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Chapter 13

Benefit Options. Chapter 13. Exhibit: 13.1 Employee Benefit Preferences. Ex. 13.2: Categorization of Employee Benefits. 1. Legally required payments. 2. Retirement and savings plan payments. 3. Life insurance and death benefits. 4. Medical and medical-related benefit payments. 5.

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Chapter 13

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  1. Benefit Options Chapter 13

  2. Exhibit: 13.1 Employee Benefit Preferences

  3. Ex. 13.2: Categorizationof Employee Benefits 1 Legally required payments 2 Retirement and savings plan payments 3 Life insurance and death benefits 4 Medical and medical-related benefit payments 5 Paid rest periods, coffee breaks, lunch periods, . . . 6 Payments for time not worked 7 Miscellaneous benefit payments

  4. Exhibit 13.3 Participation in Selected Benefits, 2005

  5. Overview: Workers’ Compensation • Form of no-fault insurance • Employer liable for providing benefits to employees that result from occupational disabilities or injuries, regardless of fault • Disability must be work-related • Covered by State, not Federal laws • Employers pay premium to insurance company or state fund

  6. Workers’ Compensation: Benefits and Laws • Types of benefits: • Permanent total disability and temporary total disability • Permanent partial disability - loss of use of a body member • Survivor benefits for fatal injuries • Medical expenses • Rehabilitation

  7. Exhibit 13.4: Benefits by Type of Injury: New Hampshire

  8. Exhibit: 13.5: Commonalities in State Workers’ Compensation Laws

  9. Social Security • Provides a basic foundation of security for American workers and their families • For tax purposes, system is split into two programs: • Social Security - 6.2% • Medicare - 1.45%

  10. Social Security in Context • Before Social Security, aging in America often meant poverty and sometimes poorhouse • Average life expectancy in 1900: 47 years • When America was agricultural nation, elderly frequently lived w/ children • By 1920, more Americans lived in cities than on farms, urban homes smaller • While life expectancy was increasing quickly, many Ers shunned older workers • In 1930, almost 1/3 of American factories had maximum age limits for new ees (40, 45, 50) • Retirement savings didn’t exist, except among wealthiest Americans • In early 20th century, only ~2% of ees covered by pensions • Most counties had poorhouse (shelters for indigent) • Germany, Sweden, France, England legislated publicly-funded old-age insurance before Americans took up debate • Opponents argued that sensible people would provide for themselves • Social Security Act ruled to be constitutional by 5-4 decision in 1937 • Source: Wall Street Journal, 9/15/04

  11. Issues: Social Security • Number of retired workers is rising without a corresponding increase in number of contributors to offset costs • Currently, 3.5 workers pay into system for each person collecting benefits • Within next 40 years this ratio drops to about 2 to 1

  12. Issues: Social Security (Cont.) • Reform options: • Increase payroll taxes • Decrease benefits • Use general revenues • Have social security go to an employee’s own account to be earmarked of his/her personal retirement

  13. Unemployment Insurance • Financing: • Majority of states, unemployment compensation is financed exclusively by employers that pay federal and state unemployment insurance tax • Federal tax amounts to 6.2 percent of the first $7,000 earned by each worker • States additionally impose a tax above the $7,000 figure • The extra amount a company pays depends on its experience rating

  14. Unemployment Insurance (cont.) • Coverage: • Eligibility requirements to receive benefits: • Must meet State requirements for wages earned or time worked during an established (one year) period of time referred to as a “base period” • Must be determined to be unemployed through no fault of your own and meet other eligibility requirements of State law

  15. Unemployment CompensationDenial of Benefits (review) • Voluntarily quit without a good cause • Discharged for misconduct (not incompetence) • Discharged for fraud • Failed to seek or accept suitable employment • Received certain other unemployment benefits (e.g., severance pay) • Unemployment was caused by labor disputes resulting in work stoppages (some limited exceptions, distinction between strike and lockout, between strikers and those involuntarily idled)

