Employee Benefits Professional Development and Certification Preparation Introduction (page 1) Benefits are a form of indirect Compensation The #1 benefit for retaining employees is: Health Insurance Product Life Cycle Stages (page 1) Introduction: Basic benefits Growth: Improved benefits with some perks Maturity: Comprehensive benefits & perks Decline: Limit costs of benefits and perks 1
Benefits Philosophy (page 1) Entitlement: Liberal benefits package Paternalistic, equitable (not salary based) Contribution based: Benefits related to performance Package varies based on salary and job worth Categories of Employees (page 1) Benefits address the needs of various groups of employees and dependents Full-time Retired Part-time Terminated Seasonal Eligibility Criteria (page 2) Employee class (full-time) Actively at work Insurability (underwriting review and physicals could be required) Probationary period Premium contribution 2
Benefit Amount Criteria (page 2) Earnings Position Flat amount Length of Service Combination of above Benefit Needs Assessment Steps (page 2) Review the organization strategy Review the total compensation philosophy Review the employee needs Review the current benefits offered Conduct gap analysis Gap Analysis The Final Stage (page 2) Compare: Organizational needs Employee needs Existing set of benefits 3
Considerations in Benefit Planning and Strategy (page 3) Economic conditions Benefits offered by competitors Employee wants and needs Cost Administration Communication Indicators of Plan Performance (page 3) Employee turnover Employee attitude/exit surveys Cost Competitiveness/Value Utilization Benefit Categories (page 4) Benefit plans can be: Contributory or Non-contributory Voluntary Qualified or Non-Qualified Insured or Self-insured Legally Required Single Employer or Multiple Employer Plans 4
Contributory vs. Non-Contributory Benefits (page 4) Contributory: Social Security Medical Dental Life Disability 401(k) Non-Contributory: Worker s Compensation Unemployment Insurance Severance Pension Voluntary Benefits (page 4) Voluntary: Supplemental Life Insurance Group Legal Vision Insurance (if not subsidized) Qualified vs. Non-qualified Benefits (page 5) Qualified: Organized under ERISA law Tax advantaged Pension plan 401(k) plan Health Insurance Non-qualified: Not organized under ERISA law Some tax advantages Supplemental executive retirement plans Deferred compensation plans 5
Insured vs. Self-Insured Benefits (page 5) Insured (could include): Defined benefit pension plan Worker s Compensation Long Term Disability Self-Insured (could include): Health Plan Dental Plan Worker s Compensation Legally Required Benefits (page 5) Mandated: Social Security Worker s Compensation Unemployment Insurance Health Insurance (starting in 2015) Social Security (page 6) Covers: Old age (1935) Unemployment (1935) Survivor s insurance (1938) Disability insurance (1956) Hospital & Physician Care Medicare Part A (1965) Supplemental medical Part B (1965) Prescription drugs Part D (2006) 6
Workers Compensation (page 7) Benefits include: Medical care Death benefits Disability income Rehabilitative services Unemployment Insurance (page 8) Benefits are payable for 26 weeks 13 week extension possible 6 eligibility criteria to receive benefits: Actively seeking work Not refuse suitable employment Not leave voluntarily (penalty period before benefits start) Not unemployed due to labor dispute (except NY & RI) Have worked minimum number of weeks No gross misconduct Quiz #1 (pages 8-9) 1. As part of conducting a benefit plan needs assessment, the HR professional has looked at the organization s business strategy and compensation philosophy. What is the NEXT step that should be taken? A) Look at market conditions to see what benefits competitors offer. B) Determine which benefits should be included in the plan. C) Conduct a utilization review to determine how benefits are used. D) Determine employee needs with regard to benefits. 2. Which of the following is a possible outgrowth of a benefit plan needs assessment? A)Paying exempt employees overtime B) Adding medical coverage for chiropractic care C)Increasing salaries for exempt employees D) Setting new strategies or objectives for the company 7
Quiz #1 (page 9) 3) A 41-year old man died while on vacation, leaving a wife and five children under the age of 12. The man was the primary breadwinner, working full-time and carrying the medical and retirement benefits for the family. Which of the following federally mandated benefits can the man s wife expect to receive? A) Death benefits under Worker s Compensation B) Social Security disability benefits C) Social Security death benefits of $225 and monthly income for herself and all dependent children under the age of 18 D) Unemployment insurance coverage for up to 26 weeks 4. A company that announces that it will close a plant in six months must provide which of the following mandated benefits? A) Unemployment benefits to an employee actively seeking work B) Medicare benefits C) A severance compensation and benefits package D) Outplacement Quiz #1 (page 9) 5) According to the law, worker s compensation benefits must be provided A) regardless of who is at fault in a work related accident. B) only in cases where the employee followed the organization s safety and health rules. C) only to workers in the construction and other heavy work industries. D) for off-the-job injuries. ERISA: Plan Characteristics (page 10) 1. Eligibility and plan coverage; Non-Discrimination & Top Heavy Rules 2. Limitations on benefits provided 3. Funding: Asset segregation; use of trust accounts & separate accts 4. Fiduciary responsibility: Minimum qualifications for plan administrators 5. Controls on investments (Prudent Person Rule) 6. Controls on tax deductible contributions for fully funded plans 7. Vesting 8. Communications: Annual reporting requirement to plan participants 9. Annual audit required 10. Minimum funding standards (defined benefit plans) 11. Accelerated contributions for under funded plans (defined benefit plans) 12. Insurance from PBGC (defined benefit plans) 13. Complaint/Appeal procedures 8
