Chapter 13: Benefit Options Flashcards
Review Exhibit 13.2: be able to list the categories of employee benefits along with the examples provided for each category.
• Legally required payments (employers share only)
o old age, survivors, disability, and health insurance (employer FICA taxes) and railroad retirement tax
o unemployment compensation
o workers compensation (including estimated cost of self insured)
o state sickness benefit insurance
• retirement and savings plan payments (employers share only)
o defined benefit pension plan contributions 401K type
o defined contribution plan payments
o profit sharing
o stock bonus and employee stock ownership plans (ESOPs)
o pension plan premiums (net) under insurance and annuity contracts (insured and trusted)
o administrative and other cost
• life insurance and death benefits (employers share only)
• medical and medical related benefit plans (employers share only)
o hospital, surgical, medical, and major medical insurance premiums (net)
o retiree hospital, surgical, medical, and major medical insurance premiums (net)
o short term disability, sickness, or accident insurance (company plan or insured plan)
o long term disability or wage continuation (insured, self administered, or trust)
o dental insurance premiums
o other (vision care, physical and mental fitness benefits for former employees)
• paid rest periods, coffee breaks, lunch periods, wash up time, travel time, clothes change time, get ready time, etc.
• Payments for time not worked
o payments for or in lieu of vacations
o payments four or in lieu of holidays
o sick leave pay
o parental leave (maternity and paternity leave payments)
o other
• miscellaneous benefit payments
o discounts on goods and services purchased from company by employees
o employee meal furnished by company
o employee education expenditures
o childcare
o other
List the benefits that are legally required. Be able to discuss each.
• Workers compensation
o As a form of no fault insurance (employees are eligible even if their actions cause the accident), workers compensation covers injuries and diseases that arise out of, and while in the course of, employment. Benefits are given for:
Medical care needed to treat the job injury or illness
temporary disability benefits to the employee to help replace lost wages
permanent disability payments to the employee to compensate for permanent effects of the injury
survivor death benefits
rehabilitation and training in most states, for those unable to return to their prior career
• Social Security
o Social Security benefits are paid to replace part of the lost family earnings when a worker retires, becomes disabled, or dies. Ever since its passage, the Social Security act has been designed and amended to provide a foundation of basic security for American workers and their families.
o The money to pay these benefits comes from the Social Security contributions made by employees, their employers, and self-employed people during working years.
o As contributions are paid in each year, they’re immediately used to pay for the benefits to current beneficiaries. This is the major problem with Social Security. While the number of retired workers continues to rise (because of earlier retirement and longer lifespans), no corresponding increase in the number of contributors Social Security has offset the cost.
Dramatic increase in both the maximum earnings base and the rate at which the base is taxed.
o Current funding levels produce a massive surplus throughout the 1990s. The federal government doesn’t pay our contributions in a Savings Bank in anticipation of your retirement. Rather they they continually use the fund to finance government spending.
o 4 categories of benefits 1 old age or disability benefit, 2. benefits for dependents of retired disabled workers, 3. benefits for surviving family members of a deceased worker, and 4. lump sum death payments.
• unemployment insurance
o Unemployment insurance laws vary by state
o financing: in the majority of states, unemployment compensation paid out to eligible workers is financed exclusively by employers that pay federal and state unemployment insurance tax.
The extra amount a company pays depends on it’s experiencing rate - lower percentages are charged to employers who have terminated fewer employees
o Coverage: all workers except a few agricultural and domestic workers are currently covered by unemployment insurance laws. Eligibility requirements are:
you must meet the state requirements for wages earned or time worked during an established period of time Referred to as a base.
