Employee BenefitsEmployee Benefits Group 6:Group 6:

Kyle DevanKyle Devan Kara KroegerKara Kroeger Nathan LangNathan Lang Aaron StandefordAaron Standeford James ThomasJames Thomas Ahmed ZarrughAhmed Zarrugh

Income ProtectionIncome Protection Social SecuritySocial Security Pension PlansPension Plans

What is Income Protection?What is Income Protection?

Social SecuritySocial SecurityIn 1935, Congress passed and President Franklin D. In 1935, Congress passed and President Franklin D. Roosevelt signed into law the "Social Security Act." This Roosevelt signed into law the "Social Security Act." This law created "a system of Federal old-age benefits" for law created "a system of Federal old-age benefits" for workers and their families. workers and their families.

In 1956, the law was amended to also provide disability In 1956, the law was amended to also provide disability benefits.benefits.

Social Security is composed of two separate entities: The Social Security is composed of two separate entities: The "Old Age and Survivors" program and the "Disability" "Old Age and Survivors" program and the "Disability" program program

Social Security taxes and Medicare taxes make up the Social Security taxes and Medicare taxes make up the Federal Insurance Contributions Act - FICAFederal Insurance Contributions Act - FICA

FICA tax rates for people who are self-employed: FICA tax rates for people who are self-employed:

FICA tax rates for people who are employees: FICA tax rates for people who are employees:

The FICA tax amounts that appear on paychecks generally do not The FICA tax amounts that appear on paychecks generally do not account for the taxes that employers pay.account for the taxes that employers pay.

Social Security TaxSocial Security Tax 12.40%12.40%

Medicare Tax Medicare Tax     2.9%2.9%

FICA Tax (total) FICA Tax (total) 15.30%15.30%

   Social Security  Tax Social Security  Tax Medicare Tax Medicare Tax FICA Tax (total) FICA Tax (total)

Employee taxEmployee tax 6.20%6.20% 1.45%1.45% 7.65%7.65%

Employer taxEmployer tax 6.20%6.20% 1.45%1.45% 7.65%7.65%

TotalTotal 12.40%12.40% 2.90%2.90% 15.30%15.30%

Social Security taxes are subject to a wage threshold. Social Security taxes are subject to a wage threshold. Any income earned above the threshold is not taxed. Any income earned above the threshold is not taxed.

In 2000, the threshold was $76,200, and in 1935 it was In 2000, the threshold was $76,200, and in 1935 it was $3,000.$3,000.

Social Security tax rate history:Social Security tax rate history:

Year Year Social Security Tax Rate Social Security Tax Rate

19501950 3%3%

19601960 6%6%

19701970 8.40%8.40%

19801980 10.20%10.20%

19901990 12.40%12.40%

20002000 12.40%12.40%

FinancialFinancial Stability of SSStability of SS

Since 1982, the Social Security program has had surpluses ranging Since 1982, the Social Security program has had surpluses ranging between 89 and 153,312 million dollars per year.between 89 and 153,312 million dollars per year.

By law, Social Security surpluses must be invested in federal By law, Social Security surpluses must be invested in federal securities. In other words, the only thing that the Social Security securities. In other words, the only thing that the Social Security program can do with its surplus money is to loan it to the federal program can do with its surplus money is to loan it to the federal government. The federal government is required by law to pay this government. The federal government is required by law to pay this money back to the Social Security program with interest. money back to the Social Security program with interest.

According to projections, in 2015, the Social Security program will According to projections, in 2015, the Social Security program will begin to spend more money than it collects in taxes. At that point, begin to spend more money than it collects in taxes. At that point, the Social Security program will begin to collect on the money that it the Social Security program will begin to collect on the money that it has loaned to the federal government. has loaned to the federal government. 

According to projections, between 2015 and 2037, the annual According to projections, between 2015 and 2037, the annual shortfalls of the Social Security program will be covered by the shortfalls of the Social Security program will be covered by the money that federal government will pay back to the Social Security money that federal government will pay back to the Social Security program.program.

In 2037, it is projected that the money and interest that the federal In 2037, it is projected that the money and interest that the federal government owes to the Social Security program will be paid in full.government owes to the Social Security program will be paid in full.

Between 2037 and 2075, the Social Security program is projected Between 2037 and 2075, the Social Security program is projected

to run annual deficits totaling 30 trillion dollars. to run annual deficits totaling 30 trillion dollars.

