McGraw-Hill/IrwinMcGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Milkovich/Newman: Compensation, Ninth EditionMilkovich/Newman: Compensation, Ninth Edition

Chapter 13Chapter 13Benefit OptionsBenefit Options

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Chapter TopicsChapter Topics Legally Required BenefitsLegally Required Benefits Retirement and Savings Plan PaymentsRetirement and Savings Plan Payments Life InsuranceLife Insurance Medical and Medically Related PaymentsMedical and Medically Related Payments Miscellaneous BenefitsMiscellaneous Benefits Benefits for Contingent WorkersBenefits for Contingent Workers Your Turn: Love Inc.Your Turn: Love Inc.

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Exhibit: 13.1 Employee Benefit Exhibit: 13.1 Employee Benefit PreferencesPreferences

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Legally Required BenefitsLegally Required Benefits

Unemployment Insurance

Social Security

Workers’ Compensation

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Exhibit 13.2 Categorization of Employee BenefitsExhibit 13.2 Categorization of Employee Benefits

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Exhibit 13.3 Participation in Selected Exhibit 13.3 Participation in Selected Benefits, 2005Benefits, 2005

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Overview: Workers’ CompensationOverview: Workers’ Compensation Form of no-fault insuranceForm of no-fault insurance

– Employer liable for providing benefits to employees Employer liable for providing benefits to employees that result from occupational disabilities or injuries, that result from occupational disabilities or injuries, regardless of faultregardless of fault

– Disability must be work-relatedDisability must be work-related Covered by State, not Federal lawsCovered by State, not Federal laws

– Employers pay premium to insurance company or Employers pay premium to insurance company or state fundstate fund

– For every dollar insurers take in to cover workplace For every dollar insurers take in to cover workplace injuries and illnesses, they pay out $1.21 to cover injuries and illnesses, they pay out $1.21 to cover claimsclaims

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Workers’ Compensation: Benefits and Workers’ Compensation: Benefits and LawsLaws

Types of benefits:Types of benefits:– Permanent total disability and temporary total Permanent total disability and temporary total

disabilitydisability– Permanent partial disability - loss of use of a Permanent partial disability - loss of use of a

body memberbody member– Survivor benefits for fatal injuriesSurvivor benefits for fatal injuries– Medical expensesMedical expenses– RehabilitationRehabilitation

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Exhibit 13.4: Benefits by Type of Exhibit 13.4: Benefits by Type of Injury: New HampshireInjury: New Hampshire

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Exhibit: 13.5: Commonalities in State Exhibit: 13.5: Commonalities in State Workers’ Compensation LawsWorkers’ Compensation Laws

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Issues: Workers’ CompensationIssues: Workers’ Compensation

Increased costs of medical expenses

Use of workers’ compensation as a surrogate for more

stringent unemployment insurance

Cost of replacing worker wages has risen

Cost increases

due to . . .

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Workers’ CompensationWorkers’ Compensation Social SecuritySocial Security Unemployment InsuranceUnemployment Insurance Family and Medical Leave Act (FMLA)Family and Medical Leave Act (FMLA) Consolidated Omnibus Budget Reconciliation Consolidated Omnibus Budget Reconciliation

Act (COBRA)Act (COBRA) Health Insurance Portability and Accountability Health Insurance Portability and Accountability

Act (HIPAA)Act (HIPAA)

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Workers’ Compensation (cont.)Workers’ Compensation (cont.) Retirement and Savings Plan PaymentsRetirement and Savings Plan Payments Defined Benefit PlansDefined Benefit Plans Defined Contribution PlansDefined Contribution Plans Individual Retirement Accounts (IRAs)Individual Retirement Accounts (IRAs) Employee Retirement Income Security Act Employee Retirement Income Security Act

(ERISA)(ERISA)

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Social SecuritySocial Security Provides a basic foundation of security for Provides a basic foundation of security for

American workers and their familiesAmerican workers and their families For tax purposes, system is split into two For tax purposes, system is split into two

programs:programs:– Social Security - 6.2%Social Security - 6.2%

– Medicare - 1.45%Medicare - 1.45%

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Issues: Social SecurityIssues: Social SecurityNumber of retired workers is rising without a Number of retired workers is rising without a

corresponding increase in number of contributors corresponding increase in number of contributors to offset coststo offset costs– Currently, 3.5 workers pay into system for each Currently, 3.5 workers pay into system for each

person collecting benefitsperson collecting benefits– Within next 40 years this ratio drops to about 2 to 1Within next 40 years this ratio drops to about 2 to 1

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Issues: Social Security (Cont.)Issues: Social Security (Cont.) Reform options:Reform options:

