Chapter 13 - Benefit Options
Types of DC Plans
- 401(k) - Employee Stock Ownership Plan - Profit-Sharing Plan
Vesting
- A benefit plan provision that guarantees that participants will, after meeting certain requirements, retain a right to the benefits they have accrued, or some portion of them, even if employment under their plan terminates before retirement.
DC Plans: Profit-Sharing Plan
- A plan that focuses on profitability as the standard for group incentive. These plans typically involve one of three distributions: 1) Cash or current distribution plans provide full payment to participants soon after profits have been determined (quarterly or annually); 2) deferred plans have a portion of current profits credited to employee accounts, with cash payments made at time of retirement, disability, severance, or death 3) combination plans that incorporate aspects of both current and deferred options.
Disability Income: Long-Term Disability Plan
- An insurance plan that provides payments to replace income lost through an inability to work that is not covered by other legally required disability income plans.
Categories of Benefits: Time not Worked Payments
- Vacation - Holidays - Sick Leave - Parental Leave
Categories of Benefits: Legally Required Payments
- Wokers Comp - Social Security - Unemployment - Family Leave/Health Insurance
Deferred Compensation
- a 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.
Individual Retirement Accounts (IRAs)
- a tax-favored retirement savings plans that individuals can establish themselves. - Portion of contributions into the retirement account are tax deductible - used mostly to store wealth accumulated in other retirement vehicles, rather than as a way to build new wealth
ROTH IRA
- another way for an individual retirement account - Do not get a tax deduction on the back end but when you retire the amount is tax free - When you leave your employer want to rollover your contributions into this account
Advantages of ESOP
- employees receive cash at retirement based upon the stock value at that time.
Advantages of Deferred Compensation
- employer receives an income tax deduction for contributions made to the plan even though employees may not yet have received any benefits · Must meet certain requirements for a qualified plan - must meet nondiscrimination tests that are intended to encourage companies to spread benefits coverage to all employees
Health Care Delivery: Preferred Provider Organization (PPO)
- employers select certain providers who agree to provide price discounts and submit to strict utilization controls (e.g., strict standards on number of diagnostic tests that can be ordered)
Objectives of Unemployment Insurance
- offset lost income during involuntary unemployment, - help unemployed workers find new jobs, - provide an incentive for employers to stabilize employment, and - to preserve investments in worker skills by providing income during short-term layoffs (which allows workers to return to their employer rather than start over with another employer).
Health Care Delivery: Point-of-Service (POS)
- permits an individual to choose which plan to seek treatment from at the time that services are needed. - provide the economic benefits of the HMO with the freedom of the PPO
Health Care Delivery: Health Maintenance Organization (HMO)
- pulls together a group of providers (e.g., hospitals and doctors) willing to provide services at an agreed upon rate in exchange for the employer limiting employees to these providers for health services
second-injury 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
Social Security Payments
- retirement insurance - survivors' insurance - disability insurance - hospital and medical insurance for the aged, the disabled, and those with end-stage renal disease - prescription drug benefits Extra Help with Medicare Prescription Drug Costs supplemental security income - special veteran's benefits
Major Problem for Social Security
- 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 offset the costs. - going to go bankrupt in 2034
Legally Required Benefits: Unemployment Insurance
- this floor of security for unemployed workers became less dependent upon the philanthropy of co-workers - part of the Social Security Act of 1935 - The maximum benefits duration is 26 weeks - "charged" against the firm or firms most recently employing that person.
Worker Compensation Payments
1. Medical care needed to treat the job injury or illness. 2. Temporary disability benefits to the employee to help replace lost wages 3. Permanent disability payments to the employee to compensate for the permanent effects of the injury. 4. Survivor death benefits. 5. Rehabilitation and training in most states for those unable to return to their prior career.
Categories of Social Security Benefits
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
Life Insurance
- 56 percent of private sector employees have access - 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 entirely by the employer o The cost is about $0.10/hour per employee - one of the benefits heavily affected by the movement to a flexible benefits program. o Provide a core of basiccoverage (e.g., $25,000). o The option is to choose greater coverage (usually in increments of $10,000 to $25,000) as part of the optional package.
