Employee Benefits TCHRA 2014 Larry Morgan, SPHR, GPHR, MAIR
Total Rewards • Compensation and Benefits • 19% PHR 13% SPHR • Compensation is “direct” • Benefits are considered “indirect compensation”
Agenda • Review employee benefits • History • Benefit planning and assessment • Legal, tax and regulatory issues • Plan design issues • Cost • Employee communications • Identify items most likely to appear on exam
Total compensation Direct compensation Indirect compensation + Pay systems Benefit programs A Total Compensation System
Indirect compensation • Designed to • Attract (limited value) • Retain • Improve productivity, work quality, and competitiveness • Protect employee/family physical and financial well being • Tax favorable treatment • Must be affordable for employers and attractive to employee
Objectives of a Total Compensation System • Compatible with organizational mission, values and strategy • Compatible with corporate culture • Appropriate for the workforce • Attract and retain talent • Externally equitable • Internally equitable • Easy to communicate and understand • Cost effective • Legally compliant
Conflicts • Employees want everything at lowest costs • Employers want to control expenses • Government want revenues • Burden on private employers / citizens vs. federal/state government programs • Medicare/ Medicaid vs. private health insurance • Social security vs. pension, 401k/403b and savings
More on conflict • Tax Code and Department of Labor define balance between conflicting priorities • “Qualified plan” definition • If not “qualified”, the employer must delay taking a deduction on the expense • Plans cannot “favor” highly compensated employees (HCE), owners, officers, etc. • Definition of HCE varies by benefit plan
A brief history of Benefits • Societal issues drive changes • Early 1900’s saw few employee benefits • 1930’s • 1940’s and 1950’s • 1970’s • 1990’s • Competitive Marketplace • Benefits as “hidden paycheck”
Review organizational strategy Review compensation philosophy Review current benefits Review employee needs Conduct gap analysis Conducting a Benefit Needs Assessment
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.
Types of Benefits • Mandated • Voluntary
Mandated • COBRA • FMLA • FUTA • SUTA • Workers comp • Social Security • FICA • Medicare
Voluntary (Optional) Benefits Health and Welfare • Health care • Dental • Vision • Section 125 Other • Tuition • Discounts • Training • Legal • EAP • Memberships • Publications • Cell phone • Training • Retirement • Pension • Defined Benefit • Defined Contribution • Retiree Medical • Perquisites • Car • Computer • Home security • Physical • First class air • Financial planning • Legal Paid Time Off • Sick leave • Vacation • Holidays • PTO
COBRA Regulations • Notify all employees who inform the company of a qualifying event within 14 days even if they do not qualify for COBRA. • Notify individuals whose coverage ends before the maximum continuous coverage period allowed. • 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.
Consolidated Omnibus Budget Reconciliation Act (COBRA) • Provides continuous group medical coverage after a qualifying event. • Type of event determines the length of coverage (18 to 36 months). • Voluntary, involuntary, reduction of hours, divorce, age attainment • Employer can charge actual cost plus an administration fee. • Initial notice. • Qualifying event notice.
COBRA timeframe • Termination for gross misconduct – O months • Other termination (voluntary or involuntary) – 18 months • Layoff or reduction in hours – 18 months • Disability – 29 months* • Divorce or death of employed spouse – 36 months • Dependent child loses eligibility – 36 months** • State laws may vary • Note changes under Patient Protection and Affordable Health Care Act to age 26 mandate (through calendar year of age 26 allowed)
According to COBRA, a company 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 company terminates its health plan. D. COBRA benefits to spouses of deceased workers.
Social Security Employer pays 7.65% Employee pays 7.65% Two components • Social Security 6.2% • Medicare 1.45% • 2013 maximum limit on SS portion is $113,700 • No limit on Medicare portion 1.45%** • Deduction still made on 401(k)!!! • No deduction on FSA pre-tax accounts • ** 2.35% on income over $200,000
Social Security • Provides: • Retirement income. • Disability, death, and survivor’s benefits. • To qualify: • People must work 40 quarters, or ten years. • Calculated as a set percentage of salary: • Yearly maximum limit • Deducted from employees’ pay • People who work and receive payments must still pay in.
Social Security Retirement Benefits • Retirement income: • Depends on individual’s average earnings. • Indexes benefits to inflation. • Pays reduced benefits at age 62. • Indexes retirement age for full benefits to year of birth.
Social Security Disability Benefits • Are paid to workers (and eligible dependents) under full retirement age. • Are paid when workers: • Cannot work for at least five months. • Have an impairment that is expected to continue for 12 months or result in death. • Start after a five-month waiting period.
Social Security Death and Survivor’s Benefits • Death benefits • $255 lump-sum payment to a surviving spouse • Survivor’s benefits are paid to: • Spouse at age 60 (50 if disabled). • Spouse caring for a child under age 16/disabled child. • Unmarried children under age 18. • Children if disabled before age 22. • Dependent parents, age 62 or older.