Prudent Person Rule (page 10) The law requires that a fiduciary must act with the care, skill, prudence and diligence that a prudent man acting in a like capacity would act. If a fiduciary lacks the expertise for a certain area then the fiduciary must obtain expert help. ERISA Employee Retirement Income Security Act (page 10) Advantages of qualified plans: Employee taxed when benefits are received Employer can take an immediate tax deduction (within limits) to fund future benefits Earnings on fund not subject to income tax while in the fund Exemption from state regulations on insurance Non-qualified Plans (page 11) Tax advantaged plans, but not organized under ERISA top hat plans for select group of management or highly paid employees Advantages: Allows for additional benefits for executives Less expensive to set up Not subject to contribution limits, Allows deferral of income beyond annual limits of qualified plans No annual reporting to plan participants required, No required communications or appeal rights No funding requirement No annual audit requirement 9
Non-qualified Plans (page 11) Disadvantages: Cannot be company-wide Assets of plan not protected from creditors No tax deductions for the employer until after the benefit payments are made to the plan participant. Fewer protections for the plan participants No ERISA protection Trust not required Retirement Benefits (page 12) Defined Benefit Pension Plans: Benefit at retirement is easily understood Value to employee is not easily understood Company absorbs all risk (investment returns) Total costs unknown over time Administration complex and costly Actuary required to determine the annual contribution Insured by the Pension Benefit Guarantee Corporation Retirement Benefits (page 13) Defined Contribution Plans Unknown benefit at retirement Employees assume risk of investment Employer cost known up front Easier to communicate and administer Not insured Much less costly than a pension plan 10
Qualified Domestic Relations Order (page 13) A court order (usually as a result of a divorce) that recognizes the right of an alternate payee (usually the ex-spouse) to receive all or a portion of the benefits under a retirement plan Financial Accounting Standards Board (page 15) Not a governmental agency Sets the accounting standards and procedures for companies that sell stock on the Stock Exchange. FASB 106 Ruling requires employers to show the estimated cost of retiree medical benefits as a liability on the balance sheet. Also requires the accrual of the estimated cost of retiree medical benefits during the active career of the employee Income Protection (page 15) Definitions: Group benefit plans Adverse selection Law of large numbers 11
Medical Benefits (page 14) Funding Options: Fully insured all risk born by insurance company Minimum premium - employer has some risk; shares in savings and overruns with the insurance company Partially self-funded - employer hires claims administrator and may purchase stop-loss coverage Self-insured plans - All risk assumed by employer. Employer hires claims administrator to process claims. No stop-loss coverage. Types of Medical Plans (pages 14-15) Indemnity Plans (Fee for Service) Covered employees go to any qualified physician or hospital There is an incentive for more services to be provided Insured submits claims Usually a fully insured plan Least common plan in the marketplace Preferred provider organizations (PPO) Negotiate discounted fees with networks of health care providers Members can elect to receive non-network treatment but have to pay more Most common plan in the marketplace Types of Medical Plans (page 15) Consumer Directed Health Plan Deductibles must be at least $1,300 per person per year. A Health Savings Account or Health Reimbursement Account can be used to provide first dollar coverage. Balance can be rolled over each year. Point of service (POS) Combination of PPO and HMO No deductibles for primary care physician visits. Flat dollar co-pays used 12
Managed Care Plans (page 15) HMO s Capitated (per head) plans Preventive care and cost containment emphasized Members must use HMO doctors and hospitals No need to submit claims Three types of HMO s Group model - contracts with doctors groups Staff model employs doctors Individual practice associations (IPA) contracts with doctors in private practice Exclusive Provider Organization (EPO) Participants must use providers in the network or no payment will be made Definitions Again (page 16) Deductible Coinsurance Co-payment HIPAA Healthcare Cost Containment Strategies (page 16) Change delivery system to managed care Redesign policies (establish limits) Promote wellness Gatekeepers pre-admission testing, pre-authorization and utilization review Shift costs to employees (i.e. premium increases) Disease management programs Incentives to change behaviors Consumer Directed or High Deductible PPO Plans 13