Retirement Plans: Defined Benefit
- A benefit option or package in which the employer agrees to give the specified benefit without regard to cost maximum. Opposite of defined contribution plan. - is expressed as either a fixed dollar amount or a percentage-of-earnings amount - Determined by a benefit formula, making current payments that will yield the future pension benefit for a retiring employee - The majority of defined benefit plans calculate average earnings over the last 3 to 5 years of service for a prospective retiree and offer a pension that is about one-half this amount (varying from 30% to 80% percent) adjusted for years of seniority
Retirement Plans: Defined Contributions
- A benefit option or package in which the employer negotiates a dollar maximum payout. Any change in benefit costs over time reduces the amount of coverage unless new dollar limits are negotiated.
DC Plans: Employee Stock Ownership Plan (ESOP)
- A retirement plan in which the company contributes its stock as the retirement benefit. - 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.
Unemployment Insurance Coverage Requirements
- All workers except a few agricultural and domestic workers are currently covered - You must meet the state requirements for wages earned or time worked during an established (one-year) period referred to as a "base period." § In most states, this is usually the first four out of the last five completed calendar quarters before the time that your claim is filed. - 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.
Legally Required Benefits: Workers Compensation
- As 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 - Most expensive component for an employer - The more claims, the premiums for their insurance will increase - Covered by state law, not federal - States vary in the size of the payout for claims
Categories of Benefits: Retirement and Savings Plans
- Benefit Pension - Defined Contributions - Profit Sharing - Stock Options - Pension Premiums - Admin
Disability Income: 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.
Human Resources Planning System
- Can control unemployment benefits through this system - Put in place by the benefit administrator to make realistic estimates of human resource needs and avoid a pattern of hasty hiring and morale-breaking terminations § a benefit administrator should attempt to audit pre-layoff behavior (e.g., lateness, gross misconduct, absenteeism, illness, leaves of absence) and compliance with UI requirements after termination (e.g., refusing a job can disqualify an unemployed worker).
Types of Health Care Delivery
- Commercial Health Insurance - Health Maintenance Organization (HMO) - Preferred Provider Organization (PPO) - Point-of-Service (POS)
Types of Retirement Plans
- Defined Benefit (DB) - Defined Contributions (DC) - both plans are subject to taxes
Categories of Benefits: Miscellaneous Payments
- Discounts on goods/services - Employee Meals - Employee Education - Child Care
Sequence for Disability Benefits
- Employee receives Paid Time Off (PTO) § This reduces the need for companies to "police" whether employees are indeed sick, and allows employees more flexibility in life planning - After PTO is used up, employees can use Short-Term Disability (STD) § pays a percentage of your salary (about 60% on average) for temporary disability because of sickness or injury · on-the-job injuries are covered by workers' compensation - After STD is used up, employees can use Long-Term Disability (LTD) § usually underwritten by insurance firms and provides 60 to 70 percent of pre-disability pay for a period varying between two years and life
Disadvantages of 401(k)
- Employees bear investment risks under defined contribution plans - Many employees do not invest enough (i.e., contribution rates are low) to meet employer match threshold.
