Module 4 Compensation and Benefits 19 PHR 13

Module 4: Compensation and Benefits 19% PHR 13% SPHR Any student use of these slides is subject to the same License Agreement that governs the student’s use of the SHRM Learning System materials. © SHRM 4 -1

Types of Compensation and benefits are two of the most visible elements of a total rewards system. Types of Compensation Direct compensation Pay systems © SHRM + Indirect compensation Benefit and recognition programs 4 -2

Compensation Legislation Davis-Bacon Act • Requires prevailing wages/benefits on federal construction projects Copeland “Anti. Kickback” Act • Precludes federal contractors from inducing employees to give up any part of compensation Walsh-Healey Act Service Contract Act © SHRM • Extends prevailing wages to federal suppliers • Stipulates overtime pay • Requires prevailing wages/benefits on all federal contracts 4 -3

Fair Labor Standards Act (Wage and Hour Law) • Applies to organizations with employees who engage in interstate commerce, produce goods for interstate commerce, or handle, sell, or work on goods/materials that have been moved in/produced for interstate commerce. • Applies to employers with at least $500, 000 in annual dollar volume of business. • Under FLSA, an employer has no ongoing obligations to independent contractors. © SHRM 4 -4

Which of the following factors would indicate independent contractor status? A. Opportunity for profit and loss B. Regular oral and written reports presented to a manager C. Right to end the relationship with the organization at any time without incurring liability D. Services provided to a single organization © SHRM 4 -5

IRS Independent Contractor Test Behavioral control Financial control Type of relationship © SHRM 4 -6

Exempt and Nonexempt Employees Type of Employee Exempt Importance: Excluded from minimum wage and overtime pay requirements of the law. Nonexempt Are not excluded from minimum wage requirements and are entitled to overtime. Overtime is guaranteed to employees who are paid less than $23, 660 per year or $455 per week. © SHRM 4 -7

FLSA Exemptions Minimum salary An exempt employee must meet three requirements. Paid on a salary basis without improper deductions Exempt duties © SHRM 4 -8

Primary Duty Issue A primary duty is the main or most important duty and is an important part of exemption. No particular percentage of exempt duties is required under the FLSA. The lower the total percentage, the greater the legal risk if challenged. © SHRM 4 -9

Executive Exemption An employee must: © SHRM Have a primary duty of managing an organization, department, or subdivision. Direct the work of at least two full-time employees or their equivalent. Have the authority of the employer to hire and fire. Affect promotion decisions. 4 -10

Administrative Exemption ü Requires performance of office or nonmanual work directly related to the management or general business operations of the employer or the employer’s customers. ü Includes the exercise of discretion and independent judgment related to “matters of significance. ” © SHRM 4 -11

Professional Exemptions • Requires advanced knowledge in a field of science or learning that is acquired by prolonged instruction. • Work is intellectual in nature and requires exercise of Learned discretion and judgment. professionals • Must meet minimum salary requirements. • Perform work that requires invention, imagination, originality, or talent. Creative professionals • Perform in a recognized field of creative or artistic endeavor. © SHRM 4 -12

Highly Compensated Exemption A highly compensated employee must: ü Be paid total annual compensation of $100, 000 or more that includes at least $455 per week paid on a salary or fee basis. ü Perform one of the duties of an exempt executive, administrative, or professional employee. © SHRM 4 -13

Computer Employees ü Must meet the salary minimum with a salary of $455 per week or $27. 63 per hour. ü Employee’s pay cannot be subject to deductions inconsistent with the salary basis requirement. ü Primary duties must fall into one of four categories. © SHRM 4 -14

Outside Sales An employee must: ü Have a primary duty involving making sales or obtaining orders and contracts. ü Be customarily and regularly engaged away from the employer’s place of business. Outside sales employees are not subject to the minimum salary requirements of other exemptions. © SHRM 4 -15

Improper Deductions Example: An exempt employee is normally not subject to deductions for illness in less than full-day increments. (An FMLA exception may occur. ) Employers that make improper © SHRM 4 -16

Safe Harbor A “safe harbor” exists if: ü The employer has a clearly communicated policy prohibiting improper pay deductions. ü Employees are reimbursed for any improper deductions. ü The organization makes a good-faith effort to comply in the future. © SHRM 4 -17

FLSA Basic Overtime Provisions Sets rate of overtime pay (1. 5 times regular pay after 40 hours worked). Requires overtime on time worked, not time compensated. Sets workweek as any fixed, recurring period of 168 consecutive hours (7 days 24 hours). © SHRM 4 -18

