Module 1 - The Environment of Employee Benefit Plans

Question 1

(A) - Employee Benefits Defined

Answer 1

All forms of financial returns and tangible services and benefits employees receive as part of an employment relationship.

Question 2

(A1) Employee Benefits Defined - Broad View of Employee Benefits

Answer 2

EB are virtually any form of compensation other than direct wages and might be defined to include the following -
1 - ER share of legally required payments (SS, Medicare, unemployment, workers comp)
2 - PTO
3 - ER Cont to Medical
4 - ER Cont to Retirement
5 - Misc. such as ee discounts, severance pay, educational expenditures, child care, etc.

Question 3

(A2) Employee Benefits Defined - More Limited (Narrow) View of Employee Benefits

Answer 3

Any type of plan sponsored or initiated unilaterally or jointly by employers and employees in providing benefits that stem from the employment relationship that are not underwritten or paid for directly by the government.

Question 4

(B) Reasons for the Growth of Employee Benefit Plans

Answer 4

Many reasons exist for the evolution of employee benefits plans from fringe benefits to a major component of financial security. They stem from external forces as well as the desire of employers to achieve certain goals and objectives.

Question 5

(B1) Reasons for the Growth of Employee Benefit Plans - Business Reasons

Answer 5

• Employers was to attract and retain capable employees
• Necessary to have equal or better plans to attract and retrain capable employees
• Corporate efficiency, productivity, and improved employee morale will be fostered by good benefit plans
• Concerns for employees’ welfare and social objectives

Question 6

(B2) Reasons for the Growth of Employee Benefit Plans - Collective Bargaining

Answer 6

-Labor Management Relations Act (LMRA) which is administered by the National Labor Relations Board (NLRB) requires good faith collective
bargaining over wages, hours, and other terms and conditions of employment
-LMRA is commonly known as the Taft-Hartley Act - established the distinction between retirement benefits and welfare benefits such as life and health ins.
-The meaning of the term wages includes a pension plan and this position was upheld in the landmark case of Inland Steel Co. vs. NLRB in the same year
-The good faith bargaining requirements were held to include a group health and accident plan

Question 7

(B3) Reasons for the Growth of Employee Benefit Plans - Favorable Tax Legislation

What are the main (3) tax benefits of employee benefit plans?

Answer 7

1 - Most contributions to employee benefit plans by employers are deductible as long as they are reasonable business expenses
2 - Contributions from employers within certain limits on behalf of employees generally are not considered income to employees
3 - On certain types of retirement and capital accumulation plans, assets set aside to fund such plans accumulate tax-free until distributed

Question 8

(B4) Reasons for the Growth of Employee Benefit Plans - Efficiency of the Employee Benefits Approach

Answer 8

• Employee benefit concepts flourished because of the ability to cover many employees under one contract
• Simplicity and convenience of providing coverage to individuals through their place of employment
• Employee benefit providers and suppliers found the marketing of such benefits through the employer to be cost effective and administratively efficient channel of distribution

Question 9

(B5) Reasons for the Growth of Employee Benefit Plans - Other Factors

Answer 9

• Impositions of limitations on the size of wage increases granted during WWII and the Korean War
• While wages were frozen, employee benefits were not
• As a result, compensation of employees could effectively be increased by provision of larger benefits

Question 10

(B5-A) Reasons for the Growth of Employee Benefit Plans - Other Factors -

GROUP TECHNIQUE - enables insurance programs (life / health) to be written as employee benefit plans

Answer 10

-prevents “adverse selection” - reduces the possibility that less-healthy individuals may join a group or be a larger percentage of a group that anticipated because of the availably of insurance or other benefits

Question 11

(B5-A) Reasons for the Growth of Employee Benefit Plans - Other Factors -

CHARACTERISTICS OF GROUP TECHNIQUE (8)

Answer 11

1 - Only certain groups eligible
2 - Steady flow of live through the group - younger individuals join the group while older individuals leave the group
3 - Minimum number of persons in a group
4 - Minimum portion of the group must participate - if noncontributory, 100%, if contributory, 75%
5 - Eligibility Requirements
6 - Maximum limits for any one person
7 - Automatic determination of benefits
8 - Central and efficient administrative agency - the employer