You must be determined to be unemployed through no fault of your own and meet other eligibility requirements of state law
o duration: until 1958 maximum number of weeks for any claimant could collect unemployment insurance was 26 weeks. The 1958 and 1960 to 61 recessions yielded large numbers of claimants who exhausted their benefits, leading many states temporarily to revise upward the maximum benefit duration. 2008 Congress enacted the emergency unemployment compensation program this program provided additional weeks of benefits to long term employed , extended benefits as long as 53 weeks. Program expired in 2023 it returned to 26 weeks
o Weekly benefit amount: generally benefits are based on a percentage of the individual’s earnings over recent 52 week. Up to the maximum amount
o controlling unemployment tax: every unemployed workers unemployment benefits are charged against the firm or firms most recently employing the currently unemployed worker. The more money paid out on behalf of a firm, the higher is the unemployment insurance rate for that firm.
o Efforts to control these costs quite logically should begin with a well designed human resource planning system
• Family and medical leave act
o the 1993 family and medical leave act applies to all employers having fifty or more employees and entitles all eligible employees to receive unpaid leave up to 12 weeks per year for specified family or medical reasons
• consolidated omnibus budget reconciliation act
o in 1985 Congress enacted this law to provide current and former employees and their spouses and dependents with a temporary extension of group health insurance which coverage is lost during qualifying events. All employers with 20 or more employees must comply with COBRA.
• health insurance portability and accountability act
o The 1996 HIPAA is designed to 1. lesson an employer’s ability to deny coverage for pre-existing conditions and 2. prohibit discrimination on the basis of health related status
What are ‘retirement and savings plan payments’?
• Pension plan: a form of deferred compensation. All pension plans usually have 4 common characteristics: they 1. involved deferred payments to a former employee (or surviving spouse) for past services rendered; 2 specify a normal retirement age, at which time benefits begin to accrue to that employee; 3. If a formula for calculating benefits, and 4. provide for integration with Social Security benefits
• More than half of the population will depend on Social Security for retirement income because of competitive pressures from globalization, the recession, and poultry growth and productivity.
o This is an issue because employees tend to rake pensions as one of the more important benefits.
o Employees with employer provided retirement plans are more likely to have sufficient savings for a comfortable retirement than those who do not have these plans
o companies switching from pensions to 401K plans
Define ‘defined benefit plans’
A benefit option or package in which the employer agrees to give the specific benefit without regard to cost maximum. Opposite of defined contribution plan
Define ‘defined contribution plans’ and be able to list and define the three popular forms of ‘defined contribution plans’
• A benefit option or package in which the employer negotiates a dollar maximum payout. Any change in benefit costs over time reduces the amount of coverage unless new dollar limits are negotiated.
• Defined contribution plans are more popular than defined benefit plans in both small and large organizations.
• 401K plan so named for the section of the Internal Revenue Code describing the requirements, is a savings plan in which employees are allowed to defer pre tax income employers typically match employee savings at a rate of $0.50 on the dollar.
• Employee stock ownership plan ESOP: a retirement plan in which the company contributes its stock as the retirement benefit. In a basic ESP a company makes a tax deductible contribution of stock shares or cash to a trust. The trust then allocates companies stock to participating employee accounts. The amount allocated is based on employee earnings.
• Profit sharing plan: a plan that focuses on profitability as the standard for group incentive. These plans typically involve one or three distributions: 1. cash or current distribution plans provide full payment to participants soon after profits have been determined (quarterly or annually); 2. deferred plans have a portion of current profits credited to employee accounts, with cash payments made at time of retirement, disability, severance, or death; 3. combination plans that incorporate aspects of both current and deferred options.
Define ‘retirement and savings plans’
• Both deferred benefit and deferred contribution compensation plans are subject to stringent tax laws
• for deferred compensation to be exempt from current taxation, specific requirements must be met period to qualify an employer cannot freely choose who will participate in the plan hence it is labeled A qualified deferred compensation plan. This requirement eliminated the common practice of building tax friendly, extravagant pension packages for executives and other highly compensated employees. The major advantage of a qualified plan is that the employer receives an income tax deduction for contributions made to the plan even though employees may not yet have received any benefit. The disadvantage arises in recruitment of high talent executives. A plan will not qualify for tax exemption if an employer pays high levels of deferred compensation to entice executives to the firm and less proportionate contributions are also made to lower level employees.
