Module 1 - The Environment of Employee Benefit Plans Flashcards
(A) - Employee Benefits Defined
All forms of financial returns and tangible services and benefits employees receive as part of an employment relationship.
(A1) Employee Benefits Defined - Broad View of Employee Benefits
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.
(A2) Employee Benefits Defined - More Limited (Narrow) View of Employee Benefits
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.
(B) Reasons for the Growth of Employee Benefit Plans
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.
(B1) Reasons for the Growth of Employee Benefit Plans - Business Reasons
- 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
(B2) Reasons for the Growth of Employee Benefit Plans - Collective Bargaining
-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
(B3) Reasons for the Growth of Employee Benefit Plans - Favorable Tax Legislation
What are the main (3) tax benefits of employee benefit plans?
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
(B4) Reasons for the Growth of Employee Benefit Plans - Efficiency of the Employee Benefits Approach
- 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
(B5) Reasons for the Growth of Employee Benefit Plans - Other Factors
- 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
(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
-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
(B5-A) Reasons for the Growth of Employee Benefit Plans - Other Factors -
CHARACTERISTICS OF GROUP TECHNIQUE (8)
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
(C) Overall Employee Benefit Concerns (8)
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
(D) Functional Approach to Designing and Evaluating Employee Benefits
The Functional Approach Definition
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.
(D1) Functional Approach to Designing and Evaluating Employee Benefits
The Functional Approach in Concept
- 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
(D2) Functional Approach to Designing and Evaluating Employee Benefits
Need for The Functional Approach
- 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
(D2) Functional Approach to Designing and Evaluating Employee Benefits
Consistency with an Employer’s Total Comp Philosophy
-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.
(D2) Functional Approach to Designing and Evaluating Employee Benefits
Consistency with an Employer’s Total Comp Philosophy
Compensation/Service Oriented Philosophy
- 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.
(D2) Functional Approach to Designing and Evaluating Employee Benefits
Consistency with an Employer’s Total Comp Philosophy
Benefits or Needs Oriented Philosophy
- 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
(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
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
(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
-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
(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
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.
(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.
This step involves measuring the EBP against the objectives and coverage criteria set up for it under the functional approach.
(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
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
(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
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.
