Objective 3 Flashcards
Definition of employee benefits
Broad definition: includes virtually any form of compensation other than direct wages, including:
1. ER’s share of legally-required payments (ex: Social Security)
2. Payments for time not worked
3. ER’s share of medical and medically-related payments
4. ER’s share of retirement and savings plan payments
5. Miscellaneous benefits (ex: EE discounts, severance pay, educational expenditures)
Limited definition: excludes legally-mandated benefits
Reasons for the growth of employee benefit plans
- Business reasons
- Collective bargaining
- Favorable tax legislation
- Efficiency of the employee benefits approach
- Wage increase limits
- Legislative actions
Characteristics of the group technique of providing employee benefits
All but the last are meant to minimize adverse selection
- Only certain groups are eligible
- Steady flow of lives through the group
- Minimum number of persons in the group
- Minimum portion of the group must participate
- Eligibility requirements and waiting periods are imposed
- Maximum limits for any one person
- Automatic determination of benefits
- Central and efficient administrative agency
Questions to ask in evaluating employee benefit plans
- What are the objectives of the ER and EE?
- What benefits should be provided?
- Who should be covered under the benefit plan?
- Should employees have benefit options?
- How should the benefit plan be financed?
- How should the benefit plan be administered?
- How should the benefit plan be communicated?
Reasons for using the functional approach to designing and evaluating employee benefits
- Benefits must be organized to be as effective as possible in meeting EE needs
- Avoiding waste in benefits can be an important cost-control measure for employers
- It is important to analyze where current benefits may overlap and costs may be saved
- A systematic approach is needed to keep benefits current, cost effective, and in compliance with regulations
- A systematic approach is needed to ensure that the various benefits can be integrated with each other
Steps in applying the functional approach to employee benefit plan design and evaluation
- Classify EE and dependent needs or objectives into logical functional categories
- Classify the categories of persons the ER may want or need to protect
- Analyze current benefits with respect to EE needs and desired categories of covered persons
- Determine any gaps in benefits or overlapping benefits in the current plan
- Consider recommendations for plan changes to meet any gaps in benefits and to correct any overlapping benefits
- Estimate the cost or savings from each of the recommendations made
- Evaluate alternative methods of financing or securing benefits
- Consider other cost-saving or cost-containment techniques for both current and recommended benefits
- Decide upon the appropriate benefits, methods of financing, and sources of benefits based on the prior analysis
- Implement the changes
- Communicate benefit changes to EEs
- Periodically reevaluate the EE benefit plan
Common loss exposures covered by employee benefit plans
- Medical expenses for EEs (active and retired) and their dependents
- Losses due to EEs’ disability (STD and LTD)
- Losses due to the death of active EEs, their dependents, and retired EEs
- Retirement needs of EEs and their dependents
- Capital accumulation needs or goals
- Needs arising from unemployment or from temporary termination or suspension of employement
- Needs for financial counseling, retirement counseling, and other counseling services
- Losses resulting from property and casualty exposures
- Needs for dependent care assistance
- Needs for educational assistance for EEs and their dependents
- Needs for LTC for EEs (active and retired) and their dependents
- Other EE benefit needs or goals (such as incentive programs)
Categories of persons the ER may want to or be required to provide benefits for
- Active full-time EEs
- Dependents of active FT EEs
- Retired former EEs
- Dependents of retired former EEs
- Disabled EEs and their dependents
- Surviving dependents of deceased EEs
- Terminated EEs and their dependents
- EEs (and dependents) on temporary leaves of absence
- Active EEs who are not full time
Typical elements of CDHPs
- A high-deductible health plan
- An individual health account to pay for expenses not covered by the HDHP
- Info and tools to provide health education and help find the highest-quality providers at the lowest cost
- Communications program to encourage consumerism and healthy behaviors
- Health coach or consultant to help individuals use available info and provide guidance on use of health care providers
- For serious chronic conditions, a proactive medical professional to coordinate care for the patient
Basic plan structures of CDHPs
- First-dollar coverage provided through a health care account
- EE is responsible for the difference between the account amount and the deductible
- After the deductible, the plan coinsurance and copays apply
- Deductibles, coinsurance, and copays differ for single vs. family coverage and IN vs. OON services
Types of health care accounts
- HSA:
a. Must accompany a HDHP with minimum deductible ($1200, 2x family) and maximum OOP limit ($5950, 2x family; 2011 amounts, indexed for inflation)
b. Can be used to pay for qualified medical expenses, health insurance premiums in limited circumstances, LTC premiums, and LTC services
c. Owned by the EE, who gets to keep the unused amount upon terminating employment - HRA: can be used to pay for qualified medical expenses, health insurance premiums, and LTC premiums
