Discretionary Employee Benefits
Karen S. Markel, Ph.D., SPHR
2010
Learning Objectives
At the completion of this section of the module,
students will be able to:
• Identify the issues in discretionary benefits
design and implementation.
• Define the types of discretionary benefits.
• Identify the relationship between various
discretionary benefits programs and
relevant federal law.
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Design and Implementation
Considerations
Session 1
Session 1 Learning Objectives
After completing this session, students will be
able to:
• Define discretionary benefits.
• Understand what benefits should be offered
in most organizations.
• Understand benefits administration.
• Know how to communicate benefits
offerings to employees.
• Determine if a benefits program is
accomplishing its purpose.
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Benefits Examples
•
•
•
•
•
Vacation leave
Sick leave
Social Security
Dental insurance
401(K) plans
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•
•
•
Vision insurance
Pensions
Health insurance
Prescription drug
insurance
• Medicare
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Discretionary Benefits Defined
Discretionary benefits are those benefits that
are not mandated by law.
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What Benefits to Offer?
To determine which benefits to offer, the
following must be considered:
•Alignment with the organization’s total rewards
strategy.
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What Benefits to Offer?
To determine which benefits to offer, the
following must be considered:
The financial imperative:
> Real cost of the benefit.
> Tax incentives.
> Cafeteria plans.
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What Benefits to Offer?
To determine which benefits to offer, the
following must be considered:
Employee characteristics:
> Demographics.
> Union status.
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What Benefits to Offer?
To determine which benefits to offer, the
following must be considered:
> Benchmarking: What benefits do our
competitors offer?
> Line of sight: Employee perceptions about
the value of the benefit.
> Return on investment (ROI).
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Benefits Administration
Four basic principles apply to good benefits plan
administration (Murphy, 2009):
•Plans should be simple and easy to understand.
•Sponsors (employer or benefit provider) should
control the administration expense of plans.
•Where possible, allow employee choice to be part of
the overall plan.
•Sponsors should allow employees to administer their
own plans by introducing information systems that
enable benefit selection, provide information and
enrollment.
Source: Murphy, T.E. (2009). Benefits and Beyond: A Comprehensive and Strategic Approach to
Retirement, Health Care, and More. Thousand Oaks, CA: Sage Publications
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Outsourcing Administration
• An employer may determine that benefits
administration should be handled (all or in
part) by a third-party administrator. The
decision may be based on:
> Subject matter expertise.
> Economies of scale.
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Communicating Benefits Information
• Legal provision guided by ERISA and PPA.
•
•
•
•
According to Martocchio (2008), the elements
of a sound benefits communication program
include:
What is communicated?
Who are the recipients of benefits information?
How are the benefits communicated?
How often are benefits communicated?
Source: Martocchio, J. J. (2008). Employee benefits: A primer for human resource professionals,
3rd edition. New York: McGraw-Hill Higher Education.
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Is the Benefits Program Achieving Desired Results?
• Before getting started, determine the
measures of success.
• Benefits providers can help the employer
determine the appropriate measures to use
and conduct the necessary analysis.
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Exercise 1: Using Benchmarking Information
Using the data on the next slide, answer the
following questions:
• Based on the information on the slide about
understanding the data, what should be considered when
using the data to generalize information?
• You are using the data to determine how your
organization compares to others in a similar industry.
What should you consider about the data when making
recommendations to correct any significant
discrepancies in benefits offered by your organization
and the findings from the report? What else besides
strategy, location and size might affect the utility of using
benchmarking data?
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Understanding the Data
As you compare your data against the other organizations, please
keep the following in mind:
• The report is based on data from the SHRM Customized
Benchmarking Database and contains data from a nonrandom
collection of U.S. organizations of all sizes and types. The report
is designed to target organizations that closely match certain
criteria, so a more focused and comparable analysis and
interpretation can be performed. Any interpretations of the data
should be kept within this context.
