Employee Benefits

Sometimes called fringe benefits

Not related to employee performance

US department of labor –org payments for employee benfoits in Sept. 2013 average 9.61 /hour and
accounted for 30.9 % of total employee compensation.

 Medical related benefits- single most expensive

 Legally acquired benefits (social secuiryt, meducare, unemployment insurance, worker’s
compensation) averaged 2.43 per hour per employee
 Payments for time not worked (paid vacations, holidays, sick leave and personal time off)
averaged 2.17 per hour per employee.
 Retirement and savings – 1.49 per hour per employee

Fringe benefits was coined almost 45 years ago. Bvy War labor board, employer provide benefits were
on the “fringe of wages:”, the agency exempted them from pay controls.

This action led to dramatic expansion of employee benefits that has since occurred. The significance of
benefits total compensate, many employers have dropped the word “fringe” because of its minimizing
effect.

What are employee benefits?

5 general categories

1. legally required, (2) retirement related, (3) insurance related, (4) payment for time not
worked, and (5) others
GROWTH IN EMPLOYEE BENEFITS

Prior to the passage of the Social Security Act in 1935, employee benefits were not wide- spread.

Not only did the act mandate certain benefits, but also its implementation greatly increased the
general public’s awareness of employee benefits. By this time, unions had grown in strength and
had begun to demand more benefits in their contracts. Thus, the 1930s are generally viewed as
the birth years for employee benefits. As productivity continued to increase throughout and after
World War II, more and more employee benefits came into existence, although the categories
used differ slightly from those described earlier. Benefits as a percentage of total compensation
peaked at almost 40 percent in the 1990s. Since then, the percentage has slowly declined. As
stated on page 306, benefits made up almost 31 percent of total compensation in the United
States in 2013.4

1. LEGALLY REQUIRED BENEFITS

Social security is a federally administered insurance system. Under current federal laws, both
employer and employee must pay into the system, and a certain percentage of the employee’s
salary is paid up to a maximum limit.

-mandatory for employees and employers.

Self- employed persons are required to contribute both the employer and employee portions. The
payments distributed under social security can be grouped into three major categories:
retirement benefits, disability benefits, and health insurance.

Retirement Benefits under Social Security

Eligible: at least 62 years old and fully insured: 40 credits (people born before 1929 need fewer
credits, depending on their year of birth)

Credit determined: generally requires that a minimum amount of money be earned ($1,200 per
credit in 2014).

Maximum of 4 credits earned in a calendar year.

The full periodic allotment to which the retiree is entitled begins at age 65 for persons born
before 1938. The age requirement increases slightly for persons born during 1938 or later (up to
a maximum of age 67 for those born during 1960 or later).

Those who retire as early as age 62 may receive periodic payments of a lesser amount
determined by their exact age and earnings from gainful employment. Earnings from gainful
employment do not include income from investments, pensions, or other retirement programs.

The size of the retirement benefit varies according to the individual’s average earnings under
covered employment. However, there are maximum and minimum limits to what eli- gible
individuals and their dependents can receive.
Disability Benefits

Eligible employees who have a disability that is expected to last at least 12 months or to result in
death.

Credit determined: depends on the person’s age (the credits vary for people under age 31), but
generally 20 credits must be earned in 10 years before becoming disabled.

Calculated with basically the same methods used for calculating retirement benefits.
Health Insurance under Social Security/ medicare

provides partial hospital and medical reimbursement for persons over 65.

Hospital insurance, which is known as Part A, is financed through the regular social security
funds. (Most inpatient hospital ex- penses, skilled nursing care, hospice care, and other related
expenses)

The medical insurance, known as Part B, helps a participant pay for a number of different
medical procedures and supplies that are completely separate from hospital care.( normal
outpatient visits and checkups)

Participation in the medical insurance program (Part B) of Medicare is voluntary and requires the
payment of a monthly fee by those wishing to receive coverage. This fee was $104.50 per month
in 2014 for individuals earning less than $85,000 per year and married couples earning less than
$170,000 per year. For those earning more, the fees are substantially higher, depending on the
amount earned.

Part C (Medical Advantage) plans allow the user to choose to receive all of their health care
services through a provider organization. Being under Part C may help lower the costs of
medical services and it may result in extra benefits for an additional monthly fee. A person must
have both Parts A and B to enroll in Part C.

Part D (prescription drug coverage) is voluntary and the costs are paid for by the monthly
premiums of enrollees and Medicare. Unlike Part B in which a person is automatically enrolled
and must opt out if he or she does not want it, with Part D, a person has to opt in by filling out a
form and enrolling in an approved plan.

Problems Facing Social Security

Fewer and fewer people are and will be working to support more and more retirees as the “baby
boom” generation reaches retirement age.

Because tax revenues plummeted so rapidly during the latest recession, some people have
projected that social security could be completely bankrupt as early as 2029.

Others think that the system could last much longer. To resolve this imbalance, Congress must
cut social security benefits, increase revenue to the program, or enact some combination of
these options.

