Milkovich/Newman: Compensation, Ninth Edition

Chapter 13

Benefit Options

McGrawMcGraw-Hill/Irwin

Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-

Chapter Topics
 Legally

Required Benefits and Savings Plan Payments

 Retirement

 Life Insurance  Medical

and Medically Related Payments Benefits for Contingent Workers

 Miscellaneous  Benefits  Your

Turn: Love Inc.

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Exhibit: 13.1 Employee Benefit Preferences

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Legally Required Benefits

Workers Compensation

Social Security

Unemployment Insurance

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Exhibit 13.2 Categorization of Employee Benefits

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Exhibit 13.3 Participation in Selected Benefits, 2005

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Overview: Workers Compensation

 Form of

nono-fault insurance

Employer liable for providing benefits to employees that result from occupational disabilities or injuries, regardless of fault Disability must be work-related work 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
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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

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Exhibit 13.4: Benefits by Type of Injury: New Hampshire

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Exhibit: 13.5: Commonalities in State Workers Compensation Laws

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Issues: Workers Compensation

Increased costs of medical expenses Use of workers compensation as a surrogate for more stringent unemployment insurance Cost of replacing worker wages has risen
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Cost increases due to . . .

Workers Compensation
 Social

Security Insurance and Medical Leave Act (FMLA)

 Unemployment  Family

 Consolidated  Health

Omnibus Budget Reconciliation Act (COBRA) Insurance Portability and Accountability Act (HIPAA)

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Workers Compensation (cont.)

 Retirement  Defined  Defined

and Savings Plan Payments

Benefit Plans Contribution Plans Accounts (IRAs) Retirement Income Security Act

 Individual Retirement  Employee

(ERISA)

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Social Security
 Provides a  For tax

basic foundation of security for American workers and their families

purposes, system is split into two programs:

Social Security - 6.2% Medicare - 1.45%

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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

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Issues: Social Security (Cont.)

 Reform options:

Increase payroll taxes Decrease benefits Use general revenues Have social security go to an employees own account to be earmarked of his/her personal retirement

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Benefits under Social Security

 Old

age or disability benefits for dependents of retired or disabled

 Benefits

workers

 Benefits  Lump

for surviving family members of a deceased worker, and sum death payments

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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

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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

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Unemployment Insurance (cont.)

 Duration:

Benefit duration involves a complex formula that ensures extended benefits in times of high unemployment
 When number of insured unemployed in a State reaches 6 percent  When unemployment rate is greater than 5 percent and at least 20 percent higher than in the same period of the two preceding calendar years and remains that way for 13 weeks

 Weekly

benefit amount  Controlling unemployment taxes

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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

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Family and Medical Leave Act (cont.)

Eligibility:

Employee must have worked at least 1,250 hours for the employer in the previous year
Common

reasons for leave:

Caring for an ill family member or adopting a Child

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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

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Health Insurance Portability and Accountability Act (HIPPA)

 Key

provisions

Lessens an employers ability to deny coverage for a preexisting condition Prohibits discrimination on the basis of healthhealthrelated status Provides stringent privacy provisions

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Retirement and Savings Plan Payments



Employees rank pensions in the top three of all benefits in terms of importance Defined benefit plans Defined contribution plans Individual Retirement Accounts (IRAs) Employee Retirement Income Security Act (ERISA)
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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 Percentage-ofyears 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

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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

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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

 Cash

balance plans hybrid of defined benefit and defined contribution plans

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Exhibit. 13.10: Relative Advantages of Different Pension Alternatives

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Individual Retirement Accounts (IRAs)

 Tax-favored Tax-

retirement savings plan that individuals can establish themselves

IRAs are used mostly to store wealth accumulated in other retirement vehicles, rather than as a way to build new wealth

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Employee Retirement Income Security Act (ERISA)

 Eligibility: Employees  Vesting: Length

at least 21 years old

Employers may require 6 months of service as a precondition for participation

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 Employers contribution must vest according to two formulas

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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

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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 postintegrated with pension?  How large a role should seniority play in determining pension level?  What can a company afford?
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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 employees salary Most plan premiums paid completely by employer Varying amounts of additional coverage often an option

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Health and Medical Benefits

General Health Care
Health Care: Cost Control Strategies

Short- & LongTerm Disability

Dental Insurance Vision Care

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General Health Care

An

employers share of health care costs is contributed into one of six health care systems:
Community-based system Community Commercial insurance plan Self-insurance Self Health maintenance organization (HMO) Preferred provider organization (PPO) Point-of-service plan (POS) Point-of1313-36

Controlling Health Care Costs: Three Strategies

Motivate

employees to change their demand for health care via changes in either design or administration of policies structure of health care delivery systems and participate in business coalitions
HMOs PPOs

Change

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Controlling Health Care Costs: Three Strategies (cont.)

 Promote

preventive health programs

No-smoking policies No Healthy food in cafeterias and vending machines

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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

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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

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ShortShort- and Long-Term Disability Long Workers  Social

compensation covers disabilities that are work-related worksecurity has provisions for disability income to those who qualify of disability income:
Employee salary continuation plans Long-term disability plans Long-

 Private sources

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Miscellaneous Benefits
Paid Time Off During Working Hours Payment for Time Not Worked

Child Care

Elder Care

Legal Insurance

Domestic Partner Benefits

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Paid Time Off During Working Hours

     

Rest periods Lunch periods WashWash-up time Travel ClothesClothes-change time GetGet-ready time

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Pay for Time Not Worked

   

Paid vacations and payments in lieu of vacation Payments for holidays not worked Paid sick leave Other
National guard Army, or other reserve duty Jury duty Voting pay allowances Personal reasons
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Exhibit 13.18: Employees Receiving Leave Time Benefits

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Exhibit 13.19: Benefits Received: FullFullTime vs. Contingent Employees

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