Module 13 (Chapter 13): Benefit Options
Unemployment insurance 4 Major Objectives
1. To offset lost income during involuntary unemployment 2. To help unemployed workers find new jobs 3. To provide incentive for employers to stabilize employment 4. To allow workers to return to their employer after short-term layoff
Qualified deferred compensation
A deferred compensation program that qualifies for tax exemption. It must provide contributions or benefits for employees other than executives that are proportionate to contributions provided to executives.
Cash balance plan
A defined benefit plan that looks like a defined contribution plan. Employees have a hypothetical account such as a 401k, into which is deposited what is typically a percentage of annual compensation. The dollar amount grows both from contributions by the employer and by some predetermined interest rate (e.g., often set equal to the rate, given on 30-year treasury certificates).
Pension Protection Act of 2006
Defined contribution plans holding publicly traded securities must provide employees with at least three investment options other than employer securities.
Paid-time-off plan
Eliminates the distinction between sick days and other paid days off, thus eliminating the incentive to "fake" illness.
Legally required benefits (employers' share only) include:
Family leave and health insurance (FLMA, COBRA, HIPAA)
Factor 4
How should seniority be factored into the payment formula?
Point-of-service (POS) plan
Hybrid combining HMO and PPO benefits. Provides economic benefits of HMO with freedom of PPO.
Traditional-time-off plans
Includes paid vacations, holidays (or pay if worked), sick leave, and personal leave, tracked separately.
Commercial insurance plans (also called indemnity/pay-for-service plans)
Offered through professional insurance companies like Humana or Prudential; employee can choose any provider.
Legally required benefits (employers' share only) include:
Social security (old-age, survivors, disability and health insurance (employer FICA taxes) and railroad retirement tax)
General health care
There are four basic underlying structures of health care delivery in the U.S.
401(k)
Type of defined contribution plan named for the section of Internal Revenue Code describing the requirements; a savings plan in which employees are allowed to defer pretax income and employers may match a portion of employee contributions.
Pension Benefit Guaranty Corporation (PBGC)
Agency to which employers are required to pay insurance premiums to protect individuals from bankrupt companies (and pension plans!). In turn, the PBGC guarantees payment of vested benefits to employees formerly covered by terminated pension plans.
Pension Protection Act of 2006
Aimed at protecting employees' retirement income and transfer some responsibility for retirement savings from the employer to the employee.
Pension Protection Act of 2006
Allows employees in publicly traded companies the freedom to sell off any employer stock purchased through deferrals or after-tax contributions.
Pension Protection Act of 2006
Allows employers to enroll workers in 401(k) plans automatically and to increase a worker's 401(k) contribution automatically to coincide with a raise or a work anniversary.
The Patient Protection and Affordable Care Act (2010)
Also referred to simply as the Affordable Care Act; aimed at expanding health care coverage through an individual mandate to purchase health insurance and an employer mandate to provide qualifying health insurance coverage. Requires individuals to maintain minimal essential health insurance coverage or pay a penalty unless exempted for religious beliefs or financial hardship (note this mandate was removed in 2018, but the employer mandate remains). Employers must enroll new employees or face a levy.
Pension Protection Act of 2006
Also targets employers who fail to set aside enough reserves to cover current and future pension obligations by defining plans less than 70% funded as 'at risk' plans.
Social security
Based on federal law that provides retirement and disability benefits. Qualified benefits usually include old age/disability benefits, benefits for dependents of retired/disabled workers, benefits for surviving family members of a deceased worker, and lump-sum death payments; designed and amended to provide a foundation of basic financial security for American workers and their families.
Salary continuation plans
Benefit options that provide some form of protection for disability. Some are legally required, such as workers' compensation provisions for work-related disability and social security disability income provisions for those who qualify.
Health Insurance Portability & Accountability Act (HIPAA)
Designed to lessen an employer's ability to deny coverage to an employee for a preexisting condition and prohibit discrimination based on health-related status.