• The information in the report should be used as a decisionmaking tool rather than an absolute standard. Because
organizations differ in their total rewards strategy, location, size
and other factors, any two organizations can be well managed,
yet their health care measures may differ greatly. No decision
should be made solely based on the results of any one study.
Source: Society for Human Resource Management. (2009). Health care benchmarking report.
Alexandria, VA: SHRM.
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Exercise 1: Using Benchmarking Information
Using the data from the table on the next slide,
answer the following questions:
• What is the most common type of health care coverage?
• Who is covered under this plan?
• You are a benefits manager for an organization using
this table to compare your health care coverage to
similar organizations. Currently, you don’t offer oppositesex domestic partner health care coverage to your
employees. Are you at a competitive disadvantage? Why
or why not?
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Table 1
HEALTH CARE COVERAGE
AND SPECIFIC STOP-LOSS COVERAGE
PREVALENCE
* To ensure that the data are seen as credible, data for metrics with an “n” of less than 5 are not
displayed.
Percentage
Percentage
of
Percentage
Percentage
of
Organization Percentage Percentage of
of
of
Organization
s Providing
of
Organizations
Organization Organization s Providing
OppositeOrganization with Specific
s Providing
s Providing
Same-Sex
Sex
s with SelfStop Loss
Employee
Spouse
Domestic
Domestic
Funded
(SSL)
Health Care
Health Care
Partner
Health Care
Coverage
Partner
Coverage
Coverage
Health Care
Health Care
Coverage
Coverage
n
101
91
39
26
39
30
Percent
95%
92%
39%
26%
40%
81%
Source: Society for Human Resource Management, (2009). Health care benchmarking report.
Alexandria, VA: SHRM.
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Exercise 1: Using Benchmarking Information
Using the data in the table on the next slide,
answer the following questions:
• Your organization only offers employees one type of
health plan, and it is an indemnity plan. Your
organization is considering offering another health care
plan to its employees. Based on the data:
• What percentage of employers responding to this
survey offer more than one plan?
• What other health care plans might be attractive to
employees?
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Table 2
EMPLOYEE PARTICIPATION AND
PLANS OFFERED
* To ensure that the data are seen as credible, data for metrics with an “n” of less than 5 are not
displayed.
Percentage of
Employees
Enrolled
Percentage of
Organizations
Offering Plan
67
98
HMO
24%
55%
1 Plan
43%
EPO
1%
4%
2 Plans
35%
PPO
49%
83%
3 or More Plans
22%
POS
9%
23%
Indemnity
1%
7%
CDHP
3%
12%
n
Number of
Health Care
Plans Offered
n
98
Source: Society for Human Resource Management. (2009). Health care benchmarking report.
Alexandria, VA: SHRM.
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Assessment: True or False Questions
1. Employers often outsource the administration of employee
benefits because it requires a specialized knowledge set.
2. Employees often consider what discretionary benefits are
available when deciding to work for an employer.
3. It is neither important nor legally required to inform employees of
their benefits offerings or elections.
4. If the right factors are considered, the choice of employee
benefits offered may lead to changes in employee behavior.
5. All employers place the same value on discretionary benefits.
6. It is ideal for employees to have a choice in the benefits they
receive.
7. Discretionary benefits are those employee benefits that are
mandated by law.
8. In an organization where the majority of employees are between
the ages of 20and 40, employees are more likely to value
benefits related to child birth and child care.
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Assessment: True or False Questions
9. Cafeteria plans have the least amount of flexibility for
employees in the variety of benefits employees receive.
10. Total rewards statements provide personalized data to
employees about the compensation and benefits received
through their employers (e.g., cost, elections, account
balances).
11. There are no legal requirements that control the type and
frequency of benefits communication.
12. Employees often compare what similar organizations offer in
terms of employee benefits.
13. The timing of benefits communication is important to its
overall success.
14. Employers should align their benefits strategy as part of a
total rewards strategy.
15. The Internal Revenue Code does not offer tax incentives to
employers for certain discretionary benefits offerings.
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Assessment: Discussion Questions
1. What role(s) can discretionary benefits play in an
organization’s HR function?
