STRATEGIC COMPENSATION
A Human Resource
Management Approach
Chapter 11
Discretionary Benefits
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Prepared by David Oakes
Discretionary Costs
In 2004
 $11,107 per employee
 40% of total payroll costs
 $15,000 total with legally-required
benefits
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Benefit Types
 Protection programs
 Pay for time-not-worked
 Services
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Income Protection
 Disability insurance
 Life insurance
 Pension programs
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Health Protection
 Self - funded plans
 Health maintenance organizations
(HMOs)
 Preferred provider organizations
(PPOs)
 Dental insurance
 Vision insurance
 Prescription drug plan
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Short-Term Disability
 Less than 6 months duration
 Unable to perform job
 Benefit: 50% - 100% of pre-tax
income
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Long-Term Disability
 6 months to life
 Unable to perform any job qualified for
 Benefit 50% - 70% of pre-tax pay
 6 - 12 month waiting period
 Other benefits used first
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Pension Plan Financing Options
 Noncontributory
 Contributory
 Employee-financed programs
 A combination of the three
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Pension Plan Tax Treatment
Options
 Qualified
 Employers get tax deductions for contributions
 Employees taxed less at retirement
 Nonqualified
 Employers & employees receive few tax break
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Qualified Plans
 Eligibility
 Minimum age 21, & 1 year of service
 Nondiscrimination
 Limited preferential treatment
 Vesting
 Usually 3 - 6 years
 Payout restrictions
 Tax penalty if taken before age 59.5
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Defined Contribution Plans
 Profit sharing plans
 Employee stock ownership (ESOPs)
 401(k)s
 Savings & thrift plans
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401(k)s
 Named after IRS code section
 Employees invest pre-tax income
 Plan limits




2006
2007
2008
$500
- $15,000
- $15,500
- $16,000
yearly increases
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ESOPs
 The basis for 401 (k) plans
 Contributions invested in company
securities
 Distributions made in company stock
 Like stock bonus plans, except stock is
purchased with borrowed funds
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Saving & Thrift Plans
 Employers match employees’ contributions
 Usually up to 50% of employees’
 Tax penalties for early withdrawals
 Employees can select investment vehicle
 Stocks
 Bonds
 Money market funds
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Defined Benefit Plans
 Guarantees benefits amount
 Amount expressed as a monthly sum
 % of pre-retirement pay
X
years of service
 Employers’ contributions can vary,
but benefit at retirement cannot
 Not widely used
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Health Care Programs
 Fee-for-service
 Managed care
 Point of service
 Consumer-driven health care
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Fee-For-Service Plans
 Indemnity plans
 Cover usual, customary, reasonable charges
 Hospital expenses
 Surgical expenses
 Physicians’ fees
 Deductibles & coinsurance
 Out-of-pocket maximums
 Individual or group coverage
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HMOs
 Organize, deliver, & finance care
 Provides prepaid medical services
 May include co-payments
 Regulated by Health Maintenance
Organization Act of 1973
 Prepaid group practices
 Individual practice associations
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PPOs
 Select group of health care providers
 Employees choose from a list
 Financial incentives to use list
 Physicians must
 Meet quality standards
 Abides by PPO cost-containment
 Accepts PPO fee structure
 Does not provide prepaid benefits
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Consumer-Driven Care
 Flexible-spending accounts
 Health reimbursement arrangements
 Health savings accounts
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Flexible-Spending Accounts
 Supplemental health coverage
 Employee funds account with
pre-tax income
 Pays for qualified expenses
 Unused funds forfeited
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Health Reimbursement
Arrangements
 Supplemental health coverage
 Employees funded
 Unused funds carried over
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Prescription Drug Plans
 Medical reimbursement plans
 Prescription card programs
 Mail order prescription drug program
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RELEVANT LEGISLATION
 ERISA
 COBRA
 FLSA
 HIPPA
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ERISA
 Regulates fringe compensation
 Medical
 Life insurance
Disability
Pension
 Monitors




Reporting
Disclosure
Funding
Fiduciary & vesting responsibilities
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COBRA
 Continues health care coverage to 36 months
 Can cost up to 102% of premium
 Employers penalized for noncompliance
 Exempt employers
 Those with less than 20 employees
 Churches
 Federal government
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HIPPA
 Guarantees health coverage
 Addresses preexisting conditions
 Concerns access to health information
 Transfer
 Disclosure
 Use
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