Many experts believe that the long-term solution to the social security program is for individuals
to supplement social security by some other type of retirement plan

Unemployment compensation is designed to provide funds to employees who have lost their jobs
through no fault of their own and who are seeking other jobs.

Title IX of the Social Security Act of 1935 requires employers to pay taxes for unemployment
compensation. However, the law was written in such a manner as to encourage individual states
to establish their own unemployment systems. If a state established its own unemployment
compensation system according to prescribed federal standards, the proceeds of the
unemployment taxes paid by an employer go to the state.
By 1937, all states and the District of Columbia had adopted acceptable unemployment
compensation plans.

To receive unemployment compensation, an individual must submit an application through the

state employment office and must meet three eligibility requirements: The individual must (1)
have been covered by social security for a minimum number of weeks, (2) have been laid off (in
some states, discharged employees may qualify), and (3) be willing to accept any suit- able
employment offered through the state’s unemployment compensation commission.

Generally, unemployment compensation is limited to a maximum of 26 weeks. Extended benefits

can continue up to an additional 13 weeks during times of high unemployment.

During high unemployment times there are two unemployment programs for extending
unemployment insurance: (1) emergency unemployment compensation (EUC) and (2) extended
benefits (EB).

Emergency unemployment compensation 2008(EUC08) and the Middle Class Tax Relief and Job
Creation Act of 2012 allow certain unemployed to extend benefits up to 20 weeks.

Extended benefits are available to unemployed who have exhausted regular unemployment
insurance benefits. The basic Extended Benefits program provides up to 13 additional weeks
when a state is experiencing high unemployment.

The amount received, which varies from state to state, is calculated on the basis of the
individual’s wages or salary received in the previous period of employment.

Unemployment compensation is usually funded through taxes paid by employers; how- ever, in
some states, employees also pay a portion of the tax.

The Federal Unemployment Tax Act (FUTA) requires all profit-making employers to pay a tax on
the first $7,000 of wages paid to each employee. The rate paid varies from employer to employer
based on the number of unemployed people an organization has drawing from the state’s
unemployment fund.

Thus, the system is designed to encourage organizations to maintain stable employment. Since
the passage of the Tax Reform Act of 1986, unemployment compensation has been fully
taxable.

Workers’ Compensation Workers’ compensation is meant to protect employees from loss of

income and to cover extra expenses associated with job-related injuries or illness.

Since 1955, several states have allowed workers’ compensation payments for job-related cases
of anxiety, depression, and certain mental disorders.
However, certain features are common to virtually all programs:

1. The laws generally provide for replacement of lost income, medical expense payments,
rehabilitation of some sort, death benefits to survivors, and lump-sum disability payments.

2. The employee does not have to sue the employer to get compensation; in fact, covered
employers are exempt from such lawsuits.

3. The compensation is normally paid through an insurance program financed through premiums
paid by employers.

4. Workers’ compensation insurance premiums are based on the accident and illness record of
the organization. Having a large number of paid claims results in higher premiums.

5. An element of coinsurance exists in the workers’ compensation coverage. Coinsurance is

insurance under which the beneficiary of the coverage absorbs part of the loss. In automobile
collision coverage, for example, there is often coinsurance in the amount of a $500 deductible
for each accident. In workers’ compensation coverage, there is coinsurance in that the workers’
loss is usually not fully covered by the insurance program. For example, most states provide for
a maximum payment of only two-thirds of wages lost due to the accident or illness.

6. Medical expenses, on the other hand, are usually covered in full under workers’ compensation
laws.

7. It is a no-fault system; all job-related injuries and illnesses are covered regardless of where the
fault for the disability is placed.

Workers’ compensation coverage is compulsory in all but a few states. In these states, it is
elective for the employer. When it is elective, any employers who reject the coverage also give up
certain legal protections.

Benefits paid are generally provided for four types of disability: (1) permanent partial disability,
(2) permanent total disability, (3) temporary partial disability, and (4) tempo- rary total disability.
Should be work-related, should be evaluated by the occupational physician

One major criticism of workers’ compensation involves the extent of coverage different states
provide. The amounts paid, ease of collecting, and the likelihood of collecting all vary
significantly from state to state.

At least 35 states began to make changes in their workers’ compensation laws.

 These changes included tighter eligibility standards, benefit cuts, improved workplace safety,
and campaigns against fraud.

2. RETIREMENT-RELATED BENEFITS

Company-Sponsored Retirement Plans

 Private plans can be funded entirely by the organization or jointly by the organization and
the employee during the time of employment.
- Plans requiring employment contributions are called contributory plans; those that do
not are called noncontributory plans.
- Funded pension plans are financed by money that has been set aside previously for that
specific purpose. Nonfunded plans make payments to recipients out of current
contributions to the fund.

 defined-benefit plan.- most popular

- the employer pledges to provide a benefit determined by a definite formula at the
employee’s retirement date.

 defined-contribution plan, - calls for a fixed or known annual contribution instead of a

known benefit.