- FSA:
a. Can be used to pay for qualified medical expenses
b. The contribution amount must be specified at the beginning of the period, and the EE can use the full amount at any time in the coverage period
c. Funds not used by the end of the period are forfeited
Comparison of key features of health care accounts
- HSA:
a. Who can set up account: Individuals and EEs covered by HDHP and no other health insurance
b. Who can contribute: ERs and EEs
c. Contribution limits: $3,050 for individuals, $6,150 for families (2011 values, indexed)
d. Carryover of unused balances: Yes
e. Portability: Yes - HRA:
a. Who can set up account: Only ERs
b. Who can contribute: Only ERs
c. Contribution limits: No federal limit, ERs usually set limits
d. Carryover of unused balances: Yes, subject to ER limits
e. Portability: No - FSA:
a. Who can set up account: Only ERs
b. Who can contribute: ERs and EEs
c. Contribution limits: Through 2012 - no limit; $2,500 (indexed) starting in 2013
d. Carryover of unused balances: No
e. Portability: No
Tax treatment of health care accounts
- HSA:
a. ER Contributions: Contributions excluded from gross income and not subject to FICA; funding limits
b. Individual contributions: Funding limits; contributions are deductible
c. Earnings on accounts: Generally not taxable
d. Distributions: Permissible reimbursements are not taxed; o/w 20% penalty (some exceptions) - HRA:
a. ER Contributions: Contributions excluded from gross income and not subject to FICA
b. Individual contributions: EEs cannot contribute
c. Earnings on accounts: Accounts are generally notional, so there are no earnings
d. Distributions: Distributions only allowed for qualified medical expenses - FSA:
a. ER Contributions: Contributions excluded from gross income and not subject to FICA; funding limits
b. Individual contributions: Generally pretax & not subject to FICA
c. Earnings on accounts: Accounts are generally notional, so there are no earnings
d. Distributions: Distributions only allowed for qualified medical expenses
Plan design considerations for CDHPs
- Establishing the parameters of the HDHP
- Selecting a type of health care account
- Level of preventive care coverage
a. Most offer an initial health screening or physical at no, or very low, cost
b. Also included are immunizations, routine annual physicals, and well-mother and well-baby visits - Whether the CDHP will be a full replacement plan or one of multiple options
- ER contribution strategy:
a. Must decide how much to contribute to the EEs’ accounts
b. CDHP contributions are often set to compare favorably with other options - For HRA plans, whether to permit carryovers of unused balances
Advantages of voluntary benefits
Voluntary benefits are offered by ER but EEs purchase them on their own
ER advantages:
1. More benefits can be offered without significant added cost
2. Can supplement or replace ER-sponsored benefits that have been reduced or eliminated
3. Can act as an EE recruitment or retention tool
4. Can offer to EEs that meet performance targets
EE advantages:
1. Can get the ER’s group discount
2. In some cases, can purchase with pretax dollars
3. Convenience of obtaining benefits through the workplace and during work time
4. They are often portable
Types of voluntary benefits
- Group term life
- Dependent life insurance
- Supplemental life insurance
- LTD and/or STD insurance
- Dental insurance
- LTC coverage
- Adoption assistance
- Accidental death and dismemberment insurance
- Automobile insurance
- Homeowners insurance
- Benefits under a legal services plan
- Vision benefits coverage
- Critical care insurance
- Cancer insurance
- Group homeowners and automobile insurance
- Hospital indemnity insurance
- Travel accident insurance
- Student medical insurance
Common functions for administering EE benefits
- Benefits plan design
- Benefits plan delivery
- Benefits policy formulation
- Communications
- Applying technology
- Cost management and resource controls
- Management reporting - needed to:
a. Compare to the competition
b. Measure achievement of HR objectives
c. Assess and manage program risks - Legal and regulatory compliance
- Monitoring the external environment
Must comply with ERISA and COBRA standards
Activities required for serving plan participants
- New EE benefits orientation
- Policy clarification on benefits eligibility, coverage, and applicability of plan provisions
- Dealing with exceptional circumstances and unusual cases
- Collection and processing of enrollment data, claims info, and requests for plan distributions
- Benefits counseling and response to EE inquiries for active EEs
- Benefits counseling for EEs who are terminating, retiring, disabled, or on leave
Technological tools used by benefits directors to support customer-driven processes
- Executive information systems
- Imaging and optical storage
- Access to information over the internet
- Client-server technology
- EE self-service
Methods for comparing benefit programs to the competition
- Compare benefits payable to representative EEs under different circumstances
- Compare actual costs to the ER for different benefit plans
- Calculate relative values of the different benefits based on uniform actuarial methods and assumptions
- Compare benefit plans feature by feature to isolate specific provisions that may be appealing to certain EE groups
External factors that impact benefit management activities
- General business and competitive conditions
- Governmental policy
- Workforce demographic shifts
- New product development
- New organizational structures
- Technological enhancement and innovation