  16. Family and Medical Leave Act • Coverage: • Employers with 50 or more employees • Eligibility: • 12 months employment with employer in which employee works 1,250 hrs • Qualifying events: • Specified family or medical reasons

  17. “A Good Idea, But…” • 16.5% of U.S. workforce took leave of absence for family or medical reasons under FMLA in 2000 • Ers pushing Congress to include better definition of “serious medical condition” and to prevent ees from taking leave in small time increments • More than 25% of leave is taken intermittently • Law currently defines serious medical condition as something that requires inpatient treatment, such as hospital stay, chronic illness, or period of incapacitation of more than three consecutive days accompanied by two treatments by doctor • SHRM reports half of HR professionals surveyed indicated they have granted FMLA requests they felt were not legitimate • Ers say condition is hard to verify • Physicians, fearful of violating medical privacy laws, usually tight-lipped • Source: Wall Street Journal, 1/24/05

  18. Consolidated Omnibus Budget Reconciliation Act (COBRA) • Coverage: • Employers with 20 or more employees • Eligibility: • Provides current and former employees and their spouses and dependents with temporary extension of health care benefits • Qualifying events: • Specified events (e.g. layoffs) • Qualifying event coverage: • 18 to 36 months, depending on category of qualifying event • Cost • Cost to Er paid by Ee plus 2%

  19. Health Insurance Portability and Accountability Act (HIPPA) • Key provisions • Lessens an employer’s ability to deny coverage for a preexisting condition • Prohibits discrimination on the basis of health-related status • Provides stringent privacy provisions

  20. Health Insurance Portability and Accountability Act (HIPAA) (review) • Intended to address “job lock” (where Ee is “locked” into current job given health insurance considerations) • Protections for coverage under group health plans that limit exclusions for pre-existing conditions • New Er must credit Ee for previous continuous health coverage (reduces or eliminates exclusion period) • Prohibits discrimination against Ees based on health status (including charging different premiums) • Does not… • Ensure that Ee who changes jobs will have access to health insurance on new job • Ensure affordability of health insurance on new job • Enable individuals to maintain same group health plan on job change • Recall that under COBRA Ee provided w/ limited extension of group health insurance (premium to be paid by Ee) when coverage lost due to qualifying events (e.g., layoff)

  21. Defined Benefit Plans • Employer provides a specific pension level defined in terms of: • Fixed dollar amount or • Percentage-of-earnings amount that may vary with years of seniority • Employer finances this obligation by: • Following an actuarially determined benefits formula and • Making current payments that will yield the future pension benefit for a retiring employee

  22. Defined Benefit Plans (Cont.) • Determination of benefit levels • Average earnings at end of tenure (last 3 – 5 years) or • Average career earnings or • Fixed dollar amount not dependent on earnings

  23. Defined Contribution Plans • Require specific contributions by employer • Final benefit received by employees is unknown • Dependent on investment success of plan manager • Three popular forms of these plans • 401 (k) plan • Savings plan in which ees allowed to defer income up to max amount, commonly matched by Er (e.g., 50 cents on the dollar) • Employee Stock Ownership Plan (ESOP) • Ees receive cash at retirement based on value of stock • Lack of diversification is disadvantage • Profit sharing • Can be considered a defined contribution plan if distribution of profits is delayed until retirement • Cash balance plans hybrid of defined benefit and defined contribution plans

  24. Exhibit. 13.10: Relative Advantages ofDifferent Pension Alternatives

  25. Pension Plans • In late ’70s, ~60% of American ees had defined-benefit pension plans • Today, <15% • In late ’70s, ~15% of American ees had defined contribution plan • Today, >60% • Due in part to shift in employment away from large, unionized manufacturing cos • Defined contribution plans by definition subject to market fluctuation • Ee who went to work at 25, put 6% of pay into 401(k) every year for 40 years, retired at 65, withdrew balance and bought annuity in 2000, would receive 134% of pre-retirement income • But if turned 65 in 2003, 401(k) savings would only buy annuity paying 57% of pre-retirement income • Because women have longer life expectancy than men, they pay more when buying annuities (however, courts have ruled illegal for defined-benefit pension plan to pay out less to women based on life expectancy) • Source: New York Times, 1/9/06

