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This document contains Chapters 9 to 10 CHAPTER 9 Discretionary Benefits Learning Objectives 1. Give an overview of discretionary benefits. 2. List the three broad components of discretionary benefits. 3. Identify and define one example of income protection programs, paid time off, and services. 4. Explain the benefits and costs of discretionary benefits. Outline I. An Overview of Discretionary Benefits II. Components of Discretionary Benefit Components A. Protection Programs B. Paid Time Off C. Services III. The Benefits and Costs Discretionary Benefits IV. Discussion Questions and Suggested Answers V. End of Chapter Case; Instructor Notes, and Questions and Suggested Student Responses VI. Additional Cases from the MyManagementLab Website; Instructor Notes, and Questions and Suggested Student Responses Lecture Outline I. An Overview of Discretionary Benefits 1. Discretionary benefits a. As of March 2012 i. Companies spent an average approximately $13,000 per employee to provide discretionary benefits ii. Discretionary benefits account for as much as 21.5 percent of payroll costs b. Are offered at the will of each company c. Employees view them as entitlements d. Employers reinforce the entitlement mentality by awarding them regardless of performance 2. Three types of benefits a. Types i. Protection programs ii. Paid time off iii. Services b. Protection programs i. Provide family benefits ii. Promote health iii. Guard against income loss caused by catastrophic factors, like: Unemployment Disability Serious illnesses c. Paid time off for such things as: i. Vacations ii. Holidays d. Services provide enhancements to employees, such as: i. Tuition reimbursement ii. Daycare assistance 3. History a. Originated in the 1940s i. During WW II and Korean War U.S. Government would not let companies increase employees’ core compensation Companies could increase fringe compensation expenditures ii. Companies began to offer welfare practices Anything for the comfort and improvement, intellectual or social, of employees Not a necessity of the industry nor required by law Designed to promote good management and enhance worker productivity
• Example: Welfare Practices Some employers offered libraries and recreational areas Some provided financial assistance for education, home purchases, and home improvements Employers’ sponsorship of health insurance coverage became common
b. National Labor Relations Act of 1935 (NLRA) i. Legitimized bargaining for employee benefits ii. Contributed to the increase of employee welfare practices iii. Nonunion employers offered similar benefits in attempt to keep unions out
Status of Discretionary Benefits and Welfare Practices: Note that as global competition increases, companies are forced to further cut costs, which only naturally leads to less spending on discretionary benefits and programs to strengthen employee morale.
II. Components of Discretionary Benefit Components A. Protection Programs 1. Income 2. Health 3. Income protection a. Disability insurance b. Life insurance c. Retirement programs d. Health protection programs 4. Disability insurance a. Replaces income when employee becomes hurt or ill b. Possibility of employee being disabled for at least 90 days, more likely than dying on the job c. One of three employees will experience a 90-day disability during life-time d. May duplicate, but not replace disability benefits mandated by: i. Social Security Administration ii. State workers’ compensation laws iii. Employee Retirement Income Security Act of 1974 (ERISA) e. Two forms i. Short-term ii. Long-term f. Short-term i. Less than six months (26 weeks) ii. Unable to perform duties of one’s regular job iii. Benefit amount generally 50 percent–66.67 percent of pretax salary; however, it can be as high as 100 percent iv. Preexisting condition clause, two waiting periods, and exclusions of particular health conditions v. Preexisting condition is a mental or physical disability for which medical advice, diagnosis, care, or treatment was received during a designated period preceding the beginning of disability insurance coverage vi. Two waiting periods include the preeligibility period and an elimination period The pre eligibility period spans from the initial date of hire to the time of eligibility for coverage in a disability insurance program The elimination period refers to the minimum amount of time an employee must wait after becoming disabled before disability insurance payments begin vii. Exclusion provisions list the particular health conditions that are ineligible for coverage viii. Disabilities that result from self-inflicted injuries, most mental illnesses, or disabilities due to chemical dependencies (e.g., addictions to alcohol or illegal drugs) are excluded g. Long-term i. Benefits for six months to life ii. Unable to engage in any occupation employee is qualified for by reason of: Training Education Experience iii. Benefit amount is generally 50 percent – 70 percent of pretax salary, subject to a maximum dollar amount iv. Usually a six to twelve month waiting period v. Employees may have to use up other benefits first Sick leave Short-term disability benefit vi. Payments usually begin after three to six months of disability vii. Many long-term disability insurance carriers have more recently also added partial disabilities viii. Include preexisting condition and exclusion clauses ix. Two waiting periods: preeligibility period and elimination period x. Preeligibility periods for short- and long-term plans are usually identical xi. Both short- and long-term disability plans may duplicate disability benefits mandated by the Social Security Act and state workers’ compensation laws (more in Chapter 11) 5. Life insurance a. Pays employees’ beneficiaries upon employee’s death b. May also include: i. Accidental death ii. Dismemberment benefits c. Pays a multiple of the employee’s salary d. Three kinds i. Term life insurance ii. Whole life insurance iii. Universal life insurance e. Term life insurance i. Most common type offered ii. Provides income to employee’s beneficiaries only during a limited period based on a specified number of years subject to a maximum age f. Whole life insurance i. Pays an amount to the designated beneficiaries ii. Do not terminate until payment is made to beneficiaries g. Universal life insurance i. Provides protection to employees’ beneficiaries based on the insurance feature of term life insurance ii. Provides more flexible savings or cash accumulation plan than whole life insurance plans h. Types i. Individual policies From independent insurance agents Representatives of insurance companies ii. Group policies Through their employers Allows all participants covered to benefit from the coverage Employers assume the burden of financing the plan either fully or partially Allows more employees coverage at lower rates per employee 6. Retirement programs (more in Chapter 10) a. Often referred to as pension plans b. Provide income to employees and their beneficiaries during some or all of their retirement c. Individuals may participate in more than one pension program simultaneously d. Employees can participate in pension plans sponsored by their companies (e.g., 401(k) plans) as well as in pension plans that they establish themselves (e.g., the individual retirement account (IRA)) e. Pension programs’ design and implementation are quite complex, largely because of the many laws that govern their operations, particularly ERISA 7. Health protection programs (more in Chapter 10) a. Total health care expenditures rose by more than 5,000 percent from $26.9 billion in 1960 b. Costs to extend health insurance coverage to employees is rising quickly, thereby representing a substantial cost burden c. Companies recognize that offering comprehensive health insurance protection helps recruit and retain the best-qualified individuals, and employees stand to be more productive when they can afford to (and actually do) take care of health problems that could interfere with job performance B. Paid Time Off 1. Compensates employees when they are not performing their primary work duties 2. Usually offered as a matter of custom 3. Can be part of collective bargaining agreements in union settings, like: a. Holidays b. Vacation c. Sick leave d. Personal leave e. Jury duty f. Funeral leave g. Military leave h. Clean-up, preparation, or travel time i. Rest period “break” j. Lunch period k. Integrated time off policies l. Sabbatical leave m. Volunteerism 4. Advantages for employee a. Helps balance work and