19% PHR
13% SPHR
Any student use of these slides is subject to the same License Agreement that governs the student’s use of the SHRM Learning System materials.
© SHRM 4-1

Compensation and benefits are two of the most visible elements of a total rewards system.
Types of Compensation
© SHRM
Direct compensation
+ Indirect compensation
Pay systems Benefit and recognition programs
4-2

© SHRM
Objectives of a Compensation and
Benefits System
Compatible with mission and strategy
Compatible with organizational culture
Appropriate for the workforce
Externally and internally equitable
Effective for recruiting and retention
4-3

• Entitlement-oriented
• “Part of the family”
• Less emphasis on individual employee contributions
• Contribution-oriented
• Performance-driven programs
• Shared responsibility for benefits
© SHRM 4-4

• Compares an organization to other organizations that share its industry, occupation, or location.
• Organizations may decide to:
Lag Match Lead
© SHRM 4-5

• Match the market
• Similar compensation/benefits to competition
• Equates to 50 th percentile
• Lead the market
• Most desirable talent=higher salaries/better benefits
• Equates to 75 th percentile
• Lag the market
• Pay & benefit levels below market
• Equates to 25 th percentile
© SHRM 4-6

© SHRM
 Why would an employer be able to lag the market?
4-7

Meets employees’ needs for a fair wage and adequate benefits.
Recognizes employees’ contributions to the organization.
Rewards equal work with equal pay.
Does not discriminate against protected classes.
© SHRM 4-8

© SHRM
Designed to:
• Reward continued employment and promote loyalty.
• Protect employees’ physical and financial well-being.
• Help to recruit and retain talent.
• Improve productivity, work quality, and competitiveness.
• Provide tax-effective purchase of insurance and benefits.
4-9

Review organization’s strategy.
Review total rewards philosophy.
Analyze benefits design and utilization data.
Analyze workforce demographics.
Conduct gap analysis.
© SHRM 4-10

The purpose of a gap analysis is to
A. determine which employees are underinsured.
B. revise benefits that are not meeting employee or organizational needs.
C. eliminate benefits that are the most costly.
D. ensure that all employees receive the same benefits.
© SHRM 4-11

Benefit Needs Assessment
• Questionnaires and surveys – Useful for gathering internal data
• Benchmarking – Looks outward to benefit programs in similar organizations
• Trend analysis – Provides valuable projections and insights about how plans and programs might change over time
© SHRM 4-12

Legislation Affecting Benefits
• Legislation affects employee benefit programs
• Federal and state governments mandate some benefits
• Retirement benefits are highly regulated
© SHRM 4-13

Employee Retirement Income
Security Act (ERISA)
• Establishes minimum standards for benefit plans.
• Plans must conform to the Internal Revenue
Code’s requirements to receive tax advantages.
• Sets up the Pension Benefit Guaranty
Corporation (PBGC).
– Plans or their sponsors pay premiums to the PBGC.
– PBGC guarantees payment of vested benefits up to a maximum limit to employees covered by pension plans.
– Does not insure defined contribution plans
© SHRM 4-14

According to ERISA:
• Plan must be operated for exclusive benefit of participants and their beneficiaries.
• Employer must follow the prudent person rule.
• Individuals may sue for recovery for fiduciary breaches that impair the value of plan assets.
© SHRM 4-15

© SHRM
Defines minimum eligibility requirements for retirement plan benefits.
Defines minimum vesting schedules for cliff and graded vesting.
Age 21
Completion of 12 months of service, with few exceptions
Employees are always 100% vested in their own contributions.
EGTRRA sets vesting schedules for employer contributions.
4-16

Defined benefit plans :
• Cliff vesting–100% after no longer than 5 years
• Graded vesting–100% after no longer than 7 years; 20% for each year beginning with the 3 rd year of service
Defined contribution plans :
• Cliff vesting–100% after no longer than 3 years
• Graded vesting – 100% after no longer than 6 years; 20% for each year beginning with the 2 nd year of service
© SHRM 4-17

• Plan sponsors must distribute summary plan descriptions to participants
• If plans are modified, summaries of material modifications may be distributed
• Participants must receive a summary annual report (SAR)
• An annual report (Form 5500) must be filed with the IRS (employers that have at least 100 participating employees)
© SHRM 4-18

• Provides legal protections for spousal beneficiaries of retirement plan participants.
• Requires written spousal consent for:
– Changes in retirement plan distribution elections.
– Changes in spousal beneficiary designations.
– In-service withdrawals.
© SHRM 4-19

