Employee Benefit Planning

Question 1

Explain the arguments related to flexibility in the design of an employee benefit plan as related to the functional approach to benefit planning.

Answer 1

One argument is that the more flexibility an employee has, the more likely he or she will select a benefit program that best meets his or her individual needs and goals. Thus, flexibility in plan design such as optional participation, coverage amount and coverage options facilitates the functional approach. The opposing argument states that allowing flexibility in types and amounts of benefits works against the functional approach, because employees might not recognize all their or their families needs and leave some important needs uncovered.

Question 2

What is the broad view of employee benefits?

Answer 2

The broad view considers employee benefits to be virtually any form of compensation other than direct wages paid to employees.

It includes both government-mandated benefits and private plans.

Such things as the employer’s share of Social Security Tax on behalf of an employee, paid vacations and pension plans are considered to be employee benefits under the broad view.

Question 3

What is the narrow view of employee benefits?

Answer 3

The narrow view can be summarized as any type of plan sponsored or initiated unilaterally or jointly by employers and employees engaged in providing benefits that result from the employment relationship that are not underwritten or paid directly by government.

Question 4

List the categories of benefits that generally are considered to fall under a broad view of employee benefits:

Answer 4

Legally required benefits - Old-Age, Survivors, Disability, and Health Insurance (OASDHI); Worker’s Compensation (WC); unemployment insurance (UI); and state temporary disability income insurance.

Payments for time not worked, e.g., rest periods, lunch periods, vacations and holidays.

Employer’s share of medical and medically related benefits

Employer’s share of retirement and savings plan payments

Miscellaneous benefits, e.g., employee discounts, severance pay, education expenditures and child care, etc.

Question 5

Explain the types of business or human resource-related reasons why firms have established employee benefit plans.

Answer 5

There are many business reasons why firms have established employee benefit plans.

Employers want to attract and retain capable employees. Having employee benefit plans in place fosters this objective. In many cases, plans are necessary to retain current employees.

Also, employers hope that good benefit plans will foster corporate efficiency, productivity and improved employee morale. Concerns for employees’ welfare and social objectives are also reasons for providing benefits.

Question 6

Labor unions, through the collective bargaining process, have had an impact on the growth of employee benefit plans.

What notable event occurred in 1948?

Answer 6

The National Labor Relations Board (NLRB) ruled in the Inland Steel case that the duty to bargain in good faith over wages also included insurance and fringes such as pension benefits.

Shortly thereafter, in the W.W. Cross & Co. case, NLRB ruled that wages included a health and accident plan.

Question 7

Explain the significance of the Taft-Hartley Act in employee benefit planning.

Answer 7

The Labor-Management Relations Act, also called the Taft-Hartley Act, sets forth the framework for good-faith collective bargaining over wages, hours, conditions and terms of employment and employee benefits.

It, along with the Internal Revenue Code (IRC), established the distinction between retirement benefits and welfare benefits.

It also provides the regulatory framework for administration of these benefits in a collective bargaining agreement. As such, it is the legislative basis on which jointly trustees benefit plans are founded.

Question 8

What are the 3 major federal tax advantages associated with employee benefit plans?

Answer 8

(1) Most contributions to employee benefit plans by employers are deductible as long as they are reasonable business expenses.
(2) Within certain limits these employer contributions are generally not considered income to employees.
(3) In certain types of retirement and capital accumulation plans, benefits accumulate tax-free to the employee until distributed.

Question 9

Why is the employee benefit mechanism an effective and efficient way of providing insurance coverage?

Answer 9

Employment-based insurance is convenient for employees. They don’t need to search for individual coverage, and it is often less expensive.

Providers and suppliers find it more convenient and simpler to communicate and market employee benefits through an employer.

Question 10

What is the starting point in the design of any employee benefit plan?

Answer 10

The design of any employee benefit plan should start with setting overall objectives from the standpoints of both the employer and the employees.

