HRMN 395-Report on Organization

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8 Benefits Basics

Benefits are a core element of the WorldatWork total rewards model. (See Figure 1.3 in Chapter  1.) Benefits include health and welfare plans and retirement plans designed to help protect and ensure employees’ finan- cial security, as well as programs providing pay for time not worked. Over a period of time, employee benefits have evolved from basic “fringe benefits” of insurance coverage and a few perquisites to a comprehensive range of ben- efits that strike a balance between employees’ personal and professional lives.

The ever-growing package of offerings has evolved, along with some com- pensation programs, into a separate element of the total rewards model, well-being. Can some programs of well-being be considered benefits? Yes, many organizations still consider them benefits. The total rewards model takes into account the fluidity of the relationship between compensation, benefits, and well-being. It will be up to each individual organization to de- fine precisely where the various programs will be categorized.

HISTORICAL PERSPECTIVE OF BENEFITS

The world of employee benefits is drastically different than just five years ago, let alone 15 to 20 years ago. What is not new is that employees need benefits and companies need employees. However, due to the escalation of benefit costs, employers have started to re-examine the employees’ role in the selection, payment, and management of benefits.

C o p y r i g h t 2 0 2 0 . W i l e y .

A l l r i g h t s r e s e r v e d . M a y n o t b e r e p r o d u c e d i n a n y f o r m w i t h o u t p e r m i s s i o n f r o m t h e p u b l i s h e r , e x c e p t f a i r u s e s p e r m i t t e d u n d e r U . S . o r a p p l i c a b l e c o p y r i g h t l a w .

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WorldatWork, & Dan Cafaro. (2020). The WorldatWork handbook of total rewards : A comprehensive guide to compensation, benefits, HR & employee engagement. Wiley.

Book Title:

Chapter 8: Benefits Basics

Historical Perspective of Benefits 197

Historically, employers handled all aspects of benefits. This was the era of providing “cradle to grave” benefits. Employers selected and paid for bene- fits. Employees had minimal to no input in any benefit-related decision. Benefits were considered “fringe” and employees viewed benefits as “entitle- ments.” (See Figure 8.1.)

Late Nineteenth Century • US economy changed from agricultural to industrial • First pension plan established in 1875 by the American Express Company

1900s: World War I • New workers entering United States • Social safety nets; no financial safety nets • Department of Labor (DOL) formed by Congress in 1913 • Homogeneous workforce (male, sole wage earner)

1920s: Riding High until Stock Market Crash • Few disability benefits available to workers retired, injured, or killed

on the job • First Blue Cross plan established at Baylor University Hospital • Kaiser Health Maintenance Organization (HMO) established • Revenue Acts of 1921, 1926, and 1928 encouraged private, employer-

sponsored retirement plans 1930s: Depression

• Public safety net began to develop • Workers’ Compensation • Unemployment insurance • Social Security (1935)

• National Labor Relations Act (NLRA)  • Collective bargaining for pay and benefits

1940s: World War II • National Labor Relations Board (NLRB) formed in 1948 • Huge growth in unions – unions demanded more for employees • Women entered the workforce – “Rosie the Riveter” • Family care issues emerged • Private pension plans grew significantly

1950s: Post–World War II • Fringe benefits emerging • Employers began competing with benefits to address the wage freeze • Simple benefits packages met the needs of the traditional family: major

medical, life, disability, pension plan • Low costs

FIGURE 8.1 Historical influences – the benefits timeline.

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198 Benefits Basics

1960s: Decade of Assassinations; Vietnam • Changing demographics

• Divorce became more common; break-up of families • Working mothers (sole income) unsupported with benefits • More transient workforce

• Medicare and Medicaid established • Title VII of the Civil Rights Act of 1964

1970s: Watergate; Oil Crisis • Economic downturn – high inflation, slow economic growth • More than 20 major pieces of legislation affecting benefits plans  – 

specifically the Employee Retirement Income Security Act of 1974 (ERISA), IRC Section 125, 401(k), HMO Act

• Initial corporate response to changing workforce • Working mother issues began to take force • Single fathers became an issue

1980s: Computer Commonplace; Space Shuttle Challenger Explosion • Benefit costs skyrocketed • Gradual development of flexible benefits • Announcement: Social Security is broke • Cost shift to employees • Consumer education • Employers moving to “self-insurance” of health plans • Beginnings of managed care (utilization management)

1990s: Information Technology; Internet • Focus on benefit value and personal responsibility  –  optimizing the

value for each dollar spent • Performance orientation of benefits plans consistent with corporate

goals • Flexible benefits expanded, addressing the needs of a diverse

workforce • Employer accountability to expand choices for employees

• Segmented benefits for different demographics • Greater employee accountability for decision-making • Emerging shift in definition of dependent

• Domestic partner, aging parents, elder care, adoption • Consolidation of health-care industry

FIGURE 8.1 (Continued)

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Elements of Benefits 199

Income Protection Plans (Mandatory)

• State and Federal Unemployment Insurance

• Workers’ Compensation • Social Security • State Temporary Disability Insurance (New Jersey,

New York, Hawaii, Rhode Island, California)

Income Protection Plans (Mandatory)

• State and Federal Unemployment Insurance

• Workers’ Compensation • Social Security • State Temporary Disability Insurance (New Jersey,

New York, Hawaii, Rhode Island, California)

FIGURE 8.2 Benefits programs at a glance.

2000s and 2010s: Focus on corporate accounting/governance; health-care coverage debates; Social Security solvency

• Movement away from “entitlement” (paternalism) to partnership and shared accountability between employers and employees

• Consumer-driven health plans expand; consumerism opportunity provided by technology

• Wellness initiatives and well-being programs expand • Funding for Social Security coverage debated • Triple whammy: child-care, elder-care, and retirement planning at

the same time • Uninsured and underinsured increases; issue of universal health-care

coverage debated • The Patient Protection and Affordable Care Act

Today, initiatives from the US government (involving Medicare) and employers are placing more responsibility and accountability on employees for benefit decision-making and cost responsibilities. Businesses and govern- ment still have important roles, but the trend is for employers and govern- ment to share the platform with benefit recipients. Some call this shared accountability.

ELEMENTS OF BENEFITS

Benefits programs may be categorized into the following two elements: (1) income protection programs; and (2) pay for time not worked programs. (See Figure 8.2.)

FIGURE 8.1 (Continued)

(continued)

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200 Benefits Basics

Income Protection Programs (Non- Mandatory)

Health-Care Benefits • Medical Plans (Indemnity Plans and Managed

Care Plans, such as HMOs, PPOs, and POS) • Prescription Drug Coverage • Dental Plans • Vision Plans • Hearing Plans Welfare Benefits • Employee Term Life Insurance • Dependent Term Life Insurance • Accidental Death and Dismemberment • Sick Pay (Salary Continuation) • Short-Term Disability • Long-Term Disability • Long-Term Care Insurance Flexible Benefits • Premium Conversion • Flexible Spending Accounts (Health Care and

Dependent Care) • Full Flexible Benefits Plans Retirement and Investment Plans • Defined Benefit Plans • Defined Contribution Plans (Savings/Thrift Plans,

Profit-Sharing Plans, SIMPLE Plans, Money Pur- chase Plans, Employee Stock Ownership Plans)

• Hybrid Plans (Cash Balance Plans, Pension Equity Plans)

Executive Benefits • Supplemental Executive Retirement Plans • Supplemental Health Plans • Supplemental Life Insurance Plans • Supplemental Disability Plans

Pay for Time Not Worked (Non-mandatory)

At Work • Rest Periods • Lunch Periods • Wash-Up Time • Clothes Change Time Not at Work • Vacations • Holidays • Personal Leave • Jury Duty • Military Duty

FIGURE 8.2 (Continued)

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Benefits Plan Objectives 201

Income Protection Programs

Income protection programs are designed to protect the standard of living of the employee and his or her family. The programs include mandatory and nonmandatory or voluntary coverage.

Mandatory plans are required by federal or state law to cover employees for:

• Social Security • Workers’ compensation • Unemployment • Nonoccupational disability (five states only)

Nonmandatory or voluntary plans are provided at the discretion of the employer and include:

• Medical • Prescription drug • Mental/behavioral health • Dental • Vision • Disability income • Survivor benefits • Flexible spending accounts • Retirement plans

Pay for Time Not Worked Programs

Pay for time not worked programs are designed to protect the employee’s income flow during certain periods, both at work and not at work, when the employee is not working.

For example, common paid time-off benefits would include vacation, holidays, sick-pay, and leaves of absence including time off for jury duty, vot- ing, military duty, and medical or bereavement leaves.

BENEFITS PLAN OBJECTIVES

Employers and employees value benefits differently. They will rarely agree on the level of benefits that plans should provide. Employers seek to balance the employees’ needs and the cost to the organization. Employees wish to maximize the value of benefits received and minimize out-of-pocket expenses.