Medicare • 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 over who are working. • Part A (hospitalization) is mandatory. • Part B (medical insurance) is optional. • Managed care option. • Part C (Medicare Advantage Plans) allows participation in different health care plans such as HMO and PPO • Part D (prescription drugs)
Medicare Part D • Adds an outpatient prescription drug benefit. • Benefits include: • Annual deductible of $325. • Coverage gap between $2,970 and $4,750. • Catastrophic level of coverage reached after $6,734 in out of pocket.
Unemployment Insurance • State run program • Mandatory benefit funded primarily by employers. • 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 • Note: Federal program may extend this during periods of high unemployment with supplemental unemployment benefits (SUB)
Workers’ Compensation • State insurance paid by the employer. • Protects workers in case of a work-related injury or disease. • Experience-rated; employers who have a high number of claims pay more. • Employers assume all costs, regardless of who is to blame.
Workers’ Compensation • Benefits include: • Medical care. • Disability income. • Rehabilitation. • Death benefits. • Compensation is tied to fixed schedules. • States regulate workers’ compensation.
An employee drops a cup of coffee on the shop floor, slips, and breaks a leg. The cost of the injury will be covered A. by the employer B. by the employee C. jointly by the employer and employee D. by Medicare
Qualified vs. Non-qualified benefits • Qualified • Meets IRS and ERISA standards • Employer may take immediate tax deduction • Non-qualified • Typically used for executives • Keeps executives “whole” • Employer cannot take deduction until it is taxable to the employee
Employee Retirement Income Security Act (ERISA) • Establishes standards for tax-favored status of ALL benefits. • Allows organization to deduct cost. • Allows employee tax favored status • Minimum eligibility standards • Sets standards for retirement plans. • Operate plans for exclusive benefit of participants and their beneficiaries. • Sets up the Pension Benefit Guaranty Corporation (PBGC). • Defines minimum vesting schedules for cliff and graded vesting. • Sets procedures for claims administration and appeals of adverse determinations. • Establishes prudent person rule.
Characteristics of Qualified Plans • Under ERISA, plans must: • Be in writing and be communicated to employees. • Be established for exclusive benefit of employees/beneficiaries. • Satisfy rules concerning eligibility, vesting, and funding. • Not favor officers, shareholders, or HCEs.
Prudent Person Rule- SPHR only • Fiduciary role • Employer sponsor must follow prudent person rule • Cannot take risks that a reasonably knowledgeable, prudent investor would take under similar circumstances
Flat-dollar formula • Benefit amount is based on a formula. • Employer funds the plan and bears the risk. • Insured by the PBGC. Career-average formula Cash balance plan Final-pay formula Defined Benefit Plans
Cash Balance Plan- hybrid • Type of defined benefit plan • Expresses promised benefit in terms of hypothetical account balance • Employer assumes investment risks and rewards • Is portable • At retirement, employees receive either: • Lifetime annuity • Lump sum
Defined Contribution Plans Profit-sharing plans • Employees and employers pay a specific amount per person into the fund. • Benefits are determined by fund performance. Money purchase plans ESOPs 401(k) / 403(b) plans
Catch up contributions • DC limit employee contributions to $17,500 in 2013 • However, persons turning age 50 or above to supplement IRA and 401k/403b contributions • 2013 catch up limit is $5,500
Rollovers Unemployment Compensation Amendments (UCA) imposes a 20% federal income tax withholding requirement on plan rollovers unless there is a trustee-to-trustee transfer.
Which of the following tax-deferred plans applies to employees of colleges, universities, and public charities? A. SEPs B. IRA C. 457 D. 403(b)
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)
Vesting for DB Pension Plans • Five year cliff vest or • 20% after three years and 100% after seven years
Economic Growth and Tax Relief Reconciliation Act (EGTRRA) • Sets permissible compensation limits—Code Section 401(a)(17). • Sets limits on annual pensions—Code Section 415(b). • Permits catch-up contributions for employees age 50 and older. • Modifies distribution and rollover rules.
Nonqualified Deferred Compensation Plans • Provide additional benefits to key executives. • Employees defer reporting income; not subject to the limits placed on qualified plans. • Employer contributions are not deductible. • Funds are not protected by ERISA or PBGC. Examples: Rabbi trusts, top hat, mirror plans and excess deferral plans
Qualified Domestic Relations Orders (QDROs) • Create or recognize the right of an alternative payee to receive all or a portion of an employee’s pension benefits. • Orders must relate to child support, alimony, or marital property rights and must be made under state domestic relations law.
Health-Care Plans • Indemnity (fee-for-service) plans • Full-choice plan • Employees can go to any qualified physician. • Fees are generated when services are used. • Managed care plans • Prepaid health-care plans • Physician is paid per capita (per head) rather than for actual treatment provided. • Members enroll and pay a set monthly or annual fee.