Milkovich/Newman: Compensation, Ninth Edition

Benefit Options

Chapter 13 McGraw-Hill/Irwin

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

Chapter Topics  Legally Required Benefits  Retirement and Savings Plan Payments  Life Insurance  Medical and Medically Related Payments  Miscellaneous Benefits  Benefits for Contingent Workers 13-2

Exhibit: 13.1 Employee Benefit Preferences 13-3

Legally Required Benefits

Workers’ Compensation Social Security Unemployment Insurance

13-4

Exhibit 13.2 Categorization of Employee Benefits 13-5

Exhibit 13.3 Participation in Selected Benefits, 2005 13-6

Overview: Workers’ Compensation  Form of no-fault insurance – Employer liable for providing benefits to employees that result from occupational disabilities or injuries, regardless of fault – Disability must be work-related  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 13-7

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 13-8

Exhibit 13.4: Benefits by Type of Injury: New Hampshire 13-9

Exhibit: 13.5: Commonalities in State Workers’ Compensation Laws 13-10

Issues: Workers’ Compensation

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

13-11

Workers’ Compensation  Social Security  Unemployment Insurance  Family and Medical Leave Act (FMLA)  Consolidated Omnibus Budget Reconciliation Act (COBRA)  Health Insurance Portability and Accountability Act (HIPAA) 13-12

Workers’ Compensation (cont.)  Retirement and Savings Plan Payments  Defined Benefit Plans  Defined Contribution Plans  Individual Retirement Accounts (IRAs)  Employee Retirement Income Security Act (ERISA) 13-13

Social Security  Provides a basic foundation of security for American workers and their families  For tax purposes, system is split into two programs: – Social Security - 6.2% – Medicare - 1.45% 13-14

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 13-15

Issues: Social Security (Cont.)  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 13-16

Benefits under Social Security  Old age or disability benefits  Benefits for dependents of retired or disabled workers  Benefits for surviving family members of a deceased worker, and  Lump sum death payments 13-17

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 13-18

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 13-19

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 13-20

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 13-21

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 13-22

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 13-23

Health Insurance Portability and 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 13-24

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) 13-25

Defined Benefit Plans  Employer provides a specific pension level defined in terms of: – Fixed dollar amount years of seniority

or

– Percentage-of-earnings amount that may vary with  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 13-26

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 13-27

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 13-28

Exhibit. 13.10: Relative Advantages of Different Pension Alternatives 13-29

Individual Retirement Accounts (IRAs)  Tax-favored 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 13-30

 Employee Retirement Income Security Act (ERISA)

Eligibility:

Employees at least 21 years old – Employers may require 6 months of service as a precondition for participation 

Vesting:

formulas 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 13-31

 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 13-32

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 integrated with pension?

 How large a role should seniority play in determining pension level?

 What can a company afford? 13-33

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 employee’s salary – Most plan premiums paid completely by employer – Varying amounts of additional coverage often an option 13-34

Health and Medical Benefits

General Health Care Health Care: Cost Control Strategies Short- & Long Term Disability Dental Insurance Vision Care

13-35

General Health Care  An employer’s share of health care costs is contributed into one of six health care systems: – Community-based system – Commercial insurance plan – Self-insurance – Health maintenance organization (HMO) – Preferred provider organization (PPO) – Point-of-service plan (POS) 13-36

Controlling Health Care Costs: Three Strategies  Motivate employees to change their demand for health care via changes in either design or administration of policies  Change structure of health care delivery systems and participate in business coalitions – HMOs – PPOs 13-37

Controlling Health Care Costs: Three Strategies (cont.)  Promote preventive health programs – No-smoking policies – Healthy food in cafeterias and vending machines 13-38

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 13-39

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 13-40

Short- and Long-Term Disability  Workers’ compensation covers disabilities that are work-related  Social security has provisions for disability income to those who qualify  Private sources of disability income: – Employee salary continuation plans – Long-term disability plans 13-41

Miscellaneous Benefits

Paid Time Off During Working Hours Payment for Time Not Worked Child Care Legal Insurance Elder Care Domestic Partner Benefits

13-42

Paid Time Off During Working Hours 

Rest periods



Lunch periods



Wash-up time



Travel



Clothes-change time



Get-ready time

13-43

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 13-44

Exhibit 13.18: Employees Receiving Leave Time Benefits 13-45

Exhibit 13.19: Benefits Received: Full Time vs. Contingent Employees 13-46