Employer Objectives

The employer objectives for benefits plans are influenced by:

• Meeting corporate, business, and compensation objectives • Actual dollar cost and percentage of payroll

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202 Benefits Basics

• Administration complexity and cost • Tax and accounting issues • The role benefits play in the total rewards objectives of the organization

Employee Objectives

Employee objectives for benefits plans include income protection for:

• Cash flow. Ensure cash flow is not compromised due to large medical and/or dental claims.

• Income replacement. Replace income if employee becomes disabled. • Income for surviving dependents. Provide income for surviving depend-

ents in the event of death. • Adequate retirement income. Provide adequate income upon retirement.

In order to design a benefits program, an organization should define its program objectives. Additionally, program objectives need to be aligned with the organization’s and HR’s philosophy and strategy. Because company philosophies and strategies differ, no two companies will share the same objectives for employee benefits plans.

Review the objectives listed in Figure  8.3 and rank the three to five objectives that are most important to your company regarding employee benefits.

Please prioritize the top three to five objectives for employee benefits in your organization.

Objectives Rank Increase employee morale Motivate action   Attract good employees Reduce turnover  Keep unions out  Better use compensation dollars Enhance employee security  Maintain favorable competitive position Enhance organization’s image among employees Increase employee productivity

______ ______ ______ ______  ______  ______ ______  ______ ______ ______

FIGURE 8.3 Employee benefits plan objectives.

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Government Regulation of Benefits Plans 203

GOVERNMENT REGULATION OF BENEFITS PLANS

Management of employee benefits includes compliance with numerous fed- eral and state laws and regulations. Sanctions and penalties for noncompli- ance can be severe, including plan “disqualification” under the Internal Revenue Code. Disqualification can cause employees to lose tax exemption or tax deferral of benefits values, and employers to lose the advantage of tax deductibility of plan expenditures.

Figure  8.4 highlights major laws affecting benefits plans and identifies principal agencies that issue regulations and monitor compliance. At least one new law each year affects some aspect of employee benefits. It is impor- tant to know that benefits continue to change due to legislation.

Federal regulations with the most significant influences include:

• Internal Revenue Code (IRC) • Refers to tax laws passed by Congress and administered by the IRS. • Early statute governing private pension plans.

• Title VII of the Civil Rights Act of 1964 • Employers can never legally base benefits decisions on race, color,

religion, sex, or national origin. • Age Discrimination in Employment Act of 1967 (ADEA)

• If an employer provides benefits to its employees, it generally must do so without regard to an employee’s age. ADEA does permit em- ployers to provide different benefits to older employees only under certain circumstances.

• The Employee Retirement Income Security Act of 1974 (ERISA). • ERISA introduced federal government involvement in the employee

benefits arena. • ERISA establishes minimum standards to provide protection for par-

ticipants and beneficiaries in employee benefits plans (participant rights). Among other things, ERISA standards cover access to plan information and fiduciary responsibility.

• ERISA covers most private sector health and pension plans but does not apply to public-sector benefits.

• Those individuals who manage plans (and other fiduciaries) must meet certain standards of conduct under the fiduciary responsibili- ties specified by law.

• The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) EGTRRA was a massive piece of federal tax legislation that: • Enacted substantial changes in the income and estate tax rate

structures • Made major changes in the alternative minimum tax rules • Established qualified tuition programs and college savings accounts

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204 Benefits Basics

• Created a new tax credit for low-income savers • Liberalized estate and gift tax rules • Adopted a broad range of enhancements affecting tax-qualified re-

tirement plans

The changes affecting qualified retirement plans represent a major retirement-policy turning point. Prior to EGTRRA, the trend in tax and benefits policy was to progressively limit the amounts that could be contrib- uted to, and benefits that could accrue, under tax-qualified retirement plans. While it is true that the deferral limits for 401(k) plans were rising modestly over time with increases in the cost of living, the overall contribu- tions limits under Code §415, among others, had been cut substantially. EGTRRA represents an abrupt departure from this trend, and it opens up significant new planning opportunities, especially for small, closely held businesses. With the passage of EGTRAA (as supplemented by certain technical corrections made in the Jobs Creation and Worker Assistance Act of 2002 [JCWAA]), Congress liberalized and rationalized the rules that govern the design, adoption, and operation of qualified plans.

Laws/Regulations Scope/Provisions Enforcing Agency

Family and Medical Leave Act of 1993 (FMLA)

Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA)

Group health plans –  requirement to continue regular coverage during periods of qualifying leaves (as many as 12 weeks per year)

Civil Rights Act of 1964

Health Insurance Portability and Accountability Act of 1996 (HIPAA)

All benefits plans – regulations prohibiting discrimination against women and other pro- tected classes in ben- efits plan “terms and conditions”

Group health plans – requirements for continuation of coverage following termination of employment and other “qualifying events.”

US Department of Labor (DOL) Equal Employment Opportunity Commission (EEOC)

FIGURE 8.4 Regulations of employee benefits.

(continued)

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Government Regulation of Benefits Plans 205

Family and Medical Leave Act of 1993

The Family and Medical Leave Act (FMLA) entitles employees to take as many as 12 weeks of unpaid, job-protected leave each year for specified fam- ily, medical, and exigent military service reasons, and as many as 26 weeks of unpaid, job-protected leave each year to care for a family member who is a covered service member. The FMLA is intended to allow employees to bal- ance their work and family lives by taking reasonable unpaid leave under limited circumstances.

Laws/Regulations Scope/Provisions Enforcing Agency

Group health plans – requires em- ployers to provide terminated employees with a certificate of group health plan coverage, when requested.

US Department of Labor (DOL) Internal Revenue Service (IRS) US Public Health Service (for state and local employee plans) US Department of Labor (DOL)

Securities and Exchange Commission (SEC) Regulations

Plans that provide employer stock to participants –  information requirements

Securities and Exchange Commission (SEC)

State insurance regulation

Insured benefits plans – standards for coverage, conversion and coordination of benefits

State insurance commissioners

Health Savings Accounts (Part of Medicare Prescription Drug Improvement and Modernization Act of 2003)

Provide tax incentives to lower health-care costs. Includes high deductibles; must be under age 65 to participate

Department of the Treasury

The Patient Protection and Affordable Care Act of 2010

Transformed the regulation of health-care financing in the United States

Department of Health and Human Services

FIGURE 8.4 (Continued)

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206 Benefits Basics

Employer Coverage, Employee Eligibility, and Leave Entitlement

The FMLA applies to public agencies, including state, local, and federal employers and local education agencies (schools), and it applies to private sector employers with at least 50 employees. Spouses employed by the same employer are jointly entitled to a combined total of 12 workweeks of family leave for the birth of a child or for placement of a child for adoption or foster care, and to care for a parent (but not a parent “in-law”) who has a serious health condition. Leave for birth or adoption (including foster care placement) must conclude within 12 months of the birth or placement.

Intermittent Leave

Under certain circumstances, employees may take FMLA leave intermit- tently. This means that an employee may take leave in blocks of time or by reducing his/her normal weekly or daily work schedule.

If FMLA leave is to care for a child following the birth of the child or the placement of a child with the employee for adoption or foster care, use of intermittent leave is subject to the employer’s approval.

FMLA leave may be taken intermittently when medically necessary for planned and/or unanticipated medical treatment or a related serious health condition by or under the supervision of a health-care provider or for recov- ery from treatment or recovery from a serious health condition. It also may be taken to provide care or psychological comfort to an immediate family member with a serious health condition.

FMLA Eligibility

To be eligible for FMLA benefits, an employee must meet the following conditions:

• Work for a covered employer • Have worked for the employer for at least a total of 12 months • Have worked at least 1,250 hours during the past 12 months • Work at a location where the employer within a 75-mile radius employs

at least 50 employees

Note: An employee also is eligible if he/she has worked at least 12 months for a covered employer that has failed to keep records regarding service time.

A covered employer must grant an eligible employee as many as 12 work- weeks of unpaid leave during any 12-month period for one or more of the following reasons:

• Birth of a child and to care for the newborn child or for placement of a child for adoption or foster care

• To care for an immediate family member (spouse, child, or parent) with a “serious health condition”

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Government Regulation of Benefits Plans 207

• To take medical leave when the employee is unable to work because of a “serious health condition.”

• For “any qualifying exigency” arising when a military family member is on active duty with the National Guard or Reserves or called to active duty status in support of a contingency operation

A covered employer must also grant an eligible employee as many as 26 workweeks of unpaid leave during any 12-month period to care for a cov- ered service member with a serious illness or injury incurred in the line of duty on active duty.

Designation

The employer is responsible for designating leave as FMLA-qualifying. An employee giving notice of the need for FMLA leave must explain the reasons for the leave so as to allow the employer to determine whether the leave is FMLA-qualifying. If the employer does not have sufficient information about the reason for an employee’s use of leave, the employer should request more information from the employee to determine whether leave is potentially FMLA-qualifying. An employer may deny leave if the employee fails to explain the reasons for the leave.

