Transcript Defined Contribution Plans

13-1
Chapter
13
McGraw-Hill
Benefit Options
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
13-2
Overview of Employee Benefits
McGraw-Hill
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
Exh. 13.1: Categorization
of Employee Benefits
1
Legally required payments
2
Retirement and savings plan payments
3
Life insurance and death benefits
4
Medical and medical-related benefit payments
5
Paid rest periods, coffee breaks, lunch periods, . . .
6
Payments for time not worked
7
Miscellaneous benefit payments
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13-3
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13-4
Overview: Workers’ Compensation
Form
of no-fault insurance
 Employer
liable for providing benefits to
employees that result from occupational
disabilities or injuries, regardless of fault
 Disability must be work related
Covered
by state, not federal, laws
 Employers
pay premium to insurance
company or state fund
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13-5
Workers’ Compensation: Benefits and Laws
Types
of benefits
 Permanent
total disability and temporary total
disability
 Permanent partial disability - loss of use of a
body member
 Survivor benefits for fatal injuries
 Medical
expenses
 Rehabilitation
Exhibit
13.3: Benefits by Type of Accident
Exhibit
13.4: Commonalities in State
Workers’ Compensation Laws
McGraw-Hill
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Exh. 13.4: Commonalities in
State Workers’ Compensation Laws
ISSUE
MOST COMMON STATE PROVISION
Type of law
Compulsory (in 47 states)
Elective (in 3 states)
Self-insurance
Self-insurance permitted (in 48 states)
Coverage
All industrial employment
Farm labor, domestic servants, and casual employees usually
exempted
Compulsory for all (or most) public sector employees (in 47
states)
Occupational
diseases
Coverage for all diseases arising out of and in the course of
employment
No compensation for “ordinary diseases of life”
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13-6
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13-7
Overview: Social Security
Provides
a basic foundation of security
for American workers and their families
For tax purposes, system is split into two
programs
 Social
Security - 6.2%
 Medicare - 1.45%
Exhibit
13.5: Social Security Through
the Years
Exhibit 13.6: What Social Security Does
to Your Paycheck
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13-8
Social Security in Context
Before Social Security, aging in America often meant poverty and
sometimes poorhouse
 Average life expectancy in 1900: 47 years


When America was agricultural nation, elderly frequently lived w/
children


While life expectancy was increasing quickly, many Ers shunned
older workers


In early 20th century, only ~2% of ees covered by pensions
Most counties had poorhouse (shelters for indigent)
Germany, Sweden, France, England legislated publicly-funded
old-age insurance before Americans took up debate


In 1930, almost 1/3 of American factories had maximum age limits for
new ees (40, 45, 50)
Retirement savings didn’t exist, except among wealthiest
Americans



By 1920, more Americans lived in cities than on farms, urban homes
smaller
Opponents argued that sensible people would provide for themselves
Social Security Act ruled to be constitutional by 5-4 decision in
1937