Pension Rights

Vesting - rights of employees to receive the dollars paid into a pension or retirement fund by their
em- ployer if they leave the organization prior to retirement.

A frequent approach is deferred full vesting, in which an employee, on meeting certain

age and service requirements, enjoys full vested rights.
A similar approach, called deferred graded vesting, gradually gives the employee an
increasing percentage of benefits until the age and service requirements for full vesting
are met.

Vesting requirements

the employee who was terminated or quit before retirement age did not receive any pension benefits
regardless of the number of years worked under the pension plan or how close he or she was to
retirement age. Even under plans that did provide vesting rights, the requirements were strict in
terms of length of service.

Employers often make requirements for vesting stringent in an effort to keep employees from
leaving the organization, at least until their rights have become fully vested. On the other hand,
employers have experienced the problem of employees quitting after being vested in the pension
plan to draw out the funds credited to them. To counteract this, many employers have incorporated
provisions in their pension plans stating that funds other than those contributed by the employee will
not be distributed until the employee reaches a certain age, even if he or she has left the
organization.

Defined-Benefit Plans

Have a specified formula for calculating benefits.

The most popular approach has been the final-average-pay plan, which the retirement benefit is
based on average earnings in the years, generally two or five, immediately preceding retirement. The
actual benefit sum is then computed as a function of the person’s calculated average earnings and
years of service.

flat-benefit plan - all participants who meet the eligibility requirements receive a fixed ben- efit
regardless of their earnings.

Plans affecting salaried employees usually use the final-average-pay plan. Plans limited to hourly
paid employees have traditionally used the flat-benefit plan.

The cash-balance plan is a hybrid of the traditional defined-benefit plan. The major difference is that
cash-balance plans allow employees to take their cash- balance pension money with them in the
form of a lump sum when they leave the organiza- tion.

Thus, cash- balance plans are easier for the average employee to comprehend than are traditional
defined- benefit plans. One drawback to cash-balance plans is that relatively junior employees can
build up sizable cash balances and, once vested, leave the organization and take the cash with them.
Traditional defined-benefit plans do not offer such ease of portability and therefore encourage
employees not to leave. Cash-balance plans became somewhat controversial in some instances
where companies reduced future benefits as they converted from a traditional defined-benefit plan
to a cash-balance plan. Cash-balance plans gained popularity in the late 1990s and were initially
seen as a compromise from traditional defined-benefit plans. Com- panies liked cash-balance plans
because they were cheaper and easier to maintain than tra- ditional pensions.

Defined-Contribution Plans

every employee has a separate pension account to which the employee and the employer contribute.
If only the employer contributes, it is a noncontributing plan. When both the employee and the
employer contribute, it is a contributing plan.

The most popular type of defined-contribution plan is the 401(k) plan. These plans were named after
section 401(k) of the Internal Revenue Code, which became effective in 1980.

The advantage of a 401(k) plan is that contributions are tax deductible up to a limit. Usually a 401(k)
plan is set up to allow employees to defer a portion of their pay into the plan. Often employers will
match employee contributions to some extent. As of 2014, the maximum tax-exempt contribution
was $17,500 or $23,000 for people over 50 years old.

Usually a 401(k) plan is set up to allow employees to defer a portion of their pay into the plan. Often
employers will match employee contributions to some extent. As of 2014, the maximum tax-exempt
contribution was $17,500 or $23,000 for people over 50 years old. In August of 2006, President Bush
signed the Pension Protection Act (PPA) of 2006 into law.14 Many people think that the PPA was
the most significant legislation to affect retire- ment plans since the passage of the Employee
Retirement Income Security Act (ERISA) in 1974 (ERISA is discussed in the next major section). The
PPA makes permanent the increased contribution limits for 401(k) plans that the Economic Growth
and Tax Relief Reconciliation Act of 2001 (EGTRRA) initially approved. The limits are also indexed to
increase in $500 increments every year. A major thrust of the PPA was also to impose much
stronger funding requirements on employers with traditional defined-benefit pension plans. For
example, previous employers were required to fund pension plans at 90 percent of their pension
liability. Under the PPA, plans will be required to be 100 percent funded (this requirement was
phased in over a period of seven years for most employers). Other requirements designed to
increase the security of traditional pension plans are also included under the PPA. Many people
believe that the passage of PPA signaled a decided shift in government policy toward defined-
contribution retirement plans like the 401(k) plans and away from the more traditional company-
funded defined-benefit plans. Recently court rulings have also lessened companies’ fear of
jettisoning both traditional and cash-balance plans in favor of 401(k) plans. HRM in Action 15.3
describes how and why Boeing has shifted its retirement plan for non- union employees from a
traditional defined-benefit plan to a 401(k) plan. 403(b) Plan The 403(b), or Tax Deferred Annuity
(TDA), plans are very similar to 401(k) plans except that they may only be used in not-for-profit
organizations. These organizations not only are usually religious, charitable, and educational but
also include other entities such as social clubs organized and operated for pleasure, recreation, and
other nonprofit- able purposes. As of January 1, 1997, the not-for-profit organization could also use
401(k) plans for the first time. Because the differences between the two types of plans are subtle,

most not-for-profit plan sponsors have chosen to stay with the familiar TDA plans rather than make
changes. Employer-Sponsored SIMPLE IRA A relatively new retirement option that is available to
employers with 100 or fewer employees receiving at least $5,000 of compensation per year is the
employer-sponsored SIMPLE IRA.