Consolidated Omnibus Budget Reconciliation Act (COBRA)
- In 1985, Congress enacted this law 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., layoffs) - All employers with 20 or more employees must comply - An employer may charge individuals up to 102 percent of the premium for coverage (100% premium plus 2% administration fee), which can extend up to 36 months (standard 18 months), depending on the category of the qualifying event - Coverage expires after 18 months then you're not eligible
Legally Required Benefits: Social Security
- Introduced in 1937, only about 60 percent of all workers were eligible. Today, nearly every American worker (96%) are covered. - The money to pay these benefits comes employees, their employers, and self-employed people during working years. § As contributions are paid each year, they are immediately used to pay for the benefits to current beneficiaries
Categories of Benefits
- Legally Required Payments - Retirement and Savings Plans - Life Insurance and Death Benefits - Medical benefit payments - Paid breaks - Payments for time not worked - Miscellaneous Payments
Disadvantages of ESOP
- Limits the number of ways employees can contribute to their retirement - 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
Categories of Benefits: Medical benefit payments
- Medical Insurance - Retiree Medical Insurance - Short-Term Disability - Long-Term Disability - Dental Insurance
Health Care Cost Control Strategies
- Motivate employees to change their demand for health care, through changes in either the design or the administration of health insurance policies - Changing the structure of healthcare delivery systems and participating in business coalitions - Incentives for healthy behaviors
Health Care Delivery: Commercial Health Insurance
- Prudential, Aetna, Humana - Plans through these companies are called indemnity plans or pay-for-service plans. - Under these plans an employee can choose any health care provider
Experience Rating
- Rating system in which insurance premiums vary directly with the number of claims filed - applied to unemployment insurance and workers' compensation and may be applied to commercial health insurance premiums. - lower percentages are charged to employers who have terminated fewer employees. - The tax rate may fall to almost 0 percent in some states for employers that have had no recent experience with downsizing and may rise to 10 percent for organizations with large numbers of layoffs.
Types of Disability Income
- Salary Continuation Plans - Long-Term Disability Plan
Advantages of 401(k)
- The growing use of defined contribution plans (and drop in use of defined benefit plans) has some advantages for younger employees - These plans are faster to vest (the company's matched share of the contribution permanently shifts over to employee ownership) and they are also more portable—job hopping employees can take their retirement fund accruals along to the next job
Qualification for Social Security Benefits
- To qualify for these benefits, a worker must work in covered employment and earn a specified amount of money ($1,320 this year) for each quarter-year of coverage - Forty quarters of coverage will insure any worker for life
Portability
- Transferability of pension benefits for employees moving to a new organization. - ERISA does not require mandatory 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.
Consumer Driven Health Plans/High Deductible Plans
- companies cuts costs by shifting much of the burden of purchasing health care over to employees - Employees choose from any of the traditional providers (HMO, PPO, Indemnity Plans), but the employer sets its contribution equal to the lower cost of these three (usually HMO) - If the employee wants a more expensive option, the extra cost is out-of-pocket · plans usually are accompanied by high deductibles, sometimes reaching several thousand dollars.
Health Insurance Portability and Accountability Act (HIPAA)
- designed to: § lessens an employer's ability to deny coverage for a preexisting condition § prohibit discrimination based on health-related status. - In 2002, when stringent new privacy provisions added considerable compliance problems for both the HR people charged with enforcement and the information technology people delegated the task of building secure health information systems
Employee Retirement Income Security Act (ERISA)
- does not require that employers offer a pension plan. But if a company decides to have one, it is rigidly controlled by these provisions. - Designed for 2 goals: § protect the interest of approximately 100 million active participants, § stimulate the growth of such plans. -Requirements: § requires that employees be eligible for pension plans beginning at age 21. · Employers may require 12 months of service as a precondition for participation. § The service requirement may be extended to three years if the pension plan offers full and immediate vesting.
Family and Medical Leave Act (FMLA)
- 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. - applies to all employers having 50 or more employees
DC Plans: 401(k)
- named for the section of the Internal Revenue Code describing the requirements, 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
Dental Insurance
- now much more prevalent, with most larger employers offering coverage - follows the model originated in health care plans o equivalent of HMOs and PPOs is the standard delivery system
Unemployment Insurance Funding
- paid out to eligible workers is financed exclusively by employers that pay federal and state unemployment insurance tax. - federal tax amounts to 0.6 percent of the first $7,000 earned by each worker - states impose a tax above the $7,000 figure
Disadvantages of Deferred Compensation
- the 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.
Legally Required Benefits: Family Leave and Health Insurance
Consists of 3 components: - Family and Medical Leave Act (FMLA) - Consolidated Omnibus Budget and Reconciliation Act (COBRA) - Health Insurance Portability and Accountability Act (HIPAA)