An employer pays an employee a $40 attendance bonus for working a full 40 -hour workweek. If the worker works 45 hours during that week, what will the employee’s gross paycheck be if her hourly rate is $10? A. B. C. D. $495. 00 $509. 50 $515. 00 $517. 25 © SHRM 4 -19

Compensatory Time • Overtime usually must be paid in cash. • Public-sector employers may grant compensatory time off. • Public employees can accumulate “comp” time. $ $ $ Presently, compensatory time is not allowed for private-sector nonexempt employees. © SHRM 4 -20

FLSA Child Labor Provisions Restrict hours and conditions of employment for minors. © SHRM 4 -21

Minimum Wage Provisions Fair Minimum Wage Act of 2007 Raised minimum wage to $7. 25 per hour in three phases © SHRM Provides $2. 13 per hour cash wage if claiming a tip credit 4 -22

Portal-to-Portal Act • Amends FLSA and defines general rules for hours worked. • Provides guidelines on: – – – © SHRM On-call/standby time. Preparatory/concluding activities. Waiting time. Meals and breaks. Travel time. Training time. 4 -23

Travel Pay © SHRM 4 -24

Equal Pay Act (EPA) Mandates equal pay for equal work. © SHRM Skills Effort Responsibility Working Conditions 4 -25

Which of the following is true under the Equal Pay Act? A. Seniority systems cannot result in pay disparity. B. Companies should provide all employees with the same working conditions. C. Employees doing equal work should receive the same pay. D. Jobs filled primarily by women should have the same salary as similar jobs filled by men. © SHRM 4 -26

Work Opportunity Tax Credit (WOTC) Federal tax credit to encourage employers to hire targeted groups of job seekers. Administered by the DOL’s Employment and Training Administration (ETA) and the IRS. Includes individuals from 12 categories. © SHRM 4 -27

Additional Compensation Legislation Lilly Ledbetter Fair Pay Act • States that the statute of limitations on pay discrimination lawsuits resets as each allegedly discriminatory paycheck is issued Dodd-Frank Wall Street Reform and Consumer Protection Act • States required communications related to executive compensation at publicly traded companies IRS Intermediate Sanctions • Provides guidelines regarding the determination of reasonable compensation for executives of nonprofit organizations © SHRM 4 -28

Objectives of a Compensation and Benefits System Compatible with mission and strategy Compatible with organizational culture Appropriate for the workforce Externally and internally equitable Effective for recruiting and retention © SHRM 4 -29

External Equity • Compares an organization to other organizations that share its industry, occupation, or location. • Organizations may decide to: Lag © SHRM Match Lead 4 -30

Internal Equity Meets employees’ needs for a fair wage and adequate benefits. Recognizes employees’ contributions to the organization. Rewards equal work with equal pay. Does not discriminate against protected classes. © SHRM 4 -31

Job Evaluation • Determines the relative worth of each job by establishing a hierarchy. • Follows job analysis, which focuses on job descriptions and specifications. © SHRM 4 -32

Job Evaluation Methods © SHRM 4 -33

Nonquantitative (Whole-Job) Evaluation • Establishes a relative order of jobs. • Does not assign numeric values. Job ranking Paired comparison Job-to-job comparison © SHRM Job classification Job-to-predeterminedstandard comparison 4 -34

Quantitative Evaluation • Uses a scaling system to evaluate the value of one job is as compared to another. • Provides a score. Point-factor method Less complex, commonly used © SHRM Factor comparison method Most complex, used infrequently 4 -35

Point-Factor Method • Each job receives a total point value, and relative worth can be compared. • Examples: Guide Chart-Profile (Hay Plan) and the U. S. government Factor Evaluation System (FES). • Points often determine pay grade assignment. © SHRM 4 -36

Market-Based Evaluation Not a true job evaluation system; can be used to develop a job-worth hierarchy. Prices jobs in the labor market(s) in which an organization competes. © SHRM Uses prevailing rates as the relative “worth” of the jobs. 4 -37

Pay Surveys © SHRM 4 -38

Data Analysis • Salary data may need to be aged, leveled, and/or factored for geography. – Aging uses movement in market rates to adjust outdated salary data. – Leveling adjusts salaries when surveyed jobs are similar but not identical to jobs in the organization. – Since wage rates will vary by location, the organization should factor for geography any national salary survey data. © SHRM 4 -39

Sorting Salary Data Frequency distributions and tables sort salary data. • Frequency distribution − Lists the grouped data, from lowest to highest. • Frequency table − Shows the number of incumbents who receive a particular salary. © SHRM Mean Salary Number of Incumbents $55, 000 $60, 000 $65, 000 $70, 000 $75, 000 2 1 2 5 1 4 -40

