Discretionary Employee Benefits Karen S Markel Ph D

Discretionary Employee Benefits Karen S. Markel, Ph. D. , SPHR 2010

Learning Objectives At the completion of this section of the module, students will be able to: • Identify the issues in discretionary benefits design and implementation. • Define the types of discretionary benefits. • Identify the relationship between various discretionary benefits programs and relevant federal law. SHRM© 2010 2

Design and Implementation Considerations Session 1

Session 1 Learning Objectives After completing this session, students will be able to: • Define discretionary benefits. • Understand what benefits should be offered in most organizations. • Understand benefits administration. • Know how to communicate benefits offerings to employees. • Determine if a benefits program is accomplishing its purpose. SHRM© 2010 4

Benefits Examples • • • Vacation leave Sick leave Social Security Dental insurance 401(K)

Discretionary Benefits Defined Discretionary benefits are those benefits that are not mandated by law.

What Benefits to Offer? To determine which benefits to offer, the following must be

What Benefits to Offer? To determine which benefits to offer, the following must be considered: > Benchmarking: What benefits do our competitors offer? > Line of sight: Employee perceptions about the value of the benefit. > Return on investment (ROI). SHRM© 2010 10

Benefits Administration Four basic principles apply to good benefits plan administration (Murphy, 2009): • Plans should be simple and easy to understand. • Sponsors (employer or benefit provider) should control the administration expense of plans. • Where possible, allow employee choice to be part of the overall plan. • Sponsors should allow employees to administer their own plans by introducing information systems that enable benefit selection, provide information and enrollment. Source: Murphy, T. E. (2009). Benefits and Beyond: A Comprehensive and Strategic Approach to . Retirement, Health Care, and More. Thousand Oaks, CA: Sage Publications SHRM© 2010 11

Outsourcing Administration • An employer may determine that benefits administration should be handled (all or in part) by a third-party administrator. The decision may be based on: > Subject matter expertise. > Economies of scale. SHRM© 2010 12

Communicating Benefits Information • Legal provision guided by ERISA and PPA. • • According to Martocchio (2008), the elements of a sound benefits communication program include: What is communicated? Who are the recipients of benefits information? How are the benefits communicated? How often are benefits communicated? Source: Martocchio, J. J. (2008). Employee benefits: A primer for human resource professionals, 3 rd edition. New York: Mc. Graw-Hill Higher Education. SHRM© 2010 13

Is the Benefits Program Achieving Desired Results? • Before getting started, determine the measures of success. • Benefits providers can help the employer determine the appropriate measures to use and conduct the necessary analysis. SHRM© 2010 14

Exercise 1: Using Benchmarking Information Using the data on the next slide, answer the following questions: • Based on the information on the slide about understanding the data, what should be considered when using the data to generalize information? • You are using the data to determine how your organization compares to others in a similar industry. What should you consider about the data when making recommendations to correct any significant discrepancies in benefits offered by your organization and the findings from the report? What else besides strategy, location and size might affect the utility of using benchmarking data? SHRM© 2010 15

Understanding the Data As you compare your data against the other organizations, please keep the following in mind: • The report is based on data from the SHRM Customized Benchmarking Database and contains data from a nonrandom collection of U. S. organizations of all sizes and types. The report is designed to target organizations that closely match certain criteria, so a more focused and comparable analysis and interpretation can be performed. Any interpretations of the data should be kept within this context. • The information in the report should be used as a decisionmaking tool rather than an absolute standard. Because organizations differ in their total rewards strategy, location, size and other factors, any two organizations can be well managed, yet their health care measures may differ greatly. No decision should be made solely based on the results of any one study. Source: Society for Human Resource Management. (2009). Health care benchmarking report. Alexandria, VA: SHRM© 2010 16

Exercise 1: Using Benchmarking Information Using the data from the table on the next slide, answer the following questions: • What is the most common type of health care coverage? • Who is covered under this plan? • You are a benefits manager for an organization using this table to compare your health care coverage to similar organizations. Currently, you don’t offer opposite-sex domestic partner health care coverage to your employees. Are you at a competitive disadvantage? Why or why not? SHRM© 2010 17

Table 1 HEALTH CARE COVERAGE AND SPECIFIC STOP-LOSS COVERAGE PREVALENCE * To ensure that the data are seen as credible, data for metrics with an “n” of less than 5 are not displayed. Percentage of Organization Percentage of of of Organization s Providing of Organizations Organization s Providing Opposite. Organization with Specific s Providing Same-Sex s with Self. Stop Loss Employee Spouse Domestic Funded (SSL) Health Care Partner Health Care Coverage Health Care Coverage n 101 91 39 26 39 30 Percent 95% 92% 39% 26% 40% 81% Source: Society for Human Resource Management, (2009). Health care benchmarking report. Alexandria, VA: SHRM© 2010 18

