Transcript Topic #12: Benefits

Paul L. Schumann, Ph.D.
Professor of Management
MGMT 440: Human Resource Management
© 2008 by Paul L. Schumann. All rights reserved.
1
Outline
 Pay for Time Not Worked
 Mandatory Protection Programs
 Optional Protection Programs
 Other Benefits
2
Pay for Time Not Worked
 Paid holidays
 Paid holidays are not required by law in the US — it’s up to
the company whether to have them & (if so) how to do it



Number of paid holidays
Which specific holidays
 Examples: New Years’ Day, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day
How to compensate employees who have to work on a paid holiday
 Extra pay
 Example: Pay hourly workers double-time if they work on a
paid holiday
 Compensating time off
 Example: If some employees work on a paid holiday, they get a
paid day off on a day of their choice (subject to approval)
3
Pay for Time Not Worked
 Paid vacations
 Paid vacations are not required by law in the US — it’s up to
the company



Length of paid vacations
 Example:
 After 1 year of service = 2 weeks
 After 5 years of service = 3 weeks
 After 10 years of service = 4 weeks
 After 20 years of service = 5 weeks
How do employees request the dates for their vacation?
 Seniority?
 Example: employee with the most seniority picks dates first
Do part-time employees get paid vacations?
4
Pay for Time Not Worked
 Paid sick leave
 Paid sick leave is not required by law in the US — it’s up to
the company


How will employees accrue sick leave time?
 Example: accrue 1 sick leave day for each month worked
What happens to unused sick leave time at end of year?
 Use it or lose it
 Problem: employees may use up unused sick days before they
lose them
 Roll over unused sick leave days to the next year
 What happens to accrued sick leave when employee leaves?


Use it or lose it
Cash out the number of unused sick leave days
5
Pay for Time Not Worked
 Paid personal days
 Paid personal days are not required by law in the US — it’s up
to the company


How will the employee accrue paid personal days?
 Example: 3 personal days per year
What happens to unused personal days at end of year?
 Use it or lose it
 Roll over unused personal days to the next year
 What happens to unused personal days when employee leaves?


Use it or lose it
Cash out the number of unused personal leave days
 Some organizations have dropped the distinction between
sick days & personal days, and just use personal days
6
Pay for Time Not Worked
 Family and Medical Leave Act
 Covered employers must grant eligible employees up to 12
weeks of unpaid leave during a 12 month period because of:




Birth & care of a newborn child of the employee
Arrival with the employee of a son or daughter by adoption or foster
care
Care of an immediate family member (spouse, child, or parent) with
a serious medical condition
Employee’s own serious medical condition
 While the required leave is unpaid, the employer must
continue any medical benefits
 Employee is entitled to the same or an equivalent job on
return to work
 http://www.dol.gov/esa/whd/fmla/
7
Pay for Time Not Worked
 Uniformed Services Employment & Reemployment
Rights Act (USERRA)
 Protects the civilian job rights & benefits of employees
who serve in the US uniformed services (Army, Navy,
Marine Corps, Air Force, Coast Guard, National Guard,
including employees who are in the Reserves who are
called up to active duty)
 http://www.dol.gov/compliance/laws/comp-userra.htm
8
Mandatory Protection Programs
 Unemployment Compensation Insurance
 Insurance that pays temporary partial wage replacement to
laid off workers who are actively looking for a job




Applies only to laid off workers
 Workers who quit or are terminated for cause are not eligible
Up to 26 weeks of benefits (sometimes extended by law)
Premiums are paid by the company
 Premiums are experience-rated: more layoffs  higher premiums
Amount of benefits varies by state
 Weekly benefit is typically a percentage of the worker’s pre-layoff
pay, subject to a maximum weekly amount
 Minnesota: http://www.uimn.org
 Weekly benefit = about 50% of employee’s average weekly wage
 Maximum weekly benefit (2008) = $538
9
Mandatory Protection Programs
 Workers’ Compensation
 No fault insurance that pays benefits to employees who suffer
an on-the-job injury (or death)
 Benefit rules & amounts vary by state



