Bryant - Course 5. Retirement Planning & Employee Benefits. 9. Employee Benefit Plans Flashcards
Today’s business environment is becoming very challenging with a greater number of experienced and talented employees providing the cutting, competitive edge. These employees are the prime assets of the organization. In order to recruit and retain such employees, every organization is strategically providing attractive retirement and benefit plans. This is because an organization’s investment in employee benefit plans is now becoming as important as their investment in plant, equipments, machinery, or any other assets. A good employee benefit plan will help employers in retaining talented employees as well as employees who would work better with such incentives.
The Employee Benefit Plans module, which should take approximately six hours to complete, will explain the different types of benefit plans that are offered to employees: group life insurance, group disability insurance, group medical insurance, cafeteria plans and flexible spending accounts and other employee fringe benefits.
Upon completion of this module you should be able to:
* Identify the steps to design the right insurance plan,
* Identify different types of employee benefit plans and when they can be indicated,
* Describe the advantages and disadvantages of each plan,
* Identify the tax implications of each plan,
* Discuss the ways in which each plan is required to comply to different Code sections, and
* Describe the methods to install the plans.
To keep abreast with the changing environment, every organization is trying to provide very attractive and lucrative benefit plans for their employees in order to retain and motivate them. A well-developed, comprehensive employee benefit plan can make a big difference in attracting and retaining good, talented employees.
Hence, as a financial planner, you need to know the various employee benefit plans that any employer can offer. This way you can help organizations devise an effective benefits strategy that would incorporate everything, including culture, funding method, selection of products, compliance issues and corporate communications. Employers and organizations look out for financial planners to develop their employee benefit plans so as to reduce administrative time and associated costs.
To ensure that you have a solid understanding of employee benefit plans, the following lessons will be covered in this module:
* Group Life Insurance
* Group Disability Insurance
* Group Medical Insurance
* Cafeteria Plans and Flexible Spending Accounts
* Other Employee Benefits
Section 1- Group Life Insurance
Every individual has some basic need for life insurance. But many of them cannot afford a complete life insurance policy because of its high costs. Thus, they look for employer-sponsored group life insurance. Group life insurance is a means of insuring a class of people, usually company employees and associations. It also provides benefits to the employers, such as helping attract and retain good employees, supplementing the employee benefit package, and increasing employee morale and productivity. Providing group life insurance is also tax-deductible for the employers.
Therefore, if an employer is aware, and responsible for the company’s employee benefit plans, the first step would be to provide an attractive group-term life insurance policy to all its employees.
To ensure that you have a solid understanding of group life insurance, the following topics will be covered in this lesson:
* Group Term
* Group Permanent
* Dependent Coverage
* Carve-out
* Tax Implications
* ERISA and Other Requirements
* Alternatives
* How to Install a Plan
Upon completion of this lesson, you should be able to:
* Explain what group-term life insurance is and when its use is indicated,
* Describe the basic features of a group-term life insurance plan,
* Discuss the carve-out concept and its benefits and structure,
* Analyze the tax implications of such a plan, and
* Describe the steps involved in setting up a group-term life insurance plan.
Under ERISA, what are the two types of employee benefit plans? Click all that apply.
* Pension plan
* Welfare plan
* Employee plan
* Insurance plan
Pension plan
Welfare plan
- Under ERISA, employee benefit plans are divided into two types: pension plans and welfare plans.
Section 1- Group Life Insurance Summary
Group-term life insurance is one of the basic insurance policies required by every employee in order to control the financial effect on their dependant when they die. Every employer who is aware and responsible about the benefits of its employees, provides group life insurance.
In this lesson, we have covered the following:
* To design the right life insurance plan is as important as planning for health and retirement benefits. You need to follow a step-by approach to plan the right insurance plan, by first identifying why employees need insurance. Then you need to analyze the employees’ existing plans, and identify what the employer and the employees want to achieve through insurance, their objectives that need to be accomplished. After all has been identified and analyzed, you can design the insurance plan.
* Group-term is a life insurance plan for a group of employees and is one of the most common insurance coverage provided by an employer. Its design features include nondiscrimination requirements, coverage rules, benefit rules, exclusion rules and compliance to Section 79 rule requirements.
* The group permanent policy is part of the group-term plan and is considered to provide a permanent benefit if it can provide economic value to the policy.