Once the employer has acquired knowledge that the leave is being taken for an FMLA-qualifying reason, the employer must notify the employee within five business days that the leave is designated and will be counted as FMLA leave. An employer may, however, retroactively designate leave as FMLA leave with appropriate notice to the employee provided that the employer’s failure to timely designate leave does not cause harm or injury to the employee. In all cases where leave would qualify for FMLA protections, an employer and an employee can mutually agree that leave be retroactively designated as FMLA leave.

Military Leave Policies

In 2009, the Department of Labor issued final regulations updating the FMLA to include two types of military leave:

“Qualifying exigency” leave provides up to 12 weeks of leave to eligible employees with a covered military member serving in the National Guard or Reserves for “any qualifying exigency” arising out of the fact that a covered mili- tary member is on active duty or called to active duty status in support of a con- tingency operation. A qualifying exigency includes one or more of the following:

• Short-notice deployment • Military events and related activities • Childcare and school activities • Financial and legal arrangements • Counseling • Rest and recuperation

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208 Benefits Basics

• Post-deployment activities • Additional activities not encompassed in the other categories, but

agreed to by the employer and employee

“Military caregiver” leave provides up to 26 weeks of leave to eligible employees who are family members of a covered service member will be able to take leave to care for a covered service member with a serious ill- ness or injury incurred in the line of duty on active duty. Military family leave is available to “next of kin,” defined as the nearest blood relative, other than the covered service member’s spouse, parent, son, or daughter, in the following order of priority: (1) blood relatives who have been granted legal custody of the service member by court decree or statutory provisions, (2) brothers and sisters, (3) grandparents, (4) aunts and uncles, and (5) first cousins.

Substitution of Paid Leave

In most cases, FMLA leave is unpaid. However, under certain circumstances, an eligible employee may use paid leave provided by the employer concur- rently with unpaid FMLA leave, which is referred to as substitution of paid leave for purposes of the FMLA. If an employee does not choose to substi- tute accrued paid leave, the employer may require the employee to substi- tute accrued paid leave for FMLA leave.

An employee must qualify for paid leave under the terms and conditions of the employer’s normal leave policy in order to substitute paid leave. If an employee does not meet the additional requirements in an employer’s paid leave policy, the employee is not entitled to substitute accrued paid leave, but remains entitled to take unpaid FMLA leave. Thus, for purposes of sub- stituting paid leave, an employer may require that an employee take a mini- mum period of leave time, such as one full day, or provide a minimum number of days of notice, if those conditions are required under the employer’s paid leave program.

Serious Health Condition

“Serious health condition” means an illness, injury, impairment, or physical or mental condition that involves one of the following:

• Inpatient care (i.e., overnight stay) in a hospital, hospice, or residential medical care facility, including any period of incapacity (i.e., inability to work, attend school, or perform other regular daily activities due to the serious health condition, treatment therefore, or recovery there from), or any subsequent treatment concerning such inpatient care. The first (or only) in-person treatment visit must take place within sev- en days of the first day of incapacity.

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Government Regulation of Benefits Plans 209

• Continuing treatment by a health-care provider. A serious health condi- tion involving continuing treatment by a health-care provider includes any one or more of the following:

A period of incapacity of more than three consecutive calendar days and any subsequent treatment or period of incapacity relating to the same condition, which also involves:

• Treatment two or more times, within 30 days of the first day of incapacity, by a health-care provider, by a nurse or physician’s as- sistant under direct supervision of a health-care provider, or by a provider of health-care services (e.g., physical therapist) under orders or on referral by a health-care provider

• Treatment by a health-care provider on at least one occasion that results in a regimen of continuing treatment under the supervision of the health-care provider

• A period of incapacity due to pregnancy or for prenatal care. • A period of incapacity or treatment due to a chronic serious health

condition that continues over an extended period, requires periodic visits to a health-care provider, and may involve occasional episodes of incapacity (e.g., asthma, diabetes).

• A period of incapacity that is permanent or long-term due to a con- dition for which treatment may not be effective (e.g., Alzheimer’s, a severe stroke, terminal cancer).

• Any absences to receive multiple treatments for restorative surgery or for a condition that would likely result in a period of incapacity of more than three days if not treated (e.g., chemotherapy or radiation treatments for cancer).

Note: According to the DOL regulations, an employee is unable to per- form the functions of the position if the health-care provider finds that the employee is unable to work at all or is unable to perform of any one of the essential functions of the employee’s position within the meaning of the Americans with Disabilities Act (ADA).

An employee who is injured on the job will likely qualify for workers’ com- pensation and thus will not use accrued paid leave. When workers’ compensa- tion only replaces a percentage of an employee’s salary, though, an employer and employee may voluntarily agree, subject to state law, to use paid leave to supplement the workers’ compensation benefits. The workers’ compensation absence will count against the employee’s FMLA entitlement if the employer properly designates the leave as FMLA leave (as described above).

Maintenance of Health Benefits

A covered employer is required to maintain group health insurance cover- age for an employee on FMLA leave whenever such insurance was provided

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210 Benefits Basics

before the leave was taken and on the same terms as if the employee had continued to work.

Where appropriate, arrangements will need to be made for employees taking unpaid FMLA leave to pay their share of health insurance premiums while on leave. For example, if the group health plan involves co-payments by the employer and the employee, an employee on FMLA leave must con- tinue making his/her portion of the insurance premium payments to main- tain insurance coverage, as must the employer. The employer must provide the employee with advance written notice of the terms and conditions under which these payments must be made.

The employer is responsible for designating whether paid leave used by an employee counts as FMLA leave, based on information provided by the employee (as described above). Continued health insurance coverage dur- ing FMLA leave must be at the same co-payment rates as for active employ- ees. Higher COBRA premiums may be required only after FMLA leave ends.

An employer’s obligation to maintain health benefits under FMLA ends if an employee informs the employer that he/she does not intend to return to work at the end of the leave period, or if the employee fails to return to work when the FMLA entitlement is completed. In certain instances, the employer may recover premiums it paid to maintain health insurance coverage for an employee who fails to return to work from FMLA leave. However, an employer cannot recover premiums paid to maintain group health coverage if the employee does not return to work due to (i) the continuation, recur- rence, or onset of a serious health condition of the employee, the employee’s family member, or a covered service member, or (ii) circumstances beyond the control of the employee.

In addition, an employer’s obligation to maintain health insurance cover- age generally ceases under FMLA if an employee’s premium payment is more than 30 days late. To stop coverage for an employee whose premium payment is late, the employer must provide written notice to the employee that payment has not been received. Such notice must be mailed to the employee at least 15 days before coverage is to cease, advising that coverage will stop on a specified date unless payment has been received by that date.

The Health Insurance Portability and Accountability Act of 1996

Title I: Group Health Plan Portability

Title I of the HIPAA amended Title I of ERISA, the IRC, and the Public Health Service Act (PHSA) to impose new requirements on employer- sponsored group health plans, insurance companies and health maintenance organizations (HMOs). These rules include provisions that limit exclusions for pre-existing conditions, prohibit discrimination against employees and dependents based on their health status, and guarantee renewability and availability of health coverage to certain employers and individuals.

While these protections are often referred to as the “health-care portabil- ity” rules, they do not provide for true portability in that a person transferring

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Government Regulation of Benefits Plans 211

from one plan to another is provided with and entitled to only the benefits under the new plan. Coverage under the new plan could be less or greater. Moreover, employers and insurance companies may continue to establish waiting periods before enrollees become eligible for benefits under the plan, and HMOs may have “affiliation periods” during which an enrollee does not receive benefits and is not charged premiums. Affiliation periods may not last for more than two months, however, and they only are allowed for HMOs that do not use preexisting condition exclusions. Even after HIPAA, the provision of health coverage by an employer is still voluntary.

Preexisting Condition Limitations

HIPAA limits the extent to which group health plans can limit coverage of preexisting medical conditions by requiring plans to cover an individual’s preexisting condition after 12 months (or 18 months in the case of a late enrollee). Moreover, for purposes of determining the preexisting exclusion period, employees must be given credit for previous coverage that occurred without a “break in coverage” of 63 days or more. This is referred to as “cred- itable coverage.” Any coverage occurring prior to a break in coverage of 63 days or more would not be credited against an exclusion period. Significantly, COBRA coverage counts as creditable coverage.

Preexisting Conditions

Under HIPAA, a preexisting condition is a condition for which medical advice, diagnosis, care, or treatment was recommended or received within the six-month period ending on the enrollment date in any new health plan. Thus, if an employee had a medical condition in the past, but he/she received no medical advice, diagnosis, care, or treatment within the six months prior to enrolling in the plan, the old condition is not a preexisting condition for which the exclusion can be applied.

Certificates of Creditable Coverage

HIPAA requires insurers and group health plans to provide documentation (referred to as “certificates of creditable coverage”) to individuals attesting to their creditable coverage. Insurers and group health plans that fail or refuse to provide certificates of creditable coverage in a timely manner are subject to penalties. HIPAA also requires that a process be established that will allow individuals to show they are entitled to creditable coverage in situations where they cannot obtain a certification from an insurer or group health plan.

