Assignment 11 - Welfare Benefits for Retirees Flashcards Preview

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Flashcards in Assignment 11 - Welfare Benefits for Retirees Deck (24):

 Explain why employers have become more concerned with retiree benefits than they were in the past, and list the common employer objectives for retiree welfare benefit programs.

  •  cost


 How are companies changing their retiree health plans to reflect general business cost pressures and changes in active employee plans (5)?

  •  (a) Revise the definition of covered expenses and/or their reimbursement.
  • (b) Impose restrictions in the group eligible for employer subsidies and/or benefits
  • (c) Increase employee contributions, particularly for short-service retirees and for dependent coverage.
  • (d) Limit the dollar amount of employer contributions.
  • (e) Increase the use of managed care techniques.


 Employers that are deciding whether to retain or modify their existing retiree welfare benefit plans while balancing retiree needs and cost-control objectives will have to address the following types of questions:


  • (a) Should we continue to offer a plan to retirees? Can they secure coverage elsewhere on favorable terms?
  • (b) What benefits provisions should the plan include? Should the medical plan, for example, have a low deductible and a high coinsurance, or vice versa?
  • (c) How should the premium cost be shared between the company and employees for each optional plan?
  • (d) How should retiree welfare benefits be integrated with other components of the retirement program?
  • (e) What special grandfather or transition rules, if any, should apply?
  • (f) What are the appropriate elements of the expensing policy?
  • (g) How should the plan cost be funded?


usually a flat dollar amount, generally in the range of $5,000 to $20,000. Another common approach, particularly for salaried employees, is to express as a percentage of the employee’s final preretirement salary or life insurance amount.

 retiree life insurance benefit 


requires the cost of retiree life benefits to be recognized over the working lifetime of employees.

 Financial Accounting Standard 106 (FAS 106), codified as ASC 715-60,


 What are the key differences between retirees and active employees in medical benefit plan design (4)?

  1.  Age differences
  2.  Certain health conditions
  3.  time to recover from serious medical conditions
  4.  Medicare assumes the bulk of the cost of hospital and physician services after the age of 65.


 In 1965, efforts to provide medical care benefits under the Old Age, Survivors, and Disability Insurance (OASDI) program succeeded and the resulting program is called _____.  All individuals aged 65 and over who are eligible for monthly benefits under OASDI or the Railroad Retirement program also are eligible for Part A _______ under Medicare.

  • Medicare
  • hospital  insurance benefits


 Part A, Hospital Insurance (HI), is financed primarily from ______ on workers covered by OASDI.

Part B, Medical Insurance, is voluntary and is financed partially by ______ with the remainder coming from federal government general revenues.

  • payroll taxes
  • enrollee premiums


 The Part A portion of Medicare covers:


  • (a) The cost of all hospital services, 
  • (b) Skilled nursing care services for convalescent or recuperative care are covered. 
  • (c) An unlimited number of home health service benefits 
  • (d) Hospice care for terminally ill persons is covered if all Medicare benefits other than physician services are waived


 Benefits provided under and excluded from the Part B portion of Medicare are:

  •  The principal medical insurance benefit is partial reimbursement for physician services
  •  Not covered are most dental services, most chiropractic services, eye examinations, eyeglasses and hearing aids and services outside the United States,


 Retirees usually receive the same or similar medical benefits as active employees until they reach the age of 65 and become eligible for Medicare. Then their employer-provided benefits are coordinated with Medicare using one of two general approaches.

  •  Offset
  •  Medigap


 The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 established a Medicare prescription drug benefit under the Medicare Part D program beginning in 2006. The provisions of the standard Part D benefit for 2011 are as follows, with indexing of the dollar amounts in subsequent years:

  • (a) A ___ annual deductible
  • (b) Coverage of ___ of drug costs between $310 and $2,840 
  • (c) No coverage for drug costs between $2,840 and $6,448, known as the _____ (The Patient Protection and Affordable Care Act (PPACA) gradually phases down from 2010 through 2020.)
  • (d) After reaching the $6,448 threshold ($4,550 in out-of-pocket spending), beneficiaries reach a _______ level of coverage and will only be required to pay the greater of a copayment ($2.50 for generic drugs or $6.30 for brand-name drugs) or coinsurance of 5%.

  • $310
  • 75%
  • “donut hole.”
  • “catastrophic”


 As a result of Medicare Part D prescription drug benefits are employers required to discontinue their retiree prescription drug plans?



 Employers have several alternative approaches available to them under the Medicare Part D prescription drug program. Among these alternatives are:


  • (1) Employers can provide drug benefits and receive the federal subsidy.
  • (2) Employers can facilitate coverage through a PDP, with or without an employer subsidy or supplemental benefit.
  • (3) Employers can exclude


 Items in PPACA most likely to impact retiree health plans include (6):


  • (a) Mandated plan provisions
  • (b) Loss of tax-free status of payments received through the retiree drug subsidy program beginning in 2013
  • (c) Closing of the Medicare Part D “donut hole”
  • (d) Early retiree reinsurance program which provides partial reimbursement to employmentbased health plans (program set to expire on January 1, 2014)
  • (e) Changes in Medicare Advantage reimbursement formulas
  • (f) State-run “exchanges” beginning 2014.


 The most common definition is termination of employment after attainment of the age of __ and __ years of active service

  • 55
  • 10


is often used for post-age-65 coverage. Under this approach, retirees are required to contribute a specified percentage of the expected plan cost for the coming year. As the plan cost increases because of inflation and utilization changes, the retirees’ contribution increases proportionately.

 The percentage-of-cost approach


commonly used by employers. This may involve cost sharing, but the underlying percentage of plan cost usually is not disclosed to employees or retirees. Although employers that use this approach usually update dollar amounts every few years, updates generally have not been adequate to keep pace with increases in plan costs.

 Specified dollar contributions 


 Today most employers offer some form of managed care to active and retired employees. Because retirees are more geographically dispersed than active employees, some employers offer _____ plans to retirees in retirement destinations such as Florida and Arizona.

health maintenance organization (HMO)


Under a _________ the employer makes an annual contribution to an account for each employee. The account may grow with interest, depending on provisions established by the employer. During the individual’s retirement, the account can be used to pay for medical premiums. If the account is depleted, the retiree becomes fully responsible for medical plan premiums.

retiree health account program,


 The three considerations concerning the financing of retiree welfare benefits are


  • expense recognition 
  • the level of cost 
  • the funding vehicle


 Employers traditionally recognized the cost of retiree medical and other welfare benefits on a _______ basis, originally believing they were making a year-by-year commitment rather than a lifetime promise



 Several funding alternatives are available to employers to prefund the cost of retiree medical expense benefit plans. These include:

  •  Book reserve/”pay-as-you-go.”
  •  A voluntary employees’ beneficiary association (VEBA).
  •  Pension plans.
  •  Insurance contracts
  •  Union funds


 Does the Employee Retirement Income Security Act (ERISA) provide for the vesting of retiree medical benefits?