– Increase payroll taxesIncrease payroll taxes– Decrease benefitsDecrease benefits– Use general revenuesUse general revenues– Have social security go to an employee’s own Have social security go to an employee’s own

account to be earmarked of his/her personal account to be earmarked of his/her personal retirementretirement

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Benefits under Social SecurityBenefits under Social Security Old age or disability benefitsOld age or disability benefits Benefits for dependents of retired or disabled Benefits for dependents of retired or disabled

workersworkers Benefits for surviving family members of a Benefits for surviving family members of a

deceased worker, and deceased worker, and Lump sum death paymentsLump sum death payments

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Unemployment InsuranceUnemployment InsuranceFinancing:Financing:

– Majority of states, unemployment compensation is Majority of states, unemployment compensation is financed exclusively by employers that pay federal financed exclusively by employers that pay federal and state unemployment insurance taxand state unemployment insurance tax

– Federal tax amounts to 6.2 percent of the first $7,000 Federal tax amounts to 6.2 percent of the first $7,000 earned by each workerearned by each worker

– States additionally impose a tax above the $7,000 States additionally impose a tax above the $7,000 figurefigure

– The extra amount a company pays depends on its The extra amount a company pays depends on its experience ratingexperience rating

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Unemployment Insurance (cont.)Unemployment Insurance (cont.) Coverage:Coverage:

– Eligibility requirements to receive benefits:Eligibility requirements to receive benefits: Must meet State requirements for wages earned or time Must meet State requirements for wages earned or time

worked during an established (one year) period of time worked during an established (one year) period of time referred to as a “base period”referred to as a “base period”

Must be determined to be unemployed through no fault of Must be determined to be unemployed through no fault of your own and meet other eligibility requirements of State your own and meet other eligibility requirements of State lawlaw

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Unemployment Insurance (cont.)Unemployment Insurance (cont.) Duration:Duration:

– Benefit duration involves a complex formula that Benefit duration involves a complex formula that ensures extended benefits in times of high ensures extended benefits in times of high unemploymentunemployment When number of insured unemployed in a State reaches 6 When number of insured unemployed in a State reaches 6

percentpercent When unemployment rate is greater than 5 percent and at When unemployment rate is greater than 5 percent and at

least 20 percent higher than in the same period of the two least 20 percent higher than in the same period of the two preceding calendar years and remains that way for 13 preceding calendar years and remains that way for 13 weeksweeks

Weekly benefit amountWeekly benefit amount Controlling unemployment taxesControlling unemployment taxes

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Family and Medical Leave ActFamily and Medical Leave ActCoverage:Coverage:

– Employers with 50 or more employeesEmployers with 50 or more employeesEligibility:Eligibility:

– 12 months employment with employer in which 12 months employment with employer in which employee works 1,250 hrsemployee works 1,250 hrs

Qualifying events:Qualifying events:– Specified family or medical reasonsSpecified family or medical reasons

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Family and Medical Leave Act (cont.)Family and Medical Leave Act (cont.)

Eligibility:Eligibility:– Employee must have worked at least 1,250 hours Employee must have worked at least 1,250 hours

for the employer in the previous yearfor the employer in the previous yearCommon reasons for leave:Common reasons for leave:

– Caring for an ill family member or adopting a ChildCaring for an ill family member or adopting a Child

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Consolidated Omnibus Budget Consolidated Omnibus Budget Reconciliation Act (COBRA)Reconciliation Act (COBRA)

Coverage: Coverage: – Employers with 20 or more employeesEmployers with 20 or more employees

Eligibility: Eligibility: – Provides current and former employees and their Provides current and former employees and their

spouses and dependents with temporary extension of spouses and dependents with temporary extension of health care benefitshealth care benefits

Qualifying events: Qualifying events: – Specified events (e.g. layoffs)Specified events (e.g. layoffs)

Qualifying event coverage: Qualifying event coverage: – 18 to 36 months, depending on category of qualifying 18 to 36 months, depending on category of qualifying

eventevent

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Health Insurance Portability and Health Insurance Portability and Accountability Act (HIPPA)Accountability Act (HIPPA)

Key provisionsKey provisions

– Lessens an employer’s ability to deny coverage for a Lessens an employer’s ability to deny coverage for a preexisting conditionpreexisting condition

– Prohibits discrimination on the basis of health-Prohibits discrimination on the basis of health-related statusrelated status

– Provides stringent privacy provisionsProvides stringent privacy provisions

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Employees rank pensions in the top Employees rank pensions in the top three of all benefits in terms of three of all benefits in terms of importanceimportance