McGraw-Hill
Source: Wall Street Journal, 9/15/04
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13-9
Social Security and Medicare Benefits
SOCIAL SECURITY
Retirement income
Dependent benefits
Survivor’s benefits
Lump-sum death
benefits
6.2% of eligible
earnings up to
$97,500 in 2007
Employee and
employer funded
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MEDICARE
 Hospital insurance
(Medicare, Part A)
 Medical Insurance
(Medicare, Part B)
 1.45% of eligible earnings
(unlimited)
 Employee and employer
funded
 Prescription drug
coverage added (Part D)
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
13-10
Issues: Social Security
Number
of retired workers is rising without a
corresponding increase in number of
contributors to offset costs
 Currently,
3.5 workers pay into system for each
person collecting benefits
 Within
Reform
next 40 years this ratio drops to about 2 to 1
options
 Increase
 Decrease
 Use
payroll taxes
benefits
general revenues
 Have
social security go to an employee’s own account
to be earmarked of his/her personal retirement
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13-11
Unemployment Insurance
Benefits
financed by federal and state taxes
levied on employers under Federal
Unemployment Tax Act (FUTA)
Employers
pay 6.2% on first $7,000 earned by
each employee ($434)
 5.4%
disbursed to state unemployment commissions
($378)
 0.8%
used for federal administrative costs ($56)
Each
company’s rate depends on its prior
experience with unemployment
 Lower
percentages charged to employers with fewer
discharged employees
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13-12
Unemployment Insurance (continued)
Money
held in federal trust for each state
Payments
typically continue for 26 weeks
 Extended
benefits paid when either of two
conditions prevail
Benefits
based on a percentage of an
individual’s earnings over a recent 52week period
 Most
recent calculation of average weekly
benefit was $211.75
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Unemployment Compensation
Denial of Benefits (review)
13-13
 Voluntarily
quit without a good cause
 Discharged for misconduct (not incompetence)
 Discharged for fraud
 Failed to seek or accept suitable employment
 Received certain other unemployment benefits (e.g.,
severance pay)
 Unemployment was caused by labor disputes resulting in
work stoppages (some limited exceptions, distinction between
strike and lockout, between strikers and those involuntarily
idled)
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13-14
Family and Medical Leave Act
Coverage:
Employers with 50 or more
employees
Eligibility:
12 months employment with
employer in which employee works 1,250 hrs
Qualifying
events: Specified family or medical
reasons
Conditions:
Employee must be able to return to
same job or one with equal status
Health
benefits: Continue while employee is on
leave
Notification:
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30 days
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13-15
“A Good Idea, But…”
 16.5%
of U.S. workforce took leave of absence for family or
medical reasons under FMLA in 2000
 Ers pushing Congress to include better definition of “serious
medical condition” and to prevent ees from taking leave in
small time increments
More than 25% of leave is taken intermittently
 Law currently defines serious medical condition as something that
requires inpatient treatment, such as hospital stay, chronic
illness, or period of incapacitation of more than three consecutive
days accompanied by two treatments by doctor

 SHRM
reports half of HR professionals surveyed indicated they
have granted FMLA requests they felt were not legitimate


Ers say condition is hard to verify
Physicians, fearful of violating medical privacy laws, usually tightlipped

McGraw-Hill
Source: Wall Street Journal, 1/24/05
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
Consolidated Omnibus Budget
Reconciliation Act (COBRA)
Coverage:
13-16
Employers with 20 or more
employees
Eligibility: Provides current and former
employees and their spouses and dependents
with temporary extension of health care benefits
Qualifying events: Specified events (e.g.
layoffs)
Qualifying event coverage: 18 to 36 months,
depending on category of qualifying event
Coverage stops: When employee becomes
eligible for medical insurance from new
employer or gains Medicare coverage
Cost: Cost of insurance plus 2%
McGraw-Hill
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Health Insurance Portability
and Accountability Act (HIPPA)
Key
13-17
provisions
 Lessens
an employer’s ability to deny
coverage for a preexisting condition
 Prohibits
discrimination on the basis of
health-related status
 Provides
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stringent privacy provisions
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Health Insurance Portability and
Accountability Act (HIPAA) (review)
13-18
 Intended
to address “job lock” (where Ee is “locked” into
current job given health insurance considerations)

Protections for coverage under group health plans that limit
exclusions for pre-existing conditions


New Er must credit Ee for previous continuous health coverage
(reduces or eliminates exclusion period)
Prohibits discrimination against Ees based on health status
(including charging different premiums)
 Does
not…
Ensure that Ee who changes jobs will have access to health
insurance on new job
 Ensure affordability of health insurance on new job
 Enable individuals to maintain same group health plan on job
change


McGraw-Hill
Recall that under COBRA Ee provided w/ limited extension of group
health insurance (premium to be paid by Ee) when coverage lost due to
qualifying events (e.g., layoff)
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
13-19
Retirement and Savings Plan Payments
Defined
benefit plans
Defined
contribution plans
Employee
Retirement Income Security
Act (E.R.I.S.A.)
McGraw-Hill
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13-20
Defined Benefit Plans
 Employer
provides a specific pension level defined in
terms of

Fixed dollar amount or

Percentage-of-earnings amount that may vary with years of
seniority
 Employer
finances this obligation by

Following an actuarially determined benefits formula and

Making current payments that will yield the future pension
benefit for a retiring employee
 Determination
of benefit levels