Exercise 1: Using Benchmarking Information Using the data in the table on the next slide, answer the following questions: • Your organization only offers employees one type of health plan, and it is an indemnity plan. Your organization is considering offering another health care plan to its employees. Based on the data: • What percentage of employers responding to this survey offer more than one plan? • What other health care plans might be attractive to employees? SHRM© 2010 19

Table 2 EMPLOYEE PARTICIPATION AND PLANS OFFERED * To ensure that the data are seen as credible, data for metrics with an “n” of less than 5 are not displayed. Percentage of Employees Enrolled Percentage of Organizations Offering Plan 67 98 HMO 24% 55% 1 Plan 43% EPO 1% 4% 2 Plans 35% PPO 49% 83% 3 or More Plans 22% POS 9% 23% Indemnity 1% 7% CDHP 3% 12% n Number of Health Care Plans Offered n 98 Source: Society for Human Resource Management. (2009). Health care benchmarking report. Alexandria, VA: SHRM© 2010 20

Assessment: True or False Questions 1. Employers often outsource the administration of employee benefits because it requires a specialized knowledge set. 2. Employees often consider what discretionary benefits are available when deciding to work for an employer. 3. It is neither important nor legally required to inform employees of their benefits offerings or elections. 4. If the right factors are considered, the choice of employee benefits offered may lead to changes in employee behavior. 5. All employers place the same value on discretionary benefits. 6. It is ideal for employees to have a choice in the benefits they receive. 7. Discretionary benefits are those employee benefits that are mandated by law. 8. In an organization where the majority of employees are between the ages of 20 and 40, employees are more likely to value benefits related to child birth and child care. SHRM© 2010 21

Assessment: True or False Questions 9. Cafeteria plans have the least amount of flexibility for employees in the variety of benefits employees receive. 10. Total rewards statements provide personalized data to employees about the compensation and benefits received through their employers (e. g. , cost, elections, account balances). 11. There are no legal requirements that control the type and frequency of benefits communication. 12. Employees often compare what similar organizations offer in terms of employee benefits. 13. The timing of benefits communication is important to its overall success. 14. Employers should align their benefits strategy as part of a total rewards strategy. 15. The Internal Revenue Code does not offer tax incentives to employers for certain discretionary benefits offerings. SHRM© 2010 22

Assessment: Discussion Questions 1. What role(s) can discretionary benefits play in an organization’s HR function? 2. What should an employer take into account when designing a discretionary benefits program? 3. How should the program be communicated? SHRM© 2010 23

Health and Medical Benefits Session 2

Session 2 Learning Objectives After completing this session, students will be able to define the following benefits and their relationship with appropriate law: • Insurance coverage options. • Major medical plans. • Other medical benefits: > Dental. > Vision. > Prescription drugs. > Employee assistance programs (EAPs). > Mental health and substance abuse programs. > Wellness programs. SHRM© 2010 25

Coverage • Single or family? > Employee (and dependents). • Individual or group? >

Major Medical Benefits • Fee-for-service. • Managed care: > Health maintenance organizations (HMOs). >

Fee-for-Service • Traditional fee-for-service medical plans are available through many employers but at a declining rate. These plans offer the greatest freedom of choice in selecting health care providers. > Deductible. > Co-insurance. > Out-of-pocket maximum. > Lifetime benefit maximum. > Employers may elect to self-fund the insurance vs. purchasing from a benefits provider. SHRM© 2010 28

Managed Care Plans Health Maintenance Organizations (HMOs) • An HMO provides comprehensive health care coverage to plan participants through a network of physicians and hospitals. • Traditionally, HMOs require a referral from the individual’s primary physician to receive care from a specialist. SHRM© 2010 29

Managed Care Plans Preferred Provider Organizations (PPOs) • PPOs delineate services between in-network and out-of-network providers. • Covered individuals receive a higher reimbursement when using services from physicians and hospitals in the plan’s network. SHRM© 2010 30

Managed Care Plans Point-of-service (POS) plans • POS plans are a hybrid between an HMO and a PPO. • Covered individuals need a referral to see innetwork specialists. • The costs of services from an out-of-network provider are higher than from an in-network provider. SHRM© 2010 31

Dental Insurance Most dental plans have four components: 1. Preventive and diagnostic. 2. Basic services. 3. Major services. 4. Orthodontia. • Often provide 100 percent reimbursement for preventive and diagnostic services and are not subject to a deductible. • This coverage is to encourage covered individuals to have routine dental care that may prevent more costly services in the future. Deductibles can apply to all other services. Source: Worldat. Work (2007) SHRM© 2010 32