Defined benefit plansDefined benefit plans

Defined contribution plansDefined contribution plans

Individual Retirement Accounts (IRAs)Individual Retirement Accounts (IRAs)

Employee Retirement Income Security Employee Retirement Income Security Act (ERISA)Act (ERISA)

Retirement and Savings Plan PaymentsRetirement and Savings Plan Payments

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Defined Benefit PlansDefined Benefit PlansEmployer provides a specific pension level Employer provides a specific pension level

defined in terms of:defined in terms of:– Fixed dollar amount Fixed dollar amount oror– Percentage-of-earnings amount that may vary with Percentage-of-earnings amount that may vary with

years of seniorityyears of seniorityEmployer finances this obligation by:Employer finances this obligation by:

– Following an actuarially determined benefits formula Following an actuarially determined benefits formula andand

– Making current payments that will yield the future Making current payments that will yield the future pension benefit for a retiring employeepension benefit for a retiring employee

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Defined Benefit Plans (Cont.)Defined Benefit Plans (Cont.) Determination of benefit levelsDetermination of benefit levels

– Average earnings at end of tenure (last 3 – 5 years) Average earnings at end of tenure (last 3 – 5 years) oror

– Average career earnings Average career earnings oror– Fixed dollar amount not dependent on earningsFixed dollar amount not dependent on earnings

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Defined Contribution PlansDefined Contribution Plans Require specific contributions by employerRequire specific contributions by employer Final benefit received by employees is unknownFinal benefit received by employees is unknown

– Dependent on investment success of plan managerDependent on investment success of plan manager Three popular forms of these plansThree popular forms of these plans

– 401 (k) plan401 (k) plan– Employee Stock Ownership Plan (ESOP)Employee Stock Ownership Plan (ESOP)– Profit sharingProfit sharing

Can be considered a defined contribution plan if distribution Can be considered a defined contribution plan if distribution of profits is delayed until retirementof profits is delayed until retirement

Cash balance plans hybrid of defined benefit Cash balance plans hybrid of defined benefit and defined contribution plansand defined contribution plans

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Exhibit. 13.10: Relative Advantages ofExhibit. 13.10: Relative Advantages ofDifferent Pension AlternativesDifferent Pension Alternatives

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Individual Retirement Accounts (IRAs)Individual Retirement Accounts (IRAs) Tax-favored retirement savings plan that Tax-favored retirement savings plan that

individuals can establish themselvesindividuals can establish themselves– IRAs are used mostly to store wealth accumulated in IRAs are used mostly to store wealth accumulated in

other retirement vehicles, rather than as a way to other retirement vehicles, rather than as a way to build new wealthbuild new wealth

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Employee Retirement Income Security Employee Retirement Income Security Act (ERISA)Act (ERISA)

Eligibility:Eligibility: Employees at least 21 years oldEmployees at least 21 years old– Employers may require 6 months of service as a Employers may require 6 months of service as a

precondition for participationprecondition for participation Vesting:Vesting: Length of time employee must work Length of time employee must work

for employer before entitled to employer for employer before entitled to employer payments to planpayments to plan – Any contributions made by an employee to a Any contributions made by an employee to a

pension fund are immediately and irrevocably vestedpension fund are immediately and irrevocably vested– Employer’s contribution must vest according to two Employer’s contribution must vest according to two

formulasformulas

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Employee Retirement Income Security Employee Retirement Income Security Act (ERISA) (cont.)Act (ERISA) (cont.)

Portability: Issue for employees moving to new Portability: Issue for employees moving to new companiescompanies– Law does not require mandatory portability of Law does not require mandatory portability of

private pensionsprivate pensions– An employer may voluntarily agree to permit An employer may voluntarily agree to permit

portability (pension rights must be vested)portability (pension rights must be vested) Pension Benefit Guaranty Corporation (PBGC): Pension Benefit Guaranty Corporation (PBGC):

Insures payment of certain pension plan benefitsInsures payment of certain pension plan benefits

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How Much Retirement Income to How Much Retirement Income to Provide?Provide?

What level of retirement income should be set What level of retirement income should be set as a target?as a target?

Should social security benefits be factored in Should social security benefits be factored in when considering level of retirement income?when considering level of retirement income?

Should other post-retirement income sources be Should other post-retirement income sources be integrated with pension?integrated with pension?

How large a role should seniority play in How large a role should seniority play in determining pension level?determining pension level?

What can a company afford? What can a company afford?

