chapter 11 - employee benefits (8 mc, 1 sa) Flashcards
Determining benefits strategy in terms of the benefits mix and benefits cost (amount)
Need to ask the question “why are we offering XYZ benefits?”
Benefits mix – What should the overall benefits package look like? Look at the labor market to determine the mix
- What do the employees look like that we are competing for?
- High tech firms → young computer geeks, low average tenure – what benefits would interest this group??
- How diverse is the workforce? Different benefits will be attractive to different groups
Benefits amount – What percentage of total compensation will benefits make up? Look at product market to determine the amount (we don’t want to pay more for our benefits than our direct competitors).
benefit costs over the years (good to know)
1929 – average benefits cost = 3% of payroll costs
Today – average benefits cost = 40% of total labor costs
Why the increase??
WWI – It wasn’t standard practice to pay benefits until
WWI when employers were put under wage/price freezes and could not increase employees pay (to control inflation during the war)
Employers got around this by giving employees more benefits (as a substitute for a wage increase)
1935 – present – union influence
1960s – present – increase in benefits legislation
goal of compensation
To attract
To retain
To motivate
required benefits: social security
Social security is funded by contributions by both the ER and the EE
6.20% tax of annual earnings on first $147,000 – provides income for retirees
1997 max annual earnings taxed = $65,400
2023 max annual earnings taxed = $160,200
Self-employed: SS tax rate = 12.4% (6.2% + 6.2%) on income up to $147,000 Medicare tax rate
- In order to be eligible to collect retirement income, you must have worked 40 quarters (10 years)
- Increasing age requirement for collecting SS retirement:
–> Born before 1950, full benefits start at age 65 (62-64 – 80% benefits)
–> Born after 1950, full benefits start at age 66
–> Born after 1960, full benefits start at age 67 - SS retirement income (on average) will provide about 30% of one’s earnings in your final year of retirement – What does this suggest?
- Currently 3 working employees putting in to SS for every 1 retiree receiving benefits
How might this issue be addressed?
- increasing age requirements
- increasing salary cap for SS tax
- some discussion (in the past) of having employees put SS money into their own personal account
required benefits: unemployment insurance
Established by the SSA of 1935
Tax paid by employer only (based on the employer’s “experience rating”)
Provides temp income for people involuntarily unemployed
Benefit is based on an employee’s recent earnings.
Involuntarily unemployed workers are eligible for up to 26 weeks of unemployment benefits.
Unemployed workers are required to seek “suitable employment.”
Unemployment Insurance (cont.)
Employers need to watch turnover rates and need to layoff as these will increase the premium the er will pay into the ins fund
Individuals who may NOT collect unemployment:
1. individuals who quit voluntarily
2. individuals discharged for “gross misconduct”
3. those who have refused an offer of suitable work
4. employees on strike
5. self-employed individuals
required benefits: workers compensation insurance
Federal- or state-mandated insurance (funded by an employer payroll tax)
Insurance defrays the loss of income and cost of treatment due to work-related injuries or illness.
Employer paid premium (ee doesn’t contribute)
Insurance rate the employer pays based on:
- The risk of injury or illness for an occupation
- Each state’s level of benefits for injuries sustained by employees varies.
- The company’s frequency and severity of employee injuries (the company’s experience rating).
Why did we need WC Insurance?
Injury is a cost of doing business
Early employers – Master/apprentice relationship
Industrial revolution – many workers under one roof, less personal concern for individual employees
When ees would sustain injuries at work – ers were not helping ees pay for cost of injury
Courts at the time were pro-business – example doctrines used by courts in the past:
1. Contributory negligence – if it could be proven that ee contributed 1% to his/her own injuries, ER not liable
2. Fellow-servant rule – if co-worker was a fault, ER not liable
required benefits: family medical leave (FMLA 1994)
- An employer must grant an eligible employee up to:
- 12 workweeks of unpaid leave in a 12-month period for the following reasons:
- What four situations are covered for taking this leave?
- Death, childbirth, family emergencies, - Benefits continuation - employees on leave retain their benefits
- Job restoration – employees have the right to return to their job or an “equivalent job.”
Eligibility for leave: must have 12 months employment with ER (need not be consecutive) and 1,250 hours during 12 months prior to leave
Leave may be taken intermittently
Determining the FMLA 12-month period
- Recall that employees are entitled to 12 weeks leave every 12 month period…How do you define 12 months?
1. calendar year (Jan 1 – Dec 31)
2. fixed year (either fiscal year or employee anniversary date)
3. 12 months forward from date of first FMLA leave
4. Rolling 12 month period – measured from today back 12 months
Which of these options prevents “leave stacking”?
- Leave stacking = taking 24 consecutive weeks off (the last 12 weeks of the previous 12 month period and the first 12 weeks of the next 12 month period)
required benefits: health insurance
In 2022, average premium for ER sponsored health plans (Kaiser Family Foundation study)
Single ee coverage:
Average premium: $7,911
ER contribution: $6,584
EE contribution: $1,327
Family coverage:
Average premium: $22,463
ER contribution: $16,357
EE contribution: $6,106
Patient Protection and Affordable Care Act (2010):
Employers with 50+ employees will pay a “shared responsibility fee” (i.e., a penalty) if they do not offer their employees (who work 30+ hours per week) health care
Health plans offered must cover EEs’ children up to age 26
No copays or deductibles for preventive care
No lifetime dollar limits
Insurance companies can’t refuse to cover someone or charge more because of a “pre-existing condition”
Exempts all businesses that have fewer than 50 employees – 96% of all businesses in the U.S.
