Discretionary Benefits

Discretionary Benefits Protection Programs

– In general provide: Family benefits, promote health, guard against income loss

– Pension Plans, Income protection, Insurance, etc.

Paid Time Off– Vacation, sick days, etc.

Employee Services– Tuition reimbursement, day care, etc.

Income Protection Programs

Pension Programs– Financing method:

Contributory vs. non-contributory

– Benefit determination: Defined contribution vs. defined benefit

– Tax treatment: Qualified vs nonqualified

Disability Insurance– Short term (usually <6mo)

• 50-100% of pretax salary

– Long term (usually 6 mo-life) • 50-70% of pretax salary

Life Insurance– Term coverage (during work

years)

– Whole life coverage

– Group plans less expensive

Pension Plans Financing methods: Contributory vs. non-contributory

– Contributory = employees contribute– Non-contributory = employer pays all– Employee-financed = employee pays all

Benefit determination: Defined benefit vs. defined contribution– Defined benefit = variable in, fixed out– Defined contribution = fixed in, variable out

• Profit sharing plans, 401K, ESOPs, savings and thrift plans

Tax Treatment: Qualified vs non qualified– Entitle employers to tax benefits--tax deductions– Employees may get tax benefits when retire—not taxed

until retirement

Exhibit 11-3

The General Characteristics of Qualified Pension Plans (1 of 2)

Eligibility

– Employers may impose any initial eligibility EXCEPT age or service.

– Cannot require “minimum age over 21”

– Cannot require “more than one year of service” Nondiscrimination

– Cannot provide highly compensated employees (e.g., VPs, CEOs) with preferential treatment with regard to employer contributions or level of level of benefits received

– Unless the employer contributions or benefit levels are based solely on employees’ compensation level or years of service.

Exhibit 11-3

The General Characteristics of Qualified Pension Plans (2 of 2)

Vesting Requirements

– Employers must provide employees with a non-forfeitable right to the funds they contribute to the plans on behalf of their employees after a specified period, commonly five years.

– Employees who leave before the five-year period forfeit the right to the funds contributed on their behalf by the employer.

Pay-out Restrictions

– Employees generally pay a penalty (usually 10 percent) on withdrawal of funds from any qualified plan before early retirement age (59 1/2 years).

Pension Practices by Industry

Gen

Ind

Ban

k

Insu

r

Util

Reta

il

Ph

arm

0

10

20

30

40

50

60

70

80

90

100

Gen

Ind

Ban

k

Insu

r

Util

Reta

il

Ph

arm

DB+DC

DB

DC

Hewitt & Assoc. 1993

Health Protection Programs Indemnity plans (fee for

service plans)– Hospital, surgical, physicians

– Usual, customary, and reasonable charge

– Deductible

– Coinsurance: % of covered insurance that employee pays

– Out of pocket maximum

Self-funded– Like indemnity, but Company

pays.

Health maintenance organizations (HMOs)– “Prepaid medical services”– Small co-payments– Prepaid group practices or individual

practice assoc Preferred Provider organizations

(PPO)– Select group of health care providers– Quality standards, cost-containment,

PPOs reimbursement structure– No benefits on prepaid basis– Can choose from comprehensive lists

of doctors and facilities

Exhibit 11-4

U.S. Health Care Expenditures, 1960 to 1993 (1

of 3)

YEAR

196019651970197119721973197419751976

PRIVATE

TOTAL

Source: US Health Care Financing Admin., Health Care Financing Review (Winter 1994); table 150.

TOTAL(BILLIONS OF

DOLLARS)

PERCAPITA

(DOLLARS) PRIVATE

TOTAL HEALTH SERVICES ANDSUPPLIES (BILLIONS OF DOLLARS)

27.141.674.382.292.3

102.4115.9132.6151.9

143204346379421464521591671

19.829.944.048.153.959.765.974.185.7

5.78.3

25.028.231.835.942.850.256.9

Exhibit 11-4

U.S. Health Care Expenditures, 1960 to 1993 (2

of 3)

YEAR

197719781979198019811982198319841985

PRIVATE

TOTAL

Source: US Health Care Financing Admin., Health Care Financing Review (Winter 1994); table 150.