2. What should an employer take into account when
designing a discretionary benefits program?
3. How should the program be communicated?
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Health and Medical Benefits
Session 2
Session 2 Learning Objectives
After completing this session, students will be able
to define the following benefits and their relationship
with appropriate law:
•Insurance coverage options.
•Major medical plans.
•Other medical benefits:
> Dental.
> Vision.
> Prescription drugs.
> Employee assistance programs (EAPs).
> Mental health and substance abuse programs.
> Wellness programs.
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Coverage
• Single or family?
> Employee (and dependents).
• Individual or group?
> Individual and the insurance provider.
> Group of employees through a single
contract.
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Major Medical Benefits
• Fee-for-service.
• Managed care:
> Health maintenance organizations (HMOs).
> Preferred provider organizations (PPOs).
> Point-of-service organizations (POSs).
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Fee-for-Service
• Traditional fee-for-service medical plans are
available through many employers but at a
declining rate. These plans offer the greatest
freedom of choice in selecting health care
providers.
> Deductible.
> Co-insurance.
> Out-of-pocket maximum.
> Lifetime benefit maximum.
> Employers may elect to self-fund the
insurance vs. purchasing from a benefits
provider.
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Managed Care Plans
Health Maintenance Organizations (HMOs)
• An HMO provides comprehensive health care
coverage to plan participants through a network
of physicians and hospitals.
• Traditionally, HMOs require a referral from the
individual’s primary physician to receive care
from a specialist.
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Managed Care Plans
Preferred Provider Organizations (PPOs)
• PPOs delineate services between in-network
and out-of-network providers.
• Covered individuals receive a higher
reimbursement when using services from
physicians and hospitals in the plan’s network.
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Managed Care Plans
Point-of-service (POS) plans
• POS plans are a hybrid between an HMO and a
PPO.
• Covered individuals need a referral to see innetwork specialists.
• The costs of services from an out-of-network
provider are higher than from an in-network
provider.
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Dental Insurance
Most dental plans have four components:
1. Preventive and diagnostic.
2. Basic services.
3. Major services.
4. Orthodontia.
• Often provide 100 percent reimbursement for preventive
and diagnostic services and are not subject to a
deductible.
• This coverage is to encourage covered individuals to have
routine dental care that may prevent more costly services
in the future. Deductibles can apply to all other services.
Source: WorldatWork (2007)
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Vision Insurance
Vision care plans typically provide coverage for routine eye
exams every two years and a bi-annual, flat-dollar amount
for frames or lenses.
Source: Martocchio (2008)
Like major medical and dental plans, vision insurance
plans are also offered in a variety of formats similar to feefor-service or managed care options.
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Prescription Drug Insurance
• These programs are either part of the major medical
benefit or managed by a pharmacy benefits manager.
• Employers often manage the costs of the programs
through various co-payment formulas. For example:
Benefit Tier
Co-payment Amount
1: Generic drugs
$8-10
2: Brand drugs
$10-15
3: Lifestyle drugs
$15-40
4: Mail order
Three-month supply for
maintenance drugs. Payment
equals to 1-2 months supply.
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Employee Assistance Plans (EAP)
• EAPs provide professional counseling through a thirdparty provider.
• Typically accessed in a confidential manner (e.g., tollfree number or a web site).
• Employees who reach out for these services are treated
in a private manner and their issues are not addressed
with the employer.
• Often addresses short-term problems, and any longerterm conditions (e.g., depression, stress) are referred to
the appropriate resource (like a mental health provider).
• These plans can also offer assistance with locating
resources (e.g., childcare providers).
• Many large employers offer EAP services.
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Mental Health and Substance Abuse
Benefits
Mental Health
• Many employers provide mental health benefits to their
employees as part of their health insurance program.
• These benefits may include in- or out-patient mental
health services, psychological testing and necessary
psychiatric drugs.
Mental Health Parity Act of 2007
Substance Abuse Benefits
• These benefits are similar to mental health coverage but
are targeted to substance abuse treatment and
recovery.