Salary Data: Measures of Central Tendency Unweighted average gives equal weight to every salary. Weighted average considers the number of people who receive each salary. Median is the middle number in the range. Mode is the most frequently occurring wage. Annual Salary # of Incumbents Total Salary $55, 000 $60, 000 $65, 000 $70, 000 $75, 000 2 1 2 5 1 $110, 000 60, 000 130, 000 350, 000 75, 000 Totals 11 $725, 000 Unweighted Average = $65, 000 Weighted Average = $65, 909 © SHRM 4 -41

Quartiles and Percentiles • Show groups relate to each other. • Show if an organization leads, lags, or matches the job market. © SHRM 4 -42

Creating a Pay Structure Establish pay grades. • Group jobs that have the same relative internal or external worth. • Pay the same rate or within the same pay range. Set pay ranges. • Set upper/lower bounds of possible compensation for individuals whose jobs fall in a pay grade. • Market data from surveys used to determine a midpoint. © SHRM 4 -43

Compa-Ratios • Divide the pay rate of an employee by the midpoint of the range. • Given a range of $16 to $20 an hour, a midpoint of $18, and a salary of $16 an hour, the comparatio is: $16 ÷ $18 =. 89 or 89%. • Compa-ratios below 1. 00 mean wages are below the midpoint; compa-ratios greater than 1. 00 mean wages exceed the midpoint. © SHRM 4 -44

An employee earns $9 an hour, and the pay range is $8 to $12. What is the compa-ratio? A. 66% B. 80% C. 90% D. 111% © SHRM 4 -45

Broadbanding • Combines several salary grades or job classifications. © SHRM 4 -46

Broadbanding Advantages and Disadvantages Advantages • Provides wider ranges. • Reduces the number of job grades. • Supports de-layering. • Provides more autonomy to line managers. • Enhances employee mobility. © SHRM Disadvantages • Reduces the value of ranges. • Affords less control. • Creates overly broad ranges. • Difficult to maintain perception of equity. • Reduces the opportunity for promotion. • Can lead to divergence from the market. 4 -47

Functions and Systems Completing paychecks Record keeping and retention Payroll systems © SHRM 4 -48

Base-Pay Systems Develop a pay determination system that helps attract, motivate, and retain employees. © SHRM $ $ $ Most employees receive base pay in the form of an hourly wage or salary. 4 -49

Single- or Flat-Rate System • Employees receive the same rate of pay, regardless of performance or seniority. • Typically used for elected jobs in the public sector or union hourly positions. • Generally corresponds to target market survey data for the job. • There may be a training wage in a flat-rate job. © SHRM 4 -50

Time-Based Step-Rate System • Rate is based on longevity. • Pay increases occur on a predetermined schedule. – Automatic step-rate – Step-rate with variabilitybased performance – Combination step-rate and performance 5 4 3 2 1 © SHRM 4 -51

Performance-Based/Merit Pay System • Individual performance is the basis for pay. • Increases are tied to performance and job mastery. • Employers must be able to defend performance appraisal methods and differences in salary increases. © SHRM 4 -52

Productivity-Based System Pay is determined by employee’s output. • Straight piece-rate − Base wage rate plus additional compensation for output • Differential piece-rate − One piece rate up to the standard and a higher rate after the standard is exceeded • Works best in assembly and manufacturing situations. © SHRM 4 -53

Person-Based System • Employee’s characteristics determine pay. • Superior knowledge or skill mastery is rewarded. – Knowledge-based (scientists whose pay is based on knowledge in a field or domain) – Skill-based (machine operators cross-trained on a variety of production equipment) – Competency-based (professionals who excel at defined competencies) © SHRM 4 -54

A window manufacturer guarantees its installers a base wage plus an extra $25 for each job completed to specifications. The employer is using a A. merit pay system. B. productivity-based system. C. competency-based system. D. flat-rate system. © SHRM 4 -55

Pay Variations Red-circle rates • Rates above the range maximum Green-circle rates • Rates below the range minimum Pay compression • Small differences in pay regardless of experience, skills, level, or seniority © SHRM 4 -56

Pay Adjustments © SHRM Pay adjustment matrix COLAs General pay increase Seniority Lump-sum increases Marketbased increases 4 -57

Time-Based Differential Pay Based on when an employee works. Except for overtime, FLSA does not require differential pay. Examples: • Shift pay • Emergency-shift pay • Premium pay • Hazard pay © SHRM • On-call or call-back pay • Reporting pay • Travel pay 4 -58

Geographic Differential Pay • Differentials for labor costs • Differentials to attract workers to certain locations • Differentials foreign pay $ $ © SHRM 4 -59