Vision Insurance Vision care plans typically provide coverage for routine eye exams every two years and a bi-annual, flat-dollar amount for frames or lenses. Source: Martocchio (2008) Like major medical and dental plans, vision insurance plans are also offered in a variety of formats similar to fee-forservice or managed care options. SHRM© 2010 33

Prescription Drug Insurance • These programs are either part of the major medical benefit or managed by a pharmacy benefits manager. • Employers often manage the costs of the programs through various co-payment formulas. For example: Benefit Tier Co-payment Amount 1: Generic drugs $8 -10 2: Brand drugs $10 -15 3: Lifestyle drugs $15 -40 4: Mail order Three-month supply for maintenance drugs. Payment equals to 1 -2 months supply. SHRM© 2010 34

Employee Assistance Plans (EAP) • EAPs provide professional counseling through a thirdparty provider. • Typically accessed in a confidential manner (e. g. , tollfree number or a web site). • Employees who reach out for these services are treated in a private manner and their issues are not addressed with the employer. • Often addresses short-term problems, and any longerterm conditions (e. g. , depression, stress) are referred to the appropriate resource (like a mental health provider). • These plans can also offer assistance with locating resources (e. g. , childcare providers). • Many large employers offer EAP services. SHRM© 2010 35

Mental Health and Substance Abuse Benefits Mental Health • Many employers provide mental health benefits to their employees as part of their health insurance program. • These benefits may include in- or out-patient mental health services, psychological testing and necessary psychiatric drugs. Mental Health Parity Act of 2007 Substance Abuse Benefits • These benefits are similar to mental health coverage but are targeted to substance abuse treatment and recovery. • This benefit is often part of an employee’s health insurance program. SHRM© 2010 36

Wellness Programs These are lifestyle programs designed to improve long-term employee well-being and might

Consolidated Omnibus Budget Reconciliation Act of 1986 (COBRA) • Eligible employers must allow employees, spouses and their dependent children to continue their health care benefits if that coverage is lost due to a qualifying event. • Those who continue benefits under COBRA: > May have to pay the entire cost of the insurance premium. > May have to pay up to an additional two percent of the premium for benefits administration costs. > Plan participants and beneficiaries must be sent an election notice not later than 14 days after the plan administrator receives notice that a qualifying event has occurred. The individual has 60 days to decide whether to elect COBRA coverage. The person has 45 days after electing coverage to pay the initial premium. Source: U. S. Department of Labor, 2006 SHRM© 2010 38

Health Insurance Portability and Accountability Act of 1996 (HIPAA) • HIPAA is another amendment to ERISA and applies to most employers who offer group health plans. • HIPAA was intended to eliminate discrimination in health care coverage and portability, regardless of medical history or claims. • It was amended in 2003 to ensure that appropriate privacy measures are in place concerning the use and disclosure of protected health information. Source: U. S. Department of Labor SHRM© 2010 39

Health and Medical Benefits Cost Management 1. 2. 3. 4. Shift to managed care plans. Push expenses to employees. Provide incentives to manage chronic conditions. Reduce benefits. Health Care Flexible Spending Accounts: Employee pre-tax contributions for annual medical expenses. SHRM© 2010 40

Exercise: Part 1 The National Compensation Survey (administered by the U. S. Bureau of Labor Statistics) conducts an annual survey about health care benefits. Based on the March 2008 Employee Benefit Survey (available at http: //www. bls. gov/ncs/ebs/benefits/2008/ownership/private/table 05 a. pdf), answer the following questions: 1. What employee segment (civilian, private, state and local government) has the most access to medical care? What percentage of that population actually participates in medical care plans? Is that percentage higher or lower than you expected? 2. What employer segment has the lowest employer share of premium? SHRM© 2010 41

Exercise: Part 2 Based on the March 2008 Employee Benefit survey table (available at http: //www. bls. gov/ncs/ebs/benefits/2008/ownership/private/table 01 a. pdf ) that details information about private-sector employers that offer retirement and health care benefits, answer the following questions: 1. Are larger or smaller employers (based on the number of employees) more likely to offer health care benefits? 2. Which organizations are more likely to offer health care benefits: goods or service-producing organizations? 3. Organizations in which type of service-producing industry are most and least likely to offer health care benefits? SHRM© 2010 42