* The dependent coverage is a small amount of coverage that can be treated favorably for tax purposes if the life insurance payable on the life of a spouse or dependent of an employee does not exceed $2,000.
* Group term Insurance Carve-out is a coverage method by which key employees or highly paid executives are separated from the group by the employer when providing group-term life insurance to other employees without affecting the status of the group-term plans. The carve-out coverage has its own advantages, such as being cost-favorable to employer, being selective and discriminatory to executives, and able to provide portable cash growth.
- Tax implications for group-term insurance include tax-exemption for the first $50,000 provided for each employee, tax being calculated only for the cost of nondiscriminatory coverage above $50,000, death benefit is tax-free for the beneficiary, all expenses borne by the employer for insurance premiums are deductible, employer needs to pay employment taxes, FICA and FUTA, on any premiums paid above the $50,000 limit.
- 1035 Exchanges the tax-free transfer of existing life insurance policies or annuity contracts for similar new contracts with different insurance companies.
- ERISA and other requirements impose extensive reporting and disclosure and the group-term plan must comply with all its requirements.
- Alternatives to group-term include life insurance in a qualified plan, split-dollar life insurance, death benefit only, and personally-owned insurance plans.
- How to install a plan specifies that a written plan complying with Section 79 requirements needs to be adopted.
Which of the following employer-provided employee benefit plans does NOT provide a death benefit or capital accumulation? (Select all that apply)
* A dependent care assistance plan
* Short-term disability plan
* A profit sharing plan
* A group-term life insurance plan
* A nonqualified deferred compensation plan
A dependent care assistance plan
Short-term disability plan
* Qualified plans such as profit sharing, group-term life insurance, and nonqualified deferred compensation all provide some form of death benefits or capital accumulations in their plan. But dependant care assistance or short-term disability plans do not provide for death benefits, as they are provided only for a small period of time and do not consider benefit provision in lieu of death.
Which of these employee groups can never be excluded from group-term life insurance that an employer maintains?
* Employees with two years of service
* Employees with five years of service
* Part-time employees
* Employees who are part of a collective bargaining unit
Employees with five years of service
Part-time employees
* The design feature of group-term life insurance includes the exclusion criteria. When calculating the percent of employees to be covered under the group-term insurance, employees with less than three years of service, part-time/seasonal employees, and employees of the collective bargaining unit can be excluded. Employees with greater than three years service are included in the plan.
What are the taxation rates used to measure the value of group-term life insurance in excess of $50,000 generally referred to as?
* The P.S. 38 rates
* The 1980 CSO rates
* The Table I rates
* The P.S. 58 (or Table 2001) rates
The Table I rates
* The cost of the first $50,000 of group-term insurance is tax-free to the employees.
* However, for coverage above $50,000, the amount taxable to the employees, or rather the value of the group-term life insurance needs to be calculated on a monthly basis.
* This is done by multiplying by the Table I rates.
Which of the following methods may NOT be used to finance a group-term carve-out arrangement?
* Death benefit only plans
* Profit sharing plans
* Split-dollar arrangements
* Bonus plans set up under Section 162
Profit sharing plans
* Financing a group-term carve-out arrangement requires the implementation of methods such as bonus plans, split-dollar plans, and death benefit plans.
* In order for carve-out programs to work as intended, they need to be carefully designed to avoid Section 79 status.
* This can be achieved if the coverage involves either/and the split-dollar, bonus, or death benefit only plans.
Section 2 - Group Disability Insurance
Employers, both small and large, need to look at every aspect of employee benefit schemes. There are times when employees might not be able to work for a period of time. This inability to work means a loss of income. For such unforeseen situations, employers need to provide disability insurance coverage to their employees. The disability income coverage replaces the income lost by an employee when either injury or illness prevents him/her from working. The disability income insurance policies can be provided either for the long term (at least five years to life-time) or the short term (up to two years).
When the employers provide disability insurance on a group basis, the benefits are usually integrated with benefits from Social Security and other public programs.
To ensure that you have a solid understanding of group disability insurance, the following topics will be covered in this lesson:
* Long-term Disability Insurance
* Short-term Disability
Upon completion of this lesson, you should be able to:
* Explain what a long-term disability insurance plan is and when its use is indicated,
* Discuss the advantages and disadvantages of this type of plan,
* Describe the design characteristics of a long-term disability insurance plan,
* Analyze the tax implications of such a plan,
* Explain what a sick pay plan is and when its use is indicated,
* Discuss the design characteristics of this type of plan,
* Analyze the tax implications of such a plan, and
* Describe the ERISA reporting requirements applicable to a sick pay plan.