Incentive Pay • Paying for performance beyond expectations. • Motivates employees to perform at higher levels. • May be a factor when determining overtime pay. Research tax ramifications before implementing any incentive pay plan. © SHRM 4 -60

Individual Incentive Plans • Improve individual performance. • Kept separate from base pay. Cash awards Provide extra cash compensation based on performance Examples: lump sum awards, piece rates, commissions © SHRM Noncash award programs Merit awards used to recognize performance, special contributions, length of service Examples: gifts, awards, trips, prizes 4 -61

Group Incentive Plans • Gainsharing – Organization shares a portion of the gains realized from group effort. • Scanlon, Rucker, and Improshare • Group performance – Group is rewarded for meeting or exceeding performance standards. • Typically, each person receives the same amount as a percentage of pay or flat dollar award. © SHRM 4 -62

Organization-Wide Incentive Pay Plans Performancesharing plans Profit-sharing plans • Allow employees to share in profits. • Include cash and deferred profit sharing. © SHRM • Use predetermined criteria and standards to measure results. • Create a fund for incentive awards. • Can be based on factors such as customer satisfaction and quality. 4 -63

Stock-Based Plans • Encourage employees to share in the success of the organization. • Stock may be purchased or earned. • Organization may facilitate stock purchase through payroll contributions. • Organization may structure stock purchase as a form of ERISA-governed qualified retirement plan (ESOP). – Nonleveraged ESOPs – Leveraged ESOPs © SHRM 4 -64

Long-Term Executive Incentives SPHR only Stock option plans (ISOs and NQSOs) Stock purchase plans Phantom stock Restricted stock grants Restricted stock units Performance grants © SHRM 4 -65

Direct Sales Compensation Straight salary Straight commission Salary plus commission Use when: More time is spent on service than sales. There is a long sales cycle. © SHRM Goal is to increase volume and control costs. Organization needs to reward behaviors that support strategy. Plan needs to be adaptable. 4 -66

Compensation for Professionals Dual career ladder Allows senior technical personnel to earn as much as management personnel. © SHRM Maturity curves Correlate pay with time spent in the field. Used for teachers, engineers, and technical personnel. 4 -67

Controlling Costs Setting ranges • Setting upper and lower compensation bounds. • Using comparatios to evaluate if policies are being implemented appropriately. © SHRM Budgeting • Top-down approach is best at controlling costs. Auditing • Monitoring of expenditures. 4 -68

Indirect Compensation Designed to: • Reward continued employment and promote loyalty. • Protect employees’ physical and financial well-being. • Help to recruit and retain talent. • Improve productivity, work quality, and competitiveness. • Provide tax-effective purchase of insurance and benefits. Cost-effective + Affordable + Compliant with all laws and regulations © SHRM 4 -69

Benefit Needs Assessment Review organization’s strategy. Review total rewards philosophy. Analyze benefits design and utilization data. Analyze workforce demographics. Conduct gap analysis. © SHRM 4 -70

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. © SHRM 4 -71

Employee Retirement Income Security Act (ERISA) • Establishes minimum standards for benefit plans. • Plans must conform to the Internal Revenue Code’s requirements to receive tax advantages. • Sets up the Pension Benefit Guaranty Corporation (PBGC). – Plans or their sponsors pay premiums to the PBGC. – PBGC guarantees payment of vested benefits up to a maximum limit to employees covered by pension plans. © SHRM 4 -72

Fiduciary Responsibility According to ERISA: • Plan must be operated for exclusive benefit of participants and their beneficiaries. • Employer must follow the prudent person rule. • Individuals may sue for recovery for fiduciary breaches that impair the value of plan assets. © SHRM 4 -73

ERISA Rules Defines minimum eligibility requirements for retirement plan benefits. © SHRM Defines minimum vesting schedules for cliff and graded vesting. Age 21 Employees are always 100% vested in their own contributions. Completion of 12 months of service, with few exceptions EGTRRA sets vesting schedules for employer contributions. 4 -74

Retirement Equity Act (REA) • Provides legal protections for spousal beneficiaries of retirement plan participants. • Requires written spousal consent for: – Changes in retirement plan distribution elections. – Changes in spousal beneficiary designations. – In-service withdrawals. © SHRM 4 -75

Consolidated Omnibus Budget Reconciliation Act (COBRA) Provides continuous group medical coverage after a qualifying event. Type of event determines the length of coverage, generally 18 to 36 months. Employer can charge actual cost plus a 2% administrative fee. © SHRM 4 -76

According to COBRA, an organization 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 organization terminates its health plan. D. COBRA benefits to spouses of deceased workers. © SHRM 4 -77

