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Employee Benefits

Employee Benefits. Employee Benefits. Rewards that employees receive for being members of the organization and for their positions in the organization: Usually not related to employee performance. 15- 2. Employee Benefits. 5 Major Categories (not mutually exclusive):

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Employee Benefits

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  1. EmployeeBenefits

  2. Employee Benefits • Rewards that employees receive for being members of the organization and for their positions in the organization: • Usually not related to employee performance 15-2

  3. Employee Benefits • 5 Major Categories (not mutually exclusive): • Legally required • Retirement related • Insurance related • Payment for time not worked • “Other” 15-3

  4. Employee Benefits • Most benefits apply to all organization employees; Some reserved for executives only. • Some benefits often extended to spouses, such as Health insurance. • Increasing number of organizations extending benefits coverage to include: unmarried heterosexual and homosexual partners of unmarried employees. 15-4

  5. Growth in Employee Benefits • Prior Social Security Act (1935), employee benefits not widespread. • Social Security Act: • Mandated certain benefits. • Increased public’s awareness of benefits. • Unions demanded more benefits in their contracts: • 1930s generally viewed as birth years for employee benefits 15-5

  6. Legally Required Benefits • Social Security • Unemployment Compensation Benefits • Workers’ Compensation Benefits 15-6

  7. Social Security • Federally administered insurance system to provide: • Funds upon retirement or disability or both. • Hospital and medical reimbursement to people who have reached retirement age. • Employer and Employee must pay into the system • Self-Employed: Must contribute to social security at a rate Higher than that paid by average employee., 15-7

  8. Social Security • 3 Major Categories of S.S. Payments: • Retirement benefits • Disability benefits • Health insurance 15-8

  9. Social Security Retirement Benefits • What is minimum Age? • What does it mean to be “Fully Insured”? • When do Full Retirement benefits begin? 15-9

  10. Social Security Retirement Benefits • Those retiring “early” receive lowered payments determined by: • Exact age at retirement. • Earnings from “gainful employment”. • “Gainful employment” does not include: • Investments • Pensions or other retirement programs 15-10

  11. Disability Benefits • Disability expected to: • Last at least 12 months, or • Result in death. • Generally, 20 credits must be earned in 10 years before becoming disabled. 15-11

  12. Health Insurance (Medicare) • Provides partial hospital and medical reimbursement for persons age 65 and over. • Medicare Part A (Hospital Insurance): • Expenses covered? • Medicare Part B (Medical insurance): • Expenses covered? • Participation is voluntary and requires payment of a monthly fee 15-12

  13. Health Insurance (Medicare) • Medicare Part C(Medicare Advantage): • Users receives all health care through provider organization (HMO, PPO, etc.). Must have both Parts A and B. • Medicare Part D(Prescription coverage) • Voluntary; costs are paid via monthly premiums of enrollees and Medicare. 15-13

  14. Problems Facing Social Security • Demographic shifts • How to resolve this imbalance? 15-14

  15. Unemployment Compensation • Insurance to provide funds to employees who have lost their jobs --- and are seeking other jobs. • Social Security Act (1935) requires employers to pay taxes for unemployment compensation: • Unemployment taxes paid by employer go to state. 15-15

  16. Unemployment Compensation • 3 Eligibility Requirements: • Covered by social security for a minimum number of weeks. • “Laid off” (in some states, discharged employees may qualify). • Willing to accept any suitable employment. • Those fired for misconduct are not eligible. 15-16

  17. Unemployment Compensation • Federal Unemployment Tax Act (FUTA): All profit-making employers pay tax on first $7,000 of wages paid to each employee: • What is Rate based on? • Purpose for varying rates? • Unemployment compensation fully taxable. 15-17

  18. Workers’ Compensation Insurance protecting employees from loss of income and extra expenses associated with job-related injuries or illness. 15-18

  19. Workers’ Compensation • Normally paid through insurance program financed via premiums paid by employers. • What are workers’ compensation insurance premiums based on? • What is the reasoning? 15-19

  20. Workers’ Compensation • In states where W.C. is elective, employers who reject the coverage also give up legal protections. • Disability must be work related; How determined? 15-20

  21. Workers’ Compensation: Common Features across States • Generally provides for: • Replacement of lost Income • Medical expense payments and Rehab • Death benefits to survivors • Lump-sum disability payments • Employee does not have to sue employer to get compensation; Employers are exempt from lawsuits (unless they rejected coverage). 15-21

  22. Workers’ Compensation: Common Features across States • Coinsurance • Workers’ loss not fully covered • Medical expenses usually fully covered • “No-fault” system 15-22

  23. Retirement Plans • Funded • Non-Funded • Defined-Benefit • Defined-Contribution 15-23

  24. Pension Rights • What are Vesting rights? • Deferred Full vesting • Deferred Graded vesting 15-24

  25. Defined-Benefit Plans • Formula for calculating benefits • Flat-Benefit plan • Final-Average-Pay plan 15-25

  26. Cash-Balance Plans • Hybrid of traditional “defined-benefit” plan • Advantages? • “Portability” Drawback? 15-26

  27. Final-Average-Pay Formula • If hourly and salaried employers are both affected, formula may be modified to provide a minimum dollar benefit for participants in lower pay classifications. • Plans may be calculated with an offset, or deduction, for employee’s social security benefits: • Amount of social security received is taken into account when determining how much retiree will receive from pension plan. 15-27