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Life InsuranceLife Insurance One of the most common employee benefitsOne of the most common employee benefits

87% of medium and large companies offer life 87% of medium and large companies offer life insuranceinsurance

Most companies offer term policiesMost companies offer term policies

– Value of one to two times an employee’s salaryValue of one to two times an employee’s salary

– Most plan premiums paid completely by employerMost plan premiums paid completely by employer

– Varying amounts of additional coverage often an optionVarying amounts of additional coverage often an option

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Health and Medical BenefitsHealth and Medical BenefitsGeneral

Health CareHealth Care: Cost Control Strategies

Short- & Long- Term Disability

Dental Insurance

Vision Care

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General Health CareGeneral Health CareAn employer’s share of health care costs is An employer’s share of health care costs is

contributed into one of six health care systems:contributed into one of six health care systems:

– Community-based systemCommunity-based system

– Commercial insurance planCommercial insurance plan

– Self-insuranceSelf-insurance

– Health maintenance organization (HMO)Health maintenance organization (HMO)

– Preferred provider organization (PPO)Preferred provider organization (PPO)

– Point-of-service plan (POS)Point-of-service plan (POS)

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Motivate employees to change their demand for Motivate employees to change their demand for health care via changes in either design or health care via changes in either design or administration of policiesadministration of policies

Change structure of health care delivery systems Change structure of health care delivery systems and participate in business coalitionsand participate in business coalitions

– HMOsHMOs

– PPOsPPOs

Controlling Health Care Costs: Three Controlling Health Care Costs: Three StrategiesStrategies

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Controlling Health Care Costs: Three Controlling Health Care Costs: Three Strategies (cont.)Strategies (cont.)

Promote preventive health programsPromote preventive health programs

– No-smoking policiesNo-smoking policies

– Healthy food in cafeterias and vending machinesHealthy food in cafeterias and vending machines

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Controlling Health Care Costs: Controlling Health Care Costs: Strategy OneStrategy One

Practices related to design and administration of Practices related to design and administration of health planhealth plan

– Increase deductiblesIncrease deductibles

– Change coinsurance ratesChange coinsurance rates

– Reduce maximum benefitsReduce maximum benefits

– Coordinate benefits with employees and spousesCoordinate benefits with employees and spouses

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Controlling Health Care Costs: Strategy Controlling Health Care Costs: Strategy One (cont.)One (cont.)

– Audit health care chargesAudit health care charges

– Require preauthorization for visits to facilitiesRequire preauthorization for visits to facilities

– Require mandatory second opinion for proceduresRequire mandatory second opinion for procedures

– Use intranet technology to allow employees access Use intranet technology to allow employees access to online benefit informationto online benefit information

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Short- and Long-Term DisabilityShort- and Long-Term Disability Workers’ compensation covers disabilities that Workers’ compensation covers disabilities that

are work-relatedare work-related Social security has provisions for disability Social security has provisions for disability

income to those who qualifyincome to those who qualify Private sources of disability income:Private sources of disability income:

– Employee salary continuation plansEmployee salary continuation plans

– Long-term disability plansLong-term disability plans

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Miscellaneous BenefitsMiscellaneous BenefitsPaid Time Off

During Working Hours

Payment for Time Not Worked

Child Care

Elder Care

Domestic Partner Benefits

Legal Insurance

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Rest periodsRest periods

Lunch periodsLunch periods

Wash-up timeWash-up time

TravelTravel

Clothes-change timeClothes-change time

Get-ready timeGet-ready time

Rest periodsRest periods

Lunch periodsLunch periods

Wash-up timeWash-up time

TravelTravel

Clothes-change timeClothes-change time

Get-ready timeGet-ready time

Paid Time Off During Working HoursPaid Time Off During Working Hours

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Paid vacations and Paid vacations and payments in lieu of vacationpayments in lieu of vacation

Payments for holidays not Payments for holidays not workedworked

Paid sick leavePaid sick leave

OtherOther

– National guardNational guard

– Army, or other reserve dutyArmy, or other reserve duty

– Jury duty Jury duty

– Voting pay allowancesVoting pay allowances

– Personal reasonsPersonal reasons

Paid vacations and Paid vacations and payments in lieu of vacationpayments in lieu of vacation

Payments for holidays not Payments for holidays not workedworked

Paid sick leavePaid sick leave

OtherOther

– National guardNational guard

– Army, or other reserve dutyArmy, or other reserve duty

– Jury duty Jury duty

– Voting pay allowancesVoting pay allowances

– Personal reasonsPersonal reasons

Pay for Time Not WorkedPay for Time Not Worked

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Exhibit 13.18: Employees Receiving Exhibit 13.18: Employees Receiving Leave Time BenefitsLeave Time Benefits

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Exhibit 13.19: Benefits Received: Full-Exhibit 13.19: Benefits Received: Full-Time vs. Contingent EmployeesTime vs. Contingent Employees