Tax credits for small businesses (<50 ees) who offer health insurance— may level the playing field for small businesses trying to compete with larger businesses WRT offering ees health care
FMLA EXAM QUESTION (solve this later cuz u didnt now)
Rolling 12 month = each time an ee takes FMLA leave, the remaining leave entitlement is any balance of the 12 weeks that has not been used in during the preceding 12 months
Example: ON EXAM
An employee requested FMLA leave for a serious health condition in January 2022. The employee has taken 8 weeks of FMLA leave during the 12 months prior to this request (OCT, NOV, DEC 2021).
- How much FMLA leave is the employee entitled to if the 12 month period is determined by the calendar year?
- How much leave is the employee entitled to under the rolling 12 month method?
california:
CRFA grants 6 weeks (of the 12 FMLA) as paid
FMLA/CFRA leaves run concurrently
CFRA gives rights to domestic partners (FMLA does not)
voluntary benefits: pensions and retirement plans
There are now more Americans age 65 and older than at any other time in U.S. history. Census data show there were 40.3 million people age 6 and older in 2010 and 54.1 million in 2020 (increased by 1/3).
According to U.S. census projections, people age 65 and older are expected to number 86 million by 2050.
2019, 2020, and 2021 US life expectancies: 79, 77, 76.1 years.
401(k) playing a minor role in retirement – key sources: social security, pensions, real estate
2021 - 68% of private sector employees in U.S. had access to a retirement plan; 92% of public sector employees had access to a retirement plan
voluntary benefits: 1) pensions and retirement plans (differences between defined benefit v. defined contribution plans)
Defined-benefit plan
- The amount an employee is to receive upon retirement is specifically stated up front
- Employer is making a promise to its employees that it will pay you X dollars a month
- This benefit is typically determined by a formula based on factors such as:
–> Years of service
–> Earnings your last year of employment
–> Age upon retiring
Defined-contribution plan
- The amount an employer and employee contributes to the pension fund is specified.
- The amount the employee will receive upon retirement will depend on the amount of money that has accumulated in that ee’s retirement fund (and how well the fund was invested by the ee)
- Example – 401(k) plans
–> Employees have contributions taken out of their pay via payroll deductions
–> Employers may match a portion of employee savings. (e.g., .50 for every $1 the ee contributes up to a cap)
Differences between DB and DC plans
1. Who assumes the risk (ER or EE)?
2. Which plan would be easier for ER to forecast costs?
3. Which plan provides a benefit that is more easily communicated to the employee?
Who assumes the risk (ER or EE)?
- for DB it is ER
- for DC it is EE
Which plan would be easier for ER to forecast costs?
- DB
Which plan provides a benefit that is more easily communicated to the employee?
- DB?
employee retirement income security act (ERISA) - federal regulation of pension plans
Employee Retirement Income Security Act (ERISA): Private pension plans are subject to ERISA regulations; provides standards and controls for pension plans:
A. Communication standard
B. Minimum funding standards
C. Vesting standards
ERISA Provisions (Focus on Vesting)
A. Communication standard
- Benefits information must be communicated in a way that the “average” employee could understand
–> In-house publications (employee handbooks and organizational newsletters)
–>Group meeting and training classes
–>Bulletin boards
–> Payroll inserts/pay stub messages
B. Funding Standard
- Prior to ERISA, there was a high pension plan forfeiture rate
- ERs would go out of business and retirees and retirement funds would disappear or ERs did not put enough money away to cover future promised retirement income
- ERs must put aside a certain amount of money each year to fund the plan
- ER must pay insurance (Pension Benefit Guaranty Corporation) to protect the plan
C. Vesting
- Refers to the rights that an employee has to the benefits (upon retirement) that have accrued in the pension fund
–> Specifically addresses the money put into the retirement fund by the ER – when can you call the ER’s contribution to your account, your money?
–> You always have the right to the money you contribute to your retirement
- ERISA requires that plans must provide that employees will have vested rights in their accrued benefits after certain minimum-years-of-service requirements have been met [e.g., 100% vested after 3 (DC) or 5 (DB) years (cliff vesting) OR 20% after 2 (DC) or 3 (DB) years, 20% each additional year until 100% vested (graduated vesting)].
VESTING DIAGRAM: ER matches EE’s 401K contribution
repeated: determining the FLMA 12-month period and leave stacking and 12 month calculation method notification
Determining the FMLA 12-month period
Recall that employees are entitled to 12 weeks leave every 12 month period…How do you define 12 months?
1. calendar year (Jan 1 – Dec 31)
2. fixed year (either fiscal year or employee anniversary date)
3. 12 months forward from date of first FMLA leave
4. Rolling 12 month period – measured from today back 12 months
Which of these options prevents “leave stacking”?
Leave stacking = taking 24 consecutive weeks off (the last 12 weeks of the previous 12 month period and the first 12 weeks of the next 12 month period)
12-month Calculation Method Notification
Employees who do not receive clear notice of calculation method can use whatever method provides them with the most leave
America West handbook stated “employees are entitled to up to twelve calendar weeks of unpaid FMLA leave within any 12 month period”
Courts ruled that this did not sufficiently communicate that AW used the rolling 12 month method