TOTAL(BILLIONS OF

DOLLARS)

PERCAPITA

(DOLLARS) PRIVATE

TOTAL HEALTH SERVICES ANDSUPPLIES (BILLIONS OF DOLLARS)

172.6193.2218.3251.1291.4328.2360.8396.0434.5

755836937

1,0681,2271,3691,4901,6201,761

96.6109.7124.0141.3164.3186.5205.3228.0252.9

64.773.684.096.1

113.9126.9139.5151.6165.2

Exhibit 11-4

U.S. Health Care Expenditures, 1960 to 1993 (3

of 3)

YEAR

19861987198819891990199119921993

PRIVATE

TOTAL

Source: US Health Care Financing Admin., Health Care Financing Review (Winter 1994); table 150.

TOTAL(BILLIONS OF

DOLLARS)

PERCAPITA

(DOLLARS) PRIVATE

TOTAL HEALTH SERVICES ANDSUPPLIES (BILLIONS OF DOLLARS)

466.0506.2562.3623.9696.6755.6820.3884.2

1,8712.0132,2142,4332,6862,8823,0943,299

268.7291.3327.5361.7399.8422.8451.7484.3

180.4196.6213.7240.1272.5206.0341.2370.9

Other Health Insurances

Dental insurance– Indemnity dental

insurance

– Self-insured dental plans

– Dental service corporations

– Dental Maintenance organizations

Vision Insurance– Fewer companies

– Eye exams. Lenses, frames, fitting

– Indemnity or managed care

– Limit frequency and types of services., e.g., once a year

– Exclude specialty prescription glasses, contacts.

Paid Time Off

Vacation: 97%* Holidays: 97% Sick leave: 68% Personal: 22% Jury duty: 90%

Funeral: 84% Military leave: 53% Clean-up, prep, travel Rest time, break: 71% Lunch periods

Exhibit 11-6

Pay for Time-Not-Worked Practices in Medium and Large Private Establishments, 1993

BENEFIT

HolidaysVacationPersonal leaveJury dutyFuneral leaveMilitary leave

AVERAGE AMOUNTPERCENT OF FULL-TIMEEMPLOYEE RECIPIENTS

76100

62877753

11 days per yearDepends on tenure3 days per yearNo stated maximum 3 days per year 10 days per year

Source: US Bureau of Labor Statistics, Employee benefits in medium and large private establishments, 1993 (Washington, D.C.: US Government Printing Office, 1994).

Vacation by Industry

Gen

Ind

Ban

k

Ins

Util

Retail

Ph

arm

0102030405060708090

100

Gen

Ind

Ban

k

Ins

Util

Retail

Ph

armBuy-sell Vaca

5: 15-19

10: 15-19

20: 20-24

30: 25-29

Employee Services Employee Assistance

Programs (EAPs): 49%– To cope with personal

problems: drug, alcohol, etc

Family assistance programs– Day care: 5%

– Elder care: 3%

– Flexible scheduling and leave: compressed work weeks, flextime, job sharing, extended leave

Wellness: 23%– Smoking cessation, stress

management, weight control and nutrition

Flexible benefit plans: 9%

Educational assistance: 69%

Transportation services Outplacement Assistance

Work & Family by Industry

Gen Ind

Bank

Ins

Util

Retail

Pharm

0102030405060708090

100

Gen Ind

Bank

Ins

Util

Retail

Pharm

Child C

Elder

Flex

Adopt

EAPs

Flexible Benefit Programs

Advantages Employees unique needs Changing needs of

changing workforce Increased involvement Easy to intro new benefits Cost containment

Disadvantages Employees make bad

choices, uncovered Adverse selection Admin burdens,

expenses increase

Others

Personal convenience: on-site laundry, payroll deductions for personal purchases, casual dress code, parking 90%, recreation facilities 28%

Other monetary: severance pay 39%, relocation allowance 36%

Flextime: Core hours, Adjustable hours Job Security

Illustration of Flextime

6am 9am noon 3pm 6pm

FlexibleTime

FlexibleTime(Lunch)

FlexibleTime

CoreCoreTimeTime

CoreCoreTimeTime

Band Width

Benefit Communication

Increase understanding, appreciation Increase knowledge of costs Cooperation in controlling costs Demonstrate respect for employees