© SHRM
Consolidated Omnibus Budget
Reconciliation Act (COBRA)
Provides continuous group medical coverage after a qualifying event.
Type of event determines the length of coverage, generally 18 to 36 months.
Employer can charge actual cost plus a
2% administrative fee.
4-20

According to COBRA, an organization with at least 20 employees must offer
A. health insurance to its employees.
B. continued medical coverage to employees terminated for gross misconduct.
C. COBRA benefits to workers if the organization terminates its health plan.
D. COBRA benefits to spouses of deceased workers.
© SHRM 4-21

 Update general and qualifying event notices.
 Provide an initial notice within 90 days of the date an employee/spouse is covered under the plan and mail the summary plan description to the residence.
 Establish reasonable notification procedures and communicate them to all employees.
© SHRM
 Provide a notice of unavailability of continuation of coverage within 14 days of the date plan administrator is informed of the qualifying event.
 Notify individuals whose coverage ends before the maximum continuous coverage period allowed.
 Notify individuals whose coverage is ending of that fact and of any continuation options available .
4-22

COBRA Coverage Amendments
American Recovery and Reinvestment
Act (ARRA)
Patient Protection and Affordable Care
Act (PPACA)
• Made significant changes to
COBRA continuation coverage rules for employees involuntarily terminated between
September 1, 2008, and
May 31, 2010.
© SHRM
• Generally requires group health plans to provide coverage to dependent children up to age 26.
4-23

Health Insurance Portability and
Accountability Act (HIPAA)
Key provisions:
 Limits exclusions for preexisting conditions.
 Guarantees renewability as long as premiums are paid.
 Gives workers leaving a job with employer-sponsored health coverage the right to purchase coverage on their own.
© SHRM 4-24

Discussion question
 Joe Smith was laid off from his job and elected COBRA benefits. His 18 months of COBRA ended 87 days prior to becoming eligible for benefits at his new employer. Can Joe be subjected to a preexisting limitation period on his health plan?
© SHRM 4-25

• Permits covered entities to use or disclose protected health information for:
– Treatment, payment, and health-care operations.
• A written authorization from the patient is required if outside of these purposes.
• Organizations must:
– Establish systems for tracking protected health information.
– Designate a privacy officer and complaint process.
– Ensure that individuals cannot waive their rights.
– Establish a system of consistently enforced sanctions.
– Keep records for six years.
– Establish written contracts with third parties.
© SHRM 4-26

After using employer-sponsored EAP services to visit a psychologist, an employee pays out of pocket for additional sessions —beyond the EAP coverage. The employee’s manager calls the psychologist without the employee’s consent. Based on information learned from the conversation, the manager terminates the employee. This action
A. ignores progressive discipline procedures.
B. demonstrates reasonable and prudent behavior.
C.
violates the employee’s expectation of privacy.
D. upholds HIPAA Privacy and Security Rules.
© SHRM 4-27

• Imposes new requirements regarding:
– Notification of security breaches of protected health information.
– Extension of HIPAA Privacy and Security Rules to include business associates.
– Enforcement and civil penalties for violations of HIPAA Privacy and Security Rules.
– Access and accounting requirements.
• Provides funding to improve the nation’s health-care information technology systems.
• Includes incentives to promote the use of electronic health records, telemedicine, and clinical data repositories.
© SHRM 4-28

Older Worker’s Benefit Protection Act
(OWBPA)
Prohibits older workers from waiving their ADEA rights unless they are given 21 days to consider the agreement and consult an attorney (45 days for group terminations).
Employees have seven days to revoke the agreement after signing.
Release must reference age discrimination claims under
ADEA.
© SHRM 4-29

Unemployment Compensation
Amendment
• Imposed a 20% federal income tax withholding requirement on qualified retirement plan proceeds that a recipient does not roll over into another qualified retirement plan or individual retirement account.
© SHRM 4-30

Family and Medical Leave Act
(FMLA)
• Covers employers with 50 or more employees for 20 or more workweeks in current or preceding year.
• Employee must have worked at least 12 months for employer, have worked
1,250 hours in past year, and work at a site that 50 or more employees work within 75 miles of.
• Provides up to 12 workweeks of unpaid, job-protected leave for birth or adoption of a child or serious health condition of a child, spouse, parent, or the employee.
© SHRM 4-31

 What methods can be used to determine the 12 month period? Which method may be most advantageous for the employer to use?
 If both mother and father of a newborn work for the same employer, how much
FMLA time are they allowed?