Click here to view information on Social Security disability benefits.
https://www.ssa.gov/applyfordisability/
After viewing the link above, answer the following questions:
* How is an individual’s monthly benefit calculated?
* What document can assist you in calculating this amount?
* How do you order this document?
Section 2 - Group Disability Insurance Summary
Group disability insurance provides for income in the event of disability of the employee due to illness or injury. Some employers provide group disability insurance to all their employees. This helps maintain the financial level of the employee when he/she is unable to work. Disability insurance can be long-term or short-term, depending on the period for which the employee is unable to work.
In this lesson, we have covered the following:
* Long-term disability insurance provides disability income to employees who are disabled for more than 6 months up to 65 years, or to some particular employees as selected by the employer. They supplement the Social Security disability coverage. The design feature of this plan includes who is eligible for the plan, or the eligibility criteria, which is under the discretion of the employer, the appropriate definition of disability to be proved to avail the coverage, and the benefit formulas that calculate the percentage coverage of the disability income insurance. This is calculated taking into consideration that other sources of disability benefits, such as Social Security, workers’ compensation, other insurance, or earnings from other employment are integrated with long-term disability income benefits.
- Short-term disability insurance provides disability income to employees who are sick or disabled, generally for 3 months up to 6 months. Short-term plans can also include selected executives at the discretion of the employer. The plan continues to pay salary or wages to the employee for the limited period of illness or injury. The short-term disability plan’s design features include sick pay and short-term types of plans. Sick pay usually refers to the uninsured continuation of salary and wages. A short-term disability plan is one that goes into effect when the employee’s sick pay benefits run out, and before the employer’s long-term disability plan, if any, and Social Security disability go into effect. Thus short-term plans are often insured. The duration of sick pay benefits is often tied to the length of an employee’s service, and the definition of disability is less strict than in long-term plans.
- The tax implications for both short-term and long-term disability are the same, wherein the employer contribution to premium or direct benefit payments is deductible as employee compensation. Disability benefits that are received by an employee are taxable in proportion to the percentage of premium paid by the employer.
- ERISA and other requirements are same for both long-term and short-term disability plans that require a written summary plan description (SPD) and a formal written claims procedure. However, both the plans are not subject to eligibility, vesting, or funding requirements of ERISA.
Of the disability definitions described below, which is the strictest one or the least preferred by employees?
* “Qualified for” definition
* “Regular occupation” definition
* “Own occupation” definition
* “Total and permanent” definition
“Total and permanent” definition
* The strictest definition of disability is the total and permanent definition that states the disability condition under which an employee is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months. Because of the nature of the defining disability, it is least favorable to the employees.
A short–term disability plan, often an insured plan, goes into effect when sick pay benefits cease, and will typically extend until?
* A six-month benefit period has been satisfied and Social Security benefits or the employer’s long-term plan goes into effect
* The employee is fully recovered from sickness or accident
* The employer cannot fund the plan any longer
* Sick pay benefits are renewed and begin with the new calendar/fiscal year for the employee
A six-month benefit period has been satisfied and Social Security benefits or the employer’s long-term plan goes into effect
* A short-term disability plan fills the gap between sick pay and the employee’s long–term disability plans. It goes into effect when the employee’s sick pay benefits run out and extends until the six-month limit has been reached, when the employer’s long-term disability plan, if any, and Social Security disability go into effect.
Benefits for the following will not be paid even if the definition of disability is met EXCEPT?
* During periods when the employee is not under a physician’s care
* Caused by an intentionally self-inflicted injury
* Before the employee became eligible for plan coverage
* Medical expenses incurred for treatment of an injury that caused disability
Medical expenses incurred for treatment of an injury that caused disability
* Disability plans usually have specific exclusions under which benefits are not paid even if they meet the definitions of disability. All of the above are excluded from payment even if they comply with disability definition, except for medical expenses incurred for treatment of an injury that caused disability. In this case disability benefits are paid due to injury.
Section 3 - Group Medical Insurance
Health insurance is the most widespread employee benefit, covering more than 75 million employees in the United States. This is because it meets a critical employee need, and also because it receives almost unique tax benefits. The tax benefits include that not only is the entire cost deductible to employers, but nothing is includable in employees’ taxable income as a result of plan coverage or payment of plan benefits. Thus health insurance is a completely tax-free form of employee compensation.