  28. Defined-Contribution Plans • Each employee has separate pension account to which employee and employer contribute: • Non-Contributing plan • Contributing plan • Organization has no potential liability • Very portable 15-28

  29. Defined-Contribution Plans: 401(k) • Most popular defined-contribution plan • Named for section 401(k) of IRS Code • Advantages? 15-29

  30. Pension Protection Act (PPA) of 2006 • Stronger funding requirements on employers with traditional “defined-benefit” pension plans: Plans required to be 100% funded. • PPA signaled shift in government policy toward defined-contribution retirement (401(k)) plans, and away from defined-benefit plans. 15-30

  31. Defined-Contribution Plans – 403(b) Plan • Tax Deferred Annuity (TDA) plans: Similar to 401(k) plans, except only for not-for-profit organizations. • Now, not-for-profit organizations can also use 401(k) plans. 15-31

  32. ERISA (1974) Employee Retirement Income Security Act • Gives employees increased security over their retirement plans. • Ensures fair treatment of employees under pension plans. • Requires that employees have vested rights in their accrued benefits. 15-32

  33. Sarbanes-Oxley Act and ERISA • Substantially raised criminal penalties for ERISA reporting and disclosure violations. • Some companies dropped pension plans rather than comply with ERISA. • ERISA another reason for employers moving toward 401(k) plans. 15-33

  34. Vesting Schedules • Cliff Vesting: No vesting during first 5 years; fully vested after 5 years • Graded vesting –20% vested after 3 years with additional 20% vesting per year until 100% percent vested after 7 years 15-34

  35. Early Retirement Incentives • Can companies mandate retirement age? • Early Retirement Incentives : • Lump-sum payment • Benefit Extension • Credit employee with additional years of service under defined-benefit plan. 15-35

  36. Individual Retirement Accounts (IRA) • Individual pension plan for employees not covered by private pension plans. • Anyone with earned income can invest in IRA: • For 2011, contributions to traditional IRA limited to $5,000. • Individuals age 50 or over may contribute an additional $1,000 to their IRA account, for a total contribution of $6,000 15-36

  37. SEP-IRA • Simplified Employee Pension IRA • Allows small businesses and sole proprietors to make deductible contributions. • Employer contributes up to 25% of an employee’s total salary 15-37

  38. Roth IRA • Can make non-deductible contributions and tax-free withdrawals with restrictions: • Non-deductible contributions per individual of up to $5,000 in 2011, less total amounts contributed to other IRAs. • Additional $1,000 Catch-up provision for individuals age 50 and over. • All earnings accumulate tax-deferred, and qualified distributions are made free of federal income tax and penalties. 15-38

  39. Roth IRA • For withdrawals to be qualified as tax free: • The “5 Year Clock”: First contribution must be credited at least 5 years earlier. • Attainment of age 591⁄2, or due to death or disability. • For first-time home buyer, expenses up to a lifetime limit of $10,000. 15-39

  40. Health Insurance • Many health insurance plans cover: • Hospitalization and outpatient physician bills • Prescription drugs • Dental, Eye, and mental health care • Many plans incorporate a deductible: Insurance pays bulk of remaining expenses. 15-40

  41. Managed Care • Managed care due to control escalating health care costs. • Provider of health care, usually an insurance company, organizes and manages program to control costs. • Two of most popular types of Managed Care: • Health Maintenance Organization (HMO) • Preferred Provider Organization (PPO) 15-41

  42. Health Maintenance Organizations (HMOs) • HMOs contract with companies to provide basic medical services, 24-7, for a fixed cost. • Advantages? • Disadvantages? 15-42

  43. Medical Savings Accounts (Medical Spending Accounts) • Employees set aside pre-tax dollars via payroll deductions to pay medical bills for calendar year. • Drawbacks? • Advantage? 15-43

  44. Health Savings Accounts • HSAs allow tax free funds to be put aside by employers and employees: • Funds can be withdrawn to pay out-of-pocket medical expenses. • Contributions tax deductible. • Funds accumulate indefinitely; withdrawn to pay for medical services. • HSA $$$ can also be spent on services not always covered by traditional plans. 15-44

  45. Life Insurance • Group life insurance: provided for all employees • Costs usually same per $ of insurance for all employees. • Physical exam usually not required: • Employers can provide up to maximum of $50,000 in life insurance for employee without cost of policy being considered income to individual. 15-45

  46. Accident Insurance • Designed to provide funds for limited period of time, usually up to 16 weeks. • Amount of benefit often some percentage of accident victim’s weekly salary. 15-46

  47. Disability Insurance • Designed to protect employee who experiences long-term or permanent disability. • 1 to 6-month waiting period required following disability before employee becomes eligible. • Disability insurance benefits also usually calculated as percentage of salary. 15-47

  48. Payment for Time Not Worked • Rest periods, Lunch breaks, Wash-up times • Holidays • Vacations • Days missed because of Sickness, Jury Duty, and Funerals • Payments for time not worked represent over one-fourth cost of all benefits. 15-48

  49. Paid Holidays • Holidays usually include? • Floating Holiday(s): • Personal time-off or “Personal Days” • Number of paid holidays provided by most companies: average of 9 to 10 per year 15-49

  50. Other Common Benefits • Food services • Exercise facilities • Health and first-aid services • Financial and legal advice • Counseling services • Educational and recreational programs • Day care services • Purchase discounts • Employee assistance programs 15-50

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