Under a SIMPLE IRA an employee can elect to have the employer make contributions to a SIMPLE
IRA rather than receiving that amount in cash. An employer that establishes a SIMPLE IRA plan must
make either matching contributions or nonelective contributions. Employers making matching
contributions must generally match employee contributions up to 3 percent of the employee’s
compensation for the calendar year. In lieu of making matching contributions, the employer may
make a nonelective contribution of 2 percent of compensation for each eligible employee making at
least $5,000 in compensa- tion during the calendar year. If an employer establishes a SIMPLE IRA
plan, all employees who received at least $5,000 in compensation from the employer during any two
prior tax years and who are reasonably expected to receive at least $5,000 during the current year
must be eligible to participate in the plan for the current year. For 2014, employee elective
contributions were limited to the lesser of (1) the employee’s compensation or (2) $12,000 ($14,500
if age 50 or older). The main advantage of SIMPLE IRA plans is that they do not have to meet the
nondiscrimination requirements, minimum participation and minimum coverage rules, and vesting
rules appli- cable with other types of plans.

ERISA and Related Acts In an effort to ensure the fair treatment of employees under pension plans,
Congress passed the Employee Retirement Income Security Act (ERISA) in 1974. This law was
designed to ensure the solvency of pension plans by restricting the types of investments that could
be made with the plan’s funds and providing general guidelines for fund management. ERISA also
requires that employees have vested rights in their accrued benefits after certain minimum
requirements have been met. Table 15.7 summarizes the major provisions of ERISA. The Sarbane-
Oxley Act, the accounting and financial reform legislation signed by President Bush in 2002, also
contains provisions that affect ERISA. Specifically, the act substantially raises the criminal penalties
for ERISA reporting and disclosure violations. Since its inception, ERISA has been criticized as being
overly costly. In fact, it has been reported that several companies dropped their pension plans rather
than comply with ERISA.15 Another major complaint has been that it causes an unwieldy amount of
paperwork. The exis- tence of ERISA is yet another reason why employers are moving toward 401(k)
plans. In 1984, Congress passed the Retirement Equity Act. The overall impact of this act was to
liberalize the eligibility requirements, vesting provisions, maternity/paternity leaves, and spouse
survivor benefits of retirement plans. Table 15.8 summarizes the major provisions of the Retirement
Equity Act. The Tax Reform Act of 1986 provided for employees to become vested sooner than
under ERISA and other legislation. The provisions of the Tax Reform Act of 1986 were generally date,
the general vesting provisions must follow one of two schedules: • Cliff vesting, under which no
vesting is provided during the first five years of service and the participant becomes vested after five
years of service. • Graded vesting, under which the participant becomes 20 percent vested after
three years of service with an additional 20 percent vesting per year until the participant is 100
percent vested after seven years of service. Mandatory Retirement An amendment to the Age
Discrimination in Employment Act (ADEA) that took effect on January 1, 1987, forbade mandatory
retirement at any age for companies employing 20 or more people in the private sector (there are
certain exceptions, as covered in Chapter 2) and for federal employees. Early Retirement As an
alternative to mandatory retirement, some organizations offer incentives to encourage early
retirement. This method of reducing the workforce is often viewed as a humanitarian way to reduce
the payroll and reward long-tenured employees. The types of incentives of- fered vary, but often
include a lump-sum payment plus the extension of other benefits, such as medical insurance.
Another popular incentive is to credit the employee with additional years of service that can be used
under a defined-benefit plan. Most pension plans have special allowances for voluntary early
retirement. Usually an em- ployee’s pension is reduced by a stated amount for every month that he
or she retires before age 65. Popular early retirement ages are 55, 60, and 62. Most plans require
that an individual shall have worked a minimum number of years with the organization to be eligible
for early retirement. Early retirement has grown in popularity, partly because of the pension benefits
available. Presently, the earliest an employee can receive social security retirement benefits at a
reduced rate is at age 62.