non-work activities b. Could result in a better attitude and sense of commitment towards the employer 5. Advantages for employer a. Reduced absenteeism b. Better productivity c. Positive employee attitudes and commitment 6. Integrated time off policies a. Combine holiday, vacation, sick leave, and personal leave policies into a single paid time off policy b. Provide individuals the freedom to schedule time off without justifying the reasons c. Reduce the incidence of unscheduled absences that can be disruptive to the workplace because these policies require advance notice unless sudden illness is the cause d. More effective in controlling unscheduled absenteeism than other types of absence control policies e. Relieve the administrative burden of managing separate plans and the necessity to process medical certifications in the case of sick leave policies f. Bereavement or funeral leave are not included because the death of a friend or relative is typically an unanticipated event beyond an employee’s control g. Jury duty and witness leave, military leave, and nonproduction time are influenced by law and nonproduction time is negotiated as part of a collective bargaining agreement h. Sabbatical leaves are also not included in paid time off banks because these are extended leaves provided as a reward to valued, long-service employees 7. Sabbatical leave a. Paid time off for such professional activities as a research project or curriculum development b. Common in college and university settings and apply most often to faculty members c. Granted to faculty members who meet minimum service requirements (e.g., three years of full-time service) with partial or full pay for up to an entire academic year d. The service requirement is applied each time, which limits the number of leaves taken per faculty member e. Outside academia, sabbatical leaves are usually limited to professional and managerial employees who stand to benefit from intensive training opportunities outside the company’s sponsorship. f. Most suitable for such employees as computer engineers whose standards of knowledge or practice are rapidly evolving g. Companies establish guidelines regarding qualification, length of leave, level of pay, and minimum length of employment following completion of a sabbatical h. Companies require employees to remain employed for a minimum of one year following the sabbatical or repay part or all of one’s salary received during the sabbatical i. Necessary in order to protect a company’s investment and to limit moves to competitors 8. Volunteerism a. Refers to giving of one’s time to support a meaningful cause b. From a company’s standpoint, a meaningful cause is associated with the work of not-for-profit organizations such as the United Way to help improve the well-being of people. c. Multitude of meaningful causes throughout the world including: i. Improving literacy ii. Providing comfort to terminally ill patients iii. Serving food at shelters for individuals who cannot afford to feed themselves iv. Serving as a mentor to children who do not have one or more parents v. Spending time with elderly or disabled residents of nursing homes who may no longer have living friends or family d. Companies generally do not dictate the causes for which employees would receive paid time off, except they exclude political campaign and political action groups for eligibility because of possible conflicts of interest with company shareholders and management e. Companies favor providing paid time off for volunteer work for three reasons: i. First, volunteer opportunities allow employees to balance work and life demands ii. Second, giving employees the opportunity to contribute to charitable causes on company time represents positive corporate social responsibility, enhancing the company’s overall image in the public eye iii. Third, paid time off to volunteer is believed to help promote retention f. Employees are likely to feel that the employer shares similar values, possibly boosting commitment to the company g. The amount of time off ultimately varies considerably from company to company, ranging anywhere between one hour per week and, in limited cases for long-service employees, several weeks C. Services 1. Types a. Employee assistance programs b. Family assistance programs c. Flexible scheduling and leave d. Daycare e. Tuition reimbursement f. Transportation services g. Outplacement assistance h. Wellness programs i. Smoking cessation j. Stress management k. Weight control and nutrition programs l. Financial education 2. Employee assistance programs a. Help employees cope with such personal problems that may impair their job performance such as: i. Alcohol or drug abuse ii. Domestic violence iii. Emotional impact of AIDS and other diseases iv. Clinical depression v. Eating disorders b. Employees are likely to experience difficulties that interfere with job performance c. Employee assistance programs’ costs are substantial d. Annual cost per employee of an EAP is approximately $50 to $60 e. Employers’ gains outweigh their out-of-pocket expenses for EAPs due to reduced costs of: i. Turnover ii. Absenteeism iii. Medical costs iv. Unemployment insurance rates v. Workers’ compensation rates vi. Accidents vii. Disability insurance f. In some companies, EAPs are informal programs developed and run on-site by in-house staff g. Other employers contract with outside firms to administer their EAPs, or they rely on a combination of their own resources and help from an outside firm 3. Family assistance programs a. Help employees provide elder care and child care b. Elder care provides physical, emotional, or financial assistance for aging parents, spouses, or other relatives who are not fully self-sufficient because they are too frail or disabled c. Child care programs focus on supervising preschool-age dependent children whose parents work outside the home d. Many employees rely on elder care programs due to parents’ increasing longevity and the growing numbers of dual-income families e. Child care needs arise due to growing number of single parents and dual-career households with children f. Various programs i. Making referrals to on-site child or elder care centers ii. Company-sponsored daycare programs g. Vary in the amount of financial and human resources needed to administer them h. The least expensive and least labor-intensive programs are generally referral services i. Designed to help workers identify and take advantage of available community resources, conveyed through such media as educational workshops, videos, employee newsletters and magazines, and EAPs 4. Flexible scheduling and leave a. Allows employees the leeway to take time off during work hours to care for relatives or react to emergencies b. Flexible scheduling includes: i. Compressed work weeks (e.g., 10-hour days or 12-hour days) ii. Flextime iii. Job sharing c. Helps employees balance the demands of work and family d. Some companies allow employees to extend their legally mandated leave sanctioned by the Family and Medical Leave Act (more in Chapter 10) e. Under extended leave, employers typically continue to provide such employee benefits as insurance and promise to secure individuals comparable jobs upon their return 5. Daycare a. Companies subsidize child or elder day care in community-based centers b. Elder care programs usually provide self-help, meals, and entertainment activities for the participants c. Child care programs typically offer supervision, preschool preparation, and meals d. Facilities must usually maintain state or local licenses 6. Tuition reimbursement a. Promotes employees’ education b. Employer fully or partially reimburses an employee for expenses incurred for education or training c. Substantial variability in the percentage of tuition an employer reimburses, based on the relevance of the course to the companies’ goals or the grades employees earn d. Not synonymous with pay-for-knowledge programs e. Employees choose the courses they wish to take, when they want to take them, and may enroll in courses that are not directly related to their work f. Companies establish set curricula that employees take, and they generally award pay increases to employees who successfully complete courses within the curricula g. Pay increases are not directly associated with tuition reimbursement programs 7. Transportation services a. Help bring employees to the workplace and back home again by using more energy-efficient forms of transportation b. Sponsor public transportation or vanpools: employer-sponsored vans or buses that transport employees