Nondiscrimination

Group health plans and issuers may not establish eligibility for enrollment based on an employee’s health status, medical condition (physical or mental), claims experience, receipt of health care, medical history, genetic information, evidence of insurability, or disability. For example, an employee cannot be excluded or dropped from coverage just because he/she has a

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212 Benefits Basics

particular illness. Employers may establish limits or restrictions on benefits or coverage for similarly situated individuals under a plan, but they may not require an individual to pay a premium or contribution that is greater than that for a similarly situated individual based on health status. HIPAA does not require specific benefits, nor does it prohibit a plan from restricting the amount or nature of benefits for similarly situated individuals.

The Patient Protection and Affordable Care Act of 2010

The Patient Protection and Affordable Care Act of 2010, as amended by the Health and Education Reconciliation Act of 2010 – referred to collectively in this chapter as the “Affordable Care Act” or, simply, the “Act”) – together transformed the regulation of health-care financing in the United States. The Act’s provisions include:

• An expansion of Medicaid eligibility, extending funding for the Children’s Health Insurance Program (CHIP), and subsidizing private insurance premiums and cost-sharing for certain lower-income individuals.

• A series of measures aimed at enhancing the delivery and quality of patient care.

• Pilot, demonstration, and grant programs to test integrated models of care. This includes accountable care organizations (ACOs), medical homes that provide coordinated care for high-need individuals, and bundling payments for acute-care episodes (including hospitalization and follow-up care).

• A new agency to test payment and service delivery models, primarily for Medicare and Medicaid beneficiaries. It mandates pay-for- reporting and pay-for-performance programs within Medicare that will pay providers based on the reporting of, or performance on, selected quality measures.

• Incentives for promoting primary care and prevention, for example, by increasing primary care payment rates under Medicare and Medicaid; covering some preventive services without cost-sharing; and funding community-based prevention programs, among other things.

Each of these programs, while important in the larger context of health- care reform, are beyond the scope of this work, the focus of which is employee benefits and programs.

Titles I and X of the Act, which include insurance market reforms, indi- vidual and employer mandates, state-based insurance exchanges, low-income premium support, and cost-sharing subsidies, and tax financing, are of par- ticular concern to employers and employer-sponsored group health plans. It is these provisions that – directly or indirectly – required significant design and operational changes to all employer-sponsored group health plans, whether fully insured or self-funded. The market for individual health insur- ance coverage has been similarly affected. Most of these “employer” provi- sions of the Act took effect in 2014, but certain insurance market reforms affecting group health plans took effect on or shortly after enactment.

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Government Regulation of Benefits Plans 213

The Affordable Care Act represents the culmination of decades of efforts to reign in health-care costs, improve the quality of medical outcomes, and expand coverage. The law implemented a series of market-based reforms that built on existing structures, i.e., the commercial insurance market and employer-provided group health insurance to reach its goals. This approach stands in marked contrast to other approaches, such as single-payer, which are politically far less palatable. To say that the law is politically divisive is an understatement. While outright repeal is unlikely, it is likely to undergo sig- nificant changes.

As of August 2020, the individual mandate (health insurance coverage) is no longer mandatory at the federal level. Some states, however, still require individuals to have health insurance coverage to avoid a tax penalty.

In addition, as of this writing (August 2020), while cost-sharing subsidies are still available for eligible marketplace enrollees, the federal government will no longer be reimbursing insurers for these subsidies. Insurers, how- ever, are required by law to provide reduced cost-sharing for lower-income enrollees.

For many years, the federal government has encouraged the development of employee benefits plans because of their social value. One way this has occurred is through changes in the tax code. In recent years, however, increasing controls and regulations have offset some tax advantages. These include:

• Federal tax advantages for both employers and employees. • “Qualified plans” that meet IRS requirements and receive allowable

offsets for statutory coverage. • Pension plan changes (see Sidebar 8.1).

Sidebar 8.1 The Pension Protection Act’s Impact on Total Rewards Professionals

The Pension Protection Act (PPA) of 2006 ushered in perhaps the most significant changes to impact retirement security in 20 years. Most of the provisions did not take effect until 2008, but the bill had immediate and long-lasting effects on how employers provide retire- ment security to their employees.

Highlights of the Act include:

• The PPA requires plans to be 100 percent funded and tightens the actuarial assumptions that apply when employers calculate the accrued liability and the return on plan assets.

• The PPA amended section 409A of the Internal Revenue Code to provide a 20 percent excise tax penalty to certain executives if funds are set aside to pay nonqualified deferred compensation if the employer or a member of its controlled group is bankrupt, has an at-risk plan, or a plan that has terminated with insufficient assets to cover all liabilities. In addition, the PPA blocks the

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214 Benefits Basics

The role of government in addressing the social needs of the nation underwent a dramatic and controversial change in the 1980s and 1990s. Federal budget deficits forced Congress to:

• View with caution any proposals for new programs that would require increased federal spending.

• Look for additional methods of increasing revenues by taxing items that had not been taxed before.

employer from taking a deduction for tax gross-up payments intended to cover the penalties triggered by funding nonquali- fied deferred compensation.

• The PPA restricts payments from plans that are less than 60 per- cent funded and prohibits benefit increases for plans that are less than 80 percent funded, using a special liability measure, and lim- its lump-sum payments.

• The PPA permits employees who reach age 62 to continue working and to receive pension payments without being penalized under tax law or the Employee Retirement Income Security Act (ERISA).

• The PPA sets a single age discrimination standard for all defined benefit (DB) plans under ERISA. It clarifies that hybrid plans such as cash balance or pension equity plans do not violate the age discrimination provisions in ERISA, the Code or the Age Discrimination in Employment Act (ADEA) if the individual’s accrued benefit would be equal to or greater than any similarly situated younger individual who could be a participant.

• The PPA places restrictions on conversions from traditional DB to hybrid plans. It requires employers to start benefit accruals under the new plan immediately after a conversion takes effect.

• The PPA makes it easier for employers to encourage employee participation in 401(k) plans by creating a safe harbor from fi- duciary liability and state garnishment laws for automatic enroll- ment programs.

• The PPA provides for the purchase of long-term care from annuity and life insurance products, making these products more flexible.

• The PPA allows employees to diversify at any time out of employer stock purchased with employee contributions. It requires employ- ers to allow diversification out of employer contributions after the employee has been in the plan for three years and may be phased in over three years.

• The PPA requires all employer contributions, whether match- ing or nonelective, to vest entirely after three years or phased in 20 percent per year starting in the second year the employee par- ticipates in a plan.

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Statutory Benefits 215

Federal governing agencies that influence employee benefits plans include the following categories.

Equal Employment Opportunity Commission (EEOC)

Established by Title VII of the Civil Rights Act of 1964, the EEOC began operating on July 2, 1965. It enforces the following federal statutes:

• Title VII of the Civil Rights Act of 1964 • The Age Discrimination in Employment Act of 1967 (ADEA) • The Equal Pay Act of 1963 (EPA) • Title I and Title V of the Americans with Disabilities Act of 1990

(ADA)

Department of Labor (DOL)

The Employee Benefits Security Administration (EBSA), formerly known as the Pension and Welfare Benefits Administration (PWBA), of the US Department of Labor (DOL) is responsible for administering and enforcing provisions of ERISA.

Securities and Exchange Commission (SEC)

The SEC is responsible for ensuring that employees as investors receive finan- cial and other significant information concerning securities being offered for public sale (e.g., company stock, 401(k), and employee stock owner- ship plans).

Pension Benefit Guaranty Corporation (PBGC)

The PBGC, an agency under the EBSA, guarantees vested defined benefit pensions up to a maximum amount established annually. Employers offer- ing covered pension plans pay insurance premiums.

STATUTORY BENEFITS

Federal and state laws require all companies to offer the following “core” benefits:

• Social Security (federal) • Workers’ compensation (state) • Unemployment compensation (state) and • Nonoccupational disability (five states)

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Social Security

Since its creation in the 1930s, Social Security has been at the center of national public policy debates. In 1945, there were 20 workers for every retiree and few sources of retirement income security outside the extended family. Today, there are only three active workers to support each retiree, and extended families provide minimal support.

The Social Security system has four distinct types of benefits:

• OA – retirement income in “old age” • S – survivor income • D – disability income • HI – health insurance benefits (Medicare)

The federal Old Age, Survivors, Disability, and Health Insurance Program (OASDHI) emerged as a result of the Social Security Act of 1935. The fed- eral budget now includes almost $500 billion in spending toward Social Security; less than half of that amount goes toward retirement.

Old Age (OA): Retirement Benefits

Presently, the earliest age at which one can start receiving Social Security retirement benefits is 62. Those born prior to 1938 are eligible to receive full benefits beginning at age 65. Those born after 1959 cannot receive full ben- efits until age 67. Those born between 1938 and 1959 are on a graduated scale. An individual who wishes to retire early may do so but is subject to a reduction in benefits as follows:

• 5/9 of 1 percent for each month (up to 36 months) that the benefit is paid prior to full retirement age (FRA), plus 5/12 of 1 percent for each month that the benefit is paid earlier than 36 months prior to full retirement age.

