Chapter 9

Defined contribution plan

A prescribed contribution invest it appropriately, but no guarantee what the end benefit will be.

Advantages of Flexible Benefit Programs

Advantages 1. Employees choose packages that best satisfy their unique needs. 2. Flexible benefits help firms meet the changing needs of a changing workforce. 3. Increased involvement of employees and families improves understanding of benefits. 4. Flexible plans make introduction of new benefits less costly. The new option is added merely as one among a wide variety of elements from which to choose. Cost containment. Organization sets dollar maximum. Employee chooses within that constraint.

ADMINISTERING THE BENEFITS PROGRAM

Benefits administration involves three functions requiring further discussion: (1) communicating the benefits program:, (2) claims processing, and (3) cost containment.

OTHER BENEFITS

Childcare Services One fast-growing employee benefit is emergency child care. Eldercare Services 5. Most programs t that are available so far provide only referral services, but Great-West Life in Winnipeg has an eldercare specialist on staff.''^ This trend is likely to continue: The number of Canadians age 65 and over is predicted to double by the year 2026

Claims Processing

Claims processing arises when an employee asserts that a specific event (such as. as disability or hospitalization) has occurred, and requests that the employer fulfill a promise of payment. 'The major challenges in this area come from the approximately 10 percent of all claims in which payment is denied. A benefits administrator must then become a counselor, explaining the equitable and consistent procedures used.

Relative Advantages of Different Pension Alternatives

Defined Benefit Plan Provides an explicit benefit which is easily communicated. 2. Company absorbs risk associated with changes in interest rates and investment returns, which affect cost. 3. More favourable to long-service employees. Employer costs unknown. 5. Pension fund surplus, but not deficit, must be shared with employees if plan is wound up. DEFINED CONTRIBUTION PLAN Unknown benefit level is difficult to communicate. Employees assume risks from changes in interest rates and investment returns, which affect benefits. /lore favourable to short-term employees. Employer costs known up front. No surplus or deficit in pension fund to manage.

Disadvantages of Flexible Benefit Programs

Disadvantages Employees make bad choices and find themselves not covered for predictable emergencies. Administrative burdens and expenses increase. Diverse selection. Employees pick only benefits they will use. The subsequent high benefit utilization increases costs.

Life insurance and accidental death benefits

Life insurance and accidental death benefits

Short-term disability plans

Provide a continuation of all or part of an employee's earnings when the employee is absent from work due to an illness or injury that is not work-related.

Government Impetus

The three government-mandated employment-related benefits are: Workers' Compensation (provincial), Employment Insurance (federal), and Canada/Quebec Pension Plan (federal and Quebec). In addition, most other employee benefits are affected by such laws as the Income Tax Act, human rights acts, pension benefits acts, and so on.

Health Care: Cost Control Strategies

There are two general strategies available to benefit managers for controlling the rapidly escalating costs of health care. First, 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 category of control strategies are: (1) deductibles (the first x dollars of healthcare cost are paid by the employee); (2) coinsurance rates (the percentage of premium payments paid by the company); (3) maximum benefits (defining a maximum payout schedule for specific health problems); and (4) coordination of benefits (ensuring no double payment when coverage exists under the employee's plan and a spouse's plan). The second cost strategy involves promotion of preventive health, or wellness, programs.

Life Insurance

Typical coverage is a group insurance policy with a face value of one to two times the employee's annual salary. In most cases, premiums are paid completely by the employer. Some em retirees with life insurance at little or no cost, Two other common forms of life insurance are dependent fife and accidental death and dismemberment insurance. Dependent life insurance provides benefits in the event or the death of the spouse or child of an employee. Accidental death and dismemberment insurance pays double the regular life insurance benefit if the employee dies in an accident, and also pays a percentage of the death benefit for accidental paralysis, or loss of limbs, eyesight, speech, or hearing.

Canada/Quebec Pension Plan (C/QPP)

a mandatory governmentsponsored pension plan for all employed Canadians, funded equally by employers and employees

4. Medical insurance

a. Employer-sponsored medical plans b.Dental insurance c.Vision care

Sick leave plans

employer-sponsored plans that grant a specified number of paid sick days per month or per year

coinsurance

percentage of insurance premiums paid for by the employer

pension plan

plan that provides income to an employee at retirement as compensation for work performed now.

vesting

waiting period for entitlement to the employer-paid portion of pension benefits

WHY THE GROWTH IN EMPLOYEE BENEFITS?