Employees Not Covered by Company Retirement Plans In 1981, legislation was enacted to allow
employees to set up individual plans called individual retirement accounts (IRAs). Although the basic
purpose of IRAs was to pro- vide an option for employees not covered by private plans, anyone who
has an earned income can invest in an IRA. For 2014, allowable contributions to an IRA can generally
be made up to the lesser of $5,500 or the individual’s compensation (wages or other earned income,
plus alimony received). Also, individuals who are at least age 50 by year end may contribute an
additional $1,000 to their IRA account, for a total contribution of $6,500. For married cou- ples, this
amount may be contributed for each person—if the combined compensation of both spouses is at
least equal to the contributed amount (assuming a joint return is filed). While a contribution is
allowable as explained above, the deductibility of an IRA contribution is dependent upon the
participation of the individual—or individual’s spouse—in an employer- sponsored retirement plan. If
there is no active participation in a retirement plan, the individual (and spouse) may deduct the full
amount of their contribution, subject to the compensation limits described above. If one or both
spouses participate in an employer plan, however, the ability to de- duct the IRA contribution may be
limited, based on modified adjusted gross income (AGI). (1) If an individual participates in a plan, the
deduction begins to phase out with modified AGI ranging from $60,000–$70,000 for single or head-
of-household filers, and $96,000– $116,000 for married couples filing jointly. (2) For married couples
where only one is cov- ered under a plan, the phase-out range begins at $181,000 with no deduction
allowed after $191,000. In a simplified

In a simplified employee pension IRA, known as a SEP-IRA or a SEPP-IRA, the employer contributes
up to 25 percent of an employee’s total salary, with a maximum of $52,000 for 2014. These plans are
offered by small businesses or even sole proprietors, which usually don’t have any other retirement
program. SEP-IRAs are subject to the same rules as regular IRAs. SEP-IRA contributions and
earnings on investments are not taxable until withdrawal (presumably retirement), when they
become subject to normal income tax.

The Roth IRA, which was also created by the Taxpayer Relief Act of 1997, allows for nondeductible
contributions of up to $5,500 annually ($11,000 married filing jointly), less the total amounts
contributed to any other IRAs. As with a regular IRA, a special catch-up provision has been added
allowing individuals age 50 and over to contribute an additional $1,000 per year. All earnings in a
Roth IRA then accumulate tax-deferred, and qualified distributions are made free of federal income
tax and penalties. In order for withdrawals from a Roth IRA to be qualified as tax free, the
withdrawals must have been made for at least five years, after the attainment of age 591⁄2, or due to
death or disability, or for first-time home buyer expenses up to a lifetime limit of $10,000.
Contributions to Roth IRAs are phased out from $114,000 through $129,000 of income for single
taxpay- ers and $181,000 to $191,000 for joint filers. The Roth IRA is especially attractive for young
employees because of the long-term growth potential of the investment. Although it can be
complicated, it is possible in many circumstances to convert a traditional IRA to a Roth IRA.

Recent broadening of retirement provisions now enable self-employed persons to have their own
401(k) plans following the same rules as other 401(k) plans.

Preretirement Planning The purpose of such a planning pro- gram is to help employees
prepare for retirement, both financially and psychologically. At the most basic level, preretirement
planning provides employees with information about the financial benefits they will receive upon
retirement. The subjects include social security, pen- sions, employee stock ownership, and health
and life insurance coverage. Other programs go beyond financial planning and cover such topics as
housing, relocation, health, nutrition, sleep, exercise, part-time work, second careers, community
service, recreation, and continu- ing education.

Trends in Retirement Planning

the use of defined-benefit plans has decreased dramatically in the past 15 years. For example, in
1998, 90 percent of the Fortune 100 companies offered some type of defined-benefit plan.16 As of
2013, only 30 percent of the Fortune 100 offered a defined-benefit plan to new salaried hires. In
2012, only 11 percent of the Fortune 1000 companies offered a defined-benefit plan, down from 90
percent in 1985.17 The trend is toward defined-contribution plans and lump-sum payments. As of
June 30, 2012, 70 percent of the Fortune 100 companies offered only defined-contribution plans, up
from only 10 percent in 1998.18 “We continue to see interest in companies offering lump-sum
buyouts to vested former employees who have not yet retired,” says Matt Herrman, leader of
retirement risk management at Towers Watson.19 While the percentages reflected among the
Fortune 100 or the Fortune 1000 companies may not be reflective of organizations in general, the
trends probably are. There is little doubt that organizations are moving away from defined-benefit
plans toward less risky types of other plans such as 401(k) plans.

INSURANCE-RELATED BENEFITS

Company-sponsored medical insurance programs are designed so that the employer pays either the
entire premium or a portion of it, with the employee responsible for the balance. The issue of health
insurance has been vigorously debated by the U.S. Congress over the last several years. The Obama
administration has passed sweeping changes to the health care system and only time will reveal
what ultimately evolves.

Health Insurance
In addition to normal hospitalization and outpatient doctor bills, some plans now cover pre- scription
drugs and dental, eye, and mental health care. Many health care plans incorporate a deductible,
which requires the employee to pay a certain amount of medical expenses each year (usually $50 to
$300 per person) befo re the insurance becomes effective.

The health insurance plan then pays the bulk of the remaining expenses.

Over the years, two distinct health insurance plans have evolved: the base plan and the major
medical expense plan.