Individuals also are eligible for increased benefits beyond full retirement age (between 5 percent and 8 percent per year depending on the year of birth).

Floor of Protection

Monthly Social Security benefits provide a minimal standard of living. Compensation is taxed and benefits are calculated based on the employee’s covered compensation up to each year’s taxable wage base. Social Security, however, was never intended to be a sole source of retirement income.

Previously, some retirement benefits were withheld from workers ages 65 through 69 when they reached a certain earnings level. In 2000, the “Freedom to Work Act” was passed, allowing older workers who reached full retirement age to work and receive their full Social Security retirement ben- efits. There continues to be an earnings limitation for Social Security retir- ees under the age of full retirement whose employment earnings exceed a certain level.

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Statutory Benefits 217

Survivor Benefits

Sidebar 8.2 addresses the features of survivor benefits.

Social Security Health Insurance (HI)

Medicare is the most expensive component of Social Security. It covers per- sons aged 65 and over and persons who are disabled and have been receiv- ing disability benefits from Social Security for two years.

Covered individuals pay the deductible for each confinement. The deductible is the amount that covered individuals pay for hospital charges, as determined each year by the government, prior to Medicare paying. Medicare pays the full cost of remaining charges for the first 60 days per occurrence of illness. Many people choose to add Medicare Part B, a sup- plemental insurance program (see Sidebar 8.3).

Other limited hospital insurance benefits include skilled nursing facilities, home health services, and hospice care. Custodial care is not covered.

Social Security FICA Tax

Federal Insurance Contributions Act (FICA) taxes are the taxes for Social Security. Employers and employees equally share the tax, which was sepa- rated into two components in 1991. As coverage has become more compre- hensive and more people have become eligible, the tax rate and wage base (indexed each year) have increased steadily. For the health insurance com- ponent, 1994 was the first year that no maximum tax applied.

Sidebar 8.2 Social Security Survivor (S) Benefits Key Characteristics

• $255 lump sum death benefit payment. • Benefit has not been indexed. • Was originally intended to cover funeral costs. • Widows and widowers. • Survivors age 60 and older. • Survivors ages 50 to 59 if disabled. • Any survivor age if caring for dependent children (under age 16). • Dependent children to age 18 (19 if a full-time student). • Dependent parents (age 62 and older) who had been receiv-

ing at least half of their support from the beneficiary at the time of death.

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218 Benefits Basics

Sidebar 8.3 Medicare Part B: Supplementary Medical Insurance Key Characteristics

• Cost

• Individuals who choose to participate in Part B: Supplementa- ry Medical Insurance are required to pay a premium that is ad- justed annually by the government. If a person does not enroll upon initial eligibility, he or she remains eligible to enroll dur- ing a future enrollment period but will pay a higher premium.

• Annual deductible

• After deductible, covered individuals pay 20 percent and Medicare pays 80 percent.

• Basic list of covered services

• Physicians’ services

• Physical and occupational therapists

• Diagnostic X-ray, laboratory, and other tests

• Prescriptions

• In December 2003, President George W. Bush signed into law the Medicare Prescription Drug, Improvement, and Moderni- zation Act (H.R. 1). This act created a prescription drug ben- efit for the first time in Medicare history (see Sidebar 8.4).

Sidebar 8.4 The Impact of Medicare Reform

H.R. 1, the Medicare Prescription Drug, Improvement, and Modern- ization Act of 2003, had – and will continue to have – a major impact on employer-provided benefits. A good start to understanding the Act’s implications would be to examine the key provisions that affect employers in this era of consumer-driven health care.

H.R. 1, commonly referred to as the Medicare Modernization Act (MMA), ushered in some important changes by creating health savings accounts (HSAs), which greatly alter the landscape of employer- provided health-care arrangements.

An HSA is a trust created for an individual that is established to pay the qualified medical expenses of the individual (or the individual’s

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Statutory Benefits 219

dependents). The trustee typically is a bank, an insurance company, or a third-party administrator. HSAs are not taxed on any earnings accrued while the assets are held in trust.

HSAs, which took effect at the beginning of 2004, are portable (meaning rollovers are permitted from other HSAs) and may be funded on a pretax basis and through a cafeteria plan. Additionally, an individual’s HSA can be transferred tax-free upon divorce or separa- tion to another individual or to the individual’s spouse upon death. If the HSA is transferred to someone other than the individual’s spouse upon death, the account ceases to be an HSA and the HSA assets become taxable income at the fair market value to the individual or the individual’s estate.

The Tax Relief and Health Care Act of 2006 includes important changes for HSAs. The law, according to the Employee Benefits Institute of America Inc., affects HSA eligibility for certain individuals who are covered by health flexible spending arrangements (health FSAs) during a grace period, changes the limits for allowable HSA con- tributions, and allows a rollover from an IRA, health reimbursement arrangement (HRA), or health FSA to an HSA under certain conditions.

Medicare Part D

Under MMA, Medicare Part D provides a limited, voluntary benefit for outpatient prescription drugs. Although the number of employers offering post-retirement health benefits has declined significantly in recent years, Medicare’s new drug benefit has revitalized discussions about whether and how to provide retiree health care.

The Medicare prescription drug benefit (Part D) is delivered to ben- eficiaries either through a private prescription drug plan (PDP) or Medicare Advantage plans (either Medicare HMOs or PPOs).

Medicare prescription drug plans must, at a minimum, provide a standard level of coverage. There are various plans available, much like private coverage. Those who qualify for extra help because of limited income and assets receive help that pays for all or part of the monthly premiums, deductible, and fills in the coverage gap and lowers the prescription copayments.

If a beneficiary’s employer continues to offer prescription drug coverage, he or she can decide whether to keep the existing coverage or switch to another plan. Note: Those who drop their employer- sponsored drug coverage may not be able to re-enroll.

As of this writing, employer-sponsored plans that provide an “actuarially equivalent” prescription drug benefit to Medicare benefi- ciaries are eligible to receive a financial subsidy to help offset their costs. For up-to-date information, go online and visit www.medicare.gov.

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220 Benefits Basics

Workers’ Compensation

Workers’ compensation is employer-paid and offered by all states. The employee receives income and the employer pays for medical and rehabilita- tion costs associated with a work-related incident resulting in an injury or illness.

Unemployment

Like workers’ compensation, unemployment compensation is employer- paid and offered by all states. Unemployment compensation provides income (for a period of time) to an employee who loses employment and is willing and able to work.

Nonoccupational Disability

Five states (New York, New Jersey, Rhode Island, California, and Hawaii) offer a nonoccupational disability benefit. The benefit provides temporary or short-term income due to a nonoccupational incident resulting in a disability.

HEALTH AND WELFARE PLANS

Health and welfare plans are critical components of the employee benefits package. These plans have been affected by significant changes over the years, including the introduction of managed care in the 1990s. However, escalating health costs, particularly for prescription drugs, have placed increasing pressure on benefits professionals attempting to continue to offer competitive benefits while maintaining fiscal responsibility for their employers’ benefits budgets. As a result of these challenges and changes in the tax code, programs such as consumer-driven health plans have emerged, offering employees greater benefits choices with certain tax incentives.

Health and Welfare: A Brief History

When Social Security first surfaced in the 1930s, it excluded health insur- ance, causing the private sector to take the lead in sponsoring health insur- ance coverage. Blue Cross/Blue Shield developed private plans, soon to be followed by commercial insurers.

The wage freezes of the post–WWII era prompted companies to offer noncash rewards in the form of health care. This is where the entitlement mentality began, with employees feeling entitled to health-care insurance. Soon after, the Taft–Hartley Act mandated the inclusion of benefits in col- lective bargaining. This era also saw the first major medical benefits intro- duced, supplementing the hospital and surgical coverage previously offered.

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Over time, more companies began offering health insurance and other options, such as dental. However, health-care costs began rising faster than the consumer price index. US workers began to retire as they reached age 65 and they found no viable health-care insurance available. The federal government responded by instituting programs such as Medicare and Medicaid.

The lack of cost-cutting initiatives soon led to rising health-care costs and the emergence of health maintenance organizations (HMOs) to curb these costs. Congress then enacted ERISA to protect qualified benefits plans, and the introduction of diagnostic related groups of service (DRGs) helped curb Medicare costs.

Soon, unions began to reduce bargained benefits due to most companies’ inability/unwillingness to sustain current levels of coverage. Larger num- bers of employers self-insured, finding they had more control over benefits offered and associated costs.

Although HMOs did help to control costs, quality of care and choice of providers became a prevailing issue with employees. Enter the era of pre- ferred provider organizations (PPOs) with negotiated-fee contracts and a larger choice of providers.

Now, as health-care costs again rise, many employers are opting to embrace a strategic approach to consumerism.

