McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 13-1 Benefit Options...

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved.

13-1

Benefit Options

Chapter

13


13-2

Overview of Employee Benefits


13-3

11 Legally required paymentsLegally required payments

22 Retirement and savings plan paymentsRetirement and savings plan payments

33 Life insurance and death benefitsLife insurance and death benefits

44 Medical and medical-related benefit paymentsMedical and medical-related benefit payments

55 Paid rest periods, coffee breaks, lunch periods, . . . Paid rest periods, coffee breaks, lunch periods, . . .

66 Payments for time not workedPayments for time not worked

77 Miscellaneous benefit paymentsMiscellaneous benefit payments

Exh. 13.1: Categorizationof Employee Benefits


13-4

Overview: Workers’ Compensation

Form of no-fault insuranceEmployer liable for providing benefits to

employees that result from occupational disabilities or injuries, regardless of fault

Disability must be work relatedCovered by state, not federal, laws

Employers pay premium to insurance company or state fund


13-5

Workers’ Compensation: Benefits and Laws

Types of benefitsPermanent total disability and temporary total

disabilityPermanent partial disability - loss of use of a

body memberSurvivor benefits for fatal injuriesMedical expensesRehabilitation

Exhibit 13.3: Benefits by Type of AccidentExhibit 13.4: Commonalities in State Workers’ Compensation Laws


13-6Exh. 13.4: Commonalities inState Workers’ Compensation

LawsISSUE MOST COMMON STATE PROVISION

Type of law Compulsory (in 47 states)

Elective (in 3 states)

Self-insurance Self-insurance permitted (in 48 states)

Coverage All industrial employment

Farm labor, domestic servants, and casual employees usually exempted

Compulsory for all (or most) public sector employees (in 47 states)

Occupational diseases

Coverage for all diseases arising out of and in the course of employment

No compensation for “ordinary diseases of life”


13-7

Overview: Social Security

Provides a basic foundation of security for American workers and their families

For tax purposes, system is split into two programsSocial Security - 6.2%Medicare - 1.45%

Exhibit 13.5: Social Security Through the Years

Exhibit 13.6: What Social Security Does to Your Paycheck


13-8

Social Security in Context

Before Social Security, aging in America often meant poverty and sometimes poorhouse

Average life expectancy in 1900: 47 years When America was agricultural nation, elderly frequently lived w/

children By 1920, more Americans lived in cities than on farms, urban homes

smaller While life expectancy was increasing quickly, many Ers

shunned older workers In 1930, almost 1/3 of American factories had maximum age limits

for new ees (40, 45, 50) Retirement savings didn’t exist, except among wealthiest

Americans In early 20th century, only ~2% of ees covered by pensions Most counties had poorhouse (shelters for indigent)

Germany, Sweden, France, England legislated publicly-funded old-age insurance before Americans took up debate

Opponents argued that sensible people would provide for themselves

Social Security Act ruled to be constitutional by 5-4 decision in 1937

Source: Wall Street Journal, 9/15/04


13-9

Social Security and Medicare Benefits

SOCIAL SECURITYRetirement incomeDependent benefitsSurvivor’s benefitsLump-sum death

benefits6.2% of eligible

earnings up to $97,500 in 2007

Employee and employer funded

MEDICAREHospital insurance

(Medicare, Part A)Medical Insurance

(Medicare, Part B)1.45% of eligible

earnings (unlimited)Employee and employer

fundedPrescription drug

coverage added (Part D)


13-10

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


13-11

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


13-12

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


13-13Unemployment Compensation

Denial of Benefits (review)

Voluntarily quit without a good cause Discharged for misconduct (not incompetence) Discharged for fraud Failed to seek or accept suitable employment Received certain other unemployment benefits (e.g.,

severance pay) Unemployment was caused by labor disputes resulting in

work stoppages (some limited exceptions, distinction between strike and lockout, between strikers and those involuntarily idled)


13-14

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


13-15

“A Good Idea, But…” 16.5% of U.S. workforce took leave of absence for family or

medical reasons under FMLA in 2000 Ers pushing Congress to include better definition of “serious

medical condition” and to prevent ees from taking leave in small time increments More than 25% of leave is taken intermittently Law currently defines serious medical condition as something

that requires inpatient treatment, such as hospital stay, chronic illness, or period of incapacitation of more than three consecutive days accompanied by two treatments by doctor

