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Chapter 13

Benefit Options

Learning Objectives

Legally required benefits
Retirement and savings plan payments
Life insurance
Medical and medically related payments
Miscellaneous benefits
Benefits for contingent workers

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Employee Benefits

Legally required payments (employers’ share only)
Retirement and savings plan payments (employers’ share only)
Life insurance and death benefits (employers’ share only)
Medical and medical-related benefit payments (employers’ share only)

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Employee Benefits

Paid rest periods, coffee breaks, lunch periods, wash-up time, travel time, clothes-change time, get ready time
Payments for time not worked
Miscellaneous benefit payments

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Legally Required Benefits

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Workers’ Compensation

Social Security

Unemployment Compensation

Workers’ Compensation

Form of no-fault insurance
Covers
Medical care for work-related injuries
Temporary disability benefits
Permanent partial and permanent total disability benefits
Survivor benefits
Rehabilitation
Covered by State, not Federal laws

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Exhibit 13.4- Commonalities in State Workers’ Compensation Laws

Source: www.ncci.com

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Social Security

Provides a foundation of basic security for American workers and their families
Money comes from contributions made by:
Employees
Employers
Self-employed people during working years

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Social Security

Problem
Number of retired workers is rising
No 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

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Social Security

Advantages
Old age or disability benefits
Benefits for dependents of retired or disabled workers
Benefits for surviving family members of a deceased worker
Lump-sum death payments

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Unemployment Insurance

Financed by:
Employers that pay federal and state unemployment insurance tax
Federal tax- 6.2% of the first $7,000 earned by each worker
States additionally impose a tax above the $7,000 figure
The extra amount a company pays depends on its experience rating

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Unemployment Insurance

Coverage - Eligibility requirements to receive benefits include:
Meeting requirements for wages earned or time worked during a base period
Being unemployed through no fault of the individual
Meeting other eligibility requirements of State law

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Unemployment Insurance

Duration
Emergency Unemployment Compensation Program (EUC08)
First two tiers - Provide benefits up to 34 weeks
Third and fourth tiers - Provide benefits up to 47 weeks
Weekly benefit amount
Controlling unemployment taxes

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Family and Medical Leave Act (FMLA)

Coverage
Employers with 50 or more employees
Eligibility
Must have worked at least 1,250 hours for the employer in the previous year
Qualifying events
Specified family or medical reasons
Qualifying event coverage
Unpaid leave up to 12 weeks per year

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Consolidated Omnibus Budget Reconciliation Act (COBRA)

Coverage
Employers with 20 or more employees
Eligibility
Current and former employees
Their spouses and dependents
Qualifying events
Specified events (e.g. layoffs)
Qualifying event coverage
18 to 36 months, depending on category of event

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Health Insurance Portability and 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

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Retirement and Savings
Plan Payments

Employees rank pensions as one of the more important benefits
Generic types of pension plans
Defined benefit plans
Defined contribution plans
Individual retirement accounts (IRAs)
Employee retirement income security act (ERISA)

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Defined Benefit Plans

Provide a specific pension level defined in terms of:
Fixed dollar amount or percentage-of-earnings amount
Financed by:
Following an actuarially determined benefit formula
Making current payments that will yield the future pension benefit

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Defined Benefit Plans

Determination of benefit levels
Calculate average earnings over last 3 – 5 years for a prospective retiree
Offer a pension that is about one-half this amount
Reasons for decline of DB plans
Need for early investment
Disproportionate cost increases
Unfavorable accounting rules

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Defined Contribution Plans

Popular forms of plans
401 (k) plan
Savings plan in which employees are allowed to defer pretax income
Employee stock ownership plan (ESOP)
Basic ESOP - Company makes a tax-deductible contribution of stock shares
ESOP as a pension vehicle - Cash at retirement based upon the stock value at that time
Profit sharing plan
Defined contribution pension plan

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Defined Contribution Plans

Qualified deferred compensation plan
Employer receives an income tax deduction for contributions made
Problematic during recruitment of high-talent executives
Cash balance plans
Hybrid of defined benefit and defined contribution plans

