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13-1
Benefit Options
Chapter
13
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13-2
Overview of Employee Benefits
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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
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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
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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
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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”
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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
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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
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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)
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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
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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
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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
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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)
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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
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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
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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%
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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
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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)
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13-19
Retirement and Savings Plan Payments
Defined benefit plans
Defined contribution plans
Employee Retirement Income Security Act (E.R.I.S.A.)
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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
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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
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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
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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
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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)
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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)
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13-26
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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
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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
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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
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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
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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
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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)
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13-33
“Consumer-Driven” Health Plans (CDHPs), Health Savings Accounts (HSAs), Health
Reimbursement Accounts (HRAs)
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
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13-34
“Consumer-Driven” Health Plans (CDHPs), Health Savings Accounts (HSAs), Health
Reimbursement Accounts (HRAs)
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
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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
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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
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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
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13-38
Miscellaneous Benefits
Paid Time Off During Working
HoursPayment for
Time Not Worked
Child Care
Elder Care
Domestic Partner Benefits
Legal Insurance
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13-39Exhibit 13.11: Employees Receiving
Leave Time Benefits
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13-40Exhibit 13.12: Benefits
Received:Full-Time vs. Contingent
Employees
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