Department of Labor regulations pertaining to:
• “Serious health condition” definition.
• Employee’s notice of FMLA leave.
• Intermittent leave.
• Medical certification.
• Fitness for duty.
© SHRM 4-33

• An employer has the right to require or permit an employee to take paid time off benefits concurrently with what would otherwise be an un-paid FMLA leave.
• An employer may require that worker’s compensation or disability benefits run concurrently with FMLA.
© SHRM 4-34

 If during an employee’s FMLA leave the organization shuts down for a week for vacation or business slow down and employees are not expected to report to work, does this week count against FMLA leave?
© SHRM
 What if a holiday falls within a week of FMLA leave? Does this day count against FMLA leave?
4-35

FMLA-eligible employees are entitled to:
Qualified exigency leave
• FMLA leave due to a spouse, son, daughter, or parent being on or called to covered active duty.
Up to 12 workweeks
Military caregiver leave
• FMLA leave for an eligible employee who is the spouse, son, daughter, parent, or next of kin to a covered service member with a serious injury or illness.
© SHRM
Up to 26 workweeks during a 12month period
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• Employers must continue the employee’s health benefits while the employee is on leave on the same terms and conditions as if the employee were not on FMLA leave.
• If the employee does not return to work following the expiration of FMLA leave,
COBRA is triggered.

• Upon return from approved FMLA leave, the employee must be restored to the same position or equivalent position.
• Is this true in all cases?
© SHRM 4-38

Uniformed Services Employment and
Reemployment Rights Act (USERRA)
• Protects the employment, reemployment, and retention rights of persons who serve in the uniformed services.
– Requires employees to provide oral or written notice of the need for leave (30 days if feasible).
– Allows for five years of leave.
– Gives employees on leave the same seniority-based benefits they would have received if they had not taken leave.
© SHRM 4-39

Uniformed Services Employment and
Reemployment Rights Act (USERRA)
• Requires that leave not create a break in service for pension plan purposes.
• Requires that employer health plans permit employees on leave to continue coverage at their expense for up to 24 months. (A 2% charge for administrative costs can be added.)
• If state laws provide protection beyond
USERRA, employees are entitled to the maximum protection.
© SHRM 4-40

Uniformed Services Employment and
Reemployment Rights Act (USERRA)
• Under USERRA employers are not required to compensate an employee on temporary military leave. Under the FLSA, exempt employees must be paid their full salary for any workweek in which they are on military leave and do any work for their employer, less any compensation received from the military.
© SHRM 4-41

According to USERRA, employees called up for active duty are entitled to
A. higher limits for salary deferral contributions.
B. credited service for retirement plan purposes.
C. lower copayments and deductibles for continued family medical benefits.
D. an early vesting schedule for retirement benefits.
© SHRM 4-42

Mental Health Parity Act (MHPA)
Addresses parity between mental health benefits and medical benefits.
© SHRM
Applies to group health plans of more than 50 employees.
Changes made by the Mental Health Parity and Addiction
Equity Act (MHPAEA) require covered employers that provide group health plans to cover mental illness and substance abuse on the same basis as physical conditions.
4-43

Mental Health Parity Act (MHPA)
• Plans that do not impose a lifetime or annual dollar limit on medical benefits may not impose limits on mental health benefits. IF a plan imposes limits on all medical/surgical benefits, it must include mental health benefits under the medical aggregate limit or apply a separate limit to mental health benefits that is no less than the limit applied to medical benefits.
© SHRM 4-44

MHPA Changes
• If a group health plan includes med/surg benefits and MH benefits, the financial requirements(deductibles,copays) and treatment limitations (# of visits/days) that apply to MH benefits must be no more restrictive.
• If a group health plan includes med/surg and substance abuse benefits, the financial requirements and treatment limitations thast apply to substance abuse must be no more restrictive than those that apply to med/surg benefits.
© SHRM 4-45

Genetic Information Nondiscrimination Act
(GINA)
Protects individuals from having genetic information used:
• In employment.
• To impact health plan eligibility, enrollment, or premiums.
Limits exceptions for genetic testing to:
• Wellness programming.
• Physician’s request.
• Checking biological effects of toxic substances in the workplace.
• Requires that the disclosure of protected genetic healthcare information be governed by HIPAA.
• Civil penalties of $100 per day,
10 years’ imprisonment.
© SHRM 4-46

© SHRM
• Makes Economic Growth and Tax Relief Reconciliation Act provisions due to sunset in 2010 permanent.
• Requires pension plans to become fully funded over a seven-year period starting in 2008.
• Allows employers to automatically enroll employees into a 401(k) plan with default contribution levels.
• Allows non-spouse beneficiaries to transfer assets inherited from a qualified retirement plan into a traditional IRA.
• Requires plans to provide benefit statements and SPDs.
• Establishes requirements for 403(b) plans and makes them more like 401(k) plans.
4-47