Assessment: True or False Questions 1. One strategy employers can use to manage increasing health care costs is to push some of that cost to employees through copayments. 2. Under COBRA, employees who are fired for gross misconduct can continue their benefits at no charge. 3. In an HMO, employees do not need to go through their primary care physicians to see a specialist. 4. Many employers include preventive care in their health care benefits with the hope that increased preventive care will lead to healthier employees and lower overall health care costs. 5. In a PPO, covered individuals pay the same costs for health care services regardless of whether they receive services in or out of the network of acceptable providers. 6. Vision insurance often covers eye surgery, not just routine care. 7. Employers may choose to self-fund their major health care plan if it is more economical than purchasing group insurance. SHRM© 2010 43

Assessment: True or False Questions 8. Because of the aging workforce at ABC Corporation, the company started offering lunchtime seminars on managing diabetes, high blood pressure and common ailments for older people. These seminars are examples of components of a wellness program. 9. HIPAA does not address issues related to medical record privacy. 10. Traditional fee-for-service medical plans offer covered individuals the most freedom in choosing health care providers. 11. Low employee deductibles are one strategy employers can use to defray healthcare costs. 12. Dental insurance plans are often structured like major medical HMOs. 13. Mental health benefits often include in- or outpatient mental health services. 14. Alex’s boss learned that Alex is having some personal problems that are affecting his behavior and demeanor at work. Alex’s boss contacts her HR department for advice, and they suggest reminding Alex of the services available through the organization’s employee assistance plan (EAP). An EAP could address Alex’s needs. 15. PPOs do not delineate services between in-network and out-of-network providers. SHRM© 2010 44

Assessment: Discussion Questions 1. Why are employers moving away from traditional health care plans? 2. What are some of the pros and cons of offering health care benefits to employees? 3. How are employers managing the rapidly increasing costs of health care benefits? SHRM© 2010 45

Retirement Benefits Session 3

Session 3 Learning Objectives After completing this session, students will be able to define the following benefits and their relation to appropriate law: > Defined benefit plans. > Defined contribution plans [401(k), profit-sharing, stock plans, 403(b)]. SHRM© 2010 47

Social Security Act of 1935 • The Social Security system was created through the Social Security Act of 1935. The system has four distinct types of benefits: > OA: Retirement income in “old age. ” > S: Survivor income. > D: Disability income. > HI: Health insurance benefits. SHRM© 2010 48

Social Security Act of 1935 Retirement benefits • The earliest age that an individual can receive OA benefits is 62. • Individuals who retire early may do so, but they are subject to a reduction in benefits depending on the age they wish to receive benefits relative to their full retirement age. • Individuals are also eligible for increased benefits beyond full retirement age depending on their year of birth. SHRM© 2010 49

Employer-Sponsored Retirement Plans • Employee Retirement Income Security Act of 1974 (ERISA). • Internal Revenue Code. • Defined benefit. • Defined contribution: > 401(k), 403(b). > Profit sharing. > Stock options. SHRM© 2010 50

ERISA (1974) • Requires plans to provide participants with information about plan features and funding. • Outlines certain fiduciary responsibilities for those who manage and control plan assets. • Requires plans to establish grievance and appeals processes for participants. • Includes provisions to give participants the right to sue for benefits and breaches of fiduciary duty. ERISA established the Pension Benefit Guarantee Corporation (PBGC). SHRM© 2010 51

Internal Revenue Code • Extends favorable tax treatment to plan sponsors (employers) and beneficiaries (employees). • Plan contributions made by the sponsor can be tax -deductible. • Plan assets can grow without being taxed. • Plan accruals for participants are tax-deferred until received. • Sets maximum annual contribution levels. Source: Murphy (2009) SHRM© 2010 52

Defined Benefit Plans • Defined benefit plans commit certain financial payments to employees based on pre-determined formulas (typically using employee age, tenure and annual salary). • From an employer’s perspective, this type of plan is the most expensive because employers must make contributions to guarantee certain benefit levels regardless of overall retirement plan investment success. • These plans are also referred to as ‘pensions. ’ SHRM© 2010 53

Defined Contribution Plans • Unlike defined benefit plans, defined contribution plans do not guarantee certain financial payments; rather, the payment is determined by the overall value of the employee’s account at the time he or she elects to receive benefits. • Employees make their own decisions (usually among a set of pre-determined options) regarding investment options (e. g. , degree of investment fund risk and type). • There are several different types of defined contribution plans determined either by the type of organization or profit or stock contributions. SHRM© 2010 54

Defined Contribution Plans 401(k), 403(b), Section 457 plans • These defined contribution plans offer several benefits to employers and employees. Employees can make pre-tax contributions into their accounts. • Employers can take tax deductions for contributions they make to employee plans. • 401(k) plans are for private-sector employees. • Plans for employees of public educational institutions are referred to as 403(b) plans. • Section 457 plans are for government employees. SHRM© 2010 55