• This benefit is often part of an employee’s health
insurance program.
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Wellness Programs
These are lifestyle programs designed to improve
long-term employee well-being and might include
weight loss, smoking cessation, exercise and
stress management.
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Consolidated Omnibus Budget
Reconciliation Act of 1986 (COBRA)
• Eligible employers must allow employees, spouses and
their dependent children to continue their health care
benefits if that coverage is lost due to a qualifying event.
• Those who continue benefits under COBRA:
> May have to pay the entire cost of the insurance premium.
> May have to pay up to an additional two percent of the
premium for benefits administration costs.
> Plan participants and beneficiaries must be sent an election
notice not later than 14 days after the plan administrator
receives notice that a qualifying event has occurred. The
individual has 60 days to decide whether to elect COBRA
coverage. The person has 45 days after electing coverage to
pay the initial premium.
Source: U.S. Department of Labor, 2006
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Health Insurance Portability and
Accountability Act of 1996 (HIPAA)
• HIPAA is another amendment to ERISA and
applies to most employers who offer group health
plans.
• HIPAA was intended to eliminate discrimination in
health care coverage and portability, regardless of
medical history or claims.
• It was amended in 2003 to ensure that appropriate
privacy measures are in place concerning the use
and disclosure of protected health information.
Source: U.S. Department of Labor
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Health and Medical Benefits Cost
Management
1.
2.
3.
4.
Shift to managed care plans.
Push expenses to employees.
Provide incentives to manage chronic conditions.
Reduce benefits.
Health Care Flexible Spending Accounts:
Employee pre-tax contributions for annual
medical expenses.
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Exercise: Part 1
The National Compensation Survey (administered by the U.S.
Bureau of Labor Statistics) conducts an annual survey about
health care benefits.
Based on the March 2008 Employee Benefit Survey (available at
http://www.bls.gov/ncs/ebs/benefits/2008/ownership/private/table
05a.pdf), answer the following questions:
1.What employee segment (civilian, private, state and local
government) has the most access to medical care? What
percentage of that population actually participates in medical care
plans? Is that percentage higher or lower than you expected?
2.What employer segment has the lowest employer share of
premium?
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Exercise: Part 2
Based on the March 2008 Employee Benefit survey table
(available at
http://www.bls.gov/ncs/ebs/benefits/2008/ownership/private/table
01a.pdf ) that details information about private-sector employers
that offer retirement and health care benefits, answer the
following questions:
1. Are larger or smaller employers (based on the number of
employees) more likely to offer health care benefits?
2. Which organizations are more likely to offer health care
benefits: goods or service-producing organizations?
3. Organizations in which type of service-producing industry are
most and least likely to offer health care benefits?
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Assessment: True or False Questions
1. One strategy employers can use to manage increasing health
care costs is to push some of that cost to employees through copayments.
2. Under COBRA, employees who are fired for gross misconduct
can continue their benefits at no charge.
3. In an HMO, employees do not need to go through their primary
care physicians to see a specialist.
4. Many employers include preventive care in their health care
benefits with the hope that increased preventive care will lead to
healthier employees and lower overall health care costs.
5. In a PPO, covered individuals pay the same costs for health care
services regardless of whether they receive services in or out of
the network of acceptable providers.
6. Vision insurance often covers eye surgery, not just routine care.
7. Employers may choose to self-fund their major health care plan if
it is more economical than purchasing group insurance.
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Assessment: True or False Questions
8. Because of the aging workforce at ABC Corporation, the company started
offering lunchtime seminars on managing diabetes, high blood pressure
and common ailments for older people. These seminars are examples of
components of a wellness program.
9. HIPAA does not address issues related to medical record privacy.
10. Traditional fee-for-service medical plans offer covered individuals the most
freedom in choosing health care providers.
11. Low employee deductibles are one strategy employers can use to defray
healthcare costs.
12. Dental insurance plans are often structured like major medical HMOs.
13. Mental health benefits often include in- or outpatient mental health
services.