Health and Welfare Plan Elements

Health and welfare plans are primarily categorized as follows:

• Health care • Medical • Prescription drug • Behavioral health • Dental • Vision • Long-term care

• Disability income • Sick leave • Short-term disability and/or salary continuation • Long-term disability

• Survivor benefits • Term life • Accidental death and dismemberment • Dependent life • Business travel accident

HEALTH CARE

Health-care programs, specifically medical care, are generally the most pop- ular and most expensive component of a company’s employee benefits

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222 Benefits Basics

program. Managed care plans, the most prevalent medical care programs, attempt to control cost and ensure quality of care by encouraging the utiliza- tion of network providers who have agreed to accept discounted fee pay- ments. These models include health maintenance organizations (HMO), preferred provider organizations (PPO), point of service (POS), and other hybrid arrangements. Indemnity plans, now rare, are traditional plans that provide specific cash reimbursement for covered services.

Health Maintenance Organization (HMO)

An HMO provides a network of physicians and hospitals for employees and their dependents to receive comprehensive care, including preventive care. The traditional HMO model requires receiving a referral from the primary phy- sician or “gatekeeper” to receive care from a specialist. Otherwise, the employee could be liable to pay the total cost to see the specialist (see Sidebar 8.5).

Sidebar 8.5 Health Maintenance Organization (HMO) Key Characteristics

HMOs are managed care plans that attempt to control the cost and ensure quality of care by encouraging preventive care. They provide both the financing and delivery of comprehensive medical coverage. Key features include:

• Primary care physician (PCP)

• Employee-selected physician that provides all routine medical care.

• Serves as gatekeeper by controlling specialist referral, there- fore curbing unnecessary medical expenses.

• Preventive/routine care typically includes:

• Well-woman, well-man, well-baby care

• Routine physicals

• Immunizations

• Copayments eliminate deductibles and coinsurance.

• Provider pay is sometimes on a capitation or discounted fee-for- service basis; physicians are sometimes salaried.

• HMO models

• Independent Practice Association (IPA)

• Group Practice Association (GPA)

• Staff

• Combinations

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Preferred Provider Organization (PPO)

Unlike HMOs, the PPO model does not include a primary physician or gate- keeper. PPOs include two levels: in-network providers (physicians and hospi- tals) and out-of-network providers. By using the in-network providers, employees receive a higher level of reimbursement for care. The PPO pro- vider should not bill the employee for any differences between the dis- counted contracted rate and the provider’s normal fee. In contrast, out-of-network providers could charge more for services rendered (see Sidebar 8.6).

Sidebar 8.6 Preferred Provider Organization (PPO) Key Characteristics

PPOs are arrangements where providers agree to discount their nor- mal fees. They continue to have the highest enrollment on a national basis. Key features include:

• Discounted fee for service

• To achieve greater volume

• No capitation

• Fees subject to a schedule

• Broader choice of providers

• Choice of provider is usually made at time medical care is needed.

• Incentives to use preferred providers

• Lower or reduced deductibles and coinsurance

• Increased coverage, such as preventive care

• In-network/out-of-network

• Patient may access in-network specialty care without primary care physician gatekeeper coordination.

• If patient chooses out-of-network care, financial incentives do not apply.

• Utilization reviews

• Assessment of medical necessity

• Curbs unnecessary procedures and monitors hospital stays

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224 Benefits Basics

Point of Service (POS)

A typical POS is a combination of HMO and PPO. The employee would need a referral to see an in-network specialist (similar to an HMO). However, the cost for seeing an out-of-network specialist would be higher than an in-network provider (similar to a PPO).

Point of service (POS) evolved as a response to a market force. It addressed the concerns employees had about being locked into the narrow network of an HMO plan. POS combines discounted fee agreements for cost savings with employee choice. Key features include:

• A hybrid between traditional indemnity, HMOs, and PPOs • A coordinated delivery system aimed at managing utilization and cost

by means of:

• Eliminating excessive utilization • Reducing costs through negotiated discount payments and

capitation • Aligning the interests of all payers

Indemnity Plans

Traditional indemnity medical plans (offered by Blue Cross/Blue Shield) are still available, but at a rapidly decreasing rate. The first health insurance plan in existence, an indemnity plan is designed where the employee pays a deductible after base benefits are exhausted. Indemnity plans offer greater “freedom of choice” in selecting providers because referrals are not needed,

• Choice of providers

• Selected at time of treatment.

• Primary care physician gatekeeper coordinates in-network spe- cialty care in network/out-of-network benefits.

• Out-of-network provider, deductibles, and copayments tend to be higher. Meaningful coinsurance differential provides incen- tives to use in-network.

• Patient retains some coverage for services even if not author- ized by primary care physician.

Models

• Open-ended

• Gatekeeper

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and the employee is free to visit any provider. However, the indemnity is now rare since it is the most expensive medical model.

Prescription Drug Coverage

Prescription/drug programs are growing in popularity and costs. These pro- grams can be part of the medical program or carved out and managed by a Pharmacy Benefit Manager (PBM). Companies are now offering three or four tiers of coverage. Employee copayments also increase by tier. Examples include:

Tier 1: Generic drugs $10–$15 copayment Tier 2: Brand drugs $20–$25 copayment Tier 3: Lifestyle drugs $30–$50 copayment Tier 4: Mail order Three-month supply for “maintenance”

drugs. Copayment can be equal to one or two months’ copayments.

Copayments can be a percentage of costs instead of a dollar amount.

Behavioral Health

Coverage includes mental health and chemical dependency services. Services can be provided on an inpatient or outpatient basis and are often integrated with an employee assistance program (EAP).

Dental Plans

Most dental plans have four components:

1. Preventive and diagnostic 2. Basic services 3. Major services 4. Orthodontia

Dental plans often provide 100 percent reimbursement for preventive and diagnostic services; charges for these services usually are not subject to a deductible. The rationale is to encourage employees to have periodic den- tal visits because these exams can help prevent future dental services more costly to both the employer and employee.

Deductibles can apply to all other services. Because of costs, orthodontia (installation and adjustment of braces) is not included in all dental plans or only applies to dependent children. In addition, orthodontia services are usually subject to a per-person lifetime maximum ($1,000–$1,500).

The traditional dental model is the indemnity approach (similar to medi- cal indemnity model). To control costs and expand services, companies

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226 Benefits Basics

provide managed care models called DMO (dental management organiza- tion  –  similar to medical HMO) or a DPPO (dental preferred provider organization – similar to medical PPO).

Vision Care Plans

Vision care plans often provide a flat-dollar rate of reimbursement or a spe- cific percentage reimbursement for an annual eye examination and a new pair of lenses per year. New frames are usually limited to one pair every two years.

Concern for eyewear and strain is growing due to increased computer use.

Long-Term Care

Long-term care is growing in importance as people live longer. Coverage commences when a person is unable to perform at least two of the five daily living activities  –  bathing, dressing, eating, walking, and using the bathroom.

DISABILITY INCOME

Disability income benefits are income replacement programs provided by employers or public agencies during the time an employee is unable to work due to a qualified disability.

Sick Leave

Key features:

• Specified number of days • Based on service • Continuation of full pay • May be carried from one year to the next

Short-Term Disability (STD)

The STD benefit provides income when an employee is unable to work due to a short-term nonoccupational illness or injury. There is usually a seven- day calendar waiting period to qualify for benefit coverage that commences after the seventh day from the incident. Benefits can extend for up to six months. Payment is a percentage of pay, often 50 percent up to a weekly maximum.

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Long-Term Disability (LTD)

The LTD benefit provides income due to a nonwork illness or injury; pay- ments can be up to age 65. The waiting period to qualify for coverage ranges from three to six months from the date of incident. Payments range from 50 percent to 67 percent of wages up to a maximum monthly amount.

While an employee collects LTD, most employers will continue to accrue pension benefits for the employee at the pre-disability rate of pay.

If the employee pays the full cost of LTD coverage with post-tax dollars, then any benefits paid are nontaxable. If the employer pays the full cost of LTD coverage or the employee pays the premium with pretax dollars, then any benefits paid are subject to tax.

LTD plans typically have a split definition of disability eligibility. To be eligible, an employee must be unable to perform current job duties for the first two years when benefits are payable; and thereafter, unable to perform job duties of any occupation. This transition period is designed to help an employee prepare to change careers without a loss of income.

SURVIVOR BENEFITS

Term Life Insurance

The most typical form of survivor benefits is term life insurance. The insur- ance is paid to the employee’s designated beneficiary (who can be anyone) in a lump sum. In contrast, under statutory programs such as Social Security and workers’ compensation, payment of survivor benefits depends on whether the employee has a spouse or eligible dependents as outlined by applicable law.

The practice for lump sum payments for exempt (salaried) staff is usually multiples of annual salary. The norm for nonexempt (hourly) workers is a flat dollar amount (independent of annual wages) but in some companies is multiples of annual wages. Term life insurance ends upon termination of employment. Employees have the right to convert within 30 days of termina- tion to a whole life or universal life insurance policy. Rates per $1,000 of coverage are based on age. The benefit to employees is the waiving of pass- ing a physical.