  26. Employee Retirement Income Security Act (ERISA) • Eligibility:Employees at least 21 years old • Employers may require 6 months of service as a precondition for participation • Vesting: Length of time employee must work for employer before entitled to employer payments to plan • Any contributions made by an employee to a pension fund are immediately and irrevocably vested • Employer’s contribution must vest according to two formulas

  27. Employee Retirement Income Security Act (ERISA) (cont.) • Portability: Issue for employees moving to new companies • Law does not require mandatory portability of private pensions • An employer may voluntarily agree to permit portability (pension rights must be vested) • Pension Benefit Guaranty Corporation (PBGC): Insures payment of certain pension plan benefits

  28. Life Insurance • One of the most common employee benefits • 87% of medium and large companies offer life insurance • Most companies offer term policies • Value of one to two times an employee’s salary • Most plan premiums paid completely by employer • Varying amounts of additional coverage often an option

  29. Types of Health Care Systems • Traditional Coverage (73% in 1988, 3% in 2005) • Community-based system, such as Blue Cross • Commercial insurance plan • Self-insurance • Health maintenance organization (HMO) • Preferred provider organization (PPO) (11% in 1988, 61% in 2005) • Point-of-service plan (POS) • Hybrid combining HMO and PPO elements

  30. Controlling Health Care Costs: Three Strategies • Motivate employees to change their demand for health care via changes in either design or administration of policies • Change structure of health care delivery systems and participate in business coalitions • HMOs • PPOs

  31. Controlling Health Care Costs: Three Strategies (cont.) • Promote preventive health programs • No-smoking policies • Healthy food in cafeterias and vending machines

  32. Controlling Health Care Costs: Strategy One • Practices related to design and administration of health plan • Increase deductibles • Change coinsurance rates • Reduce maximum benefits • Coordinate benefits with employees and spouses

  33. Controlling Health Care Costs: Strategy One (cont.) • Audit health care charges • Require preauthorization for visits to facilities • Require mandatory second opinion for procedures • Use intranet technology to allow employees access to online benefit information

  34. “Toyota Rolls Out a New Economy-Class Drug Plan” • Toyota opening its own pharmacies at its U.S. operations • Contracted w/ CHD Meridian Healthcare (also provides service to U.S. Steel, Smithfield Foods, GE) • Amount Toyota spends on prescription-drug costs has more than tripled since 1998; 15% increase projected for 2004 • For medications taken on regular basis, ees can save by using Co pharmacy or mail-order service • Co will pay entire cost of some medicines if ee uses generic • Ee use of brand-name drug may have co-pay as high as 20% • Source: Fortune, 1/24/05

  35. “Consumer-Driven” Health Plans (CDHPs), Health Savings Accounts (HSAs), Health Reimbursement Accounts (HRAs) • Congress authorized HSAs in 2003, HRAs evolved in late ‘90s and early ‘00s • Lower premiums, higher deductible (e.g., $2,000/yr), more consumer control of health care expenditures • Er can match part or all of Ee contribution to account • Pre-tax dollars into HSA, up to amount of deductible • If you don’t spend all your allowance on medical care, you carry over unused balance • Once deductible is paid, traditional insurance policy takes over • Maximum out-of-pocket spending limits ($5k for individuals, $10k for families)

  36. “Consumer-Driven” Health Plans (CDHPs), Health Savings Accounts (HSAs), Health Reimbursement Accounts (HRAs) • Encourages consumers to take active role in keeping health-care costs down • Ers will provide detailed information about prices and quality of doctors and hospitals in area • Critics fear plans will discourage people from getting care they need • Recent research indicates that when co-payments for prescription drugs increase, health of patients w/ certain chronic illnesses (e.g., diabetes and asthma) can suffer • Further, if healthy Ees sign up for HSAs while less-healthy Ees stick w/ traditional plans, costs of those plans will increase at even faster rate… • Tax breaks benefit wealthy more than low-income workers • Less-educated workers may have trouble taking advantage of Web-based information