 Base plans cover expenses for specified services within certain limits established for
each kind of service.
 Major medical plans define a broad range of covered expenses, including all services
that may be required for successful treatment. When used alone, a major medical plan is
referred to as a comprehensive plan.
Many organizations supplement a base plan with a major medical expense plan. The
reason for combining the two is usually to reduce the deductible amount for certain
types of treatment. The precise coverage, size of the deductible, and other specifics vary
considerably among plans.

The Patient Protection and Affordable Care Act21 / Affordable Care Act (ACA) or Obamacare.

President Obama- March 2010 implemented January 1, 2014 (sign-up began October 2, 2013)

While the ACA influences everything from how hospitals and doctors are reimbursed for care to
whether restaurants post calorie counts on their menus, the thrust of the act relates to efforts to
help insure Americans either who are uninsured or who purchase health insurance on the in- dividual
(“nongroup”) market.

The ACA has provisions that allow certain low-income people to get subsidized health insurance or
government-provided Medicaid. People who make more than the federal poverty line ($23,550 for a
family of four in 2014) but less than four times the poverty line can buy insurance subsidized by the
government. People making less than 133 percent of the poverty line, and living in a state that has
accepted the Medicare expansion, can get Medicaid.

Generally speaking, open enrollment for the ACA lasts from the beginning of October the previous
year to the end of March for the year in question. Uninsured people who do not sign up for the ACA
are subject to an annual fine ($100 in 2014). Much of the debate about the ACA centers around the
government’s decisions as to what insurance qualifies under the act. In order to qualify, an insurance
plan must offer what the Obama administration has defined as “essential” coverage. Table 15.9 lists
this “essential” coverage. While the ACA may have gotten off to a rocky start with significant online
sign-up glitches and because of continued political and personal opposition to the act, it is unclear
just how the act with play out over the long run.

Health Maintenance Organizations (HMOs)

Act of 1973 ushered in the concept of one-stop, prepaid medical services as an alternative to
traditional insurance programs.

Under this arrangement, organizations contract with an approved health maintenance organization
(HMO) to provide all the basic medical services the organization’s employees need for a fixed price.

structured in many different ways:

Some HMOs own their facilities and pay doctors to work for them; others contract with a physician
group to care for its patients; and still others contract either with individual doctors or with networks
of independent physi- cians practicing in their own offices.

Advantages of HMOs include emphasis on prevention of health problems and costs that are usually
lower than those of traditional coverage. One major disadvantage, from the employee’s viewpoint, is
that employees must use physicians employed or approved by the HMO, and these may or may not
be the doctors of their choice. A second disadvantage from the employee’s viewpoint is that, in
many instances, the HMO must preapprove certain procedures and treatments. Because of these
disadvantages and the resulting general employee discontent, the picture of HMOs is not as bright
as in the past.

Preferred provider organizations (PPOs) are another alternative that emerged during the 1980s. A
PPO is formed by contracting with a group of doctors and hospitals to pro- vide services at a
discounted or otherwise attractive price.

The major difference between an HMO and a PPO is that under a PPO, employees have much more
freedom to choose their own doctors.

PPOs do not restrict the provision of care to their own providers. They do, however, offer incentives,
such as higher reimbursement levels, when care is received from a PPO mem- ber.

Point-of-Service Plan

is like a combination of an HMO and a PPO. He or she is required to choose a primary care physician
from within a stipulated health care network. The chosen primary care physician becomes the
person’s “point of service.”

When needed, the primary care physician makes referrals for the patient to other physicians within
the network. A person can use out-of-network physicians, but a smaller portion of the compensation
will be paid by the patient’s health insurance company.

Health Savings Accounts

In December 2003, President Bush signed prescription drug legislation that made drug coverage
available to Medicare’s senior citizens and people with disabilities.

Similar to 401(k) retirement plans in that they allow a certain amount of tax-free funds to be put
aside by employers and employees.

The HSA funds can then be withdrawn to pay for out-of-pocket medical expenses. In general HSAs
operate as follows (the figures are for 2014):
  Employees or employers buy regular health insurance policies with high annual deductibles
of at least $1,250 per year for individuals and $2,500 for families. These policies will cover
the most expensive illnesses, but not routine medical costs such as doctors’ visits and lab
tests.
 Employees open supplemental HSAs, into which they or their employers can put up to $3,300
per year for individuals and up to $6,550 per year for families. This is a catch-up provision
where account holders of age 55 or older can contribute an extra $1,000 per year.
Contributions are tax deductible. The funds will accumulate indefinitely, and can be
withdrawn to pay for routine medical services, such as those now covered by traditional
health plans.

In addition, HSA monies can be spent on services that are not always covered by traditional
plans, such as eye glasses, dental care, and some cosmetic procedures. HSAs are owned by
the individual account holders.

Health Reimbursement Arrangements

Sometimes referred to as health reimbursement accounts, are employer-funded, tax-advantaged

health benefit plans that reimburse employees for out-of-pocket medical expenses and individual
health insurance premiums.

