chapter 13 - benefit options Flashcards
Major Types of Employee Benefits
- Legally Required (or “Statutory”) Benefits
- Retirement & Savings Plan Payments
- Life Insurance
- Medical and Medically Related Payments
- Payments for time not worked - vacation, holidays, breaks, etc.
- Miscellaneous Benefits
Exhibit 13.2: Categories of Employee Benefits
- Legally required (statutory) benefits
- Worker’s Compensation Insurance
- Social Security (FICA taxes)
- Unemployment Insurance
- Disability Insurance (a few states) - Retirement Plans
- Defined Benefit Plans
- Defined Contribution Plans
Workers’ Compensation
Covers injuries and disease that arise out of, and while in the course of, employment
$99+billion per year cost for employers
Form of no-fault insurance - employees are eligible even if their actions caused the accident
- Medical care for work-related injuries
- Temporary disability benefits
- Permanent partial and permanent total disability benefits
- Survivor benefits
- Rehabilitation
States vary in payout formulas
Covered by State, not Federal laws
Social Security and Medicare
Introduced in 1937 – 60% of workers eligible then, and now nearly every US worker is covered
Provides replacement income:
- Retirees
- Disability benefits
- Benefits for dependents of retired or disabled or diseased
Funding comes from contributions made by employees and employer split 50%/50% which is each paying 7.65% of an employee’s earnings
Amount paid is based on earnings history and full retirement age, which now rises with birth year
Unemployment Insurance
Started by the unions as a benevolent program for co-workers until passed into law as part of the Social Security Act of 1935
The program has four major objectives:
- To offset lost income during involuntary unemployment
- To help unemployed workers find new jobs
- To provide incentive for employers to stabilize employment
- To allow workers to return to their employer after short-term layoff
Payouts are financed by employers who pay a flat 6% tax on the first $7,000, then an additional tax is imposed on the remainder; the amount is based on the employer’s experience rating
Covered workers must meet eligibility requirements to receive up to 26 weeks of payments (a percentage of recent earnings
Must be determined to be unemployed through no fault of your own
Legally Required Benefits
- The 1993 Family and Medical Leave Act (FMLA) applies to employers with 50 or more employees within a 75-mile radius
- Allows up to 12 weeks of unpaid leave to take care of self or close family member (this is defined) for a serious mental or physical health condition that makes you unable to work
- Guaranteed return to same or similar job
More state legislatures are now moving toward some form of paid family and medical leave for workers
Legally Required Benefits
- In 1985, Congress passed the Consolidated Omnibus Budget Reconciliation Act (COBRA)
- Extends healthcare benefits to employees not working due to a qualifying event, such as layoff
- Employers with 20 or more employees must comply
- The biggest concern when getting health insurance under COBRA is the relatively brief qualifying period, after 18 months you are not eligible
- The Affordable Care Act allows COBRA participants to opt into the Health Insurance Marketplace - The Health Insurance Portability and Accountability Act (HIPAA) was passed in 1996 and was designed to:
- Lessen ability to deny coverage due to a preexisting condition
- Prohibit discrimination on the basis of health-related status
Retirement and Savings Plan Payments
Pensions have been around a long, long time
- The uncertainty of Social Security increases their importance
There are two generic types of pension plans
- Defined benefit plans – the term “pension plan” refers to these
- Defined contribution plans
Defined benefit plans are now less common and many companies are shifting to 401(k) plans – a defined contribution plan
types of employer-sponsored retirement plans
- tax favored
-
qualified
- defined contribution
- define benefit - non-qualified
defined contribution
- 401K
- other
- profit sharing
define benefit
- pension
- single person DB
Defined Benefit (DB) Plans
Employer provides fixed level of pension payment defined in terms of:
- Fixed dollar amount or percentage-of-earnings amount which varies with seniority
- Usually ~30-80% of last 3-5 years of earnings
Dying breed – only 20% (and falling) employees offer; cost and unfavorable accounting rules
- Issue is how employers fund these obligations
– It is difficult to predict how much is needed
– GM had $12 billion shortfall in funding its pension
– Often under-funded
Defined Contribution (DC) Plans
Much more popular/used by companies than DB plans
The employer makes provisions for contributions to an account set up for each participating employee
-> Upon retirement, pension is based on contributions and investments
There are three popular forms
- 401(k) plan
- Employee stock ownership plan (ESOP)
- Profit sharing plan
A 401(k) plan is a savings plan for pretax income
- Employers may match a portion of employee contributions
Using DC plans over DB plans is advantageous for younger workers but there are other factors affecting retirement income
- Age, rates of returns & investment diversification are important
General Health Care
Increasing costs leads employers to find ways to cut healthcare costs or eliminate them from their benefits package
Before 1930, healthcare coverage did not exist
The 1960s brought Medicare and Medicaid
The Affordable Care Act (ACA) of 2010 expanded coverage through both an individual and an employer mandate
There are four basic underlying structures of health care delivery:
- Preferred provider organization (PPO)
- Consumer Driven Health Care (CDHC) – or Health Savings Accounts (HSAs) coupled with PPOs
- Health Maintenance Organization (HMO)
- Healthcare Exchanges (through ACA)
Health Care: Cost Control Strategies
Motivate employees to change their demand for health care through changes in
- Plan design: deductibles, co-insurance amounts
- Administration: co-pays, eligibility
Consumer-driven health care (CDHC)
- Shifts much of costs to the employee through high deductibles
- Employers may provide Health Savings Accounts (HSA)
Change structure of health care delivery systems
- Direct contracting with doctors and hospitals
- Limited PPOs
Promote wellness – preventable illness are ~70% of healthcare costs
Average Cost of Health Care
Average healthcare cost per employee
2004: $3,000
2010: $4,000
2023: $9,000+ ($26K+ for family coverage)
Paid Time-Off
Traditional Time-Off (TTO):
- Vacation time and sick time tracked separately
Paid Time-Off (PTO):
- Combines vacation, sick and other medical time-off
- More expensive than TTO
Unlimited (Flexible) Time-Off