between their homes and the workplace c. Provide transit subsidies to employees working in metropolitan and suburban areas served by mass transportation (e.g., buses, subways, and trains) d. Offer transit passes, tokens, or vouchers e. Practices vary from partial subsidy to full subsidy f. Many employers must offer transportation services to comply with the law g. The Clean Air Act Amendments of 1990 require employers in such large metropolitan areas as Los Angeles to comply with state and local commuter-trip reduction laws h. Transportation services enable companies to offset deficits in parking space availability, particularly in congested metropolitan areas i. For employees, using public transportation or joining a vanpool often saves money by eliminating such commuting costs as gas, insurance, car maintenance and repairs, and parking fees 8. Outplacement assistance a. Provides technical and emotional support to employees who are being laid off or terminated b. Variety of career and personal programs designed to develop employees’ job-hunting skills and strategies and to boost employees’ self-confidence c. Those best suited to outplacement assistance programs include: i. Layoffs due to economic hardship ii. Mergers and acquisitions iii. Company reorganizations iv. Changes in management v. Plant closings or relocation vi. Elimination of specific positions, often the result of changes in technology d. Outplacement assistance provides such services as: i. Personal counseling ii. Career assessments and evaluations iii. Training in job search techniques iv. Resume and cover letter preparation v. Interviewing techniques vi. Training in the use of basic workplace technology e. Promote a positive image of the company among those being terminated, as well as their families and friends, by helping these employees prepare for employment opportunities 9. Wellness programs a. Started in the 1980s b. Promote and maintain employees’ physical and psychological health c. Offered on- or off-site d. Relatively new but some evidence already indicates that these innovations can save companies money and reduce employees’ needs for health care e. May emphasize weight loss, smoking cessation, and cardiovascular fitness 10. Smoking cessation a. Smoking cessation plans range from simple campaigns that stress the negative aspects of smoking to intensive programs directed at helping individuals to stop smoking b. Many employers offer courses and treatment to help and encourage smokers to quit c. Other options include offering nicotine replacement therapy (e.g., nicotine gum and patches) and self-help services d. Many companies sponsor such antismoking events as the Great American Smoke-Out, during which companies distribute T-shirts, buttons, and literature that discredit smoking 11. Stress management programs a. Help employees cope with many factors inside and outside work that contribute to stress b. Job conditions, health and personal problems, and personal and professional relationships can make employees anxious and therefore less productive c. Symptoms of stressful workplaces include low morale, chronic absenteeism, low productivity, and high turnover rates d. Employers offer stress management programs to teach workers to cope with conditions and situations that cause stress e. Employers benefit from increased employee productivity, reduced absenteeism, and lower health care costs 12. Weight control and nutrition programs a. Educate employees about proper nutrition and weight loss, both of which are critical to good health b. Information from the medical community has clearly indicated that excess weight and poor nutrition are significant risk factors in cardiovascular disease, diabetes, high blood pressure, and cholesterol levels c. Over time, these programs should give employees better health, increased morale, and improved appearance d. For employers, these programs should result in improved productivity and lower health care costs e. Companies can contribute to employees’ weight control and proper nutrition by sponsoring memberships in such weight-loss programs as Weight Watchers 13. Financial education a. Provides employees with the resource for managing personal budgets and long-term savings (e.g., for retirement) b. Relatively low cost benefit that helps employees plan current and future (retirement) budgets III. The Benefits and Costs of Discretionary Benefits 1. Discretionary benefits can promote competitive advantage 2. Discretionary benefits can also undermine the imperatives of strategic compensation 3. Companies that provide discretionary benefits as entitlements are less likely to promote competitive advantage than companies that design discretionary fringe compensation programs to fit the situation 4. Discretionary benefits offerings can promote particular employee behaviors that have strategic value 5. Discretionary benefits can attract quality employees by meeting the needs of a diverse workforce a. Flexible benefit plans: cafeteria plans b. Allows employees some control over meeting their own needs c. By meeting the diverse needs of its employees, companies can minimize dysfunctional behaviors, like absenteeism and turnover 6. Discretionary benefits can distinguish a company from its competition 7. Discretionary benefits have tax advantages a. Can translate into cost savings b. Companies pursuing differentiation strategies might invest more in research and development c. Companies pursuing lowest cost strategies might be able to lower prices
Final Note: Just as global competition cuts into discretionary benefits spending for a company, so to does a financial recession. The trend of companies cutting costs by reducing discretionary benefits is one that is likely to continue due to further global competition and the recent recessionary period.
CHAPTER 10 Employer-Sponsored Retirement Plans and Health Insurance Programs Learning Objectives 1. State the definitions of qualified plans and nonqualified plans and indicate the main difference between them. 2. List nine minimum standards for qualified plans. 3. Explain what defined benefit plans are. 4. Explain what defined contribution plans are. 5. List and summarize two types of defined contribution plans. 6. Identify and summarize three broad classes of health insurance programs. 7. Briefly state the rationale for consumer-driven health care. Outline I. Exploring Retirement Plans A. Overview B. Origins of Employer-Sponsored Retirement Plans C. Trends in Retirement Plan Coverage and Costs II. Qualified Plans A. Overview B. Minimum Standards for Qualified Plans III. Defined Benefit Plans A. Overview B. Minimum Funding Standards C. Benefit Limits and Tax Deductions IV. Defined Contribution Plans A. Overview B. Individual Accounts C. Investments of Contributions D. Employee Participation in Investments E. Accrual Rules F. Minimum Funding Standards G. Contribution Limits and Tax Deductions V. Types of Defined Contribution Plans A. Types B. Section 401(k) Plans C. Profit-Sharing Plans D. Stock Bonus Plans E. Employee Stock Ownership Plans (ESOPs) VI. Hybrid Plans: Cash Balance Plans A. Overview VII. Defining and Exploring Health Insurance Programs A. Overview B. Origins of Health Insurance Benefits C. Health Insurance Coverage and Costs VIII. Fee-for-Service Plans A. Overview B. Features of Fee-for-Service Plans IX. Managed Care Plans A. Overview B. Health Maintenance Organizations C. Features of Health Maintenance Organizations X. Preferred Provider Organizations A. Overview B. Features of Preferred Provider Organizations C. Deductibles D. Coinsurance XI. Point-of-Service Plans XII. Specialized Insurance Benefits A. Overview B. Prescription Drug Plans C. Mental Health and Substance Abuse D. Features of Mental Health and Substance Abuse Plans XIII. Consumer-Driven Health Care Plans A. Overview B. Flexible Spending Accounts XIV. Discussion Questions and Suggested Answers XV. End of Chapter Case; Instructor Notes, and Questions and Suggested Student Responses Additional Cases from the MyManagementLab Website; Instructor Notes, and Suggested Student Responses Lecture Outline I. Exploring Retirement Plans A. Overview 1. Individuals may receive retirement benefits from as many as three sources a. Employer-sponsored retirement plans provide employees with income after they have met a minimum retirement age and have left the company b. The Social Security Old-Age, Survivor, and Disability Insurance (OASDI) program provides government-mandated retirement income to employees who have made sufficient contributions through payroll taxes (more in Chapter 