Government Impetus ;. Unions . Employer Impetus Cost-Effectiveness of Benefits

Employer Impetus

Much of this initiative can be traced to pragmatic concerns about employee satisfaction and productivity. Rest breaks often were implemented in the belief that fatigue increased accidents and lowered productivity. S many employer-initiated benefits were designed to create a climate in which employees perceived that management was genuinely concerned for their welfare.

Income Security: Disability Plans

Short-term disability plans ( Sick leave plans, long-term disability plan, Pay for Time Not Worked )

Supplementary Unemployment Benefit (SUB) Plans

Supplementary Unemployment Benefit (SUB) plans are voluntary, self-insured employer plans to supplement benefits received under the EI plan. Maternity-, parental-, and compassionate-care SUB plans can supplement up to 100 percent of earnings, and all other SUB plans can supplement up to 95 percent of earnings. . EI benefits are not reduced by any SUB benefits received.

Long-term disability plans

employer-sponsored plans that provide income pro¬ tection due to long-term Illness or injury that is not work-related

employee benefits

part of the total compensation package, other than pay for time worked, provided to employees in whole or in part by employer payments, such as life insurance pension plan, workers' compensation, vacation, and so on

coordination of benefits

reduction of benefits by any amount paid under a spouse's plan

deductible

specified dollar amount of claims paid by the employee each year before insurance benefits begin

Key Issues in Benefits Planning, Design, and Administration

Benefits Planning and Design Issues:"What is the role of benefits in a total compensation package?"' Second, the planning process also should include strategies to ensure external competitiveless of benefits Third, the benefit plan design must ensure that benefits are adequate. This /Administration Issues: Three major administration issues arise in setting up a benefits package: (1) Who should be protected or benefited? (2) Flow much choice should employees have among an array of ben^ (3) How should benefits be financed:

Work Sharing Programs

Work-sharing programs are an arrangement by which employees work a reduced workweek and receive EI benefits for the remainder of the week. The EI Commission has to approve SUB plans and work-sharing programs.

Workers' Compensation

a mandatory, governmentsponsored, employer-paid, no-fault insurance plan that provides compensation for injuries and diseases that arise out of, and while in the course of, employment All jurisdictions provide benefits for : Loss of earnings due to temporary disability (total or partial) Loss of earnings due to permanent disabilit)' (total or partial) Healthcare expenses (including those normally paid under provincial healthcare plans) Survivor benefits for fatal injuries

Legally Required benfits

a. Canada/Quebec Pension Plan (GQPP) b.Employment Insurance (El) c. Workers' Compensation d.Government-sponsored healthcare plans

Retirement and savings plans

a. Defined benefit pension plan b.Defined contribution pension plan c. Profit sharing d.Employee stock ownership plans (ESOP)

5. Income security

a.Short-term disability b.Sick leave c. Long-term disability

Flexible benefit plans

benefit plans in which the employee is provided with a specified amount of money and then chooses which benefits to spend the money on, according to their attractiveness and cost A third approach is to offer different modules (packages) of benefits that employees choose from. The company insists that all employees have longterm disability insurance and pension, so these are included in each module. An employee whose spouse works and already has family coverage for health, dental, and vision might select package A.

Employee assistance Plan (EAP)

employer-sponsored program that provides employees with confidential counselling and/ or treatment programs for personal problems including personal problems including health issues The number of EAPs in Canada is growing, because they proactive way to reduce absenteeism and disability costs.

defined benefit plan

pension plan in which an employer agrees to provide a specific level of retirement pension, the exact cost of which is unknown Defined benefit plans generally follow one of three different formulas. The most common approach is to calculate average earnings over the last (or best) three to five y years of service for a Drospective retiree and to ofi^er a pension of about one-half this amount, adjusted for years of seniority. The second formula for a defined benefit plan uses average career earnings rather than earnings from the last few years: Other filings being equal, this would reduce the level of benefit for pensioners. The final formula commits an employer to a fixed (flat) dollar amount that is not dependent on earnings data. This figure generally rises with seniority level. Gurantee youll get x amount of money a year for your pension

Factors Infnfluencing Choice of Benefits Package

Employer Factors 1. Relationship to total compensation costs 2. Costs relative to benefits 3. Competitor offerings 4. Role of benefits in: Attraction Retention Motivation 5. Legal requirements. Employee Factors 1. Equity: fairness historically and in relationship to what others receive 2. Personal needs as linked to: Age Sex Marital status Number of dependants

Factors Influencing Benefit Planning

Employer Preferences Relationship to Total Compensation Costs A good compensation manager thinks; : "Is there a better use for this money? Could we put the money into some other compensation component and achieve better results? Costs Relative to Benefits A cost-centered approach would require benefits administrators, in cooperation with insurance carriers and armed with published forecasts of anticipated costs for particular benefits, to determine the cost commitments for the existing benefits package.