Question 11

What is the functional approach to employee benefit planning?

Answer 11

The functional approach essentially is the application of a systematic method of analysis to an employer’s total employee benefits program.

It analyzes the organization’s employee benefit program as a coordinated whole in terms of its ability to meet various employees’ (and others’) needs and to manage loss exposures within the employer’s overall compensation goals and cost parameters.

Question 12

What are some of the basic questions that should be addressed in the planning and/or evaluation of an employee benefit plan?

Answer 12

(1) What benefits should be provided?
(2) Who should be covered by the benefit plan?
(3) Should employees have benefit options?
(4) How should the benefit plan be financed?
(5) How should the benefit plan be administered?
(6) How should the benefit plan be communicated?

Question 13

What benefits should be provided?

Answer 13

There should be clearly stated reasons or objectives for the types of benefits provided.

Benefits provided both under governmental programs and for the individual employees should be considered.

Question 14

Who should be covered by the benefit plan?

Answer 14

Besides full-time employees, other categories of individuals to consider are part-time employees, retirees, dependents of eligible employees and survivors of deceased eligible employees.

Question 15

Should employees have benefit options?

Answer 15

This question has assumed greater prominence for benefit plans because of the changing workforce. With the growth of flexible or cafeteria benefit plans, employee choice is inevitable. Choices also can be given in no flexible benefit plan situations.

Question 16

How should the benefit plan be financed?

Answer 16

Several important questions need to be answered in determining the approach to funding employee benefit plans.

Should financing be entirely provided by the employer ( a noncontributory approach), or on some shared basis by the employer and employee (contributory approach)?

If on a contributory basis, what percentage should each bear?

What funding method should be used?

Many possibilities exist, from a total insurance program to total self-funding with a whole range of options between these two extremes.

Question 17

How should the benefit plan be administered?

Answer 17

Should the firm itself administer the plan?

Should an insurance carrier or other benefit plan provider do the administration?

Should some outside organization such as a third-party administrator (TPA) do this work?

Question 18

How should the benefit plan be communicated?

Answer 18

The best employee benefit plan in existence may not achieve any of its desired objectives if it is improperly communicated to all affected parties.

Effective communication of what benefit plans will and won’t do is essential if employees are to rely on such plans to provide part of their financial security at all stages of their life cycles.

Question 19

Why is the functional approach considered to be an appropriate approach for the effective planning, designing and administration of employee benefits?

Answer 19

First, because employee benefits are a very significant element of total employee compensation, and generally are a very tax-effective way of compensating employees, they should be planned and organized to be effective in meeting employee needs.

Second, employee benefits generally represent a large item of labor cost for employers. Therefore, effective planning and avoidance of waste can be an important employer cost-control measure.

Third, employee benefits in the past often were adopted by employers on a piecemail basis, without being coordinated with existing employee benefit programs. Consequently, reviewing these plans, or proposed changes to them using the functional approach can eliminate overlap and fill gaps.

Fourth, a systematic approach to planning benefits helps keep an employee benefit plan current, competitive and in compliance with regulatory requirements.

The last point can be illustrated by the enactment of the Patient Protection and Affordable Care Act (PPACA) as amended by the Health Care and Reconciliation Act. This extensive law shows the demands that may be placed on the benefit plans of private employers to help solve perceived social problems.

Finally, the functional approach allows benefits to be integrated properly with each other.

Question 20

Identify and describe 3 types of total compensation/benefits policies that employers may adopt.

Answer 20

(1) Average compensation/benefits policies follow the generally prevailing compensation/benefits level in their firm’s industry or community or both.
(2) High-compensation/benefits policies attempt to attract higher levels of management, technical and general employee talent.
(3) Low-compensation/benefits policies are lower than average and more modest in scale.

Question 21

In designing its total compensation package, an employer should…

Answer 21

Seek to balance the various elements of its compensation system, including basic cash wages and salary, current incentive compensation (current cash bonuses and company stock bonuses), longer term incentive plans and so-called employee benefits, to help meet the needs and desires of the employees on the one hand and the employers basic compensation philosophy and objectives on the other.