Quiz #2 (page 17) 1) Which of the following protects employees covered by private retirement programs? A)Tax Act of 1973 B)Employee Retirement Income Security Act C)Tax Equity and Fiscal Responsibility Act D)Age Discrimination in Employment Act 2) Which of the following retirement plans is portable for the employee? A) Defined benefit pension plan B) 401(k) plan C) Final-pay formula D) Career-average formula Quiz #2 (page 17) 3) A retirement plan that allows employees of a for-profit company to reduce their regular pay and contribute a portion of it toward retirement on a tax-deferred basis is most likely based on which of the following Internal Revenue Code sections? A) 125 B) 401(k) C) 403(b) D) 457 4) An employee opts to save money in a tax-deferred account to be used to pay for a child s college education in the future. This type of plan is most likely a A) Money purchase plan B) 401(k) plan C) 403(b) plan D) 529 plan Quiz #2 (page 18) 5) Which of the following accounts is most likely to provide retirement income for a selfemployed individual? A) 403(b) plan B) ESOP C) Keogh Plan D) 529 plan 6) Which of the following is a funding option for a health plan? A) Self-insurance B) HMO coverage C) PPO coverage D) COBRA coverage 14
Quiz #2 (page 18) 7) Which of the following strategies will NOT reduce employer health-care costs? A) Promoting a wellness program B) Eliminating caps on lifetime medical benefit coverage C) Establishing a gatekeeper system D) Conducting utilization reviews Dental Coverage (page 19) Four types of covered services: Preventive teeth cleaning and x-rays Restorative - fillings Major restorative bridges and crowns Orthodontia - braces Vision Benefits (page 19) 70% of employees covered Covered by COBRA Frequency limits on services List services covered by a vision plan: Examination Lenses (contacts included) Frames Discounts on lasik surgery 15
COBRA Provisions (page 19) Continuation of employer sponsored medical, dental and vision insurance as well as healthcare reimbursement account Covers employers with more than 20 employees Continuation required under following circumstances: Termination (voluntary or not): 18 months If gross misconduct, no continuation Disabled: 29 months Divorce or death of employed spouse: 36 months Dependent child loses eligibility: 36 months Cost is total cost of coverage plus 2% administrative fee Coverage ends when member is eligible for other medical plan or fails to pay premiums Disability Insurance (page 20) Income for non-work related illnesses or disabilities Three types of disability programs: Social Security Sick pay Short and long term disability (required in some states and the railroad industry) Definitions of disability : Own Occupation: Benefits paid if employee cannot perform duties of own job. Any Occupation: Benefits paid if employee cannot perform duties of any job. Life Insurance Benefits (page 20) Basic Group Term Life: Intended to provide cheap life insurance benefit with no cash build-up. Supplemental Life Insurance: Additional insurance with premiums paid by the employee at group rates Accidental Death and Dismemberment Insurance (AD&D): Benefits payments not paid if death or loss of limb or eye is due to disease. Dependent Life Insurance: Usually a modest flat amount of insurance benefit paid by the employee with no subsidy. 16
Other Benefits (page 21) Employee Assistance Program (EAP) Provides family counseling, psychological evaluation and referrals for substance abuse Legal Assistance 2 types of legal plans: closed panel must use the network open panel no network 5 basic services provided by a group legal plan:» Real estate» Bankruptcies» Wills» Consultations» Minor criminal representation Other Benefits (page 21) Severance package Salary continuation based on number of years of service Benefits continuation also based on number of years of service Outplacement normally provided Retraining sometimes provided Elder care / Long Term Care An emerging benefit due to increased number of people responsible for parents & grandparents Other Benefits (page 22) Childcare benefits Six benefits addressing issues of child care: On site child care centers Resource and referral services Direct financial assistance (may be taxable income) Dependent Care Reimbursement Account Flexible work schedules Flexible policies i.e. parental & adoption leave Company car Employer buys and pays all expenses on the car Employee may use the car for personal reasons, but employee should reimburse the company for this, or Employee will pay tax on the imputed income related to the amount of personal use of the car Many companies use a car allowance instead Less liability 17
Other Benefits (page 22) Commuting cost Value of employer provided parking could be taxable income if over $65 per month Mass transit subsidies could allow for tax-free employer-provided parking Tuition reimbursement If course is job-related, reimbursement is not taxable until it exceeds $5,250 each year Other Benefits (pages 22-23) Vacation Six characteristics of vacation plans: Accrual of vacation Based on length of service Use requires supervisory approval Requires advance request Allows for some carryover (balance sheet liability) Most pay at 100% of earnings Most states require payout at termination Paid Time Off (PTO) Pooling all paid time off (vacation, personal, sick and possibly holidays) into a single leave bank When converting to this program, there could be a significant increase in the vacation liability on the balance sheet. Other Benefits (page 23) Holidays Most employers offer 6-12 holidays per year Sick Days 5-10 days per year Normally paid at 100% of pay Usually uninsured Benefits begin first day absent Verification of illness is a problem Abuses are a problem 18
