couples who marry in states where it is legal.

The level of pension a company chooses to offer depends on the answers to five questions:

First, what level of retirement compensation would a company like to set as a target, expressed in relation to pre-retirement earnings? Second, should Social Security payments be factored in when considering the level of income an employee should have during retirement? Third, should other postretirement income sources (e.g., savings plans that are partially funded by employer contributions) be integrated with the pension payment? Fourth, a company must decide how to factor seniority into the payout formula. Finally, companies must decide what they can afford.

Describe a defined benefit plan.

In a defined benefit plan, an employer agrees to provide a specific level of retirement pension, which is expressed as either a fixed dollar or percentage of earnings amount that may vary or increase with years of seniority in the company. The firm finances this obligation by following an actuarially determined benefits formula and making current payments that will yield the future pension benefit for a retiring employee. Defined benefit plans generally follow one of three different formulas. The most common approach is to calculate average earnings over the last three to five years of service for a prospective retiree and offer a pension of about one-half of this amount adjusted for years of service. The second formula for a defined benefit plan uses average career earnings rather than earnings from the last few years of employment. Other things being equal, this would reduce the level of benefit for pensioners. The final formula commits an employer to a fixed dollar amount that is not dependent on any earnings data. This figure generally rises with seniority level. The level of pension a company chooses to offer depends on the answers to several questions. First, what level of retirement compensation would a company like to set as a target, expressed in relation to preretirement earnings? Second, should Social Security payments be factored in when considering the level of income an employee should have during retirement? Third, should other postretirement income sources be considered with the pension payment? Fourth, how should a company factor seniority into the payout formula? The larger the role played by seniority, the more important pensions will be in retaining employees. Most companies believe that the maximum pension payout for a particular level of earnings should be achieved only by employees who have spent an entire career with the company.

Discuss the advantages and disadvantages of defined benefit and defined contribution pension plans.

The advantages of a defined benefit plan are that it provides an explicit benefit that is easily communicated to employees. Defined benefit plans are more favorable to long-service employees and have the additional advantage to employees of having the employer assuming the risk associated with changes in inflation and interest rates that affect costs. Of course, this advantage to employees is a disadvantage to employers as is the fact that the ultimate cost to the employer is unknown. The advantages of a defined contribution plan to employers are that the employee assumes the investment risk and the employer cost is known up front; a disadvantage to employers is that the plan is more difficult to communicate. Defined contribution plans are more favorable to short-term employees. (Candidate Note: Some authors would argue that defined contribution plans are more easily communicated to employees than are defined benefit plans. This view holds that employees understand a set contribution being placed in an account for them more easily than a stream of income to be paid at a future time based on a formula.) Possibly the most important of these factors is the differential risk borne by employers on the cost dimension. Defined contribution plans have known costs from year one. The employer agrees to a specific level of payment that only changes through negotiation or through some voluntary action. This allows for quite realistic cost projections. In contrast, defined benefit plans commit the employer to a specific level of benefit. Errors in actuarial projections can add considerably to costs over the years and make the budgeting process much more prone to error. Not surprisingly, both of these deferred compensation plans are subject to stringent tax laws. For deferred compensation to be exempt from current taxation, specific requirements must be met. To qualify, an employer cannot freely choose who will participate in the plan. This requirement eliminated the common practice of building tax-friendly, extravagant pension packages for executives and other highly compensated employees. The major advantage of a qualified plan is that the employer receives an income tax deduction for contributions made to the plan even though the employees may not yet have received any benefits. The disadvantage arises in recruitment of high-talent executives. A plan will not qualify for tax exemptions if an employer pays high levels of deferred compensation to entice executives to the firm, unless proportionate contributions also are made to lower level employees. (Candidate Note: Some authors would refer to the plans described in this paragraph as "qualified plans" rather than as "deferred compensation plans.")

Discuss three general strategies available to benefit managers for controlling the rapidly escalating costs of health care.

The first cost-control strategy is that organizations can motivate employees to change their demand for health care through changes in either the design or the administration of health insurance policies. Included in this cost-control strategy are: (a) Deductibles, or the first X dollars of health care cost are paid by the employees (b) Coinsurance rates, or premium payments are shared by the company and employee (Candidate Note: Typically "coinsurance" is used to describe cost sharing between the plan and the employee on certain health care services rather than the cost sharing on insurance premiums.) (c) Maximum benefits, or defining a maximum payout schedule for specified health problems (Candidate Note: The Affordable Care Act has prohibitions and restrictions on lifetime and annual limits for benefits deemed "essential.") (d) Coordination of benefits to ensure no double payments when coverage exists under the employee's plan and a spouse's plan (e) Auditing of hospital charges for accuracy (f) Requiring preauthorization for selected visits to health care facilities (g) Mandatory second opinion whenever surgery is recommended. (More often, utilization review occurs and fewer plans require a mandatory second opinion.) (h) Using intranet technology to allow employees access to online benefit information, saving some of the cost of benefit specialists. The second general cost-control strategy involves changing the structure of health care delivery systems and participating in business coalitions. Under this category falls the trend toward HMOs, PPOs, POSs and consumer-directed health care plans. Even under more traditional delivery systems, though, there is more negotiation of rates with hospitals and other health care providers. The final cost strategy involves linking incentives to healthy behaviors. No-smoking policies and incentives for quitting smoking are popular inclusions here. But there also is increased interest in healthier food in cafeterias and vending machines, on-site physical fitness facilities and early screening to identify health problems before they become more serious.

Explain how social security is funded.

The money to pay Social Security benefits comes from the Social Security contributions made by employees, their employers and self-employed people during working years. As contributions are paid in each year, they are immediately used to pay for the benefits to current beneficiaries. Here lies a major problem with Social Security. While the number of retired workers continues to rise because of earlier retirement and longer life spans, no corresponding increase in the number of contributors to Social Security has offset these costs. To maintain solvency, there has been a dramatic increase in both the maximum earnings base and the rate at which that base is taxed. Several points need to be made. First, with the rapid rise in taxable earnings, most individuals will pay some amount of Social Security tax on every dollar they earn. This wasn't always true. In 1980 the maximum taxable earnings were $25,900. Every dollar earned over that amount was free of Social Security tax. Now the maximum is $117,000 (in 2014), and for one part of Social Security, which is Medicare, there is no earnings maximum. Second, remember that for every dollar deducted as an employee's share of Social Security, there is a matching amount paid by employers. Current funding levels produced a massive surplus throughout the 1990s. In 2000, the Social Security surplus was $167 billion. Current "baby boomers" have reached their peak earnings potential. And their Social Security payments now subsidize a much smaller generation born during the 1930s. There are now almost 3.5 workers paying into the system for every one collecting benefits. Within the next 40 years this ratio will drop to about two to one.