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Chapter. 13. Benefit Options. Learning Objectives After discussing Chapter 13, students should be able to:. List the seven categories of employee benefits and give examples of each. Explain the benefits that are legally required by employers.
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Chapter 13 Benefit Options
Learning ObjectivesAfter discussing Chapter 13, students should be able to: • List the seven categories of employee benefits and give examples of each. • Explain the benefits that are legally required by employers. • Discuss the key factors associated with the rapid cost increases with workers’ compensation programs. • Discuss the major problem associated with the solvency of social security and identify the potential options to reform the social security program. • Explain the key differences between the two types of retirement plans: defined benefit and defined contribution. • Identify the six health care delivery systems and discuss the cost containment strategies to control the escalating costs of health care.
Exh. 13.1: 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
Workers’ Compensation Social Security Unemployment Insurance Family and Medical Leave Act C.O.B.R.A. Legally Required Benefits
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 • For every dollar insurers take in to cover workplace injuries and illnesses, they pay out $1.21 to cover claims
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 • Exhibit 13.3: Benefits by Type of Accident • Exhibit 13.4: Commonalities in State Workers’ Compensation Laws
Issues: Workers’ Compensation Increased costs of medical expenses Cost increases due to . . . Use of workers’ compensation as a surrogate for more stringent unemployment insurance Cost of replacing worker wages has risen
Overview: 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% • Exhibit 13.5: Social Security Through the Years • Exhibit 13.6: What Social Security Does to Your Paycheck
SOCIAL SECURITY Retirement income Dependent benefits Survivor’s benefits Lump-sum death benefits Disability 6.2% of eligible earnings up to $90,000 in 2005 Employee and employer funded MEDICARE Hospital insurance (Medicare, Part A) Medical Insurance (Medicare, Part B) 1.45% of eligible earnings (unlimited) Employee and employer funded Social Security and Medicare Benefits
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 • 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
Unemployment Insurance • Benefits financed by federal and state taxes levied on employers under Federal Unemployment Tax Act (FUTA) • Employers pay 6.2% on first $7,000 earned by each employee ($434) • 5.4% disbursed to state unemployment commissions ($378) • 0.8% used for federal administrative costs ($56) • Each company’s rate depends on its prior experience with unemployment • Lower percentages charged to employers with fewer discharged employees
Unemployment Insurance (continued) • Money held in federal trust for each state • Payments typically continue for 26 weeks • Extended benefits paid when either of two conditions prevail • Benefits based on a percentage of an individual’s earnings over a recent 52-week period • Most recent calculation of average weekly benefit was $211.75 - 50% up to maximum
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 • Conditions: Employee must be able to return to same job or one with equal status • Health benefits: Continue while employee is on leave • Notification: 30 days
Consolidated Omnibus BudgetReconciliation 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 • Coverage stops: When employee becomes eligible for medical insurance from new employer or gains Medicare coverage • Cost: Cost of insurance plus 2%
Health Insurance Portabilityand 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
Retirement and Savings Plan Payments • Defined benefit plans • Defined contribution plans • Employee Retirement Income Security Act (E.R.I.S.A.)
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 • 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
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 • Employee Stock Ownership Plan (ESOP) • Profit sharing • Can be considered a defined contribution plan if distribution of profits is delayed until retirement
DEFINED BENEFIT PLAN DEFINED CONTRIBUTION PLAN 1. Provides an explicit benefitwhich is easily communicated Unknown benefit level is difficult to communicate 2. Company absorbs risk associated with changes in inflation and interest rates which affect cost Employees assume these risks 3. More favorable to long service employees More favorable to short-term employees 4. Employer costs unknown Employer costs known up front Exh. 13.7: Relative Advantages ofDifferent Pension Alternatives
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 • 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
How Much Retirement Income to Provide? • What level of retirement income should be set as a target? • Should social security benefits be factored in when considering level of retirement income? • Should other post-retirement income sources be integrated with pension? • How large a role should seniority play in determining pension level? • What can a company afford?
Life Insurance • One of the most common employee benefits • 87% of medium and largecompanies 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
General Health Care Health Care: Cost Control Strategies Short- & Long- Term Disability Dental Insurance Vision Care Health and Medical Benefits
Types of Health Care Systems • Traditional coverage • Community-based system,such as Blue Cross • Commercial insurance plan • Self-insurance • Health maintenance organization (HMO) • Preferred provider organization (PPO) • Point-of-service plan (POS) • Exhibit 13.9: How Health Insurance Options Differ • Exhibit 13.10: Average Employer Monthly Costs 2003
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 healthcare delivery systems andparticipate in business coalitions • HMOs • PPOs • Promote preventive health programs • No-smoking policies • Healthy food in cafeterias and vending machines
Controlling Health Care Costs:Strategy One • Practices related to design andadministration of health plan • Increase deductibles • Change coinsurance rates • Reduce maximum benefits • Coordinate benefits with employees and spouses • 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
Miscellaneous Benefits Paid Time Off During Working Hours Payment for Time Not Worked Child Care Elder Care Domestic Partner Benefits Legal Insurance
Paid Time Off During Working Hours • Rest periods • Lunch periods • Travel • Work prep time
Pay for Time Not Worked • Vacation • Holidays • Sick pay • Personal holiday • Funeral leave • Military leave • Jury duty
Awards Food Services Recreational and Social Services On-Site Health Services Credit Unions Legal Services Purchasing Assistance Financial Planning Housing and Moving Transportation Pooling Other Miscellaneous Services