• Cash balance plans are defined benefit plans that look like a defined contribution plan. Employees have a hypothetical account like a 401K into which deposited what is typically a percentage of annual compensation. The dollar amount grows both for contributions by the employer and from some predetermined interest rate.
Define ‘individual retirement accounts’
• A tax favored retirement savings plan that individuals can establish themselves. Unlike other pension options, iras don’t require an employer to set them up.
Discuss the ‘Employee Retirement Income Security Act’ (ERISA); make sure to note the four major requirements of this act.
• For employers who choose to have a retirement plan, this act sets some formidable rules that must be followed to be in compliance. Rules were enacted because in the early 1970s were a public relations and economic disaster for private pension plans. People thought they were covered and ended up being victims of complicated rules insufficient funding irresponsible financial management and employer bankruptcy. Pension funds were mismanaged or required long vesting periods it resulted in a pension system that left far too many lifelong workers poverty stricken
• Four major requirements of the ACT:
o general requirements: requires that employees be eligible for pension plans beginning at age 21. Employers may require 12 months of service as a precondition for participation. The service requirement be extended to three years that the pension plan offers full and immediate vesting.
o vesting and portability:
Vesting refers to the length of time an employee must work for an employer before he or she is entitled to employer payments made into the pension plan. The vesting come it has two components. First, any contribution made by the employee to a pension fund or immediately an irrevocably vested. The vesting right becomes questionable only with respect to the employers contributions.
Portability of pension plans becomes an issue for employers moving to new organizations. Should pension assets company the transferring employees in some fashion? ER ISA does not require mandatory portability of private pensions. On a voluntary basis, though, the employer may agree to let the employees pension benefit transfer to a new employer.
o pension benefit guarantee corporation: The PB GC guarantees payment of vested benefits to employees formerly covered by terminated pension plans
o Pension Protection act of 2006 (PPA): the PPA was passed by Congress in the wake of Enron and WorldCom. Its purpose was to protect employees retirement income as well as transfer some responsibility for retirement savings from the employer to the employee. A key provision of the law allows employees and publicly traded companies the freedom to sell off any employer stock purchase deferrals or after talks contributions.
Review Exhibit 13.9 and be able to explain the ‘Affordable Care Act’
• Enacted by Congress and survivor of Supreme Court tests, this law requires the vast majority of Americans to either have health insurance or to pay a tax for not doing so.
• Exhibit 13.9 the Affordable Care Act in 200 words or less:
o if you have health insurance and it makes you smile, keep it
o if you don’t have coverage you can use the new health insurance marketplace to buy a private plan (like Blue Cross Blue shield or an HMO)
o if you qualify (family size and income) you may get lower costs on premiums and out pocket medical expenses
o you may also qualify for free or low cost coverage under Medicaid or Children’s Health insurance program
o if you have coverage already and want to consider changing based on looking at marketplace plans, you can. If, however, you have an offer of insurance from your employer, you may not be able to get lower cost based on your income. It depends on whether the employers coverage is considered affordable and meets minimum standards
o a large employer who doesn’t offer health insurance coverage for all full time employees is taxed
o individuals must purchase a plan either through their employer, through private companies or through state mandated insurance programs. Failure to do so results in taxation
o any company with too good a plan pays a 40% Cadillac tax so named because the big three automakers are prime targets
Discuss three general strategies for controlling the cost of health care
• First, organizations can motivate employees to change their demand for health care, through changes in either the design or the administration of health insurance policies.
o Deductibles
o coinsurance rates
o maximum benefits
o coordination of benefits
o auditing of hospital charges for accuracy
o requiring pre authorization for selected visits to healthcare facilities
o mandatory second opinion when surgery is recommended
o using intranet technology to allow employees access to online benefit information, saving some of the cost of benefit specialist
o providing incentives to employees for using providers who meet certain high performance criteria
• the second general cost strategy involves changing the structure of health care delivery systems and participating in business coalitions. At the extreme or companies that simply declined to provide any health care coverage whatsoever. Less extreme are things like HMOs, PPOs, POSs.
• A final category of cost control strategies links incentives to healthy behaviors.
