Employee Benefits

1. Employee Benefits Chapter 15

2. Learning Objectives Define employee benefits. Describe how employee benefi ts have grown over the last several years. Summarize those benefits that are legally required. Differentiate between a defined benefit pension plan and a defined contribution pension plan. Discuss the attractiveness of a cash balance plan to employees.

3. Learning Objectives (cont.) Describe a 401(k) plan and how it differs from a 403(b) plan. Explain the purposes of the Employee Retirement Income Security Act (ERISA) and the Retirement Equity Act. Distinguish between an IRA and a Roth IRA. Describe a health maintenance organization (HMO) and a preferred provider organization (PPO).

4. Learning Objectives (cont.) Describe a Medical Savings Account and a Health Savings Account Explain the concepts of a fl oating holiday and personal days. Discuss two reasons employees are often unaware of the benefi ts their organizations offer. Explain the concept of a flexible benefit plan.

5. Employee Benefits • Employee benefits (fringe benefits) • Rewards that employees receive for being members of the organization and for their positions in the organization • usually not related to employee performance.

6. Potential Employee Benefi ts Table 15.1

7. Categories of Benefits

8. Examples of Common Benefits, by Major Category Table 15.2

9. Benefits Expenditures from the Payroll Dollar, by Major Categories Table 15.3

10. Legally Required Benefits

11. Social Security • Social security • Federally administered insurance system designed to provide funds upon retirement or disability or both and to provide hospital and medical reimbursement to people who have reached retirement age.

12. Retirement Benefits under Social Security To be eligible for periodic payments through social security, a person must have reached at least age 62, and be fully insured under the system. The size of the retirement benefit varies according to the individual’s average earnings under covered employment.

13. Dependents Eligible for Retirement Benefits in the Event of Death of a Covered Employee Table 15.5

14. Disability Benefits Pensions may be granted under social security to eligible employees who have a disability that is expected to last at least 12 months or to result in death

15. Health Insurance Health insurance under social security, commonly known as Medicare, provides partial hospital and medical reimbursement for persons over 65.

16. Problems Facing Social Security The basic problem is that fewer and fewer people are and will be working to support more and more retirees as the “baby boom” generation reaches retirement age. Experts believe that the long-term solution to the social security program is for individuals to supplement social security by some other type of retirement plan

17. Unemployment Compensation • Unemployment compensation • Form of insurance designed to provide funds to employees who have lost their jobs and are seeking other jobs

18. Unemployment Compensation To receive unemployment compensation must meet three eligibility requirements: have been covered by social security for a minimum number of weeks have been laid off (in some states, discharged employees may qualify) be willing to accept any suitable employment offered through the state’s unemployment compensation commission.

19. Unemployment Compensation Federal Unemployment Tax Act (FUTA) requires all profit-making employers to pay a tax on first $7,000 of wages paid to each employee Designed to encourage organizations to maintain stable employment

20. Workers’ Compensation • Workers’ compensation • Form of insurance that protects employees from loss of income and extra expenses associated with job-related injuries or illness.

21. Workers’ Compensation The laws generally provide for replacement of lost income, medical expense payments, rehabilitation of some sort, death benefits to survivors, and lump-sum disability payments. The employee does not have to sue the employer to get compensation The compensation is normally paid through an insurance program financed through premiums paid by employers.

22. Workers’ Compensation Workers’ compensation insurance premiums are based on the accident and illness record of the organization An element of coinsurance exists in the workers’ compensation coverage Medical expenses are usually covered in full under workers’ compensation laws. All job-related injuries and illnesses are covered regardless of where the fault for the disability is placed

23. Job-Connected Injuries Usually Covered by Workers’ Compensation Table 15.6

24. Workers’ Compensation Benefits paid are generally provided for four types of disability: Permanent partial disability Permanent total disability Temporary partial disability Temporary total disability

25. Company-Sponsored Retirement Plans • Private plans • Employee benefit that provides a source of income to people who have retired; funded either entirely by the organization or jointly by the organization and employee during employment.

