Milkovich/Newman: Compensation, Ninth Edition
Chapter 13
McGraw-Hill/Irwin
Benefit Options
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Exhibit: 13.1 Employee Benefit
Preferences
13-2
Ex. 13.2: 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
13-3
Exhibit 13.3 Participation in Selected
Benefits, 2005
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
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
13-6
Exhibit 13.4: Benefits by Type of
Injury: New Hampshire
13-7
Exhibit: 13.5: Commonalities in State
Workers’ Compensation Laws
13-8
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%
13-9
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
 By 1920, more Americans lived in cities than on farms, urban homes smaller

While life expectancy was increasing quickly, many Ers shunned older
workers
– 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
– 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
– Opponents argued that sensible people would provide for themselves

Social Security Act ruled to be constitutional by 5-4 decision in 1937

Source: Wall Street Journal, 9/15/04
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 next 40 years this ratio drops to about 2 to 1
13-11
Issues: Social Security (Cont.)
 Reform
options:
– Increase payroll taxes
– Decrease benefits
– Use general revenues
– Have social security go to an employee’s own
account to be earmarked of his/her personal
retirement
13-12
Unemployment Insurance
Financing:
– Majority of states, unemployment compensation is
financed exclusively by employers that pay federal
and state unemployment insurance tax
– Federal tax amounts to 6.2 percent of the first $7,000
earned by each worker
– States additionally impose a tax above the $7,000
figure
– The extra amount a company pays depends on its
experience rating
13-13
Unemployment Insurance (cont.)

Coverage:
– Eligibility requirements to receive benefits:
 Must meet State requirements for wages earned or time
worked during an established (one year) period of time
referred to as a “base period”
 Must be determined to be unemployed through no fault of
your own and meet other eligibility requirements of State
law
13-14
Unemployment Compensation
Denial of Benefits (review)

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)
13-15
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
13-16
“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 tight-lipped

Source: Wall Street Journal, 1/24/05
13-17
Consolidated Omnibus Budget
Reconciliation Act (COBRA)
Coverage:
– 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
Cost
– Cost to Er paid by Ee plus 2%
13-18
Health Insurance Portability and
Accountability Act (HIPPA)

Key provisions
– Lessens an employer’s ability to deny coverage for a
preexisting condition
– Prohibits discrimination on the basis of healthrelated status
– Provides stringent privacy provisions
13-19
Health Insurance Portability and Accountability
Act (HIPAA) (review)

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 preexisting 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
 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)
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
13-21
Defined Benefit Plans (Cont.)

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
13-22
Defined Contribution Plans


Require specific contributions by employer
Final benefit received by employees is unknown
– Dependent on investment success of plan manager

Three popular forms of these plans
– 401 (k) plan
 Savings plan in which ees allowed to defer income up to max
amount, commonly matched by Er (e.g., 50 cents on the dollar)
– Employee Stock Ownership Plan (ESOP)
 Ees receive cash at retirement based on value of stock
 Lack of diversification is disadvantage
– Profit sharing
 Can be considered a defined contribution plan if distribution of
profits is delayed until retirement

Cash balance plans hybrid of defined benefit and
defined contribution plans
13-23
Exhibit. 13.10: Relative Advantages of
Different Pension Alternatives
13-24
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 definedbenefit pension plan to pay out less to women based on life
expectancy)

Source: New York Times, 1/9/06
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
13-26
Employee Retirement Income Security
Act (ERISA) (cont.)

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
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 of one to two times an employee’s salary
– Most plan premiums paid completely by employer
– Varying amounts of additional coverage often an option
13-28
Types of Health Care Systems
Traditional Coverage
(73% in 1988, 3% in 2005)
– Community-based system, such as Blue Cross
– Commercial insurance plan
– Self-insurance
Health
maintenance organization (HMO)
Preferred provider organization (PPO)
(11% in
1988, 61% in 2005)
Point-of-service plan
(POS)
– Hybrid combining HMO and PPO elements
13-29
Controlling Health Care Costs: Three
Strategies
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
13-30
Controlling Health Care Costs: Three
Strategies (cont.)

Promote preventive health programs
– No-smoking policies
– Healthy food in cafeterias and vending machines
13-31
Controlling Health Care Costs:
Strategy One
Practices
related to design and administration of
health plan
– Increase deductibles
– Change coinsurance rates
– Reduce maximum benefits
– Coordinate benefits with employees and spouses
13-32
Controlling Health Care Costs: Strategy
One (cont.)
– Audit 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
13-33
“Toyota Rolls Out a New Economy-Class Drug
Plan”

Toyota 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%
 Source: Fortune, 1/24/05
13-34
“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
 Maximum out-of-pocket spending limits ($5k for individuals, $10k
for families)
13-35
“Consumer-Driven” Health Plans (CDHPs), Health Savings
Accounts (HSAs), Health Reimbursement Accounts (HRAs)

Encourages consumers to take active role in keeping health-care costs
down
– Ers will provide detailed information about prices and quality of doctors and
hospitals in area

Critics fear plans will discourage people from getting care they need
– 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
13-36
“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
 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
13-37
“One Cure for High Health Costs: In-House
Clinics at Companies”

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 pays doctors ~$130-160k/yr, comparable to average general
practitioner in Milwaukee area
– Quad spends more on primary care than most cos ($715/ee in
2003, cf. $375/ee at other local cos)
 Quad spent $1,540/ee in 2003 on hospital costs, cf. local average of
$2,250
13-38
“One Cure for High Health Costs: In-House
Clinics at Companies”

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 nonunion)
 Source: Wall Street Journal, 2/11/05
13-39
“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
– 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
 Source: Wall Street Journal, 3/23/05
13-40
Health Care Reform: What Employers
Need to Know

Short-Term Changes (plan years beginning on or
after 10/1/10)
– Lifetime benefit limits eliminated, annual benefit limits
restricted
– Dependent children covered up to age 26 (as long as
they don’t have access to other Er-sponsored coverage)
– Children under age 19 cannot be denied coverage for
pre-existing conditions
– Health flexible spending arrangements, HRAs, HSAs
can reimburse participants for OTC drugs only if they
have prescription written by their health-care provider
13-41
Health Care Reform: What Employers
Need to Know

Long-Term Changes (plan years beginning on or
after 1/1/14)
– Establishment of health insurance exchanges, individual
mandates, and subsidies to purchase insurance
– Ban on waiting periods longer than 90 days
– Er ‘free-rider’ penalty (Ers w/ 50+ ees)
 If Ee obtains subsidies for coverage in exchange, Er must pay
penalty
– Excise tax on health plans above threshold
– Also some reforms affecting Cos that still offer retiree
health plans
 Source: Workspan, 3/30/10
13-42
Short- and Long-Term Disability

Workers’ compensation covers disabilities that
are work-related

Social security has provisions for disability
income to those who qualify

Private sources of disability income:
– Employee salary continuation plans
– Long-term disability plans
13-43
Miscellaneous Benefits
Paid Time Off
During Working
Hours
Payment for Time
Not Worked
Child Care
Elder Care
Legal Insurance
Domestic Partner
Benefits
13-44
Exhibit 13.18: Employees Receiving
Leave Time Benefits
13-45
Exhibit 13.19: Benefits Received: FullTime vs. Contingent Employees
13-46