Question 12

(C) Overall Employee Benefit Concerns (8)

Answer 12

1 - What are the employer and employee objectives of in establishing the plan?
2 - What benefits should be provided under the plan?
3 - Who should be covered under the benefit plan?
4 - Should employees have benefit options?
5 - How should the benefit plan be financed?
6 - How should the benefit plan be administered?
7 - How should the benefit plan be communicated?
8 - Future of Employee Benefits

Question 13

(D) Functional Approach to Designing and Evaluating Employee Benefits

The Functional Approach Definition

Answer 13

An organized system for classifying and analyzing the risks and needs of active employees, their dependents, and various other categories of persons into logical categories of exposures to loss and employee needs.

Exposures and needs may include medical expenses, losses resulting from death, losses caused by STD / LTD, retirement income needs, capital accumulation needs, needs arising out of short term and long term unemployment, custodial care (LTC) needs, or other employee needs.

Question 14

(D1) Functional Approach to Designing and Evaluating Employee Benefits

The Functional Approach in Concept

Answer 14

• George C. Foust / Robert M. McCaffery
• Analyzes the employers program as a coordinate whole in there if its ability to meet employees needs and to manage loss exposure within the employers overall compensation goals and cost parameters
• Useful in overall employee benefit plan design, in evaluating proposals for new or revised benefits, for eval of cost-saving proposals, and in effective communication of an employers total benefits program
• Represents such systemic management of employs benefits function

Question 15

(D2) Functional Approach to Designing and Evaluating Employee Benefits

Need for The Functional Approach

Answer 15

• Needed in planning, designing, and administering employee benefits for many reasons
  (1) EB are a very significant element of total comp of employees
  (2) EB represent a large item of labor cost for employers, therefore, effective planning and avoidance of waste in providing benefits can be an important cost control measure for employers
  (3) apply the functional approach in reviewing existing employee benefit plans to determine where overlapping benefits may exist and costs may be saved and where gap in benefits may exist and new or revised benefits may be in order
  (4) keep benefits current, competitive, and in compliance
  (5) integration of benefits properly

Question 16

(D2) Functional Approach to Designing and Evaluating Employee Benefits

Consistency with an Employer’s Total Comp Philosophy

Answer 16

-ER should seek to balance the elements of its compensation system including basic cash wages and salary, incentive compensation (cash bonus or company stock bonus), longer term incentive plans (stock based or performance based), to help meet the needs and desires of the employees and the employers basic comp philosophy and objectives.

Question 17

(D2) Functional Approach to Designing and Evaluating Employee Benefits

Consistency with an Employer’s Total Comp Philosophy

Compensation/Service Oriented Philosophy

Answer 17

• Relates employee benefits primarily to compensation or service, or both, in design their EBP.
• Level of benefits provided tends to be tied in with compensation level and eligibility for benefits may be based directly or indirectly on salary level
• Certain kinds of benefits such as group life and pensions tend to be primarily compensation oriented, at least for non-union employees.

Question 18

(D2) Functional Approach to Designing and Evaluating Employee Benefits

Consistency with an Employer’s Total Comp Philosophy

Benefits or Needs Oriented Philosophy

Answer 18

• Tends to focus primarily on the needs of employees and their dependents, rather than on compensation and service
• Certain kinds of benefits such as medical expense benefits tend to be primarily benefit of needs oriented

Question 19

(E1) Application of The Functional Approach - Logical Steps in Applying The Functional Approach to EBP Design

Classify employee (and dependent) needs or objectives in logical functional categories

Answer 19

1 - medical expenses incurred by active, termed, or retired employees and their dependents
2 - losses due to employees disability (STD/LTD)
3 - losses resulting from death of active, termed, or retired employees and their dependents
4 - retirement needs of employees and their dependents
5 - capital accumulation needs or goals (short term and long term)
6 - needs arising from unemployment or from temporary termination or suspension of employment
7 - financial, retirement, or other counseling services
8 - losses resulting from property or liability exposures
9 - dependent care assistance
10 - educational assistance for employees and/or their dependents
11 - custodial care expenses (LTC) for employees and/or their dependents
12 - stock plans or other longer term incentive programs

