Ch. 11: Discretionary benefits

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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
 Disability
Insurance
– Short term (usually <6mo)
 Pension
• 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
Programs
– Financing method:
Contributory vs. noncontributory
– Benefit determination:
Defined contribution vs.
defined benefit
– Tax treatment: Qualified vs
nonqualified
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
•
 Tax
–
–
Profit sharing plans, 401K, ESOPs, savings and thrift plans
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
DB+DC
DB
DC
Pharm
Retail
Util
Insur
Bank
Gen Ind
100
90
80
70
60
50
40
30
20
10
0
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)
TOTAL
YEAR
1960
1965
1970
1971
1972
1973
1974
1975
1976
TOTAL HEALTH SERVICES AND
SUPPLIES (BILLIONS OF DOLLARS)
TOTAL
PER
(BILLIONS OF CAPITA
DOLLARS) (DOLLARS)
27.1
41.6
74.3
82.2
92.3
102.4
115.9
132.6
151.9
143
204
346
379
421
464
521
591
671
PRIVATE
PRIVATE
19.8
29.9
44.0
48.1
53.9
59.7
65.9
74.1
85.7
5.7
8.3
25.0
28.2
31.8
35.9
42.8
50.2
56.9
Source: US Health Care Financing Admin., Health Care Financing Review (Winter 1994); table 150.
Exhibit 11-4
U.S. Health Care Expenditures, 1960 to 1993 (2
of 3)
TOTAL
YEAR
1977
1978
1979
1980
1981
1982
1983
1984
1985
TOTAL HEALTH SERVICES AND
SUPPLIES (BILLIONS OF DOLLARS)
TOTAL
PER
(BILLIONS OF CAPITA
DOLLARS) (DOLLARS)
172.6
193.2
218.3
251.1
291.4
328.2
360.8
396.0
434.5
755
836
937
1,068
1,227
1,369
1,490
1,620
1,761
PRIVATE
PRIVATE
96.6
109.7
124.0
141.3
164.3
186.5
205.3
228.0
252.9
64.7
73.6
84.0
96.1
113.9
126.9
139.5
151.6
165.2
Source: US Health Care Financing Admin., Health Care Financing Review (Winter 1994); table 150.
Exhibit 11-4
U.S. Health Care Expenditures, 1960 to 1993 (3
of 3)
TOTAL
YEAR
1986
1987
1988
1989
1990
1991
1992
1993
TOTAL HEALTH SERVICES AND
SUPPLIES (BILLIONS OF DOLLARS)
TOTAL
PER
(BILLIONS OF CAPITA
DOLLARS) (DOLLARS)
466.0
506.2
562.3
623.9
696.6
755.6
820.3
884.2
1,871
2.013
2,214
2,433
2,686
2,882
3,094
3,299
PRIVATE
PRIVATE
268.7
291.3
327.5
361.7
399.8
422.8
451.7
484.3
180.4
196.6
213.7
240.1
272.5
206.0
341.2
370.9
Source: US Health Care Financing Admin., Health Care Financing Review (Winter 1994); table 150.
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
Holidays
Vacation
Personal leave
Jury duty
Funeral leave
Military leave
PERCENT OF FULL-TIME
EMPLOYEE RECIPIENTS
76
100
62
87
77
53
AVERAGE AMOUNT
11 days per year
Depends on tenure
3 days per year
No 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
Buy-sell Vaca
5: 15-19
10: 15-19
20: 20-24
30: 25-29
Pharm
Retail
Util
Ins
Bank
Gen Ind
100
90
80
70
60
50
40
30
20
10
0
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
Child C
Elder
Flex
Adopt
EAPs
Pharm
Retail
Util
Ins
Bank
Gen Ind
100
90
80
70
60
50
40
30
20
10
0
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
Flexible
Time
6am
Core
Time
9am
Flexible
Time
(Lunch)
noon
Band Width
Core
Time
Flexible
Time
3pm
6pm
Benefit Communication
 Increase
understanding, appreciation
 Increase knowledge of costs
 Cooperation in controlling costs
 Demonstrate respect for employees
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