Only be funded by the employer and are tax deductible for the employer and are not taxable to the
employee.

Unlike HSAs, HRAs do not have a limit on the amount that an employer can contribute. Employers
may allow employees’ access to their HRAs after retirement but they cannot distribute cash from the
account to any employee.

HRAs are owned by the employees and can be used with any type of health care plan.

Flexible Spending Accounts / flexible spending arrangements

Are special accounts employees can put money into to pay for certain qualified costs including
health care, dependent care, and commuter costs.

With an FSA, an employee makes tax-deductible contri- butions; employers may also make
contributions, but it is not common.

A major drawback to an FSA is that funds not used by the end of the plan year are forfeited to the
employer.

The plan year is commonly defined as the calendar year but can include a 21⁄2-month grace period
into the next year. The pretax contribution limit for a health care FSA was $2,500 in 2014.

Consumer-Driven Health Plans

relatively new term that includes all plans that use HSAs, or HRAs, or FSAs to offset the out-of-
pocket costs of health care to employees.

The term consumer-driven health care is used because ordinary medical claims are paid by using a
consumer (employee or employer) controlled account.
More likely to be cost conscious than people under ordinary insurance plans.

Dental Insurance

Has been one of the fastest-growing types of employee benefits in recent years.

Some major medical expense plans include dental treatment, but most dental insurance is provided
as a separate plan. The majority of dental plans specify a deductible and require the employee to
pay a portion of the cost of services.

Life Insurance

Benefit commonly available from organizations.

When provided for all employees, it is called group life insurance. Costs of this type of insurance,
based on the characteristics of the entire group covered, are typically the same per dollar of
insurance for all employees.

Generally, the employer provides a minimum coverage, usually $10,000 to $20,000. Presently,
employers can provide up to a maximum of $50,000 worth of life insurance for an employee without
the cost of the policy being considered as income to the individual.

Accident and Disability Insurance

Most accident insurance is designed to provide funds for a limited period of time, usually up to 16
weeks. The amount of benefit is often some percentage of the accident victim’s weekly salary.

 Disability insurance is designed to protect the employee who experiences a long-term or

permanent disability.
Normally, a one- to six-month waiting period is required following the disability before the
employee becomes eligible for benefits. As with accident insurance, disability insurance
benefits are usually cal- culated as a percentage of salary.

PAYMENT FOR TIME NOT WORKED

Paid Holidays and Paid Vacations - Christmas Day, New Year’s Day, Thanksgiving Day, Independence
Day, Labor Day, and Me- morial Day are currently provided as paid holidays by most companies.

Floating holiday, which is observed at the discretion of the employee or the employer.

Personal time-off or personal days- organizations give employees a certain number of days with
pay to at- tend to personal affairs.

Normally these days can be taken at the employee’s discretion. The number of paid holidays
provided by most companies appears to have stabilized at an average of 9 to 10 per year.

Typically, an employee must meet a certain length-of-service requirement before becoming eligible
for a paid vacation. Also, the time allowed for paid vacations generally depends on the employee’s
length of service.

Unlike holiday policies that usually affect everyone in the same manner, vacation policies may differ
among categories of employees. Most organizations allow employees to take vacation by the day or
week but not in units of less than a day.
OTHER BENEFITS

In addition to the previously discussed major benefits, organizations may offer a wide range of
additional benefits, including food services, exercise facilities, health and first-aid services, financial
and legal advice, counseling services, educational and recreational programs, day care services,
adoption assistance, and purchase discounts.

The extent and attractiveness of these benefits vary considerably among organizations. For
example, purchase discounts would be especially attractive to employees of a retail store or an
airline.

EMPLOYEE PREFERENCES AMONG BENEFITS

If an organization expects to get the maximum return from its benefit package in terms of such
factors as retention, motivation, satisfaction, low turnover, and good relations with unions, the
benefits should be those its employees most prefer.

Organizations that provide benefits without input from their employees assume manage- ment
always knows what is best for the employees and that all employees need and desire the same
benefits.

Flexible-Benefit Plan

individual employees have some choice as to specific benefits each will actually receive; usually
employees select from among several options how they want their direct compensation and benefits
to be distributed.

The idea is to allow employees to select benefits most appropriate to their individual needs and
lifestyles. F

“cafeteria plans” - because they provide a “menu,” or choice of benefits, from which employees
select. The selection possibilities within a flexible-benefit plan may vary considerably from plan to
plan.

TRW Systems and Energy Group, Education Testing Service, American Can, Northern States Power,
and North American Van Lines (a subsidiary of PepsiCo) were some of the first companies to offer
flexible benefits.

Why Are Flexible Plans Attractive?