There are two main types of health insurance plans:
Prepaid plans, in which health care providers are paid in advance of providing services, and
Postpaid plans, which pay health care providers for services rendered, or reimburse employees for payments to providers.
The principal form of prepaid plans is the Health Maintenance Organization, or HMO. HMOs are discussed later in the lesson. You will begin this lesson with a focus primarily on postpaid plans, which are the traditional form of health insurance.
To ensure that you have a solid understanding of group medical insurance, the following topics will be covered in this lesson:
* Plan Design
* Benefit Structure
* Plan Funding
* Eligibility and Coverage
* HMO
* PPO
Upon completion of this lesson, you should be able to:
* Identify the fundamental types of health insurance plan designs,
* Discuss the benefit structures of health insurance plans,
* Describe the various funding mechanisms for such plans,
* Explain the eligibility and coverage requirements (including COBRA continuation coverage requirements),
* Explain what an HMO plan is and when its use is indicated,
* Discuss the advantages and disadvantages of this type of plan,
* Describe the basic types of HMOs and the requirements for federally qualified HMOs,
* Distinguish between insured plans and typical HMOs,
* analyze the tax implications of such a plan, and
* analyze the tax implications of such plans,
* describe what a PPO is and discuss its advantages, disadvantages, and its types.
Lori covered under a coinsurance provision and is responsible for 20% of covered expenses. She has a deductible of $250. Lori incurs expenses of $2,000 during the year. How much will she have to pay and how much will the company pay?
* Lori will pay $400 and the company will pay $1,600
* Lori will pay $650 and the company will pay $1,350
* Lori will pay $250 and the company will pay $1,750
* Lori will pay $600 and the company will pay $1,400
Lori will pay $600 and the company will pay $1,400
* Lori will pay $600 ($2,000-$250=$1,750x20%=$350($250+$350=$600)) and the company will pay $1,400($2,000-$600).
Blue Cross plans are used for doctors’ bills, and Blue Shield plans used for hospital bills. (Select True or False)
* False
* True
False
* Blue Cross plans are used for hospital bills, and Blue Shield plans used for doctors’ bills.
Participants may be not excluded or required to pay an extra premium on the basis of which of the following? Click all that apply.
* Age of participants
* Genetic information
* Medical history
* Health status
Genetic information
Medical history
Health status
* Participants may not be excluded or required to pay an extra premium on the basis of the following: health status, medical condition (physical and mental), claims experience, receipt of health care, medical history, genetic information, evidence of insurability, or disability.
COBRA provides for continued coverage to all except? Click all that apply.
* Directors
* Independent contractors
* Small Business of 50 employees
* Self-employed individuals
Directors
Independent contractors
Self-employed individuals
* Self-employed individuals, independent contractors, and directors are not counted and exempted from COBRA.
What are the advantages and disadvantages of the pay-as-you-go funding for retiree medical benefits?
Advantages
* Low initial cash flow
* Simplicity
* No nondiscrimination requirements
Disadvantages
* FASB standards require liability
* Increasing cash flow requirements
* Burdens future management/shareholders
Which group medical insurance types have deductibility of contributions?
Increased Pension Benefits
Incidental Qualified Plan Benefit (410(h))
VEBA
No tax deduction until benefits are paid:
* Earmarked Corporate Assets
* Corporate-owned Life Insurance
What are the main differences between PPOs and HMOs? Click all that apply.
* PPOs provide benefits on a fee-for-service basis as their services are used.
* PPO participants have financial incentives to use the preferred provider network.
* In PPOs, the primary care physician has control over a participant’s access to specialists.
* In PPOs, the fee schedule is different for each participant in the plan.
PPOs provide benefits on a fee-for-service basis as their services are used.
PPO participants have financial incentives to use the preferred provider network.
* PPOs typically differ from HMOs in two aspects: First, they provide benefits on a fee-for-service basis as their services are used. Fees are usually subject to a schedule that is the same for all participants in the PPO. Second, plan participants have financial incentives to use the preferred provider network. The primary care physician does not control a participant’s access to specialists, as is the case in most HMO plans.
Section 3 - Group Medical Insurance Summary
Other than the general life insurance requirement, employees also need medical and health care insurance. Medical/health insurance is the most widespread employee benefit, as it meets a critical employee need. It also receives unique tax benefits.