Average earnings at end of tenure (last 3 – 5 years) or

Average career earnings or

Fixed dollar amount not dependent on earnings
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13-21
Defined Contribution Plans
Require
specific contributions by employer
Final
benefit received by employees is
unknown
 Dependent
on investment success of plan
manager
Three
 401
popular forms of these plans
(k) plan
 Employee
 Profit
Stock Ownership Plan (ESOP)
sharing
 Can
be considered a defined contribution plan if
distribution of profits is delayed until retirement
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Exh. 13.7: Relative Advantages of
Different Pension Alternatives
DEFINED BENEFIT PLAN
DEFINED CONTRIBUTION PLAN
1. Provides an explicit benefit
which is easily communicated
Unknown benefit level is difficult to
communicate
2. Company absorbs risk associated
with changes in inflation and
interest rates which affect cost
Employees assume these risks
3. More favorable to long service
employees
More favorable to short-term
employees
4. Employer costs unknown
Employer costs known up front
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13-22
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13-23
Pension Plans
 In
late ’70s, ~60% of American ees had defined-benefit
pension plans

Today, <15%
 In
late ’70s, ~15% of American ees had defined
contribution plan

Today, >60%
 Due
in part to shift in employment away from large,
unionized manufacturing cos
 Defined contribution plans by definition subject to market
fluctuation

Ee who went to work at 25, put 6% of pay into 401(k) every
year for 40 years, retired at 65, withdrew balance and bought
annuity in 2000, would receive 134% of pre-retirement income

But if turned 65 in 2003, 401(k) savings would only buy annuity
paying 57% of pre-retirement income
 Because
women have longer life expectancy than men,
they pay more when buying annuities (however, courts
have ruled illegal for defined-benefit pension plan to pay
out less to women based on life expectancy)

McGraw-Hill
Source: New York Times, 1/9/06
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
13-24
Cash Balance Plans
 Defined
benefit plan that looks similar to defined
contribution plan
 Accounts established, receives contribution credit from Er
(% of pay that may vary with age/yrs service) and interest
credit
 Benefits accrue evenly over course of employment
 Insured by PBGC (unlike defined contribution)
 Benefits portable (available as lump sum at separation
 May require “grandfathering” for Ees nearing retirement (if
defined benefit plan had been in place)
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13-25
Employee Retirement Income Security Act (ERISA)
 Eligibility:

Employees at least 21 years old
Employers may require 6 months of service as a precondition for
participation
 Vesting:
Length of time employee must work for
employer before entitled to employer payments to plan
Any contributions made by an employee to a pension fund are
immediately and irrevocably vested
 Employer’s contribution must vest according to two formulas

 Portability:
Issue for employees moving to new
companies
Law does not require mandatory portability of private pensions
 An employer may voluntarily agree to permit portability (pension
rights must be vested)

 Pension
Benefit Guaranty Corporation (PBGC):
Insures payment of certain pension plan benefits
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13-26
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13-27
Life Insurance
One
of the most common employee benefits
87%
of medium and large
companies offer life insurance
Most
companies offer term policies
 Value
 Most
of one to two times an employee’s salary
plan premiums paid completely by employer
 Varying
amounts of additional coverage often an
option
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13-28
Types of Health Care Systems
Traditional
coverage

Community-based system,
such as Blue Cross

Commercial insurance plan

Self-insurance
Health
maintenance organization (HMO)
Preferred
provider organization (PPO)
Point-of-service
plan (POS)
Exhibit
13.9: How Health Insurance Options
Exhibit
13.10: Average Employer Monthly Costs
Differ
2003
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Controlling Health Care Costs:
Three Strategies
13-29
Motivate
employees to change their
demand for health care via changes in
either design or administration of policies
Change structure of health
care delivery systems and
participate in business coalitions
 HMOs
 PPOs
Promote
preventive health programs
 No-smoking
policies
 Healthy food in cafeterias and vending
machines
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Controlling Health Care Costs:
Strategy One
13-30
Practices
related to design and
administration of health plan
 Increase
deductibles
 Change
coinsurance rates
 Reduce
maximum benefits
 Coordinate
 Audit
benefits with employees and spouses
health care charges
 Require
preauthorization for visits to facilities
 Require
mandatory second opinion for procedures
 Use
intranet technology to allow employees
access to online benefit information
McGraw-Hill
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
“Toyota Rolls Out a New Economy-Class
Drug Plan”
 Toyota
13-31
opening its own pharmacies at its U.S. operations
Contracted w/ CHD Meridian Healthcare (also provides service to
U.S. Steel, Smithfield Foods, GE)
 Amount Toyota spends on prescription-drug costs has more than
tripled since 1998; 15% increase projected for 2004

 For
medications taken on regular basis, ees can save by using
Co pharmacy or mail-order service
 Co will pay entire cost of some medicines if ee uses generic