11) c. Individuals may use their initiative to take advantage of tax regulations that have created such retirement programs as individual retirement accounts (IRAs) and Roth IRAs 2. Companies establish retirement or pension plans following one of three design configurations: a. Defined benefit plan b. Defined contribution plan c. Hybrid plan 3. Tax incentives encourage companies to offer pension programs 4. Employee Retirement Income Security Act of 1974 ERISA Title I and Title II provisions set the minimum standards required to “qualify” pension plans for favorable tax treatment 5. Failure to meet any of the minimum standard provisions “disqualifies” pension plans for favorable tax treatment 6. Pension plans that meet these minimum standards are known as qualified plans 7. Nonqualified plans refer to pension plans that do not meet at least one of the minimum standard provisions; typically, highly paid employees benefit from participation in nonqualified plans (more in Chapter 12) B. Origins of Employer-Sponsored Retirement Plans 1. Until World War II, pension plans were adopted primarily in the railroad, banking, and public utility industries 2. Favorable tax treatment of pensions was established through the passage of the Revenue Act of 1921 and government-imposed wage increase controls during World War II in the early 1940s 3. Led companies to adopt discretionary employee benefits plans such as pensions that were excluded from those wage increase restrictions 4. Current tax treatment of qualified plans continues to provide incentives both for employers to establish plans and for employees to participate in them 5. Contribution to a qualified plan is deductible in computing the employer’s or employee’s taxes based on who made the contribution 6. This preferential tax treatment is contingent on the employer’s compliance with the ERISA C. Trends in Retirement Plan Coverage and Costs 1. According to the U.S. Bureau of Labor Statistics, private sector participation in at least one company-sponsored retirement plans was: a. 55 percent in 1992–1993 b. 32 percent in 1992–1993 in defined contribution plans and slightly less in defined benefit plans c. 48 percent in 2012 in defined contribution plans d. Noticeable decline in defined benefit plans in the last several years 2. Two important explanations for these trends in participation a. Shift in the labor force toward different occupations and industries b. Costs 3. Shift in labor force a. Relative decline in employment among full-time workers, union workers, and workers in goods-producing businesses b. Decline in full-time workers and increase in part-time workers has led to fewer opportunities for participation in company-sponsored retirement plans c. Decline in union affiliation (i.e., union members or just part of the bargaining unit) also contributes to the overall trends i. In 2012, about 66 percent of employees affiliated with unions were eligible to participate in a defined benefit plan whereas only 12 percent of employees not affiliated with unions were eligible. ii. In 2012, about 45 percent of employees affiliated with unions were eligible to participate in a defined contribution plan whereas only 41 percent of employees not affiliated with unions were eligible. d. Expansion of service industries relative to somewhat stable employment in the goods-producing sector helps to explain retirement plan participation e. Fewer service-oriented workers have access to defined benefit plans (17 percent versus 27 percent) f. Percentage of workers with access to defined contribution plans is higher and similar in both industries (approximately 60 percent percent) g. Actual employee participation in defined contribution plans is drastically lower for service employers than for goods-producing companies 4. Costs a. Defined benefit plans are quite costly to employers compared with defined contribution plans b. The Pension Benefit Guaranty Corporation (PBGC) serves as the insurer by taking over pension obligations for companies that terminate their defined benefit plans because of severe financial stress c. Companies with defined benefit plans pay premiums to the PBGC to insure defined benefit plans in the event of severe financial distress d. The Pension Protection Act requires that companies that are at high risk of not meeting their pension obligations pay substantially more to insure defined benefit plans, adding to the substantial cost II. Qualified Plans A. Overview 1. Entitle employers and employees to substantial tax benefits 2. Employers and employees specifically do not pay tax on their contributions within dollar limits that differ for defined benefit and defined contribution plans 3. Investment earnings of the trust in which plan assets are held are generally exempt from tax 4. Participants or beneficiaries do not pay taxes on the value of retirement benefits until they receive distributions B. Minimum Standards for Qualified Plans 1. Thirteen fundamental characteristics: a. Participation requirements b. Coverage requirements c. Vesting rules d. Accrual rules e. Nondiscrimination rules: testing f. Key employee and top-heavy provisions g. Minimum funding standards h. Social Security integration i. Contribution and benefit limits j. Plan distribution rules k. Qualified survivor annuities l. Qualified domestics relations orders m. Plan termination rules and procedures 2. Participation requirements a. Age requirements - employees must be allowed to participate in pension plans after they have reached age 21 b. Service requirements - employees must be allowed to participate in pension plans after they have completed one year of service (based on 1,000 work hours) 3. Coverage requirements a. Limit the freedom of employers to exclude employees b. Qualified plans do not disproportionately favor highly compensated employees 4. Vesting rules a. Vesting refers to an employee’s non-forfeitable rights to pension benefits b. There are two aspects of vesting: i. First, employees are always vested in their contributions to pension plans ii. Second, companies must grant full vesting rights to employer contributions on one of the following two schedules - cliff vesting or six-year graduated schedule c. Cliff vesting schedules must grant employees 100 percent vesting after no more than three years of service d. Known as cliff vesting because leaving one’s job prior to becoming vested under this schedule is tantamount to falling off a cliff because an employee loses all of the accrued employer contributions e. The six-year graduated schedule allows workers to become 20 percent vested after two years and to vest at a rate of 20 percent each year thereafter until they are 100 percent vested after six years of service f. Plans may have faster gradual schedules to 100 percent vesting in fewer than six years g. The graduated schedule is preferable to employees who anticipate changing jobs frequently because they will earn the rights to keep part of the employer’s contribution sooner. h. Employees recognize that layoffs are more common in today’s volatile business environment and they stand to benefit by earning partial vesting rights sooner than earning full vesting rights at a later date i. Employers prefer the cliff vesting schedule recognizing that many employees tend to change jobs more frequently than ever before, allowing them to reclaim non-vested contributions for employees who leave before becoming vested j. After six years of participation in the pension plan, an employee has the right to receive all of the contributions plus interest on the contributions made by the employer 5. Accrual rules a. Qualified plans are subject to minimum accrual rules based on the Internal Revenue Code (IRC) and ERISA b. Accrual rules specify the rate at which participants accumulate (or earn) benefits c. Defined benefit and defined contribution plans use different accrual rules 6. Nondiscrimination rules: Testing a. Nondiscrimination rules prohibit employers from discriminating in favor of highly compensated employees in contributions or benefits, availability of benefits, rights, or plan features b. Employers may not amend pension plans so that highly compensated employees are favored 7. Benefit and contribution limits a. Refer to the maximum annual amount an employee may receive from a qualified defined benefit plan during retirement b. Contribution limits apply to defined contribution plans: i. Employers are limited in the amount they may contribute to an employee’s defined contribution plan each year ii. The Economic Growth and Tax Relief Reconciliation Act of 2001 