In this lesson, we have covered the following:
* The plan design for health insurance is of three fundamental types: basic plan, major medical plan, and comprehensive plan. The basic plan provides health care services primarily in connection with hospitalization. Major medical plans provide all other health care services that are excluded from the basic plan and fill in the gap in basic coverage. The comprehensive plan is a combination of the other two plans and is now gaining popularity. In fact many employers are replacing the basic and major medical plans with comprehensive plans.
* The benefit structure for many health insurance plans includes employee payment for some part of the cost of the health care services by using deductibles, coinsurance and maximum coverage limits. A deductible is the initial amount specified in the plan that is paid by the employee toward covered benefits and is usually computed annually. Under a coinsurance provision, the employee needs to pay some specified percent of the total cost, usually 20%. The Affordable Care Act prohibits plans from imposing an annual or lifetime maximum benefit amount.
* The plan funding -is covered by the employers in one or a combination of three ways: commercial insurance company contracts, Blue Cross/Blue Shield contracts, and self-funding/self-insurance without contracts. A contract from a commercial insurance company usually provides reimbursement to employees for their expenses for covered medical procedures. A contract may be made with Blue Cross and Blue Shield, which are nonprofit organizations operating within a given geographical area. A contract with these organizations for health benefit plans was originally designed by organizations of hospitals and physicians in order to facilitate the payment of hospital and doctor bills. On the other hand, with self-funding or self-insurance, the employer pays the claims and other costs directly to its employee. In this type of plan funding, the employer pays claims out of current operating revenues or out of a reserve fund accumulated in advance.
- Eligibility and coverage under the health care insurance generally all employees are eligible. However, there are tax law (IRC) provisions that require certain compliance for group health plan coverage. The coverage of health plans includes the COBRA continuation coverage and continuing coverage for retirees. Many employers provide the COBRA continuation coverage for their employees and their dependents for a maximum of 36 months after termination of employment. Many employers also provide continuing coverage for retirees, either for all employees or for a selected group. This type of coverage requires a lot of planning for the design of the plan, as it requires proper funding on the part of the employer.
- The tax implications for health insurance include deductibility of the cost of premiums as business expenses for the employer. Code sections 419 and 419A rules are applicable to prefunding medical benefits. The employees do not have taxable income either when the employer pays insurance premiums, when benefits are paid, or when the plan reimburses the employee for covered expenses. Employees who itemize and exceed a certain threshold can deduct as specified under Code Section 213.
- HMO is an organization that provides a complete range of medical care services on a prepaid basis. HMOs are typically more common among the younger employees as they cover all medical expenses without significant deductibles or co-pay provisions. There are three types of HMOs, depending on the benefit structure, and each has its own advantages and disadvantages. Tax implications, eligibility and coverage requirements, including the COBRA provisions for HMOs, are the same as that of any health insurance.
- PPO is a health care delivery system wherein health care providers get contracts with employers, insurance companies, and union trust funds to provide medical care services. They may take the form of group practices or IPAs. They have their own advantages and disadvantages. PPO subscribers can get the benefit of reduced fees if they consult the PPO physician.
- Managed Care Plans is a system that controls the financing and delivery of health services to members who are enrolled in an HMO, PPO, or Point of Service Plan.
- Individual Medical Expense Insurance is used to reduce health costs and premiums as well as to provide deferred tax benefits. HSAs, MSAs, and HRAs are specific savings vehicles which can be used to set aside funds for future medical expenses.
Which type of plan or contract is not considered a postpaid-type health plan?
* Commercial insurance contracts
* Health maintenance organizations (HMOs)
* Self-funded plans
* Blue Cross/Blue Shield contracts
Health maintenance organizations (HMOs)
* Health insurance plans can be of two types – prepaid or postpaid. The principal form of prepaid plan is the health maintenance organization (HMO), where the health care provider is paid in advance.
Under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), an employer must provide an option to continue health insurance coverage for an employee whose termination from employment is due to disability for what period of time?
* 12 months
* 36 months
* 18 months
* 29 months
29 months
* Many employers provide benefit plans of continuing insurance coverage for employees and their dependents for some time after the termination of employment under the COBRA rule. COBRA requires that if the termination of employment is due to disability, then the coverage should continue for a period of 29 months. If the termination is due to death of the employee, divorce or separation, or bankruptcy, then the continuation period is 36 months, and in all other cases, except misconduct, the time period is 18 months.