Patient Protection and Affordable Care Act
(PPACA)
2010
Extensive health-care insurance reforms with a rolling time frame.
2011 2012 2013 2014 2015 2016 2017 2018
Examples:
• Affordable minimum health coverage
• Lifetime maximum benefit limits
• Preexisting conditions
• Small employer health-care tax credit
• Preventive care
• Dependent coverage (age 26)
• Uniform explanation of coverage
• Summary of material modifications
(SMM)
• Annual benefit limits
• State health exchanges
• "Cadillac plan" tax
© SHRM 4-48

© SHRM
 Has your employer developed their strategy?
 What are the pros and cons of not offering health insurance for your employees?
4-49

Economic Growth and Tax Relief
Reconciliation Act (EGTRRA)
• Adjusts minimum vesting schedules for employer matching contributions to defined contribution plans.
– Three-year cliff vesting
– Six-year graded vesting (20% after two years and 20% per year thereafter)
• Sets permissible compensation limits—Code Section
401(a)(17).
• Sets limits on annual pensions—Code Section
415(b)(1)(A).
• Permits catch-up contributions for employees age 50 and older.
• Modifies distribution and rollover rules.
© SHRM 4-50

© SHRM
Enacted in response to Enron and other corporate accounting scandals.
Requires administrators to notify plan participants of blackout periods for 401(k) or defined contribution plans.
Prohibits insider trading during the blackout period.
4-51

• Must be done in writing 30 days in advance and must contain:
– Reasons for blackout.
– Identification of affected rights and investments.
– Expected beginning date and length of blackout.
– Statement that individuals should evaluate the appropriateness of their current investment decisions.
© SHRM 4-52

• Protects employees who:
– Report conduct that they
“reasonably believe” violates federal securities laws.
– File, testify in, or assist in a proceeding related to securities fraud.
• Employer cannot take adverse action or discriminate against employees for taking part in protected activities.
© SHRM 4-53

• FASB decides how organizations should report financial information to shareholders.
– Required companies to treat employee stock options as an expense on financial statements beginning in 2005.
• IRS implements and interprets tax legislation(once passed by Congress):
– Revenue rulings.
– Private-letter rulings.
© SHRM 4-54

• Social Security/Medicare
• Unemployment insurance
• Workers’ compensation
• COBRA
• FMLA
LAW
© SHRM 4-55

Benefits
• Retirement income.
• Disability, death, and survivor’s benefits.
Qualifications
• People must work 40 quarters, or at least ten years.
Calculations
• Calculated as a set percentage of salary:
•
Yearly maximum limit.
• Deducted from employees’ pay.
• People who work and receive payments must still pay in.
© SHRM 4-56

• Retirement income:
– Depends on individual’s average earnings.
– Pays reduced benefits at age 62; full benefits are indexed to year of birth.
– Those older than full retirement age can earn any amount without losing benefits.
• Disability benefits:
– Are paid when workers cannot work for at least five months.
– Are paid when workers have an impairment that is expected to continue for 12 months or result in death.
– Start after a five-month waiting period.
• Death and survivor’s benefits
© SHRM 4-57

• Not dependent on income or ability to pay.
• Employee and employer pay a percentage of salary; there is no yearly maximum.
• All individuals are eligible at age 65.
• Employer benefits are primary for employees
65 and older who are working.
Part A (hospital insurance) is mandatory.
Part B (medical insurance) is optional.
Part C (Medicare Advantage
Plans) is optional.
Part D (outpatient prescription drugs) is optional.
© SHRM 4-58

 EEOC ruling allows employers to reduce health benefits for Medicare-eligible retirees to avoid paying premiums that are higher than those paid for retirees not covered by
Medicare.
 The rule was in response to a federal appeals court decision stating that health insurance benefits received by Medicare-eligible retirees be the same or cost the same as health insurance benefits received by younger retirees.
© SHRM 4-59

• Mandatory benefit funded primarily by employers and administered by states.
• Eligibility in most states includes:
– Being available and actively seeking work.
– Not refusing suitable employment.
– Not having left job voluntarily.
– Not being unemployed because of labor dispute.
– Not being terminated for misconduct.
– Working a minimum number of weeks .
• Duration: 26 weeks (unless Congress grants an extension).
© SHRM 4-60