COBRA Regulations (2004) ü Update general and qualifying event notices. ü 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. ü Establish reasonable notification procedures and communicate them to all employees. © SHRM ü Provide a notice of unavailability of continuation of coverage within 14 days of the date plan administrator is informed of the qualifying event. ü Notify individuals whose coverage ends before the maximum continuous coverage period allowed. ü Notify individuals whose coverage is ending of that fact and of any continuation options available. 4 -78

COBRA Coverage Amendments American Recovery and Reinvestment Act (ARRA) • Made significant changes to COBRA continuation coverage rules for employees involuntarily terminated between September 1, 2008, and May 31, 2010. © SHRM Patient Protection and Affordable Care Act (PPACA) • Generally requires group health plans to provide coverage to dependent children up to age 26. 4 -79

Health Insurance Portability and Accountability Act (HIPAA) Key provisions: ü Limits exclusions for preexisting conditions. ü Guarantees renewability as long as premiums are paid. ü Gives workers leaving a job with employer-sponsored health coverage the right to purchase coverage on their own. © SHRM 4 -80

HIPAA Privacy Rule • Permits covered entities to use or disclose protected health information for: – Treatment, payment, and health-care operations. • A written authorization from the patient is required if outside of these purposes. • Organizations must: – – – © SHRM Establish systems for tracking protected health information. Designate a privacy officer and complaint process. Ensure that individuals cannot waive their rights. Establish a system of consistently enforced sanctions. Keep records for six years. Establish written contracts with third parties. 4 -81

After using employer-sponsored EAP services to visit a psychologist, an employee pays out of pocket for additional sessions—beyond the EAP coverage. The employee’s manager calls the psychologist without the employee’s consent. Based on information learned from the conversation, the manager terminates the employee. This action A. B. C. D. ignores progressive discipline procedures. demonstrates reasonable and prudent behavior. violates the employee’s expectation of privacy. upholds HIPAA Privacy and Security Rules. © SHRM 4 -82

HIPAA Security Rule and ARRA • Imposes new requirements regarding: – Notification of security breaches of protected health information. – Extension of HIPAA Privacy and Security Rules to include business associates. – Enforcement and civil penalties for violations of HIPAA Privacy and Security Rules. – Access and accounting requirements. • Provides funding to improve the nation’s health-care information technology systems. • Includes incentives to promote the use of electronic health records, telemedicine, and clinical data repositories. © SHRM 4 -83

Older Worker’s Benefit Protection Act (OWBPA) Prohibits older workers from waiving their ADEA rights unless they are given 21 days to consider the agreement and consult an attorney (45 days for group terminations). Employees have seven days to revoke the agreement after signing. Release must reference age discrimination claims under ADEA. © SHRM 4 -84

Family and Medical Leave Act (FMLA) • Covers employers with 50 or more employees for 20 or more workweeks in current or preceding year. • Employee must have worked at least 12 months for employer, have worked 1, 250 hours in past year, and work at a site that 50 or more employees work within 75 miles of. © SHRM • Provides up to 12 workweeks of unpaid, job-protected leave for birth or adoption of a child or serious health condition of a child, spouse, parent, or the employee. 4 -85

FMLA Updated Regulations Department of Labor regulations pertaining to: • “Serious health condition” definition. • Employee’s notice of FMLA leave. • Intermittent leave. • Medical certification. • Fitness for duty. DOL A FML ions ulat Reg © SHRM 4 -86

FMLA Expansion FMLA-eligible employees are entitled to: Qualified exigency leave • FMLA leave due to a spouse, son, daughter, or parent being on or called to covered active duty. Up to 12 workweeks Military caregiver leave • FMLA leave for an eligible employee who is the spouse, son, daughter, parent, or next of kin to a covered service member with a serious injury or illness. Up to 26 workweeks during a 12 month period © SHRM 4 -87

Uniformed Services Employment and Reemployment Rights Act (USERRA) • Protects the employment, reemployment, and retention rights of persons who serve in the uniformed services. – Requires employees to provide oral or written notice of the need for leave (30 days if feasible). – Allows for five years of leave. – Gives employees on leave the same seniority-based benefits they would have received if they had not taken leave. © SHRM 4 -88

Uniformed Services Employment and Reemployment Rights Act (USERRA) • Requires that leave not create a break in service for pension plan purposes. • Requires that employer health plans permit employees on leave to continue coverage at their expense for up to 24 months. (A 2% charge for administrative costs can be added. ) • If state laws provide protection beyond USERRA, employees are entitled to the maximum protection. © SHRM 4 -89