The Internal Revenue Code permits an employer to provide up to $50,000 of noncontributory group life insurance to an employee without any tax consequences, provided the plan does not discriminate in favor of higher- paid employees. Employees who receive more than $50,000 of employer- paid group life insurance are subject to additional taxes depending on an employee’s age and amount of coverage in excess of $50,000. This addi- tional tax is called imputed income tax.

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228 Benefits Basics

Accidental Death and Dismemberment (AD&D)

AD&D provides a benefit to the employee in the event of dismemberment or the beneficiary in the event of accidental death. It often duplicates the term life amount and has two components: company-paid portion and sup- plemental (employee-paid) portion.

Supplemental Life Insurance

It’s common for employers to provide employees with opportunities to pur- chase additional term life insurance. Rates vary by employees’ ages. Older workers pay more per $1,000 of coverage than younger workers.

Dependent Life Insurance

Employees can purchase life insurance for a spouse and dependent chil- dren. This benefit is often called burial insurance. The monthly premium is usually very low, and the benefit is a set dollar amount.

FLEXIBLE BENEFITS

Flexible benefits provide employees with choices that allow them to select between cash and one or more qualified (nontaxable) benefits (e.g., health, life, disability insurance). Made possible by Section  125 of the Internal Revenue Code (IRC), flexible benefits plans are also referred to as cafe- teria plans.

Employees have a chance to change elections to their flexible benefits plan during an annual open enrollment period held by the employer. Changes during a plan year are only allowed in the event of a “qualified sta- tus change” as defined by the IRS. Qualified status changes include the birth or adoption of a child, the death of a dependent, open enrollment at a spouse’s place of employment, marriage, or divorce.

Flexible benefits allow employers to:

• Manage rising costs • Maximize employee perceptions of benefits • Facilitate program design • Readily adapt to change in laws, benefits, and business conditions • Reap advantage of tax savings • Support a total rewards focus • Meet competitive pressures • Maintain progressive company image

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Retirement Plans 229

RETIREMENT PLANS

Under the Employee Retirement Income Security Act of 1974 (ERISA), and the Internal Revenue Code (IRC), employer-provided pension plans are classified as either:

• Defined benefit (DB) plans, or • Defined contribution (DC) plans.

Key differences between these two types of plans are highlighted in Figure 8.5.

Defined Benefit (DB) Plans

A defined benefit plan promises an employee a specific future benefit if certain age, tenure, and income projections are achieved. The actual plan formula and the definition of earnings in the formula have a significant impact on the level of benefits an employee will receive. Many DB plans use the average of an employee’s highest five consecutive calendar years of earn- ings during the employee’s last 10 years of service to calculate benefits. This “high” five of past “10” method frequently is referred to as FAP, or final average pay.

Defined Benefit Plans Defined Contribution Plans

Benefit is known. Benefit is unknown.

Cost is unknown. Cost is known.

Employer bears financial risk. Employee bears financial risk.

Generally provides higher benefits for long-service employees.

Can provide substantial benefits to short-service employees.

Separate account for each employee is not required.

Separate account for each employee is required.

Requires sign-off by an enrolled actuary.

Actuary not required. However, record keeper is required.

Subject to PBGC premiums. Not subject to PBGC premiums.

FIGURE 8.5 Primary differences between defined benefit and defined contribution plans.

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230 Benefits Basics

An example of a DB plan is found in Figure 8.6. Cash-balance plans, also categorized under hybrid pension plans, are DB

plans. Companies have switched from traditional pension plans to cash- balance plans since they are less costly to the employer and provide a guar- anteed pension to workers. An employee’s vested balance is portable on termination.

In DB pension plans, employers typically fund the plan 100 percent. Employees make no contributions and become vested (entitled to pension) upon being vested. However, even after becoming vested, an employee may have to wait to receive the pension. Normal retirement is age 65 with early retirement at age 55. Plans can have lower age limits.

Most companies use either “cliff” or “graded” vested schedules. Cliff means the employee becomes fully vested after five years of qualified service. With graded, an employee becomes partially vested after two years and increases a percentage of vesting for each year after two, but must be fully vested after seven years. These vesting schedules are used for “qualified plans” as defined by ERISA. Qualified plans mean both the employer and employee receive favorable tax treatments on pension monies.

Most DB pension plans provide a variety of payout options. A key consid- eration is whether anyone is financially dependent on the employee. Generally, a single life annuity option will provide the largest monthly pre- mium. Following are the most prevalent:

• Single life annuity. Benefits are payable only to the employee. There is no survivor benefit. When the employee dies, all payment ceases. This

Eligibility Date of employment Formula 1.75 percent final average pay X years of service Final Average Pay An employee’s highest five consecutive calendar years of earning during his or her last 10 years of service Normal Retirement Age 65 Early Retirement At least age 55 and 10 or more years of service Vested Benefit 100 percent vested after five years of credited service Payment Option Lump sum or 50 percent joint and survivor annuity or 100 percent joint and survivor annuity

FIGURE 8.6 Sample defined benefit plan.

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Retirement Plans 231

is the default option for single employees. This means if the single em- ployee dies before selecting an option, the plan automatically selects single life annuity.

• Joint and survivor option. The employee is the “joint” and the spouse is the “survivor.” This is the default option for a married employee who dies before electing an option. If a married employee wishes an op- tion other than joint and survivor, then the employee’s spouse must sign a form agreeing to permit the employee to do so. Otherwise, the employee must use the joint and survivor option.

If the employee (joint) dies first, then the spouse (survivor), de- pending on the percentage for this option, will receive 100 percent, 75 percent, or 50 percent of the employee’s monthly pension. Payment will stop once the survivor dies. If the survivor dies before the employ- ee, then payments will stop once the employee dies.

• Lump sum. The employer provides the employee with a lump sum amount that is calculated by determining the present value of the future annuity payments the employee could have received. Most plans give employees a lump-sum payout if total payment is less than $5,000.

• Period certain. The employee receives a monthly amount for either three years (36 months) or 10 years (120 months). If the employee dies before receiving total months eligible, then the employee’s benefi- ciary will receive the remaining number of monthly payments based on option selected.

Defined Contribution (DC) Plans

DC plans are increasing in popularity since companies can control costs by adjusting employer contributions, and many employees like the possibility of managing their own pension monies. DC plans are also easier for employees to understand and, in many cases, provide short-service employ- ees with higher benefits than DB plans. With DB plans, the company makes all decisions, including selection of investment vehicles. In contrast, with DC plans, employees have greater say on investment options and amounts to invest.

The most prevalent DC plan is a “savings/thrift” plan, with a 401(k) feature. Sometimes these 401(k) plans are called “capital accumulation” plans. An attractive feature is that employee contributions are tax deferred. Many plans have “matching” employer contributions that can be viewed by employees as “free money.” The match amount varies by company. While in the plan, all monies compound tax-free. This means that an employee pays federal and state withholding tax on redeeming funds, preferably on retirement when the individual tax rate is usually lower than while working. An example of a 401(k) plan is found in Figure 8.7.

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232 Benefits Basics

Employees can make withdrawals for specific reasons, but the withdrawals are generally subject to taxation. Therefore, many plans contain a loan pro- vision that enables employees to borrow rather than withdraw funds when necessary. IRS regulations limit the size of a loan to 50 percent of the employ- ee’s vested account balance or $50,000, whichever is less.

Distribution options are available when an employee terminates employ- ment. These include a lump-sum payment, an annuity arrangement, install- ment payments, and a direct rollover to an IRA or another employer’s qualified plan. By directly rolling over a lump-sum distribution to an IRA or another qualified plan, an employee is able to avoid the 20 percent with- holding tax required by government regulations.

Eligibility First of the month coinciding with or next following date of employment Employee Contributions 2 percent to 15 percent of an employee’s earnings

• Pretax basis or • After-tax basis or • A combination of pretax and after-tax

Company Contributions 50 percent match on first 6 percent contributed by employee Vesting of Company Contributions (Cliff) 100 percent vested after three years of credited service Investment Choices Employee contributions

• Common stock fund • Company stock • Bond fund • Fixed-rate-of-return vehicle

Company contribution – company stock Withdrawal Provisions Age 59 ½ or older Death or disability Retirement or termination of employment Loan Provision Up to 50 percent of value of vested account balance or $50,000, which- ever is less Payment Options Cash Company stock

FIGURE 8.7 Sample 401(k) plan.

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Pay for Time Not Worked Benefits 233

Vesting for employer contributions in 401(k) plans are:

1. 100 percent vested after three years if “cliff option” is selected. 2. 100 percent vested after six years if “graded” option is selected.

An employee is 100 percent vested immediately for all monies the employee invests.

Other types of DC plans include:

• Money-purchase pension plans whereby the company contributes a speci- fied percent of each employee’s salary to purchase annuities.

• Employee stock-ownership plans whereby the employee receives an annual allocation of employer stock.

• Deferred profit-sharing plans whereby the company contributes an amount of profits each year, and each participant is credited with a share.