Typical benefits:
 Cost of medical care for the work injury
 Wage-loss because of the work injury
 Temporary total disability
 Temporary partial disability
 Permanent total disability
 Permanent partial disability
Premiums are experience-rated & paid by the company
Minnesota: http://www.doli.state.mn.us/workcomp.html
10
Mandatory Protection Programs
 Social Security
 Social Security Administration (SSA): http://www.ssa.gov/
 Types of benefits (5 main types):

Retirement benefits: income benefits for retired workers
 Age to qualify for full retirement benefits depends on year of birth
 Penalty (reduced benefits) if retire before full retirement age
 http://www.ssa.gov/retire2/agereduction.htm
 Amount of monthly retirement benefits depends on the earnings
history of the employee (higher earnings  higher benefits)
 SSA sends you once a year (about 3 months before your
birthday, beginning at age 25) a statement with your earnings
history & estimated benefits



http://www.ssa.gov/mystatement/
Maximum monthly benefit for new full retirees in 2008 = $2185
Average monthly benefit in June 2007 = $1050
11
Mandatory Protection Programs
 Social Security
 Types of benefits (more)



Family benefits: income benefits to spouse & children of a
retired worker
 http://www.ssa.gov/retire2/applying7.htm
Survivors benefits: income benefits to widows, widowers, &
other survivors of a worker who paid into Social Security
 http://www.ssa.gov/ww&os2.htm
Disability benefits & Supplemental Security Income (SSI)
benefits: income benefits when a person has a severe physical
or mental impairment that prevents them from doing
“substantial” work for a year or more
 http://www.ssa.gov/d&s1.htm
12
Mandatory Protection Programs
 Social Security
 Types of benefits (more)

Medicare: health insurance plan for people 65 or older, or under 65
with certain disabilities
 http://www.medicare.gov
 http://www.medicare.gov/Publications/Pubs/pdf/10050.pdf
 Original Medicare Plan: fee-for-service medical insurance
 Part A: Hospital Insurance (HI): mandatory: covers part of the
cost of inpatient hospital care & some post-hospital care


Annual deductible for hospital stays (2008) = $1024
Part B: Supplemental Medical Insurance (SMI): optional:
covers physicians’ fees & most outpatient hospital services



Monthly premium (2008) = $96.40
Annual deductible (2008) = $135
Co-insurance = 20% (you pay 20% of bill, Medicare pays 80%)
13
Mandatory Protection Programs
 Social Security
 Types of benefits (more)

Medicare (more)
 Alternative to Original Medicare Plan: like HMOs & PPOs
 Part C: Medicare Advantage Plans: combines Part A & Part B
(and sometimes Part D): Medicare insurance managed by
private insurance companies approved by Medicare


Depending on the selected plan, there are different deductibles, coinsurance, & co-pays than the Original Medicare Plan
Part D: Medicare Prescription Drug Coverage
 Monthly premiums, annual deductibles, co-pays, & coinsurance varies by plan (plans are complex with gaps)


Medicare Prescription Drug Plan (PDP): for Original Medicare Plan
participants
Medicare Advantage Plan that includes prescription drug coverage
(MA-PD)
14
Mandatory Protection Programs
 Social Security
 Financing: Federal Insurance Contribution Act (FICA)

Contributions to OASDI (Old Age, Survivors, & Disability Insurance):




Contributions to HI (Hospital Insurance - Medicare):




Employee withholding = 6.20% on earnings up to $102,000 (in 2008 — the
maximum taxable earnings goes up every year)
Employee’s withholding is matched by the employer
Self-employed pay as both employee & employer: 12.4% on earnings up to
$102,000 (in 2008)
Employee withholding = 1.45% on earnings (no limit)
Employee’s withholding is matched by the employer
Self-employed pay as both employee & employer: 2.90%
Total maximum contribution rate = 15.30% (= 7.65% employee + 7.65%
employer) for self-employed who earn less than $102,000 (in 2008)
15
Mandatory Protection Programs
 Social Security
 Financing: Federal Insurance Contribution Act (FICA)