26. Company-Sponsored Retirement Plans • Defined-benefit plan • Pension plan under which an employer pledges to provide a benefi t determined by a definite formula at the employee’s retirement date. • Defined-contribution plan • Pension plan that calls for a fixed or known annual contribution instead of a known benefit.

27. Pension Rights • Vesting • Right of employees to receive money paid into a pension or retirement fund on their behalf by their employer if they leave the organization prior to retirement.

28. Pension Rights • Deferred full vesting • an employee, on meeting certain age and service requirements, enjoys full vested rights • Deferred graded vesting • gradually gives the employee an increasing percentage of benefits until the age and service requirements for full vesting are met

29. Defined Benefit Plans • Final-average-pay plan • retirement benefit is based on average earnings in the years, generally two or five, immediately preceding retirement. • Flat-benefit plan • all participants who meet the eligibility requirements receive a fixed benefit regardless of their earnings

30. Defined Benefit Plans • Cash-balance plan • hybrid of the traditional defined-benefit plan. • allows employees to take their cash balance pension money with them in the form of a lump sum when they leave the organization. • An advantage of cash-balance plans is that participants can track the growth of their retirement funds in current dollars through regular statements

31. Defined-Contribution Plans • Defined-contribution plans • every employee has a separate pension account to which the employee and the employer contribute • Non-contributing, contributing

32. Defined-Contribution Plans • 401-k • set up to allow employees to defer a portion of their pay into the plan • 403-b • Tax Deferred Annuity (TDA), similar to 401(k) plans except that they may only be used in not-for-profit organizations

33. Employer-Sponsored Simple IRA • Employer-Sponsored Simple IRA • an employee can elect to have the employer make contributions to a SIMPLE IRA rather than receiving that amount in cash. • An employer that establishes a SIMPLE IRA plan must make either matching contributions or nonelective contributions.

34. ERISA and Related Acts • Employee Retirement Income Security Act (ERISA) • Federal law passed in 1974 designed to give employees increased security for their retirement and pension plans and to ensure the fair treatment of employees under pension plans

35. ERISA and Related Acts • Retirement Equity Act • Act passed in 1984 that liberalized eligibility requirements, vesting provisions, maternity/paternity leaves, and spouse survivor benefits of retirement plans.

36. Major Provisions of ERISA Table15.7

37. Major Provisions of theRetirement Equity Act Table 15.8

38. Mandatory Retirement • Amended Age Discrimination in Employment Act (ADEA) • Forbids mandatory retirement at any age for all companies employing 20 or more people in the private sector and in the federal government.

39. Employees Not Covered by Company Retirement Plans • Individual retirement accounts (IRA) • Individual pension plan for employees not covered by private pension plans • SEP-IRA • Retirement plan that allows small businesses and sole proprietors to make deductible contributions.

40. Employees Not Covered by Company Retirement Plans • Roth IRA • Retirement plan that allows individuals to make nondeductible contributions and tax-free withdrawals with certain restrictions.

41. Insurance-Related Benefits

42. Health Insurance • Health maintenance organization (HMO) • Health service organization that contracts with companies to provide certain basic medical services around the clock, seven days a week, for a fixed cost.

43. Health Insurance • Preferred provider organizations (PPO) • Formed by contracting with a group of doctors and hospitals to provide services at a discount or otherwise attractive price • Such providers are designated as “preferred” providers of care.

44. Medical Savings Accounts • Allows employees to set aside pretax dollars through normal payroll deductions to pay for medical bills throughout calendar year • Drawback • Any money not used during calendar year is usually forfeited

45. Health Savings Accounts HSAs are similar to 401(k) retirement plans in that they allow a certain amount of tax free funds to be put aside by employers and employees HSA funds can then be withdrawn to pay for out-of-pocket medical expenses

46. Payment for Time-Not-Worked

47. Employee Preferences Among Benefits • Flexible-benefit plan (cafeteria plan) • Benefit plan that allows employees to select from a wide range of options how their direct compensation and benefits will be distributed.

48. Communicating the Benefit Package • The method used to communicate the benefit package is as important as the readability of the document Figure 15.1