The S, it is clear that the functional approach to planning and designing an employee benefit plan must remain consistent with the employer’s total compensation philosophy.

Question 22

Explain how the type of industry in which a firm is operating affects its total compensation philosophy and employee benefits approach.

Answer 22

A larger, well-established employer in immature industry, a financial institution or a nonprofit organization may take a relatively liberal approach toward meeting the benefits needs and desires of its employees.

Developing firms, or growth industries with considerable current needs for capital, may seek to rely more heavily on short-term-oriented incentive types of compensation.

Further, firms and industries that are highly competitive, subject to cyclical fluctuations or perhaps in a currently depressed state, may not be willing to add to their relatively fixed labor cost by adopting or liberalizing employee benefits, even if there may be a functional need for doing so.

In fact, such firms may seek to cut back on their employee benefit commitments one possible.

Question 23

Compare the compensation/service-oriented benefit philosophy and the needs-oriented benefit philosophy:

Answer 23

Employers with a compensation/service-oriented benefit philosophy tend to relate employee benefits primarily to compensation or service, or both, in designing benefit plans within the constraints of any nondiscrimination rules.

Thus, the level of benefits would tend to be tied to the salary or pay levels of employees and their years of service.

The benefit-or needs-oriented philosophy tends to focus on the needs of employees and their dependents, and employers with this philosophy typically would design benefit plans primarily on this basis.

Question 24

What are the steps involved in applying the functional approach to employee benefit plan design, review and revision?

Answer 24

(1) classify employee (and dependent) needs or objectives in logical functional categories.
(2) classify the categories of persons the employer may want to protect.
(3) analyze the benefits present only available under the plan in terms of functional categories of needs or objectives, in terms of categories of persons the employer may want to benefit, and in terms of regulatory requirements and possibly mandatory coverages.
(4) determine any gaps in benefits, or overlapping of benefits, or both, provided from all sources under the plan and other benefit plans in terms of functional categories of needs and the persons to be protected.
(5) consider recommendations for changes in the employers present employee benefit plan to meet any gaps in benefits and to correct any overlapping of benefits, including possible use of the flexible benefit (cafeteria plan) approach.
(6) Estimate the cost or savings from each of the recommendations made and step 5.
(7) evaluate alternate methods of financing or securing the benefits previously recommended as well as the employee benefit plans existing benefits.
(8) consider other cost saving techniques in connection with the recommended benefits or existing benefits (that is, plan possible cost- containment strategies).
(9) decide upon the appropriate benefits, methods of financing and sources of benefits as a result of the preceding analyses.
(10) implement the changes.
(11) communicate benefit changes to employees.
(12) periodically reevaluate the employee benefit plan.

Question 25

What are the categories of persons that a firm may want to include in its employee benefit coverages?

Answer 25

(1) Active full-time employees
(2) Dependents of active full-time employees
(3) Retired former employees
(4) Dependents of retired former employees
(5) Disabled employees and their dependents
(6) Surviving dependents of deceased employees
(7) Terminated employees and their dependents
(8) Employees (and their dependents) who are temporarily separated from the employer’s service, such as during layoffs , leaves of absence, military duty, strikes and so forth
(9) individuals other than full-time active employees (for example, part-time employees, directors and so forth).