State insurance paid by the employer.
Protects workers in case of a work-related injury or disease.
Employers assume all costs, regardless of who is to blame for an accident.
Experience-rated; employers who have a high number of claims pay more.
© SHRM 4-61

• Indemnity or fee-forservice plans (offered less frequently).
– Full-choice plans.
– Employees can go to any qualified physician.
– Fees are generated when services are used.
• Managed care plans
(offered most frequently).
− Prepaid capitated health-care plans.
− Members enroll and pay a set monthly or annual fee.
− Members must use
HMO physicians and facilities to get low fees; no need to submit claims.
© SHRM 4-62

© SHRM
Prescription drug plans
Dental plans
Beyond basic medical coverage …
Vision care plans
Alternative health care
4-63

 Why do dental plans have a high adverse risk selection rate?
 How do dental plans compensate for this?
© SHRM 4-64

Fully insured
• Employer pays premiums to a third-party insurance carrier that bears the risk.
Self-funded
• Employer assumes the role of the insurance company and assumes some or all the risk.
Health alliances
• Health insurance purchasing cooperatives
(HIPCs) act as purchasing agents for large groups of employers in a region.
© SHRM 4-65

Change the delivery system.
Promote prevention and wellness.
Let employees choose.
Redesign the policies.
Conduct careful reviews.
Consider medical tourism.
Undertake a utilization review.
© SHRM 4-66

Consumer-Directed Health Care
Objective: To help employers control costs while allowing employees to make decisions about their health care.
Health reimbursement accounts
Combine a highdeductible medical plan with individual HRAs
Health savings accounts
Tax-sheltered savings accounts used to pay for medical expenses
© SHRM 4-67

Health Reimbursement Account
(HRA)
• Employer purchases a high-deductible medical plan.
• Plan reimburses employees for eligible and substantiated health-care expenses.
• Employees may NOT contribute on any pretax basis.
• Subject to COBRA continuation.
• If self-funded, must meet nondiscrimination requirements and not favor HCEs.
© SHRM 4-68

• Individuals are covered by a high-deductible health plan.
• Employer contributions are deductible; employee contributions are excluded from income when done through a Section 125 plan.
• Earnings grow tax-free, and distributions for qualified medical expenses are tax-free.
• Unused funds can be carried over from year to year, are portable, and can be used into retirement.
© SHRM 4-69

Premiumonly plans
•
Employees receive favorable tax treatment on benefits already offered.
Flexible spending accounts
• Pretax dollars are set aside to pay for dependent care or unreimbursed expenses.
• “Use-it-or-lose-it” option amended to contain a grace period of two and one-half months at the end of the plan year.
Full cafeteria plans
•
Benefit credits are used to purchase benefits.
•
Unused credits can be cashed out.
•
Additional benefits may be bought through pretax salary reductions.
© SHRM 4-70

An employer pays an FSA medical claim for $500 in March. In April, the employee leaves the organization after setting aside only $250. What happens in this situation?
A. The employee must return $250 to the organization.
B.
The employer may withhold $250 from the employee’s last paycheck.
C. The employee is entitled to the reimbursement as paid.
D. The employee becomes ineligible for COBRA coverage.
© SHRM 4-71

Employerprovided sick leave
•
Pays 100% of pay for a set number of days.
Short-term disability
•
Replaces a portion of lost income.
• Typically 50% to 70% for up to six months.
Long-term disability
•
Begins when short-term coverage expires.
• Usually integrated with Social
Security.
© SHRM 4-72

Group-term life insurance
• Lump-sum payment to beneficiaries.
Excess group-term life insurance
Dependent group life insurance
• Insurance over $50,000 is taxed as imputed income.
• Employees can insure spouses/dependent children.
© SHRM 4-73

• Coverage for people who are chronically ill for at least 90 days.
• Not counted as employee income.
• Employers can deduct their part of the insurance premiums.
© SHRM 4-74

• Paid leave for events:
– Holiday pay
– Vacation pay
– Pay for legally protected activities
– Leave of absence
– Bereavement leave
– Personal days
• Paid-time-off banks
– Paid time off is lumped into one account.
© SHRM 4-75

 What are the pros and cons of PTO vs. vacation/sick time?
© SHRM 4-76

Child and elder care
Prepaid legal insurance
Benefits
Tuition reimbursement
© SHRM
Transportation assistance
4-77

Which of the following items is generally subject to federal taxation?
A. $1,000 reimbursement for a business trip
B. $300 per month for parking
C. $20 gift from a vendor
D. $1,500 for a job-related training seminar
© SHRM 4-78