Question 20

(E2A) Application of The Functional Approach - Logical Steps in Applying The Functional Approach to EBP Design

Classify the categories of persons (employee, former employee, dependents) the employer may want to protect, at least to some extent, through its EBP

Answer 20

-who should be protected by an EBP, for what benefits, for what time periods and under what conditions.
1 - active FT employees
2 - dependents of active FT employees
3 - retired formed employees
4 - deponents of retired employees
5 - disabled employees and their dependents
6 - surviving deponents of deceased employees
7 - terminated employees and their dependents
8 - employees and their dependents who are temporarily separated from the employers service (layoffs, LOA, military duty, strikes, etc.)
9 - part time employees, directors

Question 21

(E2B) Application of The Functional Approach - Logical Steps in Applying The Functional Approach to EBP Design

Financial Account Standards Board (FASB) has adopted the Employers Accounting for Post-retirement Benefits Other Than Pensions FSA 106

Answer 21

Requires employers to recognize during covered employees’ periods of service that accrued benefit cost of these post-retirement benefits (the net periodic post-retirement benefit cost) as a current business expense, and to recognize the liabilities for and any plan assets dunning these benefits for balance sheet purposes.

Question 22

(E3) Application of The Functional Approach - Logical Steps in Applying The Functional Approach to EBP Design

Analyze the benefits, terms of coverage, and plan participation by employees in terms of how well the existing or proposed EBP meets employee needs and goals in the various functional categories for those classes of persons that the employer wants to protect or benefit.

Answer 22

This step involves measuring the EBP against the objectives and coverage criteria set up for it under the functional approach.

Question 23

(E3 - Overview) Application of The Functional Approach - Logical Steps in Applying The Functional Approach to EBP Design

Analyze the benefits, terms of coverage, and plan participation by employees in terms of how well the existing or proposed EBP meets employee needs and goals in the various functional categories for those classes of persons that the employer wants to protect or benefit.

7 Steps to Analysis

Answer 23

1 - Types of Benefits
2 - Levels of Benefits
3 - Probationary Periods - also know as waiting period for coverage
4 - Eligibility Requirements
5 - Employee Contribution Requirements
6 - Flexibility Available to Employees
7 - Actual Employee Participation in the Benefit Plans

Question 24

(E3 - Step 3) Application of The Functional Approach - Logical Steps in Applying The Functional Approach to EBP Design

Analyze the benefits, terms of coverage, and plan participation by employees in terms of how well the existing or proposed EBP meets employee needs and goals in the various functional categories for those classes of persons that the employer wants to protect or benefit.

Probationary Benefits - also known as benefit waiting period

Answer 24

Protection Oriented Benefits - medical expense benefits, life insurance, STD, LTD. Protect employees and their dependents against serious loss exposure which could spell immediate financial disaster if occurs. Waiting period may be lesser for these benefits.

Accumulation Oriented Benefits - pension plans, profit sharing, thrift plans, stock bonus plans, stock purchase plans could have longer waiting periods imposed and could be subject to legal requirements. These are a reward for relatively long service with the employer.

Question 25

(E3 - Step 4) Application of The Functional Approach - Logical Steps in Applying The Functional Approach to EBP Design

Analyze the benefits, terms of coverage, and plan participation by employees in terms of how well the existing or proposed EBP meets employee needs and goals in the various functional categories for those classes of persons that the employer wants to protect or benefit.

Eligibility Requirements

Answer 25

The employer or the employer and union(s) with whom the employer negotiates should consider such issues as -

1 - Which dependents of active employees should or must be covered for medical expenses benefits?
2 - Should retirees continue to be covered? If yes, for what benefits?
3 - Should survivors of deceased active employees continue to be covered? If so, for what benefits and how long?
4 - Should survivors of retired former employees continue to be covered? If so, for what benefits?
5 - Should employees or former employees on DBL continue to be covered? If so, for what benefits, how long and under what conditions?
6 - Should or must coverage be extended to employees during layoffs, LOA (non-FMLA), strikes, and other temp interruptions of employment?
7 - Should coverage only be offered to full time employee or part time employees too?
8 - What coverage should or must be continued to made available to persons after termination of employment with the employer and on what basis?