According to USERRA, employees called up for active duty are entitled to A. higher limits for salary deferral contributions. B. credited service for retirement plan purposes. C. lower copayments and deductibles for continued family medical benefits. D. an early vesting schedule for retirement benefits. © SHRM 4 -90

Mental Health Parity Act (MHPA) Addresses parity between mental health benefits and medical benefits. Applies to group health plans of more than 50 employees. Changes made by the Mental Health Parity and Addiction Equity Act (MHPAEA) require covered employers that provide group health plans to cover mental illness and substance abuse on the same basis as physical conditions. © SHRM 4 -91

Genetic Information Nondiscrimination Act (GINA) Protects individuals from having genetic information used: • In employment. • To impact health plan eligibility, enrollment, or premiums. Limits exceptions for genetic testing to: • Wellness programming. • Physician’s request. • Checking biological effects of toxic substances in the workplace. • Requires that the disclosure of protected genetic health-care information be governed by HIPAA. • Civil penalties of $100 per day, 10 years’ imprisonment. © SHRM 4 -92

Pension Protection Act (PPA) • Makes Economic Growth and Tax Relief Reconciliation Act provisions due to sunset in 2010 permanent. • Requires pension plans to become fully funded over a seven-year period starting in 2008. • Allows employers to automatically enroll employees into a 401(k) plan with default contribution levels. • Allows non-spouse beneficiaries to transfer assets inherited from a qualified retirement plan into a traditional IRA. • Requires plans to provide benefit statements and SPDs. • Establishes requirements for 403(b) plans and makes them more like 401(k) plans. © SHRM 4 -93

Patient Protection and Affordable Care Act (PPACA) 2010 Extensive health-care insurance reforms with 2013 a rolling time 2015 frame. 2011 2012 2014 2016 2017 2018 Examples: • Affordable minimum health coverage • Lifetime maximum benefit limits • Preexisting conditions • Small employer health-care tax credit • Preventive care © SHRM • Dependent coverage • Uniform explanation of coverage • Summary of material modifications (SMM) • Annual benefit limits • State health exchanges • "Cadillac plan" tax 4 -94

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) • Sets permissible compensation limits—Code Section 401(a)(17). • Sets limits on annual pensions—Code Section 415(b)(1)(A). • Permits catch-up contributions for employees age 50 and older. • Modifies distribution and rollover rules. © SHRM 4 -95

Sarbanes-Oxley Act (SOX) Enacted in response to Enron and other corporate accounting scandals. Requires administrators to notify plan participants of blackout periods for 401(k) or defined contribution plans. Prohibits insider trading during the blackout period. © SHRM 4 -96

Blackout Notice Requirements • Must be done in writing 30 days in advance and must contain: – Reasons for blackout. – Identification of affected rights and investments. – Expected beginning date and length of blackout. – Statement that individuals should evaluate the appropriateness of their current investment decisions. © SHRM 4 -97

Whistleblower Provisions • Protects employees who: – Report conduct that they “reasonably believe” violates federal securities laws. – File, testify in, or assist in a proceeding related to securities fraud. • Employer cannot take adverse action or discriminate against employees for taking part in protected activities. © SHRM ess Witn t r Repo 4 -98

Tax and Accounting Treatment • FASB decides how organizations should report financial information to shareholders. – Required companies to treat employee stock options as an expense on financial statements beginning in 2005. • IRS implements and interprets tax legislation: – Revenue rulings. – Private-letter rulings. © SHRM 4 -99

Benefits Required by Statute • Social Security/Medicare • Unemployment insurance • Workers’ compensation • COBRA • FMLA © SHRM LAW 4 -100

Social Security Benefits Qualifications Calculations © SHRM • Retirement income. • Disability, death, and survivor’s benefits. • People must work 40 quarters, or at least 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. 4 -101

Social Security Benefits • Retirement income: – Depends on individual’s average earnings. – Pays reduced benefits at age 62; full benefits are indexed to year of birth. • Disability benefits: – Are paid when workers cannot work for at least five months. – Are paid when workers have an impairment that is expected to continue for 12 months or result in death. – Start after a five-month waiting period. • Death and survivor’s benefits © SHRM 4 -102

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 older who are working. © SHRM Part A (hospital insurance) is mandatory. Part B (medical insurance) is optional. Part C (Medicare Advantage Plans) is optional. Part D (outpatient prescription drugs) is optional. 4 -103

EEOC Ruling on Medicare ü EEOC ruling allows employers to reduce health benefits for Medicare-eligible retirees to avoid paying premiums that are higher than those paid for retirees not covered by Medicare. ü The rule was in response to a federal appeals court decision stating that health insurance benefits received by Medicare-eligible retirees be the same or cost the same as health insurance benefits received by younger retirees. © SHRM 4 -104