PAY FOR TIME NOT WORKED BENEFITS

Pay for time not worked benefits are generally not regulated by the govern- ment. Typically, they are covered by company policy. The most frequently provided time-off benefits are:

1. Vacation 2. Sick leave 3. Legal holidays 4. Bereavement leave 5. Military leave 6. Jury duty 7. Personal holidays 8. PTO (paid time off) banks

Vacation

Vacation allowances are often based on service and position. Exempt staff usually receives more generous vacation time than nonexempt, especially during the earlier years of employment. Increases based on service can be as follows:

Years of Service Annual Vacation Allowance

3 months to 1 year 5 days 1 to 5 years 10 days 5 to 15 years 15 days 15 to 20 years 20 days 20 or more years 25 days

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234 Benefits Basics

Sick Leave

Companies provide a set number of days per year for salary continuation in the event an employee is unable to work due to a personal illness.

Legal Holidays

Most companies provide employees with payment for not working on legal holidays. Holidays typically include:

• New Year’s Day • Martin Luther King’s Birthday • Memorial Day • July 4th • Labor Day • Thanksgiving Day • Christmas Day

Companies often pay nonexempt employees “premium” time if they work on a legal holiday and grant another day off with pay as the legal holiday.

Bereavement Leave

Companies often grant time off to attend the funeral of an immediate family member. Typical number of days off with pay is three.

Military Leave

According to the Uniformed Services Employment and Reemployment Rights Act, employees who serve in the armed forces are entitled to the con- tinuation of their position, seniority, status, and pay rate as if there had not been a break in employment.

Jury Duty

Companies are required to grant employees time off for jury duty. The employee receives nominal payment for serving from the court. Additional compensation is based on company policy.

Personal Holidays

Companies frequently provide two to three paid personal days per year for an employee to use for any purpose. Some companies view these days as “emergency days.”

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Other Benefits 235

Paid Time Off (PTO) Banks

Unscheduled absences are costly and can negatively affect a company’s abil- ity to meet customer demands. In response, companies are implementing paid time off (PTO) programs to control costs associated with unscheduled absences and give employees time off with pay to balance work and nonwork pressures.

With PTO programs, an employee receives a bank of time to use for time off activities regardless of reason. PTO replaces traditional separate accounts for vacation, personal time, sick time, and in some cases legal holidays. When designed properly, PTO can save a company money and still provide a safety net of time off with pay for workers to meet nonwork pressures.

OTHER BENEFITS

Many “other benefits” are self-explanatory. However, it is important to note that a specific written company policy should be prepared and available for employees to use. Written policies help to ensure equity among all employ- ees and resolve disputes if an employee questions the appropriateness of any procedures. Examples of “other benefits” include:

Adoption benefit. Some companies decided that because medical plans pro- vide maternity coverage, it is appropriate to also provide some reimburse- ment to employees who elect to adopt a child. Reimbursements can range from $1,500 to $3,000 per adoption.

Commuting assistance. This benefit includes vans or vouchers used for pub- lic transportation.

Credit unions. These employee-run endeavors provide loans for employees and give interest on account balances.

Dependent care and health-care reimbursement accounts (flexible spending accounts). Both accounts use pretax dollars to reimburse for eligible ser- vices and have a “use it or lose it” provision. This means any money left in the plan at the end of the plan year’s grace period is forfeited back to the plan.

With a dependent care account, an employee uses the money to reim- burse caregivers who provide covered services to an employee’s dependent child or children. With the health-care reimbursement account, an employee pays for services not covered by the company’s health-care plans. Also included are deductibles, copayments, and co-insurances.

Educational assistance plans. These plans are sometimes called tuition reim- bursement plans. The plan provides for full or partial reimbursement of eligi- ble educational expenses per year that are incurred by employees.

Employee assistance program (EAP). This program often features a toll-free telephone number employees can call to seek help to resolve personal mat- ters (i.e., financial, marital, or substance abuse problems).

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236 Benefits Basics

Employee health services. This benefit usually provides on-site medical care in the event an employee becomes ill at work or is injured on the job.

Financial counseling. This benefit provides financial advice to workers, especially for those enrolled in 401(k) plans.

Flextime. This policy allows employees to choose convenient starting and quitting times and under some plans, extended lunchtime, while still requiring the standard number of hours worked each day or week.

Product/service discounts. Employees use many companies’ services and products. Therefore, it’s common for companies to make their services or products available to workers at a reduced cost.

Relocation allowances. Companies often ask exempt staff to relocate to a different company facility. To assist with the move, companies underwrite the costs to help cushion any upset associated with relocation. Allowances are sometimes provided to new hires, but generally are less generous than for current employees.

Subsidized food service. Employers typically subsidize the cost of food served in employee cafeterias.

Job share. This is where two part-time workers end up doing the work of a full-time employee. The two employees share the workload. This arrange- ment is often effective when employees do not want to work full-time and can complement each other.

THE IMPORTANCE OF EFFECTIVE COMMUNICATION

Effective communication (both written and oral) is essential for employees to understand and appreciate the value of your company’s total rewards pro- gram. Compared with wages and salaries, which are relatively easier to understand and highly visible, benefits tend to be complex, diverse, and, to some extent, hidden. You only use benefits when you need them. Therefore, unused benefits tend to be invisible.

To be effective, a benefits communication program should:

• Meet legal requirements (ERISA) for reporting and disclosing critical information to employees and regulators.

• Have means for employees to express interests and concerns and include a feedback mechanism to respond to workers’ comments.

• Enable employees to clearly understand the provisions of their ben- efit package.

• Gain employee confidence that the information about their benefits is easily accessible and accurate, and that the benefit plans will deliver what they promise.

• Highlight value of benefits. • Have employees realize the dollar investment made by employers for

providing employees with benefits.

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The Importance of Effective Communication 237

Legal Requirements

ERISA (Employee Retirement Income Security Act) requires plan sponsors (employers) to give participants (employees) various documents. Two basic ones are:

1. A summary plan description (SPD) is the benefits “handbook.” This document should explain the benefit in a way an average worker would understand. The SPD must be given to each plan participant within 90 days of participation.

2. A summary annual report (SAR) includes key financial information about the benefit plan. The SAR must be given to participants within nine months following the end of each plan year.

In addition to satisfying ERISA reporting and disclosure provisions, ben- efits administrators need to comply with other federal and state require- ments for distributing and posting various information affecting employees.

Cobraize Employees

Employees become eligible for COBRA (Consolidated Omnibus Budget Reconciliation Act of 1985) on losing welfare benefits due to various qualify- ing events (e.g., loss of job). COBRA allows an eligible employee to continue receiving some benefits for themselves and their eligible dependents and spouse for up to 18–36 months by paying the full monthly premium, plus a 2 percent administrative fee.

Most workers are shocked with the high cost of medical coverage. The information causes many employees to appreciate what the company had done for them; unfortunately, this awareness occurs when most workers leave the company.

What is recommended is to “Cobraize” employees the first day of employ- ment (in addition to meeting traditional COBRA requirements). This means informing employees what the employer is paying for benefits (in particular, medical) in addition to what workers pay. Numbers convey value, and per- haps the disclosure will cause employees to have a greater appreciation of what companies are doing for them.

Creating and Building Awareness of Benefits

In some instances, employees and their dependents become aware of bene- fits coverage only when needs become acute. For example, when someone becomes ill or disabled, when the day of retirement nears, or when a death occurs, there will be a search for and inquiries about necessary application forms. However, workers may fail to use other company-provided benefits unless they receive periodic reminders. Examples, as described earlier,

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238 Benefits Basics

include educational assistance, employee assistance programs, long-term care, and adoption benefits.

Ways to inform employees about benefits include:

• Articles in company newsletters and company intranet site • Notices posted on bulletin boards • Information mailed to employees’ homes • Payroll inserts • Benefits fairs • Special programs (e.g., a representative from the Social Security

Administration makes a presentation and answers questions)

Permit employees to invite nonworkers to attend benefits information meetings held by the company. Often, benefit decision makers are not the workers. Allowing employees to bring a family member or friend will help foster better understanding and decision making.

Enhancing Confidence and Trust

Credibility is enhanced when employees have confidence in the accuracy of plan information and believe they can obtain information about benefits on a timely basis. Responding quickly and accurately is the key to building cred- ibility. The delivery of benefits information to workers can be facilitated by the use of:

• Interactive voice response via touch-tone telephones • Touch-screen kiosks • Intranet • Email

Involve Employees in Benefit Changes

Many companies find success by actively involving employees when chang- ing benefits programs. This includes use of “employee task forces” or “focus groups” to review ideas and express opinions of planned changes. Other task forces are asked to review proposed communication pieces to ensure employee understandings. These interactions are similar to companies ask- ing a group of paying customers to critique a new product or service before being marketed.

Marketing executives have learned the value of customer feedback to ensure new products or services meet customers’ needs. The best way is to ask for comments rather than wait until after the product or service goes live. The same logic applies to asking employees for comments prior to final- izing a new benefits program or communication piece.

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