amended IRC Section 415, mandating increases in these limits effective after December 31, 2001, and indexing them each year for inflation to keep retirement savings from falling behind increases in the cost of goods and services, thereby making retirees less dependent on Social Security retirement benefits (more in Chapter 11) ii. The limits were set to expire after the year 2009, but the Pension Protection Act of 2006 made the limits permanent 8. Allowable tax deductions for employers a. Employers may take tax deductions for contributions to employee retirement plans based on three conditions: i. Retirement plans must be qualified ii. The employer must make contributions before the due date for its federal income tax return for that year iii. Deductible contributions are based on designated amounts set forth by the IRC (as subsequently amended by the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Pension Protection Act of 2006) 9. Plan distribution rules a. Refers to the payment of vested benefits to participants or beneficiaries b. Payable in a variety of ways i. Lump sum distributions are single payments of benefits ii. In defined contribution plans, lump sum distributions equal the vested amount (i.e., the sum of all employee and vested employer contributions, and interest on this sum) iii. In defined benefit plans, lump sum distributions equal the equivalent of the vested accrued benefit iv. Annuities represent a series of payments for the life of the participant and beneficiary v. Annuity contracts are usually purchased from insurance companies, which make payments according to the contract vi. Inherent risk of defined contribution plans has given rise to income annuities vii. Income annuities distribute income to retirees based on retirement savings paid to insurance companies in exchange for guaranteed monthly checks for life 10. Plan termination rules and procedures a. Apply only to defined benefit plans b. Three types of plan terminations: i. Standard termination ii. Distress termination iii. Involuntary termination c. Qualified plans must follow strict guidelines for plan terminations including sufficient notification to plan participants, notification to the PBGC, and distribution of vested benefits to participants and beneficiaries in a reasonable amount of time III. Defined Benefit Plans A. Overview 1. Guarantee retirement benefits specified in the plan document 2. Usually expressed in terms of a monthly sum equal to a percentage of a participant’s preretirement pay multiplied by the number of years he or she has worked for the employer 3. Benefit is fixed by a formula 4. Level of required employer contributions fluctuates from year to year 5. Level depends on the amount necessary to make certain that benefits promised will be available when participants and beneficiaries are eligible to receive them 6. Annual benefits are usually based on age, years of service, and final average wages or salary 7. Retirement plans based on unit benefit formulas specify annual retirement benefits as a percentage of final average salary
Example: Unit Benefit Formulas Let’s assume Mary retires at age 59 with 35 years of service. Let’s also assume her final average salary is $52,500. Mary multiplies $52,500 by the annual percentage of 68.20%. Her annual benefit is $35,805.00 ($52,500 X 68.20%)
B. Minimum Funding Standards 1. Employers make an annual contribution that is sufficiently large to ensure that promised benefits will be available to retirees 2. Actuaries periodically review several kinds of information to determine a sufficient funding level a. Life expectancies of employees and their designated beneficiaries b. Projected compensation levels c. Likelihood of employees terminating their employment before they have earned benefits 3. ERISA imposes the reporting of actuarial information to the IRS, which in turn submits these data to the U.S. Department of Labor, which reviews the data to ensure compliance with ERISA regulations C. Benefit Limits and Tax Deductions 1. IRC sets a maximum annual benefit for defined benefit plans that is equal to the lesser of $205,000 in 2013, or 100 percent of the highest average compensation for three consecutive years 2. The limit is indexed for inflation in $5,000 increments each year beginning after 2006 IV. Defined Contribution Plans A. Overview 1. Employers and employees make annual contributions to separate accounts established for each participating employee, based on a formula contained in the plan document 2. Formulas typically call for employers to contribute a given percentage of each participant’s compensation annually 3. Employers invest these funds on behalf of the employee, choosing from a variety of investment vehicles a. Company stocks b. Diversified stock market funds c. Federal government bond funds 4. Participants bear the risk of possible investment gain or loss, and benefit amounts depend upon several factors, including: a. Contribution amounts b. Performance of investments c. Forfeitures transferred to participant accounts B. Individual Accounts 1. Defined contribution plans contain accounts for each employee into which contributions are made, and losses are debited or gains are credited 2. Contributions to each employee’s account come from four possible sources: a. The first, employer contributions, are expressed as a percentage of an employee’s wage or salary b. The second, employee contributions, are usually expressed as a percentage of the employee’s wage or salary c. The third, forfeitures, come from the accounts of employees who terminated their employment prior to earning vesting rights d. The fourth contribution source is return on investments. In the case of negative returns (or loss), the corresponding amount is debited from employees’ accounts C. Investments of Contributions 1. ERISA requires that a named fiduciary manage investments into defined contribution plans 2. Fiduciaries are individuals who manage employee benefit plans and pension funds 3. Possess discretion in managing the assets of the plan, offering investment advice to employee participants, and administering the plan 4. Responsible for minimizing the risk of loss of assets 5. Possess the authority to delegate investment responsibility to an investment manager 6. Investment managers select investments based on a comparison of the risk and return potential of various investment options 7. May invest assets in a variety of investment vehicles, including equities, government bonds, cash, insurance, and real estate 8. Usually invest assets in more than one type of investment vehicle to balance risk and return potential D. Employee Participation in Investments 1. Some companies may allow plan participants to choose the investment of funds in their individual accounts 2. It is not uncommon for large companies to offer investment alternatives through such companies as Fidelity, Vanguard, and T. Rowe Price E. Accrual Rules 1. The accrued benefit equals the balance in an individual’s account 2. Companies must not reduce contribution amounts based on age 3. Companies may also not set maximum age limits for discontinuing contributions F. Minimum Funding Standards 1. The minimum funding standard for defined contribution plans is less complex than it is for defined benefit plans 2. This standard is met when contributions to the individual accounts of plan participants meet the minimum amounts as specified by the plan G. Contribution Limits and Tax Deductions 1. Employer contributions to defined contribution plans represent one factor in annual additions 2. Refers to the annual maximum allowable contribution to a participant’s account in a defined contribution plan 3. The annual addition includes employer contributions, employee contributions, and forfeitures allocated to the participant’s account 4. In 2013, annual additions were limited to the lesser of $51,000 or 100 percent of the participant’s compensation V. Types of Defined Contribution Plans A. Types 1. Section 401(k) plans 2. Profit sharing 3. Stock bonus plans 4. Employee stock ownership plans (ESOPs) B. Section 401(k) Plans 1. Named after the section of the IRC that created them 2. Also known as cash or deferred arrangements (CODAs) 3. Permit employees to defer part of their compensation to the trust of a qualified defined contribution plan 4. Only private sector or tax-exempt employers are eligible to sponsor 401(k) plans 5. Three noteworthy tax benefits: a. Employees do not pay income taxes on their contributions to the plan until they withdraw funds b. Employers deduct their contributions to the plan