Example: employee earns $50,000 in 2008:




Withholding from employee’s paychecks:
 OASDI = 6.20% × $50,000 = $3,100
 HI (Medicare) = 1.45% × $50,000 = $725
 Total = $3,825 paid by employee through withholding
Company also pays into Social Security $3,825 for the employee
Self-employed would pay $3,825 + $3,825 = $7,650
Example: employee earns $200,000 in 2008:



Withholding from employee’s paychecks:
 OASDI = 6.20% × $102,000 = $6,324 (the maximum for 2008)
 HI (Medicare) = 1.45% × $200,000 = $2,900
 Total = $9,224 paid by employee through withholding
Company also pays into Social Security $9,224 for the employee
Self-employed would pay $9,224 + $9,224 = $18,448
16
Optional Protection Programs
 Life insurance: pays benefits to the employee’s beneficiaries
when the employee dies
 The company might pay the premiums for the employee
 Group rates are frequently lower than individual rates
 The employee might be able to buy additional coverage at the group
rate
 Disability insurance: pays income replacement benefits to
the employee if the employee becomes disabled and is
unable to work
 Supplements disability insurance under Social Security
 The company might set up a deal with an insurance company
so that the employee can buy the coverage at the group rate
 Alternatively, the company might pay the premiums for the
employee
17
Optional Protection Programs
 Health insurance
 Health plan design elements




Deductible: annual out-of-pocket expense that must be paid by the
employee before reimbursement begins
 Example: $140 per year
Co-pay: fixed amount paid by employee per occurrence
 Example: $22 for each visit to the doctor’s office
 Example: $75 for each visit to a hospital emergency room
 Example: $16 for a 30-day supply of a prescription drug
Co-insurance: percentage of the bill paid by the employee vs. paid by
the insurance
 Example: 5% for lab, pathology, x-ray, & MRI (employee pays 5%
of bill, insurance pays the remaining 95%)
Plan maximum out-of-pocket expense
 Example: $800 for prescriptions & $1100 for everything else
18
Optional Protection Programs
 Health insurance (more)
 Types of plans

Fee-for-service: health care providers bill for each service
 Most fee-for-service plans allow employees to select any health
care provider
 In some cases, the employee pays the bill & then submits the
bill for reimbursement (less any deductibles, co-pays, & coinsurance)
 In some cases, the employee only pays the deductible, the copay, or the co-insurance, & the provider bills the insurance
company for the balance due
 These plans tend to be the most expensive
 So, companies have been tending to move away from fee-forservice plans to one of the managed care plans (PPO or HMO)
19
Optional Protection Programs
 Health insurance (more)
 Types of plans (more)

Preferred Provider Organization (PPO): a type of managed care in
which health care providers in the PPO have agreed to provide care
based on a discounted fee schedule that has been negotiated in
advance
 Most PPO plans require employees to use providers who are in the
PPO network for maximum coverage (lowest co-pays & coinsurance)
 The employee might have to designate a Primary Care
Physician, who coordinates medical care for the employee

The Primary Care Physician would decide on the need to bring in
specialists, order medical tests, and so forth

Decisions of the Primary Care Physician might be subject to utilization
review
20
Optional Protection Programs
 Health insurance (more)
 Types of plans (more)

Health Maintenance Organization (HMO): a type of managed care
in which the HMO has a network of health care providers & in which
the HMO is typically paid a fixed annual fee per covered employee
regardless of utilization by the employee
 Most HMO plans require employees to use providers who are in
the HMO network for maximum coverage (lowest co-pays & coinsurance)
 The employee might have to designate a Primary Care
Physician, who coordinates medical care for the employee