Ee use of brand-name drug may have co-pay as high as 20%

McGraw-Hill
Source: Fortune, 1/24/05
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
13-32
“Consumer-Driven” Health Plans (CDHPs), Health Savings
Accounts (HSAs), Health Reimbursement Accounts (HRAs)
 Congress
authorized HSAs in 2003, HRAs evolved in
late ‘90s and early ‘00s
 Lower premiums, higher deductible (e.g., $2,000/yr),
more consumer control of health care expenditures
 Er can match part or all of Ee contribution to account
Pre-tax dollars into HSA, up to amount of deductible
 If you don’t spend all your allowance on medical care, you
carry over unused balance


Once deductible is paid, traditional insurance policy
takes over

McGraw-Hill
Maximum out-of-pocket spending limits ($5k for
individuals, $10k for families)
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
13-33
“Consumer-Driven” Health Plans (CDHPs), Health Savings
Accounts (HSAs), Health Reimbursement Accounts (HRAs)

Encourages consumers to take active role in keeping healthcare costs down


Critics fear plans will discourage people from getting care they
need


Ers will provide detailed information about prices and quality of
doctors and hospitals in area
Recent research indicates that when co-payments for prescription
drugs increase, health of patients w/ certain chronic illnesses
(e.g., diabetes and asthma) can suffer
Further, if healthy Ees sign up for HSAs while less-healthy
Ees stick w/ traditional plans, costs of those plans will
increase at even faster rate…


Tax breaks benefit wealthy more than low-income workers
Less-educated workers may have trouble taking advantage of
Web-based information
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13-34
“Consumer-Driven” Health Plans (CDHPs), Health Savings
Accounts (HSAs), Health Reimbursement Accounts (HRAs)
 Percentage
of Ers adding high-deductible plans rose
from 7 percent in 2004 to 13 percent in 2005, 29
percent in 2006, and 33 percent plan to offer them in
2007
 CDHPs that are most successful at controlling costs rely
on variety of programs that encourage smart Ee
consumerism
 53 percent use incentive to encourage ees to complete
health risk appraisals
 43 percent use incentives to encourage ees to improve
their health

McGraw-Hill
Source: USA Today, 10/31/03; Wall Street Journal,
6/23/04; Wall Street Journal, 5/19/04; Business Week,
11/8/04; SHRM HRNews Online, 3/21/06
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
“One Cure for High Health Costs: In-House
Clinics at Companies”
13-35
 Quad/Graphics
(one of biggest printing cos in U.S.)
spent ~$6k/ee on medical costs in 2004, 30% less than
average Co in Wisconsin
 Has brought nearly all primary care in-house
 Doctors’ bonuses tied to patient evaluations and health
outcomes


Quad spends more on primary care than most cos
($715/ee in 2003, cf. $375/ee at other local cos)

McGraw-Hill
Quad pays doctors ~$130-160k/yr, comparable to average
general practitioner in Milwaukee area
Quad spent $1,540/ee in 2003 on hospital costs, cf. local
average of $2,250
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
“One Cure for High Health Costs: In-House
Clinics at Companies”
13-36
Others
considering building in-house
clinics include Toyota
 Need
to have large number of ees
concentrated in a few places to make
economic sense
Also
need harmonious relations w/ ees (Quad
is non-union)

McGraw-Hill
Source: Wall Street Journal, 2/11/05
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
“Health Benefits Offered by Firms Shrink for
Retirees”

29% of early retirees (those retiring before age 65 [thus
generally ineligible for Medicare]) had er-sponsored health
insurance in 2002, down from 39% in 1997





13-37
For those 65+, down from 28% to 25%
13% of private ers offer health benefits to retirees
Coverage estimated to have peaked in late 80s at ~ 45% of all
retirees
1990 FASB rule thought to have contributed to decline
Decline expected to continue, requiring reliance on “Medigap”
private supplemental policies

McGraw-Hill
Source: Wall Street Journal, 3/23/05
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
13-38
Miscellaneous Benefits
Paid Time Off
During Working
Hours
Payment for Time
Not Worked
Child Care
Elder Care
Legal Insurance
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Domestic Partner
Benefits
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Exhibit 13.11: Employees Receiving
Leave Time Benefits
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13-39
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Exhibit 13.12: Benefits Received:
Full-Time vs. Contingent Employees
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13-40
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