from taxable income c. Investment gains are not taxed until participants receive payments C. Profit-Sharing Plans 1. Set up to distribute money to employees 2. Establish a profit-sharing pool (i.e., the money earmarked for distribution to employees) 3. May choose to fund profit-sharing plans based on gross sales revenue or some basis other than profits 4. May take a tax deduction for contributions not to exceed 25 percent of the plan participants’ compensation in 2013 5. Employer contributions a. Three common formulas establish employer contributions: i. Fixed first-dollar-of-profits ii. Graduated first-dollar-of-profits iii. Profitability threshold b. The fixed first-dollar-of-profits formula uses a specific percentage of either pretax or after-tax annual profits (alternatively, gross sales or some other basis) contingent upon the successful attainment of a company goal c. The graduated first-dollar-of-profits formula is not a fixed percentage and varies by profit levels d. Profitability threshold formulas fund profit-sharing pools only if profits exceed a predetermined minimum level, but fall below some established maximum level 6. Allocation formulas a. Companies usually make distributions in one of three ways: i. Equal payments ii. Proportional payments to employees based on their annual salary iii. Proportional payments to employees based on their contribution to profits b. Equal payments to all employees reflect a belief that all employees should share equally in the company’s gains in order to promote cooperation among employees c. For proportional payments to employees based on their annual salary, higher paying jobs presumably indicate the greatest potential to influence a company’s competitive position d. For proportional payments to employees based on their contribution to profits, some companies measure employee contributions to profits based on job performance; however, this approach is not very feasible because it is difficult to isolate each employee’s contributions to profits D. Stock Bonus Plans 1. May be the basis for a company’s 401(k) plan 2. Qualified stock bonus plans and qualified profit-sharing plans are similar because both plans invest in company securities 3. Reward employees with company stock (i.e., equity shares in the company) 4. Benefits are usually paid in shares of company stock 5. Participants of stock bonus plans possess the right to vote as shareholders 6. Voting rights differ based on whether company stock is traded in public stock exchanges E. Employee Stock Ownership Plans (ESOPs) 1. May be the basis for a company’s 401(k) plan 2. Invest in company securities, making them similar to profit-sharing plans and stock bonus plans 3. ESOPs and profit-sharing plans differ because ESOPs usually make distributions in company stock rather than cash 4. ESOPs are essentially stock bonus plans that use borrowed funds to purchase stock 5. Two types: a. Non leveraged—company contributes stock or cash to buy stock which is then allocated to participants b. Leveraged—plan administrator borrows money from a financial institution to purchase company stock which may then be used for the financing of existing debt, estate planning, or financing an acquisition or divestiture VI. Hybrid Plans: Cash Balance Plans A. Overview 1. Combine features of traditional defined benefit and defined contribution plans 2. Cash balance plans are defined benefit plans that define benefits for each employee by reference to the amount of the employee’s hypothetical account balance 3. Many companies have chosen to convert their defined benefit plans to cash balance plans for two key reasons: a. Cash balance plans are less costly to employers than defined benefit plans b. They pay out benefits in a lump sum instead of a series of payments and increase the portability of pension benefits from company to company
Why Cash Balance Plans: In January 2012, employees had worked for their current employer for a median value of 4.4 years; those aged 45 to 54 had worked for their current employer a median value of 7.8 years. Younger workers aged 25 to 34 had worked a median value of 3.2 years. These data suggest workers may be accumulating retirement benefits from several jobs; employers have attempted to deal with these changing needs by seeking alternative approaches to providing retirement income.
4. Most common approaches include a fixed percentage of earnings and percentages that vary by age, length of service, or earnings 5. Participants receive credits expressed as a percentage of annual pay, and these credits earn interest at a designated rate 6. Amounts stated in these individual accounts are strictly hypothetical because the employer contributes money to the plan as a whole covering all employees 7. Complex federal rules require that employers have sufficient assets to cover the amounts expressed in every employee’s hypothetical account VII. Defining and Exploring Health Insurance Programs A. Overview 1. Covers the costs of a variety of services that promote sound physical and mental health, including physical examinations, diagnostic testing, surgery, hospitalization, psychotherapy, dental treatments, and corrective prescription lenses for vision deficiencies 2. Employers usually enter into a contractual relationship with one or more insurance companies to provide health-related services for their employees and, if specified, employees’ dependents 3. The insurance policy specifies the amount of money the insurance company will pay for such particular services as physical examinations 4. Employers pay insurance companies a negotiated amount, or premium, to establish and maintain insurance policies; the term insured refers to employees covered by the insurance policy 5. In the United States, companies can choose from three broad classes of health insurance programs: a. Fee-for-service programs b. Managed care plans c. Point-of-service plans 6. An emerging class of health insurance programs is based on consumer-driven health care, where employees: a. play a greater role in decisions on their health care b. have better access to information c. share more in the costs B. Origins of Health Insurance Benefits 1. Great Depression of the 1930s gave rise to employer-sponsored health insurance programs 2. Congress proposed the Social Security Act of 1935 to address many of the social maladies caused by the adverse economic conditions, incorporating health insurance programs 3. President Franklin D. Roosevelt, however, opposed the inclusion of health coverage under the Social Security Act. Health insurance did not become part of the Social Security Act until an amendment to the Act in 1965 established the Medicare program 4. In the 1930s, hospitals controlled nonprofit companies that inspired today’s Blue Cross and Blue Shield plans 5. In the 1940s, local medical associations created nonprofit Blue Shield plans, which were prepayment plans for physician services 6. The federal government also imposed wage freezes during World War II, which did not extend to employee benefit plans 7. Many employers began offering health care benefits to help compete for and retain the best employees, particularly during the labor shortage when U.S. troops were overseas fighting in World War II 8. In the 1960s, the federal government amended the Social Security Act. Titles XVIII and XIX of the Act established the Medicare and Medicaid programs, respectively 9. The Health Maintenance Organization Act of 1973 (HMO Act) promoted the use of health maintenance organizations 10. Since the 1970s there has been substantial emphasis on managing costs, and consideration has been given to providing coverage to the uninsured (e.g., the failed national health care proposal under former President Bill Clinton) C. Health Insurance Coverage and Costs 1. Companies stand to gain from sponsoring these benefits in at least two ways: a. Healthier workforce should experience a lower incidence of sickness absenteeism b. Health insurance offerings should help the recruitment and retention of employees 2. Most recent comprehensive national data indicate that more than half (70 percent) of all private sector employees had access to at least one employer-sponsored health insurance program in 2012 3. Varies by employer size, industry group, and union presence 4. A larger percentage of employees in larger companies, goods-producing companies, and union employees had coverage 5. Employee contributions represent a relatively small percentage of the health insurance premiums as of March 2012 a. Single coverage - 21 percent b. Family coverage - 32 