Question 26

(E3 - Step 6) Application of The Functional Approach - Logical Steps in Applying The Functional Approach to EBP Design

Analyze the benefits, terms of coverage, and plan participation by employees in terms of how well the existing or proposed EBP meets employee needs and goals in the various functional categories for those classes of persons that the employer wants to protect or benefit.

Flexibility Available to Employees

Answer 26

The degree to which employees have flexibility in making such choices as to whether they will participate in a given employee benefits; the amounts of additional coverage that they may purchase; the opportunity to select from amount two or more alternative plans; the opportunity to structure their own benefit program under a flexible benefits (cafeteria compensation) approach

Question 27

(E4) Application of The Functional Approach - Logical Steps in Applying The Functional Approach to EBP Design

Determine any gaps in benefits or overlapping benefits, or both, provided from all sources under the employers EBP and from other benefit plans in terms of functional categories of needs and the persons to be protected

Question 28

(E5) Application of The Functional Approach - Logical Steps in Applying The Functional Approach to EBP Design

Consider recommendations for changes in the employers present EBP to meet any gaps in benefits and to correct any overlapping benefits, including possible use off the flexible benefits (cafeteria plan) approach

Question 29

(E6) Application of The Functional Approach - Logical Steps in Applying The Functional Approach to EBP Design

Estimate the cost or savings from each of the recommendations made in step 5

Question 30

(E7) Application of The Functional Approach - Logical Steps in Applying The Functional Approach to EBP Design

Evaluate alternative methods of financing or securing the benefits recommended above, as well as the EBP existing benefits

Question 31

(E8) Application of The Functional Approach - Logical Steps in Applying The Functional Approach to EBP Design

Consider other cost savings techniques in connection with the recommended benefits or existing benefits (plan cost containment strategies)

Answer 31

-may involve changes in benefit plan design, elimination or reduction of certain benefits, adoption or modification of flexible benefit (cafeteria compensation approach, use of managed care approaches for medical benefits, use of utilization review for medical expenses benefits, use of disability management and rehabilitation, adoption of wellness and similar programs, changes in insurers or servicing organizations, changes in investment policies or advisors, the decision to self-fund or return certain benefits, and other similar techniques.

Question 32

(E9) Application of The Functional Approach - Logical Steps in Applying The Functional Approach to EBP Design

Decide upon the appropriate benefits, methods of financing, and sources of benefits as a result of the preceding analysis

Question 33

(E10) Application of The Functional Approach - Logical Steps in Applying The Functional Approach to EBP Design

Implement the changes

Question 34

(E11) Application of The Functional Approach - Logical Steps in Applying The Functional Approach to EBP Design

Communicate benefit changes to employees

Answer 34

-often a neglected element

Question 35

(E12) Application of The Functional Approach - Logical Steps in Applying The Functional Approach to EBP Design

Periodically reevaluate the employee benefit plan

Answer 35

-EBP planning is a task that is never complete

Question 36

Identify the 3 types of total compensation/benefit policies that employers may adopt

Answer 36

1 - Average compensation/benefits policies follow the generally prevailing compensation/benefits level in a firm’s industry, 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 37

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

Answer 37

Larger, well established employer in a mature industry, finance insulation, or non-profit may take a relatively liberal approach towards meeting benefit 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 erm oriented incentive types of compensation.

Firms in industries that are highly competitive, subject to cyclical fluctuations or in a currently depressed state may not be willing to add to their relatively fixed labor costs by adopting or liberalizing employee benefits, even if there may be functional need for doing so. In fact, such firms may seek to cut back on their employee benefit commitments when possible.

Question 38

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

Answer 38

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 their retirement plan itself would be considered.

The same kind of analysis can be used when design a disability income plan in terms of a replacement ratio of average or normal earnings. Income from all sources under the total comp package, as well as the disability income plan itself, should be considered.