Topic 15. Employee Benefit Plans

1. Topic 15.Employee Benefit Plans BUS 200 Introduction to Risk Management and Insurance Jin Park

2. Overview • Regulations • Group Life Insurance Benefits • Disability Insurance Benefits • Health Care Benefits • Retirement Plans (Pension Plans) • Other Benefit Plans

3. Regulations • Age Discrimination in Employment Act (ADEA) of 1967 • Prohibits employers from forcing employees to retire at any age. • Provides employers an option to change some benefits for older workers • Civil Rights Act of 1978 • Requires employers to provide some benefits for pregnancy and related medical conditions • Americans with Disabilities Act (ADA) of 1990 • Forbids employers with more than 15 employees from discriminating against disabled persons in employment • Family Medical Leave Act (FMLA) of 1993 • Requires employers to grant an eligible employee unpaid leave for family medical related reasons

4. Regulations • Employee Retirement Income Security Act (ERISA) of 1974 • Purpose • To protect the benefits of retirement plan participants • To prevent discrimination in favor of HCEs • Regulates the design, funding, and communication aspects of private, qualified retirement plans. • Economic Growth Tax Relief and Reconciliation Act (EGTRRA) of 2001 • To amend some of ERISA’s shortfalls • Increases the retirement saving limits • Annual benefits under a defined benefit plan is increased to $160,000. • Annual additions under a defined contribution plan is increased to $40,000 • Mandates faster participant vesting in 401(k) plans • Increases the portability and flexibility in plan funding and design • Includes a sunset provision

5. Regulations • Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1986 • Amendment to the ERISA • Provides certain former employees, retirees, spouses and dependent children the right to temporary continuation of health coverage at group rates • Usually 18 months • Health Insurance Portability and Accountability Act (HIPAA) of 1996 • Protects health insurance coverage for workers and their families when they change or lose their jobs

6. Group Life Insurance Benefits • The oldest of the employer sponsored employee benefit program • One to five times of an employee’s salary • Group term life insurance – paid by employer • Premium for the first $50,000 of coverage • Premium for greater than $50,000 of coverage • Group universal life insurance – paid by employee • Premium is determined on the basis of group’s characteristics

7. Disability Insurance Benefits • Provides economic security for employees who can’t work due to injury or illness • Group short-term disability (STD) plan • An elimination period of one to seven days • From 7 days up to 2 years (depends on plan) • 65 to 75 percent of income is replaced • Group Long-term disability (LTD) plan • An elimination period is often equivalent to the benefit period for the STD plan. • May have a gap in coverage, if a LTD plan’s elimination period is longer than a STD plan’s benefit period. • The benefit period is until 65 or lifetime.

8. Health Care Benefits • On a Group Health Insurance Basis • one insurance policy covering a group of people • Choices by employees are usually limited • Traditional Indemnity Insurance • 6% of total health care market, it used to be 96% in twenty years ago • Complete freedom of choice of providers • Fee-for-service plan • A role of an insurer is to indemnify the insured for covered losses • High cost

9. Health Care Benefits • Managed Care 1. HMO – Health Maintenance Organization • Low cost, but limited choices • Primary care physician (PCP) • Not all physicians participate in HMO’s • A referral by the PCP is required to see other physicians • Service by the out-of-network provider is not covered • Group Practice Association and Staff Model HMO’s • Individual Practice Association HMO’s

10. Health Care Benefits • Managed Care 2. PPO – Preferred Providers Organization • A group of doctors and hospitals that work under one umbrella (called the PPO), to provide medical services at a discount to the PPO participants. • Providers are paid on a discounted fee-for-service basis. • PPO participants may utilize any doctor they wish, like traditional indemnity plan as long as the doctor is in the PPO. • At the point of service (or when an insured needs medical service), the insured has a choice to • stay in the network with more complete coverage; or • go outside of the network, but the payment by PPO is limited or less.

11. Health Care Benefits • Managed Care 3. POS – Point of Service • A combination of HMO and PPO developed by HMO’s to compete with PPO. • See Table 17.1 on page 420.

12. Retirement Plans • Defined Benefit (DB) Plans • The benefit amount at retirement is defined • Retirement benefit amounts are determined by a formula • Final average formula • Career average formula • Employers take all investment risk • No individual employee’s retirement account • New type of a DB plan: Cash Balance Plan • Hypothetical individual employee accounts with a fixed employer contribution rate • Employer credits a certain percentage of employees’ salary into their hypothetical accounts with a guaranteed minimum rate of return.

13. Retirement Plans • Defined Contribution (DC) Plans • The contribution amount is defined, but the benefit amount available at retirement varies. • The benefit available at retirement depends on • The contribution amount • The length of covered service • Investment return on the retirement funds • Retirement age • Money Purchase Plan • Profit Sharing Plan • 401(k) Plan • ESOPs – Employee Stock Ownership Plans