SHRM reports half of HR professionals surveyed indicated they have granted FMLA requests they felt were not legitimate Ers say condition is hard to verify Physicians, fearful of violating medical privacy laws, usually

tight-lipped Source: Wall Street Journal, 1/24/05


13-16

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%


13-17

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


13-18Health Insurance Portability and Accountability Act (HIPAA)

(review) Intended to address “job lock” (where Ee is “locked” into

current job given health insurance considerations) Protections for coverage under group health plans that limit

exclusions for pre-existing conditions New Er must credit Ee for previous continuous health coverage

(reduces or eliminates exclusion period) Prohibits discrimination against Ees based on health status

(including charging different premiums) Does not…

Ensure that Ee who changes jobs will have access to health insurance on new job

Ensure affordability of health insurance on new job Enable individuals to maintain same group health plan on job

change Recall that under COBRA Ee provided w/ limited extension of group

health insurance (premium to be paid by Ee) when coverage lost due to qualifying events (e.g., layoff)


13-19

Retirement and Savings Plan Payments

Defined benefit plans

Defined contribution plans

Employee Retirement Income Security Act (E.R.I.S.A.)


13-20

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 vary with years

of seniorityof 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


13-21

Defined Contribution Plans

Require specific contributions by employerFinal benefit received by employees is unknownDependent on investment success of plan

managerThree popular forms of these plans

401 (k) planEmployee Stock Ownership Plan (ESOP)Profit sharing

Can be considered a defined contribution plan if distribution of profits is delayed until retirement


13-22Exh. 13.7: Relative Advantages of

Different Pension Alternatives

Employer costs known up front4. Employer costs unknown

More favorable to short-term employees

3. More favorable to long service employees

Employees assume these risks2. Company absorbs risk associated with changes in inflation and interest rates which affect cost

Unknown benefit level is difficult to communicate

1. Provides an explicit benefitwhich is easily communicated

DEFINED CONTRIBUTION PLANDEFINED BENEFIT PLAN


13-23

Pension Plans

In late ’70s, ~60% of American ees had defined-benefit pension plans Today, <15%

In late ’70s, ~15% of American ees had defined contribution plan Today, >60%

Due in part to shift in employment away from large, unionized manufacturing cos

Defined contribution plans by definition subject to market fluctuation Ee who went to work at 25, put 6% of pay into 401(k) every

year for 40 years, retired at 65, withdrew balance and bought annuity in 2000, would receive 134% of pre-retirement income

But if turned 65 in 2003, 401(k) savings would only buy annuity paying 57% of pre-retirement income

Because women have longer life expectancy than men, they pay more when buying annuities (however, courts have ruled illegal for defined-benefit pension plan to pay out less to women based on life expectancy)

Source: New York Times, 1/9/06


13-24

Cash Balance Plans Defined benefit plan that looks similar to defined

contribution plan Accounts established, receives contribution credit from Er

(% of pay that may vary with age/yrs service) and interest credit

Benefits accrue evenly over course of employment Insured by PBGC (unlike defined contribution) Benefits portable (available as lump sum at separation May require “grandfathering” for Ees nearing retirement

(if defined benefit plan had been in place)


13-25

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

Employee Retirement Income Security Act (ERISA)


13-26


13-27

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


13-28

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

DifferExhibit 13.10: Average Employer Monthly

Costs 2003


13-29

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 coalitionsHMOsPPOs

Promote preventive health programsNo-smoking policiesHealthy food in cafeterias and vending

machines

Controlling Health Care Costs:Three Strategies


13-30

Controlling Health Care Costs:Strategy One

Practices related to design andadministration of health plan Increase deductiblesChange coinsurance ratesReduce maximum benefitsCoordinate benefits with employees and spousesAudit health care chargesRequire preauthorization for visits to facilitiesRequire mandatory second opinion for

proceduresUse intranet technology to allow employees

access to online benefit information


13-31

“Toyota Rolls Out a New Economy-Class Drug Plan”

