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Benefit Options

Chapter

13

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1. List the seven categories of employee benefits and give examples of each.

2. Explain the benefits that are legally required by employers.

3. Discuss the key factors associated with the rapid cost increases with workers’ compensation programs.

4. Discuss the major problem associated with the solvency of social security and identify the potential options to reform the social security program.

5. Explain the key differences between the two types of retirement plans: defined benefit and defined contribution.

6. Identify the six health care delivery systems and discuss the cost containment strategies to control the escalating costs of health care.

Learning ObjectivesAfter discussing Chapter 13, students

should be able to:

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11 Legally required paymentsLegally required payments

22 Retirement and savings plan paymentsRetirement and savings plan payments

33 Life insurance and death benefitsLife insurance and death benefits

44 Medical and medical-related benefit paymentsMedical and medical-related benefit payments

55 Paid rest periods, coffee breaks, lunch periods, . . . Paid rest periods, coffee breaks, lunch periods, . . .

66 Payments for time not workedPayments for time not worked

77 Miscellaneous benefit paymentsMiscellaneous benefit payments

Exh. 13.1: Categorizationof Employee Benefits

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Legally Required Benefits

Workers’ Compensation Social Security

Unemployment Insurance

Family and Medical Leave

ActC.O.B.R.A.

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Overview: Workers’ Compensation

Form of no-fault insuranceEmployer liable for providing benefits to

employees that result from occupational disabilities or injuries, regardless of fault

Disability must be work relatedCovered by state, not federal, laws

Employers pay premium to insurance company or state fund

For every dollar insurers take in to cover workplace injuries and illnesses, they pay out $1.21 to cover claims

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Workers’ Compensation: Benefits and Laws

Types of benefitsPermanent total disability and temporary total

disabilityPermanent partial disability - loss of use of a

body memberSurvivor benefits for fatal injuriesMedical expensesRehabilitation

Exhibit 13.3: Benefits by Type of AccidentExhibit 13.4: Commonalities in State Workers’ Compensation Laws

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Exhibit 13.3: Benefits by Type of Accident: New Hampshire

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13-8Exh. 13.4: Commonalities inState Workers’ Compensation

LawsISSUE MOST COMMON STATE PROVISION

Type of law Compulsory (in 49 states)

Elective (in Texas)

Self-insurance Self-insurance permitted (in 48 states)

Coverage All industrial employment

Farm labor, domestic servants, and casual employees usually exempted

Compulsory for all (or most) public sector employees (in 47 states)

Occupational diseases

Coverage for all diseases arising out of and in the course of employment

No compensation for “ordinary diseases of life”

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Issues: Workers’ Compensation

Increased costs of medical expenses

Use of workers’ compensation as a surrogate for more

stringent unemployment insurance

Cost of replacing worker wages has risen

Cost increases

due to . . .

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Overview: Social Security

Provides a basic foundation of security for American workers and their families

For tax purposes, system is split into two programsSocial Security - 6.2%Medicare - 1.45%

Exhibit 13.5: Social Security Through the Years

Exhibit 13.6: What Social Security Does to Your Paycheck

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Social Security and Medicare Benefits

SOCIAL SECURITYRetirement incomeDependent benefitsSurvivor’s benefitsLump-sum death benefitsDisability6.2% of eligible earnings

up to $90,000 in 2005Employee and employer

funded

MEDICAREHospital insurance

(Medicare, Part A)Medical Insurance

(Medicare, Part B)1.45% of eligible earnings

(unlimited)Employee and employer

funded

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Issues: Social Security

Number of retired workers is rising without a corresponding increase in number of contributors to offset costs Currently, 3.5 workers pay into system for each

person collecting benefits Within next 40 years this ratio drops to about 2 to 1

Reform options Increase payroll taxes Decrease benefits Use general revenues Have social security go to an employee’s own

account to be earmarked of his/her personal retirement

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Unemployment Insurance

Benefits financed by federal and state taxes levied on employers under Federal Unemployment Tax Act (FUTA)

Employers pay 6.2% on first $7,000 earned by each employee ($434) 5.4% disbursed to state unemployment commissions

($378) 0.8% used for federal administrative costs ($56)

Each company’s rate depends on its prior experience with unemployment Lower percentages charged to employers with fewer

discharged employees

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Unemployment Insurance (continued)

Money held in federal trust for each state

Payments typically continue for 26 weeks

Extended benefits paid when either of two conditions prevail

Benefits based on a percentage of an individual’s earnings over a recent 52-week period

Most recent calculation of average weekly benefit was $211.75 - 50% up to maximum

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Family and Medical Leave Act

Coverage: Employers with 50 or more employees

Eligibility: 12 months employment with employer in which employee works 1,250 hrs

Qualifying events: Specified family or medical reasons

Conditions: Employee must be able to return to same job or one with equal status

Health benefits: Continue while employee is on leave

Notification: 30 days

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Consolidated Omnibus BudgetReconciliation Act (COBRA)

Coverage: Employers with 20 or more employeesEligibility: Provides current and former employees

and their spouses and dependents with temporary extension of health care benefits

Qualifying events: Specified events (e.g. layoffs)Qualifying event coverage: 18 to 36 months,

depending on category of qualifying eventCoverage stops: When employee becomes

eligible for medical insurance from new employer or gains Medicare coverage

Cost: Cost of insurance plus 2%

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Health Insurance Portabilityand Accountability Act (HIPPA)

Key provisions

Lessens an employer’s ability to deny coverage for a preexisting condition

Prohibits discrimination on the basis of health-related status

Provides stringent privacy provisions

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Defined benefit plans

Defined contribution plans

Employee Retirement Income Security Act (E.R.I.S.A.)