The Primary Care Physician would decide on the need to bring in
specialists, order medical tests, and so forth

Decisions of the Primary Care Physician might be subject to utilization
review
21
Optional Protection Programs
 Health insurance (more)
 Health Savings Accounts (HSAs): tax-advantaged savings
accounts used to pay for health care for employees who are in
a high-deductible health insurance plan



New: signed into law on 12/8/2003
Employee, employer, or both make contributions into the employee’s
HSA
 Contributions are pre-tax (i.e., they are not taxed)
 Funds can be invested
Employees make withdrawals from their HSAs to pay for medical
expenses not covered by their high-deductible health insurance plan
22
Optional Protection Programs
 Pension plans
 Types of pension plans

Defined benefit plan: participants are promised a specified
monthly pension benefit at retirement
 Pension plan pays the retired employee a pension amount that
is based on a specified formula
 Example: annual pension = (2% of employee’s average
annual pay from the 5 highest paid years) × (years of
service)

Example:
Employee’s average “high-5” annual pay = $50,000
 Employee has 30 years of service with the company
 Employee’s annual pension = 0.02 × $50,000 × 30 = $30,000
 Employee’s monthly pension = $30,000 / 12 = $2,500

23
Optional Protection Programs
 Pension plans (more)
 Types of pension plans (more)

Defined contribution plan: participants are not promised a
specific monthly pension amount at retirement
 Employee (and maybe employer) make regular contributions
into the employee’s pension account; the monthly pension
benefit at retirement depends on how much money is in the
employee’s account (contributions plus investment returns)
when the employee retires
 Example: 401(k): employee contributes up to 15% from each
paycheck (tax deferred, up to a maximum annual
contribution) plus the employer contributes $1 for every $2
contributed by the employee

Maximum employee contribution (2008) = $15,500
24
Optional Protection Programs
 Pension plans (more)
 Employee Retirement Income Security Act (ERISA): US federal law that
sets minimum standards for pension plans if the company chooses to
have a pension plan

Vesting
 Employee’s own contributions are always 100% vested
 Company can pick one of two vesting options for the company’s contributions:
 Cliff vesting:



Graded vesting:







Before 5 years of service = 0% vested
5 or more years of service = 100% vested
Before 3 years of service
3 years of service
4 years of service
5 years of service
6 years of service
7 or more years of service
= 0% vested
= 20% vested
= 40% vested
= 60% vested
= 80% vested
= 100% vested
Employee must rollover balances to a qualified plan to avoid tax consequences
25
Other Benefits
 Wellness programs
 Examples:


Exercise & recreational facilities
 Company’s own on-site facilities or the company pays (all or part)
of off-site health club dues for the employees
Programs to improve health & wellness
 Examples: stop smoking, lower blood pressure, lower cholesterol
levels, diabetes control, etc.
 Possible corporate motivations for the benefit:
 It’s just part of the company’s compensation package
 Company expects a return on their investment
 Healthier employees may cost the company less
 Lower absenteeism
 Lower increases in health insurance rates
26
Other Benefits
 Educational assistance programs
 Company might reimburse employees for costs
associated with going to school


Tuition reimbursement (all or part)
Maybe reimbursement for books & other expenses
 The educational program usually has to be job-related

Example: a company might pay part of the cost of a manager
to get a MBA degree
27
Other Benefits
 Child-care assistance
 Company might have an on-site child care facility
 Company might provide financial assistance to
employees to help pay for child care off-site
28
Other Benefits
 Flexible benefits (flex benefits or cafeteria benefits)
 Company provides employees with a package of core
benefits

Examples: vacations, health insurance, pension plan, etc.
 Company also provides each employee with an annual
benefit “budget” that the employee can allocate to “buy”
additional benefits of their choice

Examples: child-care assistance, educational assistance,
additional vacation days, etc.
29
Outline
 Pay for Time Not Worked
 Mandatory Protection Programs
 Optional Protection Programs
 Other Benefits
30