To keep the Social Security program solvent, the tax rate would To keep the Social Security program solvent, the tax rate would need to be raised by about 50%, or the benefits would need to be need to be raised by about 50%, or the benefits would need to be cut by about 33%.cut by about 33%.

Recap:Recap:Time Period Time Period Financial Status Financial Status

1984- 20151984- 2015 The Social Security program brings in more money than it The Social Security program brings in more money than it spends. The surplus money is loaned to the federal spends. The surplus money is loaned to the federal government.government.

2015-20372015-2037 The Social Security program spends more money than it The Social Security program spends more money than it collects in taxes. The federal government pays back the collects in taxes. The federal government pays back the money that the Social Security program has loaned to it with money that the Social Security program has loaned to it with interest.interest.

2037-20752037-2075 The SS program runs annual deficits totaling 30 trillion dollars.The SS program runs annual deficits totaling 30 trillion dollars.

Pension PlansPension PlansProvides Income to individuals in their retirementProvides Income to individuals in their retirement

Over 50% of full-time employees participate in Over 50% of full-time employees participate in some type of pension plansome type of pension plan

Pension Plan distinctions:Pension Plan distinctions: Contributory vs. Noncontributory PlansContributory vs. Noncontributory Plans Defined Contribution Plans vs. Defined Benefit PlansDefined Contribution Plans vs. Defined Benefit Plans Qualified vs. Nonqualified PlansQualified vs. Nonqualified Plans

Contributory vs. NoncontributoryContributory vs. Noncontributory

Contributory: Employees contribute to a pension plan Contributory: Employees contribute to a pension plan with regular payroll deductions.with regular payroll deductions.

Employer often matches the value of employee contribution or a Employer often matches the value of employee contribution or a % of the contribution% of the contribution All Contributions are tax deductible All Contributions are tax deductible Increased flexibility of investment options (mutual funds, bonds)Increased flexibility of investment options (mutual funds, bonds) Increasingly popular among employers (ease of administration Increasingly popular among employers (ease of administration & tax benefits)& tax benefits) Ex: 401KEx: 401K

Noncontributory: Plan is funded entirely by the employerNoncontributory: Plan is funded entirely by the employer Retirement benefit to be received is based on salary and years Retirement benefit to be received is based on salary and years of service while a participant is in the plan. of service while a participant is in the plan. Low risk – low return – low flexibilityLow risk – low return – low flexibility

Defined Contribution Plans vs. Defined Contribution Plans vs. Defined Benefit PlansDefined Benefit Plans

Defined Benefit: Employees know the benefit he/she will Defined Benefit: Employees know the benefit he/she will receivereceive

Benefit usually determined by formula that considers pre-Benefit usually determined by formula that considers pre-retirement pay and number of years with the firmretirement pay and number of years with the firm Similar to Social SecuritySimilar to Social Security Common defined benefit: Final average plansCommon defined benefit: Final average plans

• = % x (Avg. 5yr. Salary) x (years w/company)= % x (Avg. 5yr. Salary) x (years w/company) pros : No investment risk for employeespros : No investment risk for employees

cons : Not beneficial to employees who leave before retirementcons : Not beneficial to employees who leave before retirement Defined Contribution:Defined Contribution:

Benefits determined by the amount contributed to the accountBenefits determined by the amount contributed to the account Pros : Participants can benefit from good investment resultsPros : Participants can benefit from good investment results Cons : Participants bear investment risk Cons : Participants bear investment risk EGTRRA raises max contribution $10,500 in 01 to $15,000 in 06EGTRRA raises max contribution $10,500 in 01 to $15,000 in 06

Qualified vs. NonqualifiedQualified vs. Nonqualified

Qualified Plans: A plan that meets the requirements of Qualified Plans: A plan that meets the requirements of the Employee Retirement Income Security Act (ERISA)the Employee Retirement Income Security Act (ERISA)

ERISA: Protects pensions of workers and stimulates pension ERISA: Protects pensions of workers and stimulates pension plan growth.plan growth. Contributions made by the employer are tax-deductible Contributions made by the employer are tax-deductible The plan assets are safe from the employer's creditorsThe plan assets are safe from the employer's creditors

Nonqualified Plans: Do not meet ERISA requirementsNonqualified Plans: Do not meet ERISA requirements Provide Supplemental benefitsProvide Supplemental benefits Not subject to contribution limitsNot subject to contribution limits Do not qualify for as many tax breaksDo not qualify for as many tax breaks Common among non-profit employers in which taxation issues Common among non-profit employers in which taxation issues are minor or non-applicableare minor or non-applicable