Retirement and Savings Plan Payments

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Defined Benefit Plans

Employer provides a specific pension level defined in terms of Fixed dollar amount or Percentage-of-earnings amount that may vary with years vary with years

of seniorityof seniority

Employer 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

Determination of benefit levels Average earnings at end of tenure (last 3 – 5 years) or Average career earnings or Fixed dollar amount not dependent on earnings

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Defined Contribution Plans

Require specific contributions by employerFinal benefit received by employees is unknownDependent on investment success of plan

managerThree popular forms of these plans

401 (k) planEmployee Stock Ownership Plan (ESOP)Profit sharing

Can be considered a defined contribution plan if distribution of profits is delayed until retirement

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13-21Exh. 13.7: Relative Advantages of

Different Pension Alternatives

Employer costs known up front4. Employer costs unknown

More favorable to short-term employees

3. More favorable to long service employees

Employees assume these risks2. Company absorbs risk associated with changes in inflation and interest rates which affect cost

Unknown benefit level is difficult to communicate

1. Provides an explicit benefitwhich is easily communicated

DEFINED CONTRIBUTION PLANDEFINED BENEFIT PLAN

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Eligibility: Employees at least 21 years old Employers may require 6 months of service as a precondition for

participation

Vesting: Length of time employee must work for employer before entitled to employer payments to plan Any contributions made by an employee to a pension fund are

immediately and irrevocably vested Employer’s contribution must vest according to two formulas

Portability: Issue for employees moving to new companies Law does not require mandatory portability of private pensions An employer may voluntarily agree to permit portability

(pension rights must be vested)

Pension Benefit Guaranty Corporation (PBGC): Insures payment of certain pension plan benefits

Employee Retirement Income Security Act (ERISA)

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How Much Retirement Income to Provide?

What level of retirement income should be set as a target?

Should social security benefits be factored in when considering level of retirement income?

Should other post-retirement income sources be integrated with pension?

How large a role should seniority play in determining pension level?

What can a company afford?

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Life Insurance

One of the most common employee benefits

87% of medium and largecompanies offer life insurance

Most companies offer term policies

Value of one to two times an employee’s salary

Most plan premiums paid completely by employer

Varying amounts of additional coverage often an option

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Health and Medical Benefits

General Health Care

Health Care: Cost Control Strategies

Short- & Long- Term Disability

Dental Insurance

Vision Care

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Types of Health Care Systems

Traditional coverage Community-based system,

such as Blue Cross Commercial insurance plan Self-insurance

Health maintenance organization (HMO)Preferred provider organization (PPO)Point-of-service plan (POS)Exhibit 13.9: How Health Insurance Options

DifferExhibit 13.10: Average Employer Monthly

Costs 2003

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Motivate employees to change their demand for health care via changes in either design or administration of policies

Change structure of healthcare delivery systems andparticipate in business coalitionsHMOsPPOs

Promote preventive health programsNo-smoking policiesHealthy food in cafeterias and vending

machines

Controlling Health Care Costs:Three Strategies

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Controlling Health Care Costs:Strategy One

Practices related to design andadministration of health plan Increase deductiblesChange coinsurance ratesReduce maximum benefitsCoordinate benefits with employees and spousesAudit health care chargesRequire preauthorization for visits to facilitiesRequire mandatory second opinion for

proceduresUse intranet technology to allow employees

access to online benefit information

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Miscellaneous Benefits

Paid Time Off During Working

HoursPayment for

Time Not Worked

Child Care

Elder Care

Domestic Partner Benefits

Legal Insurance

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Rest periods

Lunch periods

Travel

Work prep time

Rest periods

Lunch periods

Travel

Work prep time

Paid Time Off During Working Hours

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Vacation

Holidays

Sick pay

Personal holiday

Funeral leave

Military leave

Jury duty

Vacation

Holidays

Sick pay

Personal holiday

Funeral leave

Military leave

Jury duty

Pay for Time Not Worked

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Purchasing Assistance

Recreational and Social Services

Credit Unions

Awards

Transportation Pooling

Financial Planning

On-Site Health

Services

Legal Services

Food Services

Housing and Moving

Other Miscellaneous Services

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13-33 Benefits Received:Full-Time vs. Contingent

Employees