14. Alex’s boss learned that Alex is having some personal problems that are
affecting his behavior and demeanor at work. Alex’s boss contacts her HR
department for advice, and they suggest reminding Alex of the services
available through the organization’s employee assistance plan (EAP). An
EAP could address Alex’s needs.
15. PPOs do not delineate services between in-network and out-of-network
providers.
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Assessment: Discussion Questions
1. Why are employers moving away from traditional
health care plans?
2. What are some of the pros and cons of offering
health care benefits to employees?
3. How are employers managing the rapidly
increasing costs of health care benefits?
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Retirement Benefits
Session 3
Session 3 Learning Objectives
After completing this session, students will be able to
define the following benefits and their relation to
appropriate law:
> Defined benefit plans.
> Defined contribution plans [401(k), profit-sharing,
stock plans, 403(b)].
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Social Security Act of 1935
• The Social Security system was created
through the Social Security Act of 1935. The
system has four distinct types of benefits:
> OA: Retirement income in “old age.”
> S: Survivor income.
> D: Disability income.
> HI: Health insurance benefits.
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Social Security Act of 1935
Retirement benefits
• The earliest age that an individual can receive
OA benefits is 62.
• Individuals who retire early may do so, but
they are subject to a reduction in benefits
depending on the age they wish to receive
benefits relative to their full retirement age.
• Individuals are also eligible for increased
benefits beyond full retirement age depending
on their year of birth.
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Employer-Sponsored Retirement Plans
• Employee Retirement Income Security Act
of 1974 (ERISA).
• Internal Revenue Code.
• Defined benefit.
• Defined contribution:
> 401(k), 403(b).
> Profit sharing.
> Stock options.
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ERISA (1974)
• Requires plans to provide participants with
information about plan features and funding.
• Outlines certain fiduciary responsibilities for those
who manage and control plan assets.
• Requires plans to establish grievance and appeals
processes for participants.
• Includes provisions to give participants the right to
sue for benefits and breaches of fiduciary duty.
ERISA established the Pension Benefit Guarantee
Corporation (PBGC).
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Internal Revenue Code
• Extends favorable tax treatment to plan sponsors
(employers) and beneficiaries (employees).
• Plan contributions made by the sponsor can be
tax-deductible.
• Plan assets can grow without being taxed.
• Plan accruals for participants are tax-deferred until
received.
• Sets maximum annual contribution levels.
Source: Murphy (2009)
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Defined Benefit Plans
• Defined benefit plans commit certain financial
payments to employees based on pre-determined
formulas (typically using employee age, tenure and
annual salary).
• From an employer’s perspective, this type of plan
is the most expensive because employers must
make contributions to guarantee certain benefit
levels regardless of overall retirement plan
investment success.
• These plans are also referred to as ‘pensions.’
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Defined Contribution Plans
• Unlike defined benefit plans, defined contribution
plans do not guarantee certain financial payments;
rather, the payment is determined by the overall
value of the employee’s account at the time he or
she elects to receive benefits.
• Employees make their own decisions (usually
among a set of pre-determined options) regarding
investment options (e.g., degree of investment
fund risk and type).
• There are several different types of defined
contribution plans determined either by the type of
organization or profit or stock contributions.
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Defined Contribution Plans
401(k), 403(b), Section 457 plans
• These defined contribution plans offer several
benefits to employers and employees. Employees
can make pre-tax contributions into their accounts.
• Employers can take tax deductions for
contributions they make to employee plans.
• 401(k) plans are for private-sector employees.
• Plans for employees of public educational
institutions are referred to as 403(b) plans.
• Section 457 plans are for government employees.
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Defined Contribution Plans
Profit sharing and stock ownership plans
• Employers often use profit sharing plans to
distribute money to employee retirement accounts
using a predetermined formula based on
organizational financial performance measures.
• Employer sponsors of profit sharing retirement
plans often fund those accounts with company
stock.
> Employees’ shares grow each year as the plan
sponsor deposits company stock.
> Employees receive all the benefits of stock
ownership (e.g., dividends and voting rights).