Medical Insurance

Employer-sponsored medical insurance provides coverage for expenses not payable under provincial/territorial plans. Canadian employees consider drug plans to be their most impor¬ tant employee benefit, and they are willing to pay more to ensure that coverage is not diminished. A survey of Canadian CEOs found that 66 percent ranked the costs of employee stress. burnout, and other physical and mental health issues as the top factors affecting the future ductivity of the workforc Many Canadian employers that provide healthcare benefits to retirees are considering eliminating these benefits due to rising cost

Pay for Time Not Worked

Included within this category are several self-explanatory benefits: 1. Paid rest periods, lunch periods, wash-up time, travel time, clothes-change time, and get-ready time benefits 2. Paid vacations 3. Paid holidays (statutory and other) 4. Other (jury duty allowances, bereavement pay, paid personal leave, paid time for community volunteer work)

Cost Containment

Increasingly, employers are auditing their benefits options for cost containment opportunities. The most prevalent practices include: 1. Probationary periods: 2. Benefit maximums: 3. Coinsurance: 4. Deductibles: 5. Coordination of benefits: 6. Administrative cost containment:

Unions

Largely through the efforts of unions, most notably the auto and steelworkers unions, several benefits common today were given their initial impetus: pension plans, supplementary unemployment benefits, and retiree benefits

Employee Benefits Communication

Pension legislation across Canada specifies the information that must be disclosed to plan members and their spouses/domesdc partners. C The most frequent method for communicating employee benefits is still the employee benefits handbook, usually available in both paper and online versions. A typical handbook contains a description of all benefits, including levels of coverage and eligibility requirements. The benefits handbook is usually supplemented with personalized benefits statements. These tailor-made reports provide a breakdown of package components and list selected cost information about the options. An effective communications package must have three elements. First, an organization must spell out its benefit objectives and ensure that any communications achieve these objectives. Second the message must be matched with the appropriate medium. element three: The content of the communications package must be complete, clear, and free of the complex jargon.

Administration Issues

Three major administration issues arise in setting up a benefits package: (1) Who should be protected or benefited? (2) How much choice should employees have among an array of benefits? (3) How should benefits be financed? Companies often differentiate treatment on the basis of employment status. The second administrative issue concerns choice (flexibility) in plan coverage. In the traditional benefits package, employees typically have not been offered a choice among employ benefits. Rather, a package is designed with the average employee in mind, and any deviations in needs simply go unsatisfied. Even companies that are not considering a flexible benefit program are offering greater flexibility and choice Such plans might provide, for example, (1) optional levels of group term life insurance; (2) the availability of death or disability benefits under pension or profit-sharing p ' or (3) choices of covering dependents under group medical expense coverage. The third administrative issue involves the question of financing benefits plans. Alternatives ; the following: 1. Non-contributory (employer pays total costs) 2. Contributory (costs shared between employer and employee) 3.Employee-financed (employee pays total costs for some benefits, e.g., long-term disability)

Employment Insurance

a mandatory, governmentsponsored plan for all employed Canadians that provides workers with tempo¬ rary income replacement as a result of employment interruptions due to circumstances beyond their control; funded by employer and employee contributions

6. Payments for time not worked

a. Paid rest periods, coffee breaks, lunch periods, wash-up time, travel time, clothes-change time. get-ready time, etc. b. Payments for vacations c. Long-term disability

Miscellaneous benefits

a. Parental leave b. Childcare services c.Eldercare services d. Employee assistance plans (EAP) e.Other

Cost-Effectiveness of Benefits

The first cost advantage is that most employee benefits are not taxable. Provision of a benefit rather than an equivalent increase in wages avoids payment of personal income tax. A second cost-effectiveness component of benefits arises because many group-based benefits (e.g., hi^ and health insurance) can be obtained at a lower rate than could be obtained by employees acting on their own. Group insurance also has relatively easy qualification standards, giving security to a set of employees who might not otherwise qualify. Finally benefit premiums and pension contributions are tax deductible up to limits specified in the Income Tax Act.