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Individual Retirement Accounts (IRAs)

Tax-favored retirement savings plan
Can be established by individuals themselves
Used to store wealth accumulated in other retirement vehicles

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Employee Retirement Income Security Act (ERISA)

Eligibility
Employees at least 21 years old
Employers may require 6 months of service
Vesting
Length of time employee must work for employer before entitlement to payments

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Employee Retirement Income Security Act (ERISA)

Components of vesting
Employee contributions to pension fund are immediately and irrevocably vested
Employer’s contribution must vest using one of the two formulas:
Full vesting after 3 years (down from 5 years previously)
20 % after 2 years (down from 3 years) and 20 % each year thereafter, resulting in full vesting after 6 years

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Employee Retirement Income Security Act (ERISA)

Portability: Benefit issues for employees moving to new companies
ERISA does not require mandatory portability of private pensions
An employer may voluntarily agree to permit portability
Pension Benefit Guaranty Corporation (PBGC)
Guarantees payment of vested benefits to employees :
Formerly covered by terminated pension plans

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Employee Retirement Income Security Act (ERISA)

The Pension Protection Act of 2006 (PPA)
Protects employees’ retirement income
Transfers some responsibility for retirement savings to the employee

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How Much Retirement Income
to Provide?

What level of retirement income should be set as a target?
Should social security be considered
Should other postretirement income sources be integrated
How should seniority be factored into the payout formula?
What can a company afford?

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Life Insurance

Most companies offer term policies
Value 1-2 times an employee’s salary
Most plan premiums are paid completely by employer
Companies make retiree coverage forfeitable at the time of departure
Is heavily affected when shifting to flexible benefit program

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General Health Care

Employer’s share of health care costs are contributed into:
Community-based system
Insurance rates are based on the medical experience of the entire community
Commercial insurance plan
Guarantees fixed payment to the insured for hospital service
The insured in turn reimburses the hospital

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General Health Care

Self-insurance
Cost of medical coverage is directly related to usage level
Employer payments go directly to medical care providers
Health maintenance organization (HMO)
Comprehensive benefits for a fixed fee
Preferred provider organization (PPO)
Direct contractual relationship between and among:
Employers, health-care providers, and third-party payers

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General Health Care

Point-of-service plan (POS)
Hybrid plan combining HMO and PPO benefits
Permits an individual to choose which plan to seek treatment from
Health reimbursement arrangements (HRAs)
Employer sets up an account for a specified amount
Qualified medical costs, are submitted for reimbursement until the account is depleted

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General Health Care

Customized plans
Employee chooses among a menu of health-care products
Employer subsidizes part of the premium
Design your own products
Employees select their own providers and benefit
Employer subsidizes up to a set level
Health savings accounts (HSAs)
Tax-exempt account built up by contributions of the employee, employer, or both

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Exhibit 13.9 - How Health Insurance Options Differ on Key Dimensions*

*Overview of the four most common health-care options.

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Health Care: Cost Control Strategies

Motivate employees to change their demand for health care via:
Changes in design or administration of policies
Change structure of health care delivery systems
Participate in business coalitions
HMOs
PPOs
Promote preventive health programs

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Short- and Long-Term Disability

Workers’ compensation covers disabilities that are work-related
Social security has provisions for disability income to those who qualify
Private sources of disability income
Employee salary continuation plans
Long-term disability plans

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Short- and Long-Term Disability

Short - term disability
Pays a percentage of salary for temporary disability because of sickness or injury
Long - term disability
Applicable after the short-term plan expires
Provides 60 to 70 percent of pre-disability pay
Dental insurance
Vision care

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Miscellaneous Benefits

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Paid Time Off During Working Hours

Payment for Time Not Worked

Child Care

Elder Care

Domestic Partner Benefits

Legal Insurance

Benefits for Contingent Workers

Contingent work relationships include:
Working through a temporary help agency
Working for a contract company
Working on call
Working as an independent contractor
Contracting offers a viable way to meet rapidly changing environmental conditions by:
Reducing costs
Permitting easier expansion and contraction of production/services

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