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Defined Benefit vs. Defined
Contribution Plans
Defined Benefit
• Benefit is known.
• Cost is unknown.
• Employer bears
financial risk.
• Generally higher
benefits for longservice
employees.
Defined Contribution
• Benefit is unknown.
• Cost is known.
• Employee bears
financial risk.
• Can provide
substantial benefits
to short-service
employees.
Source: WorldatWork (2007) p. 419
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Implementation Issues
•
•
Benefit formulas
> Most retirement plans use formulas to determine employee
eligibility, company contributions and employee benefits.
Vesting
> Determines when employees are eligible to receive
contributions made to the plan.
• Cliff schedules typically mean that covered individuals
are eligible for the benefits/contributions after a certain
time period, but no benefits before that time period has
passed.
• Graded or gradual schedules offer partial benefits with
company tenure and full vesting at a certain time period.
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ERISA Maximum Vesting Schedules
Effective After 2002
Defined Contribution Plans
Three-Year Cliff
After Year(s)
1
2
3
% Vested
0
0
100
Six-Year Graduated
Year
1
2
3
4
5
6
% Vested
0
20
40
60
80
100
Source: Murphy (2009) (p. 265)
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ERISA Maximum Vesting Schedules
Effective After 2002
Defined Benefit Plans
Five-Year Cliff
After
year(s)
1
2
3
4
5
% Vested 0
0
0
0
100
Seven-Year Graduated
Years
0-3
3-4
4-5
5-6
6-7
7
%
Vested
0
20
40
60
80
100
Source: Murphy (2009) (p. 265)
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Pension Protection Act of 2006 (PPA)
• The PPA increased minimum funding requirements
for pension plans and strengthened the pension
insurance system.
• Employers must provide more frequent information
to employees about their employer-sponsored
retirement plan accounts and notify them of any
underfunding problems.
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Exercise: Part 1
• The Employee Benefits Research Institute
(EBRI) conducts a retirement confidence survey
annually to examine trends and attitudes about
retirement benefits and plans. Go to the survey
web site (http://www.ebri.org/surveys/rcs/ ) and
answer the following questions.
• Based on the EBRI’s survey results for 2009,
what are workers’ expectations for retirement?
Have they changed and why?
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Exercise: Part 2
Discuss the gender comparisons regarding
retirement confidence and expectations for the
past two years.
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Exercise: Part 3
Describe the confidence level and expectations
for Social Security.
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Assessment: True or False Questions
1. Employer sponsors of profit-sharing retirement plans often
fund those accounts with company stock.
2. The earliest that an individual can receive “old age” Social
Security benefits is age 62.
3. Employers do not receive any tax incentives for making
financial contributions to their employees’ 401(k) plans.
4. A defined contribution plan guarantees a predetermined
benefit at retirement.
5. A vesting schedule determines when an employee is eligible
to receive certain benefits.
6. Employees pay taxes on contributions to their employersponsored retirement plans at the time of the contribution.
7. The Social Security Act of 1935 created employer-sponsored
retirement plans.
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Assessment: True or False Questions
8. Most retirement plans use a formula to determine employee
eligibility, employer contributions and employee benefits.
9. The Internal Revenue Code is one law that regulates
retirement plans.
10. A cliff vesting schedule typically means that a covered
individual is eligible only after a certain time period to receive
full benefits.
11. Defined benefit plans are more expensive to employers than
defined contribution plans.
12. Social Security benefits are received on a graduated scale.
13. In a defined contribution plan, employees often have discretion
over how their funds are invested among a set of
predetermined options.
14. Stocks are never used as contributions to retirement accounts.
15. The government offers an incentive through increased Social
Security benefits by delaying payment receipt at the time of
eligibility.
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Assessment: Discussion Questions
1. What laws are important in the provision and regulation
of retirement benefits?
2. What are some pros and cons to offering defined
benefit (DB) or defined contribution (DC) plans from
the employee and employer perspectives?
3. How does the government provide incentives for
individuals to delay the receipt of their Social Security
benefits?
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