Flexible plans may be of interest to organizations for several reasons:

1. Employee benefits are a very significant component of overall compensation.

2. Flexible benefits can allow employers to limit their contributions without alienating
employees, since options give employees some control over the distribution of benefits.
3. Lifestyles have changed in the past several years, causing employees to reevaluate the need
for certain traditional benefits. For example, in a family where both spouses work and receive
family medical insurance, one coverage is sufficient.
4. Benefits can be useful in recruiting and retaining employees. However, when a mandatory
benefit package is largely unresponsive to a prospective employee’s needs or to the
retention of present employees, the organization is wasting money.
 5. The high cost of benefits is causing organizations to try to communicate effectively the real
cost to the employee. By making specific benefit choices, the employee becomes highly
familiar with the costs associated with each benefit.
6. 6. There can be positive tax ramifications for employees. Also, because certain benefits are
taxable and others are not, different benefit mixes can be attractive to different employees
(the tax ramifications of flexible plans are discussed below).
7. A flexible plan can have a positive impact on employee attitudes and behavior.
8. It can lower overall health care costs.35 Problems with Flexible Plans Flexible plans are not
without their difficulties.

The major problems are as follows:

1. A flexible plan requires more effort to administer.

2. Unions often oppose flexible plans because they are required to give up control over the
program details or face losing some of their previously negotiated benefit improvements.
3. Employees may not choose those benefits that are in their own best in

Tax Implications of Flexible Plans

Flexible plans can have certain tax advantages by allowing employees to purchase benefits on a
pretax basis. Contributions made under a flexible plan are generally not subject to social security tax
(FICA)

Flexible-spending plans that offer employees choices between taxable and nontaxable benefits are
subject to special rules under the Internal Revenue Code’s Section 125, enacted in 1978.

The Deficit Reduction Act (DEFRA) of 1984 clarified many of the tax questions that had clouded
flexible benefits since the inception of Section 125.

The following list summarizes many of the requirements resulting from Section 125 and/or DEFRA:

 An employer cannot require an employee to complete more than three years of service
before becoming eligible under the plan.
 Flexible plans must offer a choice between only taxable and statutory nontaxable benefits.
Taxable benefits allowed include cash, group term life insurance in excess of $50,000, and
group term life insurance for dependents. Statutory nontaxable benefits include group term
life insurance, group legal services, accident and health benefits, dependent care assistance,
and certain types of deferred compensation. Vacation days are also treated as nontaxable
benefits.
 If more than 25 percent of the total nontaxable benefits in the plan are provided for key
employees, as defined by Section 416(i)(1) of the Internal Revenue Code, the key employees
will be taxed on the value of those benefits.
 Employee benefits elections must be irrevocable and made at the beginning of the period of
coverage. • No change in coverage is allowed except in the case of a change in family status.
 No cash-out or carryover of individual balances is allowed if the selected benefits are not
fully used. In other words, any monies left in an account at the end of the year must be
forfeited. Although the present laws do present some restrictions, there is still considerable
 opportunity for establishing effective flexible plans, and the potential gains from flexible
plans are large enough to merit consideration

THE BENEFIT PACKAGE

Unfortunately, many benefit packages are thrown together piecemeal and are poorly balanced.

The major problem is that companies often add or delete new benefits without examining their
impact on the total package. Also, they frequently add or delete benefits for the wrong reasons, such
as a whim of a top executive, union pressures, or a fad.

The key to any successful benefit package is to plan the package and integrate all the different
components. Such an approach ensures that any new benefit additions or deletions will fit in with
the other benefits currently offered.

Many small companies have found they can lower the cost and keep benefits relatively at- tractive by
working through their professional associations. In these cases, the professional or industry
association offers different benefit options to its members. The association often can offer relatively
attractive pricing because of the ability to group its members together.

COMMUNICATING THE BENEFIT PACKAGE

Why are employees often unaware of their benefits? One explanation is that organizations do not
make much of an effort to communicate their employee benefits. Another possible explanation is
that employees cannot easily understand descriptive material on benefits when it is available.

One provision of the Employee Retirement Income Security Act of 1974 (ERISA) requires an
employer to communicate at specified intervals certain types of benefit information in a manner
employees can understand.

Several methods can be used to evaluate the readability of written documents. Generally, in these
methods the number of words per sentence and the percentage of difficult polysyllabic words in the
passage are counted in a readability index related to a school-grade reading level.

The basic goal is to match the readability index of the benefit description to the educational level of
the organization’s employees.

The method used to communicate the benefit package is as important as the readabil- ity of the
document. One successful method of communication is a personalized statement sent periodically
to each employee.

With today’s computerized payroll systems, benefit information can easily be printed on each
employee’s check stub. The latest method for communicating benefits is to use intranet technology.

Having access restricted to qualified users, the intranet, without any additional operating cost, can
provide benefit information around the clock, seven days a week. With the intranet, employees can
log on at work or from any location and instantly access company information regarding most
employee benefits, such as medical and dental plans. With this technology, employees can even
revise benefit forms and update their records.

Other methods for communicating benefit information include posters and visual presentations,
such as videos, slide shows, and flip charts.
Meetings and conferences can also be used to explain an organization’s benefits.