  37. “Consumer-Driven” Health Plans (CDHPs), Health Savings Accounts (HSAs), Health Reimbursement Accounts (HRAs) • Percentage of Ers adding high-deductible plans rose from 7 percent in 2004 to 13 percent in 2005, 29 percent in 2006, and 33 percent plan to offer them in 2007 • CDHPs that are most successful at controlling costs rely on variety of programs that encourage smart Ee consumerism • 53 percent use incentive to encourage ees to complete health risk appraisals • 43 percent use incentives to encourage ees to improve their health • Source: USA Today, 10/31/03; Wall Street Journal, 6/23/04; Wall Street Journal, 5/19/04; Business Week, 11/8/04; SHRM HRNews Online, 3/21/06

  38. “One Cure for High Health Costs: In-House Clinics at Companies” • Quad/Graphics (one of biggest printing cos in U.S.) spent ~$6k/ee on medical costs in 2004, 30% less than average Co in Wisconsin • Has brought nearly all primary care in-house • Doctors’ bonuses tied to patient evaluations and health outcomes • Quad pays doctors ~$130-160k/yr, comparable to average general practitioner in Milwaukee area • Quad spends more on primary care than most cos ($715/ee in 2003, cf. $375/ee at other local cos) • Quad spent $1,540/ee in 2003 on hospital costs, cf. local average of $2,250

  39. “One Cure for High Health Costs: In-House Clinics at Companies” • Others considering building in-house clinics include Toyota • Need to have large number of ees concentrated in a few places to make economic sense • Also need harmonious relations w/ ees (Quad is non-union) • Source: Wall Street Journal, 2/11/05

  40. “Health Benefits Offered by Firms Shrink for Retirees” • 29% of early retirees (those retiring before age 65 [thus generally ineligible for Medicare]) had er-sponsored health insurance in 2002, down from 39% in 1997 • For those 65+, down from 28% to 25% • 13% of private ers offer health benefits to retirees • Coverage estimated to have peaked in late 80s at ~ 45% of all retirees • 1990 FASB rule thought to have contributed to decline • Decline expected to continue, requiring reliance on “Medigap” private supplemental policies • Source: Wall Street Journal, 3/23/05

  41. Health Care Reform: What Employers Need to Know • Short-Term Changes (plan years beginning on or after 10/1/10) • Lifetime benefit limits eliminated, annual benefit limits restricted • Dependent children covered up to age 26 (as long as they don’t have access to other Er-sponsored coverage) • Children under age 19 cannot be denied coverage for pre-existing conditions • Health flexible spending arrangements, HRAs, HSAs can reimburse participants for OTC drugs only if they have prescription written by their health-care provider

  42. Health Care Reform: What Employers Need to Know • Long-Term Changes (plan years beginning on or after 1/1/14) • Establishment of health insurance exchanges, individual mandates, and subsidies to purchase insurance • Ban on waiting periods longer than 90 days • Er ‘free-rider’ penalty (Ers w/ 50+ ees) • If Ee obtains subsidies for coverage in exchange, Er must pay penalty • Excise tax on health plans above threshold • Also some reforms affecting Cos that still offer retiree health plans • Source: Workspan, 3/30/10

  43. Short- and Long-Term Disability • Workers’ compensation covers disabilities that are work-related • Social security has provisions for disability income to those who qualify • Private sources of disability income: • Employee salary continuation plans • Long-term disability plans

  44. Miscellaneous Benefits Paid Time Off During Working Hours Payment for Time Not Worked Child Care Elder Care Domestic Partner Benefits Legal Insurance

  45. Exhibit 13.18: Employees Receiving Leave Time Benefits

  46. Exhibit 13.19: Benefits Received: Full-Time vs. Contingent Employees

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