Question 26

Describe the types of employee needs and exposures to loss that may be covered under an employee benefit plan:

Answer 26

(a) Medical expenses incurred by active employees, by their dependents, by retired (or certain otherwise terminated, suspended or temporarily not in service) employees or former employees and by their dependents.
(b) Losses due to employees’ disability (short and long term).
(c) Losses resulting from active employees deaths, from their dependents deaths and from the deaths of retired (or certain otherwise terminated, suspended or temporarily not in service) employees or former employees.
(d) Retirement needs of employees and their dependents.
(e) Capital accumulation needs or goals (short and long term)
(f) Needs arising from unemployment or from temporary termination or suspension of employment.
(g) Needs for financial counseling, retirement counseling and other counseling services
(h) Losses resulting from property-and-liability exposures and the like
(i) Needs for dependent care assistance for employees themselves or for employees’ dependents or for both
(j) Needs for educational assistance for employees themselves or for employees’ dependents or for both
(k) Needs for custodial-care expenses (long term care) for employees or their dependents or for retired employees or their dependents.
(l) Other employee benefit needs or goals (such as a desire to participate in corporate stock plans or other longer term incentive programs.

Question 27

Explain how the concept of replacement ratio can be used by firms for setting benefit levels of retirement and disability plans.

Answer 27

The retirement income objective might be expressed in terms of some percentage of the estimated final pay of an employee, or so-called replacement ratio. In designing a retirement plan to meet this objective, income from Social Security, various capital accumulation benefits and the retirement plan itself would be considered. The same kind of analysis can be used in designing a disability income plan in terms of a replacement ratio of average or normal earnings. Income from all sources under the total compensation package, as well as the disability income plan itself, should be considered.

Question 28

Explain how the use of the length of service, or probationary periods, may vary with respect to protection-oriented benefits and accumulation-oriented benefits.

Answer 28

Protection oriented benefits - consist of medical expense benefits, life insurance benefits, and short and long term disability income benefits that protect employees and their dependents against serious loss exposures that could spell immediate financial disaster. Such benefits may have a relatively short probationary period because of the need for immediate coverage of the employees and their dependents.

Accumulation-oriented benefits - such as pension plans, profit-sharing plans, savings or thrift plans, and so forth, reward an employee for relatively long service with an employer. These types of benefits usually involve a longer probationary period than protection-oriented benefits because they are viewed as a reward for long service and the longer probationary period is not a disadvantage for long-term employees.

Question 29

Need to Know - Review Answer

Answer 29

Making a plan contributory will have an impact on employee participation and how well a plan meets the needs of the employee as a whole. Moreover, if participation in a contributory plan is mandatory, this may create an employee relations problem. Thus, most contributory plans are not mandatory, and many contributory plans vary the levels or types of benefits in accordance with the degree of employee contributions.

Question 30

Explain the arguments related to flexibility in the design of an employee benefit plan as related to the functional approach to benefit planning.

Answer 30

One argument is that the more flexibility an employee has, the more likely he or she will select a benefit program that best meets his or her individual needs and goals. Thus, flexibility in plan design such as optional participation, coverage amount and coverage options facilitates the functional approach.

The opposing argument states that allowing flexibility in types and amounts of benefits works against the functional approach, because employees might not recognize all their or their families’ needs and leave some important needs uncovered.

Question 31

The view of employee benefits as virtually any form of compensation other than direct wages including both government-mandated benefits and private plans is called the:

Answer 31

Broad view of employee benefits.

Question 32

Which of the following benefits is (are) categorized in industry surveys as legally mandated benefits?

Answer 32

I. Unemployment compensation
II. Premiums paid to the Pension Benefit Guaranty Corporation (PBGC) for defined benefit pension plans
III. Death benefits payments

Answer = I only

Question 33

Reasons for using the functional approach in the design and administration of employee benefit plans include all of the following EXCEPT:

Answer 33

A. Employee benefits currently represent a large item of labor costs for employers.
B. Often employee benefit plans have been adopted by employers on a piecemeal basis without being coordinated with existing benefit programs.
C. Employee benefits are a very significant element of the total compensation of employees.
D. Employee benefit plans must be designed in accordance with the specific total compensation standards of the Labor-Management Relations Act.
E. Some types of employee benefit plans often provide coverages relating to several separate employee needs or loss exposures.

Answer = D. The Labor-Management Relations Act addresses good-faith collective bargaining requirements, not total compensation standards.