percent 6. Single coverage extends benefits only to the covered employee 7. Family coverage offers benefits to the covered employee and his or her family members as defined by the plan (usually, spouse and children) VIII. Fee-for-Service Plans A. Overview 1. Provide protection against health care expenses in the form of a cash benefit paid to the insured or directly to the health care provider after the employee has received health care services 2. Three types of eligible health expenses: a. Hospital expenses b. Surgical expenses c. Physician charges 3. Policyholders (employees) may generally select any licensed physician, surgeon, or medical facility for treatment, and the insurer reimburses the policyholders after medical services are rendered 4. Two types of fee-for-service plans: a. Indemnity plans b. Self-funded plans 5. Indemnity plans are based on a contract between the employer and an insurance company which specifies the expenses that are covered and the rate 6. Self-funded plans are those in which companies pay benefits directly from their own assets, either current cash flow or funds set aside in advance for potential future claims 7. Self-funding makes sense when a company’s financial burden of covering employee medical expenses is less than the cost to subscribe to an insurance company for coverage 8. Three types of expenses: a. Hospitalization b. Surgical c. Physician 9. Companies sometimes select major medical plans to provide comprehensive medical coverage instead of limiting coverage to these three specific types of expenses or to supplement these specific benefits B. Features of Fee-for-Service Plans 1. Common fee-for-service stipulations include: a. Deductibles b. Coinsurance c. Out-of-pocket maximums d. Preexisting condition clauses e. Preadmission certification f. Second surgical opinions g. Maximum benefits limits 2. Deductibles a. Employees must pay for services (i.e., meet a deductible) before insurance benefits become active b. The amount is modest, usually a fixed amount ranging anywhere between $100 and $500 depending on the plan c. Amounts may also depend on annual earnings, either expressed as a fixed amount for a range of earnings or as a percentage of income 3. Coinsurance a. Refers to the percentage of covered expenses paid by the insured b. Most indemnity plans stipulate 20 percent coinsurance c. This means the plan will pay 80 percent of covered expenses; the policyholder is responsible for the difference, in this case 20 percent d. Insurance plans most commonly apply no coinsurance for diagnostic testing and 20 percent for other medical services; coinsurance rates for these services tend to be the highest, usually 50 percent. 4. Out-of-pocket maximum a. Protects individuals from catastrophic medical expenses or expenses associated with recurring episodes of the same illness b. Usually stated as a fixed dollar amount and apply to expenses beyond the deductible amount c. Unmarried individuals often have an annual out-of-pocket maximum of $1,000, and family out-of-pocket maximums are as high as $3,500 5. Preexisting condition clauses a. Condition for which medical advice, diagnosis, care, or treatment was received or recommended during a designated period preceding the beginning of coverage b. Designated period for preexisting conditions usually spans between three months and one year c. Imposed by insurance companies in order to limit their liabilities for serious medical conditions that predate an individual’s coverage 6. Preadmission certification a. Physicians must receive approval from a registered nurse or medical doctor employed by an insurance company before admitting patients to the hospital on a nonemergency basis (i.e., when a patient’s life is not in imminent danger) b. Insurance company doctors and nurses judge whether hospitalization or alternative care is necessary c. They determine the length of stay appropriate for the medical condition d. Precertification requirements reserve the right for insurance companies not to pay for unauthorized admissions or hospital stays that extend beyond the approved period 7. Second surgical options a. Reduce unnecessary surgical procedures (and costs) by encouraging an individual to seek an independent opinion from another doctor b. Insurance companies cover the cost of this consultation 8. Maximum benefit limits a. Expressed as a dollar amount over the course of one year or over an insured’s lifetime b. Setting annual maximums provide insurance companies with greater control over total cost expenditures IX. Managed Care Plans A. Overview 1. Emphasize cost control by limiting an employee’s choice of doctors and hospitals 2. Three kinds: a. Health maintenance organizations (HMOs) b. Preferred provider organizations (PPOs) c. Point-of-service plans (POS) B. Health Maintenance Organizations 1. Prepaid medical services—fixed periodic enrollment fees cover HMO members for all medically necessary services only if the services are delivered or approved by the HMO 2. Generally provide inpatient and outpatient care as well as services from physicians, surgeons, and other health care professionals 3. Most medical services are either fully covered or, in the case of some HMOs, participants are required to make nominal copayments 4. Common copayment amounts vary between $15 and $50 for each doctor’s office visit, and $10 to $50 per prescription drug C. Features of Health Maintenance Organizations 1. Share several features in common with fee-for-service plans (out-of-pocket maximums, preexisting condition clauses, preadmission certification, second surgical opinions, and maximum benefits limits) 2. HMOs differ from fee-for-service plans in three important ways: a. HMOs offer prepaid services, whereas fee-for-service plans operate on a reimbursement basis b. HMOs include the use of primary care physicians as a cost-control measure c. HMO coinsurance rates are generally lower than fee-for-service plans 3. HMOs designate some of their physicians, usually general or family practitioners, as primary care physicians 4. Primary care physicians determine when patients need the care of specialists 5. The most important duty is perhaps to diagnose the nature and seriousness of an illness promptly and accurately, after which the primary care physician refers the patient to the appropriate specialist 6. The most common HMO copayments apply to physician office visits, hospital admissions, prescription drugs, and emergency room services 7. Office visits are nominal amounts, usually $25 to $50 per visit; hospital admissions and emergency room services are higher, ranging between $50 and $150 for each occurrence 8. Inpatient services require copayments that are similar in amount to those for hospital admissions for medical treatment; however, copayments for outpatient services (e.g., psychotherapy, consultation with a psychiatrist, or treatment at a substance abuse facility) are generally expressed as a fixed percentage of the fee for each visit or treatment. HMOs usually charge a copayment ranging between 15 percent and 25 percent X. Preferred Provider Organizations A. Overview 1. Select group of health care providers agrees to furnish health care services to a given population at a higher level of reimbursement than under fee-for-service plans 2. Physicians qualify as preferred providers by meeting quality standards, agreeing to follow cost-containment procedures implemented by the PPO, and accepting the PPOs reimbursement structure 3. The employer, insurance company, or third-party administrator helps guarantee provider physicians’ minimum patient loads by furnishing employees with financial incentives to use the preferred providers B. Features of Preferred Provider Organizations 1. Features most similar to fee-for-service plans are out-of-pocket maximums and coinsurance, and those most similar to HMOs include the use of nominal copayments 2. Preexisting condition clauses, preadmission certification, second surgical opinions, and maximum benefits limits are similar to those in fee-for-service and HMO plans 3. PPOs contain deductible and coinsurance provisions that differ somewhat from other plans C. Deductibles 1. Unlike fee-for-service plans, PPOs often apply different deductible amounts for services rendered within and outside the approved network 2. Higher deductibles are set for services rendered by non-network providers to discourage participants from using services outside the network D. Coinsurance 1. PPOs calculate coinsurance as a percentage of fees for covered services 2. PPOs also use two sets of coinsurance payments: a. The first set applies to services rendered within the network of care providers b. The second to services rendered outside the network 3. Coinsurance rates for network services are substantially lower than they are for non-network services. 