Unemployment Insurance • Mandatory benefit funded primarily by employers and administered by states. • 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. © SHRM 4 -105

Workers’ Compensation State insurance paid by the employer. Protects workers in case of a work-related injury or disease. Employers assume all costs, regardless of who is to blame for an accident. Experience-rated; employers who have a high number of claims pay more. © SHRM 4 -106

Benefits of Qualified Deferred Compensation Plans Allow organizations to recruit and retain employees. Allow people to retire, creating opportunities for others. Provide tax deferrals for plan participants if plans comply with ERISA and IRS Code. © SHRM 4 -107

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. © SHRM 4 -108

Defined Benefit Plans Flat-dollar formula • Benefit amount is • Benefit is basedamount on a formula. • based Employer funds the • Employer plan andfunds bearsthe plan risk. and bears the • risk. Insured by the • Insured PBGC. by the PBGC. Career-average formula Final-pay Cash balance plan formula Cash balance Final-pay formula plan © SHRM 4 -109

Defined Contribution Plans Flat-dollar formula Profit-sharing plans • • Benefit amount is Employees and/or employers a based on a pay formula. specific amount per • Employer funds the person into the fund. plan and bears the • Benefits are risk. determined by amountsby contributed • Insured the PBGC. Career-average Money purchase plans formula Cash balance plan ESOPs and fund performance. Final-pay formula 401(k) plans; 403(b) plans; Roth 401(k)/403(b) plans © SHRM 4 -110

Other Tax-Deferred Plans Individual retirement accounts (IRAs) Roth IRAs Savings Incentive Match Plan for Employees (SIMPLE) © SHRM Simplified Employee Pensions (SEPs) 457 plans 4 -111

529 Plans • Referred to as qualified tuition programs (QTPs). • Federal tax-free way to save money for college. – College savings plan • Establishes an account for a future student. • May be used at any college. – Prepaid tuition plan • Locks in future tuition at current price. • Used at participating in-state public colleges and universities. © SHRM 4 -112

Nonqualified Deferred Compensation Plans • Provide additional benefits to key executives. • Do not qualify for favorable treatment under ERISA. • 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: Top hat plans, 457(f) plans, excess deferral plans, rabbi trusts © SHRM 4 -113

Qualified Domestic Relations Orders (QDROs) • Create or recognize the right of an alternate payee to receive all or a portion of pension benefits. • Orders must relate to child support, alimony, or marital property rights and must be made under state domestic relations law. Related case: Kennedy v. Plan Administrators for Dupont Savings © SHRM 4 -114

Health-Care Plans • Indemnity or fee-forservice plans (offered less frequently). – Full-choice plans. – Employees can go to any qualified physician. – Fees are generated when services are used. © SHRM • Managed care plans (offered most frequently). − Prepaid capitated health -care plans. − Members enroll and pay a set monthly or annual fee. − Members must use HMO physicians and facilities to get low fees; no need to submit claims. 4 -115

Other Health-Care Options Prescription drug plans Dental plans Beyond basic medical coverage … Vision care plans © SHRM Alternative health care 4 -116

Health-Care Funding Fully insured • Employer pays premiums to a third-party insurance carrier that bears the risk. © SHRM Selffunded • Employer assumes the role of the insurance company and assumes some or all the risk. Health alliances • Health insurance purchasing cooperatives (HIPCs) act as purchasing agents for large groups of employers in a region. 4 -117

Controlling Health-Care Costs Change the delivery system. Let employees choose. Redesign the policies. Promote prevention and wellness. Conduct careful reviews. Undertake a utilization review. Consider medical tourism. © SHRM 4 -118

Consumer-Directed Health Care Objective: To help employers control costs while allowing employees to make decisions about their health care. Health reimbursement accounts Health savings accounts Combine a highdeductible medical plan with individual HRAs Tax-sheltered savings accounts used to pay for medical expenses © SHRM 4 -119

Health Reimbursement Account (HRA) • Employer purchases a high-deductible medical plan. • Plan reimburses employees for eligible and substantiated health-care expenses. • Employees may NOT contribute on any pretax basis. • Subject to COBRA continuation. • If self-funded, must meet nondiscrimination requirements and not favor HCEs. © SHRM 4 -120

Health Savings Account (HSA) • Individuals are covered by a high-deductible health plan. • Employer contributions are deductible; employee contributions are excluded from income when done through a Section 125 plan. © SHRM • Earnings grow tax-free, and distributions for qualified medical expenses are tax-free. • Unused funds can be carried over from year to year, are portable, and can be used into retirement. 4 -121