Toyota opening its own pharmacies at its U.S. operations Contracted w/ CHD Meridian Healthcare (also provides service to

U.S. Steel, Smithfield Foods, GE) Amount Toyota spends on prescription-drug costs has more than

tripled since 1998; 15% increase projected for 2004 For medications taken on regular basis, ees can save by

using Co pharmacy or mail-order service Co will pay entire cost of some medicines if ee uses generic

Ee use of brand-name drug may have co-pay as high as 20% Source: Fortune, 1/24/05


13-32

“Consumer-Driven” Health Plans (CDHPs), Health Savings Accounts (HSAs), Health

Reimbursement Accounts (HRAs)

Congress authorized HSAs in 2003, HRAs evolved in late ‘90s and early ‘00s

Lower premiums, higher deductible (e.g., $2,000/yr), more consumer control of health care expenditures Er can match part or all of Ee contribution to account

Pre-tax dollars into HSA, up to amount of deductible If you don’t spend all your allowance on medical care, you

carry over unused balance Once deductible is paid, traditional insurance policy

takes over Maximum out-of-pocket spending limits ($5k for

individuals, $10k for families)


13-33



Encourages consumers to take active role in keeping health-care costs down Ers will provide detailed information about prices and quality of

doctors and hospitals in area Critics fear plans will discourage people from getting care

they need Recent research indicates that when co-payments for

prescription drugs increase, health of patients w/ certain chronic illnesses (e.g., diabetes and asthma) can suffer

Further, if healthy Ees sign up for HSAs while less-healthy Ees stick w/ traditional plans, costs of those plans will increase at even faster rate… Tax breaks benefit wealthy more than low-income workers Less-educated workers may have trouble taking advantage of

Web-based information


13-34



Percentage of Ers adding high-deductible plans rose from 7 percent in 2004 to 13 percent in 2005, 29 percent in 2006, and 33 percent plan to offer them in 2007

CDHPs that are most successful at controlling costs rely on variety of programs that encourage smart Ee consumerism 53 percent use incentive to encourage ees to

complete health risk appraisals 43 percent use incentives to encourage ees to

improve their health Source: USA Today, 10/31/03; Wall Street Journal, 6/23/04;

Wall Street Journal, 5/19/04; Business Week, 11/8/04; SHRM HRNews Online, 3/21/06


13-35“One Cure for High Health Costs: In-House Clinics at

Companies”

Quad/Graphics (one of biggest printing cos in U.S.) spent ~$6k/ee on medical costs in 2004, 30% less than average Co in Wisconsin

Has brought nearly all primary care in-house Doctors’ bonuses tied to patient evaluations and

health outcomes Quad pays doctors ~$130-160k/yr, comparable to

average general practitioner in Milwaukee area Quad spends more on primary care than most cos

($715/ee in 2003, cf. $375/ee at other local cos) Quad spent $1,540/ee in 2003 on hospital costs, cf. local

average of $2,250


13-36“One Cure for High Health Costs: In-House Clinics at

Companies”Others considering building in-house clinics include ToyotaNeed to have large number of ees

concentrated in a few places to make economic senseAlso need harmonious relations w/ ees (Quad

is non-union) Source: Wall Street Journal, 2/11/05


13-37

“Health Benefits Offered by Firms Shrink for Retirees”

29% of early retirees (those retiring before age 65 [thus generally ineligible for Medicare]) had er-sponsored health insurance in 2002, down from 39% in 1997 For those 65+, down from 28% to 25% 13% of private ers offer health benefits to retirees Coverage estimated to have peaked in late 80s at ~ 45% of all

retirees 1990 FASB rule thought to have contributed to decline

Decline expected to continue, requiring reliance on “Medigap” private supplemental policies

Source: Wall Street Journal, 3/23/05


13-38

Miscellaneous Benefits

Paid Time Off During Working

HoursPayment for

Time Not Worked

Child Care

Elder Care

Domestic Partner Benefits

Legal Insurance


13-39Exhibit 13.11: Employees Receiving

Leave Time Benefits


13-40Exhibit 13.12: Benefits

Received:Full-Time vs. Contingent

Employees

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 13-1 Benefit Options...

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Transcript of McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 13-1 Benefit Options...