Defined Contribution Plans Profit sharing and stock ownership plans • Employers often use profit sharing plans to distribute money to employee retirement accounts using a predetermined formula based on organizational financial performance measures. • Employer sponsors of profit sharing retirement plans often fund those accounts with company stock. > Employees’ shares grow each year as the plan sponsor deposits company stock. > Employees receive all the benefits of stock ownership (e. g. , dividends and voting rights). SHRM© 2010 56

Defined Benefit vs. Defined Contribution Plans Defined Benefit • Benefit is known. • Cost is unknown. • Employer bears financial risk. • Generally higher benefits for longservice employees. Defined Contribution • Benefit is unknown. • Cost is known. • Employee bears financial risk. • Can provide substantial benefits to short-service employees. Source: Worldat. Work (2007) p. 419 SHRM© 2010 57

Implementation Issues • • Benefit formulas > Most retirement plans use formulas to determine employee eligibility, company contributions and employee benefits. Vesting > Determines when employees are eligible to receive contributions made to the plan. • Cliff schedules typically mean that covered individuals are eligible for the benefits/contributions after a certain time period, but no benefits before that time period has passed. • Graded or gradual schedules offer partial benefits with company tenure and full vesting at a certain time period. SHRM© 2010 58

ERISA Maximum Vesting Schedules Effective After 2002 Defined Contribution Plans Three-Year Cliff After Year(s) 1 2 3 % Vested 0 0 100 Six-Year Graduated Year 1 2 3 4 5 6 % Vested 0 20 40 60 80 100 Source: Murphy (2009) (p. 265) SHRM© 2010 59

ERISA Maximum Vesting Schedules Effective After 2002 Defined Benefit Plans Five-Year Cliff After year(s) 1 2 3 4 5 % Vested 0 0 100 Seven-Year Graduated Years 0 -3 3 -4 4 -5 5 -6 6 -7 7 % Vested 0 20 40 60 80 100 Source: Murphy (2009) (p. 265) SHRM© 2010 60

Pension Protection Act of 2006 (PPA) • The PPA increased minimum funding requirements for pension plans and strengthened the pension insurance system. • Employers must provide more frequent information to employees about their employer-sponsored retirement plan accounts and notify them of any underfunding problems. SHRM© 2010 61

Exercise: Part 1 • The Employee Benefits Research Institute (EBRI) conducts a retirement confidence survey annually to examine trends and attitudes about retirement benefits and plans. Go to the survey web site (http: //www. ebri. org/surveys/rcs/ ) and answer the following questions. • Based on the EBRI’s survey results for 2009, what are workers’ expectations for retirement? Have they changed and why? SHRM© 2010 62

Exercise: Part 2 Discuss the gender comparisons regarding retirement confidence and expectations for the

Exercise: Part 3 Describe the confidence level and expectations for Social Security. SHRM© 2010

Assessment: True or False Questions 1. Employer sponsors of profit-sharing retirement plans often fund those accounts with company stock. 2. The earliest that an individual can receive “old age” Social Security benefits is age 62. 3. Employers do not receive any tax incentives for making financial contributions to their employees’ 401(k) plans. 4. A defined contribution plan guarantees a predetermined benefit at retirement. 5. A vesting schedule determines when an employee is eligible to receive certain benefits. 6. Employees pay taxes on contributions to their employersponsored retirement plans at the time of the contribution. 7. The Social Security Act of 1935 created employer-sponsored retirement plans. SHRM© 2010 65

Assessment: True or False Questions 8. Most retirement plans use a formula to determine employee eligibility, employer contributions and employee benefits. 9. The Internal Revenue Code is one law that regulates retirement plans. 10. A cliff vesting schedule typically means that a covered individual is eligible only after a certain time period to receive full benefits. 11. Defined benefit plans are more expensive to employers than defined contribution plans. 12. Social Security benefits are received on a graduated scale. 13. In a defined contribution plan, employees often have discretion over how their funds are invested among a set of predetermined options. 14. Stocks are never used as contributions to retirement accounts. 15. The government offers an incentive through increased Social Security benefits by delaying payment receipt at the time of eligibility. SHRM© 2010 66

Assessment: Discussion Questions 1. What laws are important in the provision and regulation of retirement benefits? 2. What are some pros and cons to offering defined benefit (DB) or defined contribution (DC) plans from the employee and employer perspectives? 3. How does the government provide incentives for individuals to delay the receipt of their Social Security benefits? SHRM© 2010 67