Other Benefits (page 23) Unpaid leave Professional leave (usually a year or less; no benefits) Sabbatical leave (usually a year or less; sometimes paid) Personal leave Bereavement Emergency (family) Inclement weather Civic paid leave for community or public service Jury duty Election duty Witness duty Military leave for members of the National Guard or Reserves Family Medical Leave Act (FMLA) (page 24) Eligibility: Employees must have 12 months of service within previous 7 years Employees must have worked 1250 hours in the last 12 month period Applies to worksites with more than 50 workers in a 75 mile radius and governmental agencies Covers all but key employees (highest paid 10%) Employee can take leave for a serious health condition requiring hospitalization or residential care by a physician such as the birth of child, care of newborn, adoption, employee s medical condition or care for ill relative Guaranteed health benefits at same level and cost as current employees Must return to original job or equivalent position at no reduction in pay Leave can be up for 12 weeks in any 12 month period (calendar or rolling) Leave not required to be paid, but employers may allow use of personal and sick time to care for dependents Employer can require employee to use vacation before unpaid time. FMLA time off can be difficult to track if used on an intermittent basis. Flexible Spending Accounts (pages 24-25) Flexible Spending Account for Healthcare: Use pretax dollars to reimburse self for expenses unpaid by medical or dental plans Amounts used to cover plan deductibles, co-pays and uncovered services are eligible for reimbursement. Over the counter drugs with prescriptions are also eligible for reimbursement. use it or lose it Any amounts deposited in the account and not used for eligible expenses will be forfeited at the end of the plan year. Employer at risk for annual amount even if the employee quits during the plan year and fails to make all the payments As of 2013, the account is capped at $2,500 per year Dependent care account: Use pretax dollars to pay for daycare for children under 12 Up to $5,000 per year Account can be used to pay for care of disabled dependent or spouse. Amounts paid out during the plan year can never exceed the account balance use it or lose it. Any amounts deposited in the account and not used for eligible expenses will be forfeited at the end of the plan year. 19
Cafeteria Plan (page 25) Employees can pick from a variety of benefits. Section 125 of Internal Revenue Code governs these plans. Usually consists of 3 types of benefits: Core paid by employer Elective subsidized or paid by employer and selected by employee Supplemental selected and paid entirely by employee (Voluntary) List five advantages of a cafeteria plan: 1. Employers and employees save FICA (Social Security) taxes 2. Employees also save on income taxes not paid on compensation used to pay premiums. Life insurance is handled differently. 3. Flexibility benefits can change as lifestyles change 4. Employees can select just the benefits they need 5. Employees don t pay for unused benefits List six disadvantages of a cafeteria plan: 1. Employees can choose wrong benefits 2. Recordkeeping/Administration costs 3. Non-discrimination tests 4. Adverse selection 5. Communications Types of cafeteria plans: Premium only plan: Use the 125 plan to pay for benefits and save FICA (Social Security) taxes. There are few choices. Full cafeteria plan: Benefit credits used to offer cash to employees who select no benefits. More choices among benefit options Expatriates and Foreign Nationals (page 26) Expatriates: Employees who leave their own country (from which citizenship is granted) to work in another. An American who works in England Foreign Nationals: Employees whose work location is in a country different than their native country and the employees are citizens of a country other than the native country of the employer. English workers living/working in France employed by a US company Expatriate and Foreign National Benefits (page 26) International relocations are expensive Keeping the employee whole should be a top concern Employee economic concerns: Currency exchange risk Inflation Double taxation 20
Compensation Methods & Issues (page 27) Headquarters based Home country based Better of home or host country Localization Totalization agreements: Eliminate dual social security payments Decide which plan will provide benefits Quiz #3 (page 27) 1) Which of the following health plans do not allow an employee to rollover unused account balances from year to year? A. Premium-only plans B. Flexible spending accounts C. Full cafeteria plans D. Indemnity plans 2) Which of the following benefits would typically pay benefits to an employee who is out of work for 65 days while recovering from an illness? A. Employer-provided sick leave B. Short-term disability coverage C. Long-term disability coverage D. Social Security disability benefits Quiz #3 (page 27) 3. Which of the following employer-paid benefits would an employee receive tax-free? A. Ten days of sick leave at 100% of original salary B. $1,500 for taking a computer class at a community college C. $500 award for a labor-saving suggestion D. Two weeks of paid vacation 21