Section 125 Plans Premiumonly plans • Employees receive favorable tax treatment on benefits already offered. Flexible spending accounts • Pretax dollars are set aside to pay for dependent care or unreimbursed expenses. • “Use-it-or-lose-it” option amended to contain a grace period of two and one-half months at the end of the plan year. Full cafeteria plans • Benefit credits are used to purchase benefits. • Unused credits can be cashed out. • Additional benefits may be bought through pretax salary reductions. © SHRM 4 -122

An employer pays an FSA medical claim for $500 in March. In April, the employee leaves the organization after setting aside only $250. What happens in this situation? A. The employee must return $250 to the organization. B. The employer may withhold $250 from the employee’s last paycheck. C. The employee is entitled to the reimbursement as paid. D. The employee becomes ineligible for COBRA coverage. © SHRM 4 -123

Income Replacement Protection Employerprovided sick leave • Pays 100% of pay for a set number of days. © SHRM Short-term disability Long-term disability • Replaces a portion of lost income. • Typically 50% to 70% for up to six months. • Begins when short-term coverage expires. • Usually integrated with Social Security. 4 -124

Life Insurance Protection Group-term life insurance • Lump-sum payment to beneficiaries. Excess group -term life insurance • Insurance over $50, 000 is taxed as imputed income. Dependent group life insurance © SHRM • Employees can insure spouses/dependent children. 4 -125

Long-Term Care Insurance • Coverage for people who are chronically ill for at least 90 days. • Not counted as employee income. • Employers can deduct their part of the insurance premiums. © SHRM 4 -126

Paid Leave • Paid leave for events: – Holiday pay – Vacation pay – Pay for legally protected activities – Leave of absence – Bereavement leave – Personal days © SHRM • Paid-time-off banks – Paid time off is lumped into one account. 4 -127

Other Benefits Child and elder care Prepaid legal insurance Benefits Transportation assistance Tuition reimbursement © SHRM 4 -128

Which of the following items is generally subject to federal taxation? A. $1, 000 reimbursement for a business trip B. $300 per month for parking C. $20 gift from a vendor D. $1, 500 for a job-related training seminar © SHRM 4 -129

Global Compensation and Benefits Considerations SPHR only • Standardization versus localization • Culture • Competitive labor market © SHRM • Collective bargaining, employee representation, and government mandates • Economic factors • Taxation • Laws and regulations 4 -130

International Compensation Approaches SPHR only Negotiation/ad hoc Pure localization Higher-of-home-or-host-country Home-country-based balance sheet Headquarters-based balance sheet Lump-sum Cafeteria © SHRM 4 -131

SPHR only What is the advantage of paying an international assignee a differential between home-country costs and assignment costs? A. It preserves purchasing power regardless of country of origin. B. It requires minimal planning and is easy to administer. C. It is more tax-effective for the employee. D. It gives the international assignee a choice. © SHRM 4 -132

International Benefit Variations SPHR only Benefits that are governmentprovided Benefits that are governmentmandated Benefits that are voluntary (discretionary) Benefits that are market practice Tax treatment of benefits © SHRM 4 -133

Nonsalary International Benefits SPHR only Social security Paid time off Retirement Severance Health and welfare insurance (health care, disability, and life insurance) © SHRM 4 -134

Totalization Agreements SPHR only International social security agreements. Eliminate dual social security coverage and taxes for employers and workers. Fill gaps in benefit protection for workers. © SHRM 4 -135

Evaluating the Compensation and Benefits System • Is it in compliance? • Is it compatible with the organization’s mission and strategy? • Does it fit the culture? Is it appropriate for the workforce? • Is it internally equitable? • Is it externally competitive? © SHRM 4 -136

Required Communication • ERISA requires: – Summary plan description, summary annual report, and summary of material modifications. – Filing Form 5500 with the DOL. • Other required communications include: – – – FMLA policy. COBRA continuation of benefits notice. Special HIPAA enrollment rights and privacy rights. Medicare Part D notification. PPA notice and disclosure requirements for retirement plans. – Explanation of stock options (SEC regulations). – Posting of all required federal, state, and local employment laws. © SHRM 4 -137

Voluntary Communication plans © SHRM Direct communication 4 -138

Self-Service Technology Benefits • Reduced administrative work for HR. • Increased accuracy of employee data. • Improved timeliness in information and employee transactions. © SHRM • Reduced dollars spent on other traditional HR delivery channels (e. g. , paper-based transactions). • Enhanced reputation as a “green, ” environmentally conscious employer. 4 -139