4. Coinsurance rates for network services range between 10 percent and 20 percent 5. Non-network coinsurance rates run between 60 percent and 80 percent XI. Point-of-Service Plans 1. Combines features of fee-for-service systems and health maintenance organizations 2. Employees pay a nominal copayment for each visit to a designated network of physicians 3. Employees possess the option to receive care from health care providers outside the designated network of physicians, but they pay somewhat more for this choice XII. Specialized Insurance Benefits A. Overview 1. Carve-out plans are set up to cover dental care, vision care, prescription drugs, mental health and substance abuse, and maternity care 2. Specialty HMOs or PPOs usually manage carve-out plans based on the expectation that single-specialty practices may control costs more effectively than multispecialty medical practices B. Prescription Drug Plans 1. Cover the costs of drugs 2. Apply exclusively to drugs that state or federal laws require to be dispensed by licensed pharmacists 3. Prescription drugs dispensed to individuals during hospitalization or treatment in long-term care facilities are not covered by prescription drug plans 4. Three kinds of prescription drug programs: a. Medical reimbursement plans i. Reimburse employees for some or all of the cost of prescription drugs ii. Usually associated with self-funded or independent indemnity plans b. Prescription card programs i. Offer prepaid benefits with nominal copayments ii. Limit benefits to prescriptions filled at participating pharmacies, similar to managed care arrangements for medical treatment c. Mail order prescription drug programs i. Dispense expensive medications used to treat chronic health conditions such as HIV infection or such neurological disorders as Parkinson’s disease ii. Offer a cost advantage because they purchase medications at discounted prices in large volumes C. Mental Health and Substance Abuse 1. Twenty percent of Americans experience some form of mental illness (e.g., clinical depression) at least once during their lifetimes 2. Nearly 20 percent develop a substance abuse problem 3. Employee Assistance Programs (EAPs) represent a portal to taking advantage of employer-sponsored mental health and substance abuse treatment options 4. EAPs help employees cope with personal problems that may impair their personal lives or job performance, including alcohol or drug abuse, domestic violence, the emotional impact of AIDS and other diseases, clinical depression, and eating disorders D. Features of Mental Health and Substance Abuse Plans 1. Cover the costs of a variety of treatments, including: a. Prescription psychiatric drugs (e.g., antidepressant medication) b. Psychological testing c. Inpatient hospital care d. Outpatient care (e.g., individual or group therapy) 2. Diagnostic and Statistical Manual of Mental Disorders (DSM-V) used to diagnose mental disorders based on symptoms, and both fee-for-service and managed care plans rely on the DSM-V to authorize payment of benefits 3. From the employee’s perspective, coinsurance and maximum benefits amounts are generally less generous than general health plans in three ways: a. First, coinsurance amounts for mental health and substance abuse benefits, expressed as a percentage of treatment cost for both indemnity and managed care plans, range between 40 percent and 50 percent b. Second, mental health and substance abuse plans limit the annual number of outpatient visits or days of inpatient care c. Third, annual and lifetime maximum benefits were set significantly lower 4. The Mental Health Parity Act and Addiction Equity Act of 2008 requires that any group health plan that includes mental health and substance use disorder benefits along with standard medical and surgical coverage must treat them equally in terms of: a. out-of-pocket costs b. benefit limits and practices (such as prior authorization and utilization review) XIII. Consumer-Driven Health Care Plans A. Overview 1. Refers to the objective of helping companies maintain control over costs while also enabling employees to make greater choices about health care 2. Enables employers to lower the cost of insurance premiums by selecting plans with higher employee deductibles 3. The most popular consumer-driven approaches are flexible spending accounts and health reimbursement accounts 4. Provide employees with resources to pay for medical and related expenses not covered by higher deductible insurance plans at substantially lower costs to employers B. Flexible Spending Accounts 1. Permit employees to pay for specified health care costs that are not covered by an employer’s insurance plan 2. Prior to each plan year, employees elect the amount of pay they wish to allocate to this kind of plan 3. Employers then use these monies to reimburse employees for expenses incurred during the plan year that qualify for repayment 4. Qualifying expenses include: a. Out-of-pocket costs for medical treatments b. Products or services related to mental or physical defect or disease along with certain associated costs 5. The advantage to employees is the ability to make contributions to their FSAs on a pretax basis 6. The disadvantage is the “use it or lose it” provision of FSAs 7. Employers may establish health reimbursement accounts 8. Three differences between HRAs and FSAs: a. Employers make the contributions to each employee’s HRA whereas employees fund FSAs with pretax contributions deducted from their pay. HRA arrangements are particularly appealing to employees with relatively low salaries or hourly wage rates because they do not contribute to them b. HRAs permit employees to carry over unused account balances from year to year, whereas employees forfeit unused FSA account balances present at the end of the year c. Employers may offer employees HRAs as well as FSAs, and the use of these accounts are not limited to participation in high-deductible health care plans, which is the case for HSAs 9. The idea of consumer-driven health care has most recently received substantially greater attention than before because of the Bush Administration (President George W. Bush) and the Republican-led congress who favor greater employee involvement in their medical care and reducing the cost burden for companies to help maintain competitiveness in the global market 10. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 added section 223 to the IRC, effective January 1, 2004, to permit eligible individuals to establish HSAs to help employees pay for medical expenses 11. Employers offer HSAs along with a high deductible insurance policy, established for employees. High-deductible health insurance plans require substantial deductibles and low out-of-pocket maximums a. For individual coverage, the minimum annual deductible was $1,250 with maximum out-of-pocket limits at or below $6,250 in 2013 b. For family coverage, the deductible was $2,500 with maximum out-of-pocket limits at or below $12,500 12. HSAs offer four main advantages to employees relative to FSAs and HRAs: a. First, HSAs are portable, which means that the employee owns the account balance after the employment relationship ends b. Second, HSAs are subject to inflation-adjusted funding limits c. Third, employees may receive medical services from doctors, hospitals, and other health care providers of their choice, and they may choose the type of medical services they purchase, including such items as long-term care, eye care, and prescription drugs d. Fourth, HSA assets must be held in trust and cannot be subject to forfeiture. That is, any unspent balances in the HSA can be rolled over annually and accumulate tax-free until the participant’s death. FSAs and HRAs have no legal vesting requirement, which means employees do not possess the right to claim unused balances when they terminate employment
• HSAs: In 2013, an employer, an employee, or both may contribute as much as: $3,250 annually for unmarried employees without dependent children or $6,450 for married or unmarried employees with dependent children Employers may require employees to contribute toward these limits. Employee contributions would be withheld from an employee’s pay on a pretax basis.
Instructor Manual for Strategic Compensation: A Human Resource Management Approach Joseph J. Martocchio 9780133457100, 9780135192146