Preferred provider organization (PPO)
Employers select certain providers who agree to provide price discounts and submit to utilization controls. Employees pay higher fees if they seek care outside of the provider network.
Consolidated Omnibus Budget Reconciliation Act (COBRA) 1984
Enacted by Congress 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 (e.g., a layoff).
Life insurance
Guarantees insurer pays a sum of money to named beneficiaries when the insured dies in exchange for the premiums paid by the policyholder during their lifetime.
Workers' compensation
Legally required programs in each state that provide payment of medical expenses and compensation for lost wages resulting from work-related injuries, diseases, or disabilities; Benefits include medical care, temporary and permanent disability, death benefits, and rehabilitation and training.
Family and Medical Leave Act
Legislation passed in 1993 that entitles eligible employees to receive unpaid leave up to 12 weeks per year for specified family or medical reasons, such as caring for ill family members or adopting a child.
Deferred compensation
Pay approach that provides income to an employee at some future time as compensation for work performed now. Types of deferred compensation programs include stock option plans and pension plans.
Short-term disability plan
Pays a percentage of salary (about 60%) for temporary disability due to sickness or injury. On-the-job injuries are covered by workers' compensation (see workers' compensation).
Health maintenance organization (HMO)
Pulls together a group of providers willing to provide services at an agreed upon rate if employer limits employees to these providers for health services; employees make prepayments in exchange for guaranteed health care on demand.
Experience rating
Rating system in which insurance premiums vary directly with the number of claims filed.
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.
Defined benefit plan
Retirement plan in which employers pay a level of pension expressed as either a fixed dollar amount or a percentage which may vary with seniority; often referred to as a pension.
Defined contribution plan
Retirement plan in which the employer makes provisions for contributions to an account set up for each participating employee. Upon retirement, payment is based on contributions and investments; often faster to vest than defined benefit plan, but whether an employee will be able to afford to retire depends more on decisions made by the employee.
Factor 3
Should other post-retirement income sources be integrated with pension payments?
Factor 2
Should social security payments be factored in?
Employee Retirement Income Security Act (ERISA)
Specifies that if an employer decides to provide a pension (it is not mandatory) specific rules must be followed. Plan must vest (employee has right to both personal and company contributions into pension) after five years' employment. Pension Benefit Guaranty Corporation, as set up by this law, provides worker some financial coverage when a company and its pension plan go bankrupt.
Unemployment insurance
State-administered program that provides financial security for workers during periods of joblessness; has four major objectives:
Individual retirement account (IRA)
Tax-favored retirement savings plans that individuals can establish themselves.
How much retirement income should an employer provide?
The answer to this question depends on five factors.
Portability
Transferability of pension benefits for employees moving to a new organization. ERISA does not require mandatory portability of private pensions. On a voluntary basis, the employer may agree to let an employee's pension benefit transfer to an individual retirement account (IRA) or, in a reciprocating arrangement, to the new employer.
Legally required benefits (employers' share only) include:
Unemployment compensation
Long-term disability plan
Usually underwritten by insurance firms and provides 60-79% of wages for period varying from two years to life. If available, kicks in after the short-term plan expires.
Health savings (HSA) or health reimbursement accounts ((HRA) also called Consumer Driven Health Plans and High Deductible Plans)
Usually used in conjunction with plans that have a high deductible. Funds in these accounts are designed to help limit the cost of the deductible and are either contributed by employees with pretax dollars (HSA) or by the employer up to some fixed dollar amount (HRA). Set up to force employees to make choices in the most economical way while hopefully not neglecting important health issues.
Factor 5
What can the company afford?
Factor 1
What level of retirement compensation would a company like to set as a target, expressed in relation to pre-retirement earnings?
Legally required benefits (employers' share only) include:
Workers' compensation
Domestic partner benefits
voluntarily offered by employers to an employee's unmarried partner, whether of the same or opposite sex.