Compensation Chapter 10

Employer Funded (like Pension)

guaranteed retirement benefits as specified in the plan document

expressed in terms of a montly sum equal to a percentage of a participant's preretirement pay Multiplied by the number of years worked for employer

benefit is fixed by formula but level of required employer contributions fluctuates from year to year
-Employers must make an annual contribution that is sufficiently large enough to ensure that promised benefits will be available to retirees

Funding levels determined by:

• life expectancies of employees & their desingated beneficiaries
• projected compensation levels
• likelihood of employees terminating employment before they have earned benefits

Plan funded by employees with employer matching (like 401K, stock ownership, etc.)
Employer invests funds on behalf of employee--> more risk for employee b/c they manage their own portfolio

Employers & employees make annual contributions to separate accounts established for each participating employee, based on a formula in the plan document

Formulas typically call for employers to contribute a given percentage of each participant’s compensation annually

Contribution Sources

• Employer Contributions--expressed as a percentage of employee’s wage or salary
• Employee Contributions--expressed as a percentage of employee’s wage or salary
• Forteitures--from accounts of employees who terminated employment prior to earning vesting rights
• Return on Investments--money made on investments; if there is a loss the corresponding amount is debited from account

Investment Vehicles: 401(k), Employee Stock Ownership Plans (ESOPs), Stock Bonus Plans

401(k)--> also known as Cash or Deferred Arrangements (CODAs)
-allow employees to defer part of their compensation to the trust of a qualified defined contribution plan
-only allowable in private sector or tax-exempt employees
-don’t pay taxes until funds withdrawn
-employers deduct their contributions from taxable income
-investment gains not taxed until participant receives payment

• Shift in labor force towards different occupations/industries: decline in full-time workers, union workers, and workers in goods-producing businesses
• Cost to employers is higher with defined benefits and companies may struggle to fund these adequately

Entitle employers & employees to tax benefits; in order for pre-tax $ to be contributed, the plan must be qualified; only pay taxes when you pull $ out (Must start withdrawing at age 70.5)

Minimum Standards:

• Participation Requirements—must be allowed to participate after age 21 with 1 yr. of service
• Coverage Requirements—limits freedom of employers to exclude employees; not to favor highly compensated eee’s
• Vesting Rules
• Accrual Rules—specify the rate at which participants accumulate (earn) benefits
• Non-discrimination Rules: testing—prohibit employers from discriminating in favor of highly compensated eee’s
• Key employee & Top-heavy positions
• Minimum Funding Standards
• Social Security Integration
• Contribution & Benefit Limits—max annual amount eee may receive from qualified plan during retirement; employers limited in amount they may contribute
• Plan Distribution Rules—lump sum vs. annuity distributions
• Qualified Survivor Annuities
• Qualified Domestic Relation Orders
• Plan Termination Rules & Procedures

Vesting is an employee’s non-forfeitable rights to pension benefits
-applied to both Defined Benefits & Defined Contributions

Employees must be allowed to participate in pension plans after they have reached age 21 & have completed 1 yr. of service

2 Types of Vesting Schedules

Cliff--> 100% vested after 3 years; BUT if you leave before vested you lose all employer contributions (fall off the cliff)

6 Year Graduated: 20% vested after 2 years & then vest at a rate of 20% each year thereafter until fully vested at 6 years; earn right to keep some employer contribution sooner

Lump Sum Distributions--> single payment of benefits
-In Defined Contribution plans, lump sum distributions equal the vested amount (sum of all employee & vested employer contributions & interest on that sum)
-In Defined Benefit plans, lump sum distributions equal the equivalent of the vested accrued benefit


Annuity Distributions--> represent a series of payments for the life of the participant & beneficiary
-usually purchased from insurance companies who make payments according to the contract

Health Insurance covers the cost of a variety of services that promote sound physical & mental health, including physical examinations, diagnostic testing, surgery, hospitalization, psychotherapy, dental treatments, & corrective prescription lenses


Employers enter into contractual relationship with insurance company—Insurance Policy which specifies the amount of money the insurance company will pay for certain services; employers pay insurance companies a negotiated amount (premium) to establish & maintain the policy

Most private sector companies require employees to contribute to a portion of premiums; for single coverage employees contribute about 23% & for family coverage about 33%

Companies choose from 3 broad classes of health insurance programs:
Fee for Service

Managed Care Plans

Point of Service Plans

Provide protection against against health care expenses in the form of a cash benefit paid to the insured or directly to health care provider after services received by employee

Employee may select any licensed physician, surgeon or medical facility

3 types of eligible health care expenses
-hospital expenses
-physician charges
-surgical expenses

2 types of fee for service plans:
Indemnity plans-->contract between employer & insurance company which specifies expenses covered and the rate

Self-Funded plans-->à operates same as indemnity except companies pay benefits directly from their own assets (makes sense when the financial burden of covering employee medical expenses is less than cost to subscribe to insurance company)

Emphasize cost control by limiting employee's choice of doctors & hospitals

HMOs (Health Maintenance Organizations)--> “pre-paid” medical service; periodic fees that cover the services delivered or approved by the HMO
-Offers pre-paid services instead of reimbursement like fee for service does
-Primary Care Physician as “gate-keeper”: determine when patient needs care of specialist
-No co-insurance aspect, but may have copayments required (copayment= nominal payments an individual makes as a condition of receiving services); copayments for dr. office visits, prescriptions, hospital admissions

PPOs (Preferred Provider Organizations)--> most common type of plan; employee chooses from list of pre-selected doctors BUT employee does NOT have to go to one of the listed doctors; if you go to a pre-selected doctor there are financial incentive and would likely pay a lesser co-pay amount
-Co-insurance calculated as percentage of fees for covered services: In-network and Out of network rates
-Deductibles: often different amounts applied for in-network & out-of-network

-Combines Fee-for-Service & HMO systems

-employees pay a nominal copayment for each visit to a designated network of physicians "on-list"

-employees possess the option to receive care from providers outside the designated network but pay more for this choice

Deductible---out of pocket expense that employees must pay before health insurance benefits become active


Co-Insurance---percentage of covered expenses paid by the insured; usually around 20% (insured pays 20% of covered expenses & insurance company pays 80%)


Out of Pocket Max---maximum amount a policyholder must pay per year; once you hit this, you don’t have to pay anymore


Pre-existing Conditions Clauses---a condition for which diagnosis/treatment received preceding the beginning of coverage; clauses limit liability for insurance companies



Pre-admission certification---certification by health insurance company before authorization of medical care; insurance company authorizes you to admit person to hospital for this treatment, etc. ***Very Important with HMOs***



Max Benefit Limits---max amount of money insurance company expressed over the course of 1 year or over an insured’s lifetime; if you go over the maximum amout, insurance company feels you are too expensive and will no longer cover you



*Max Benefit Limits & Pre-existing conditions clauses no longer in effect due to Affordable Care Act

Helping companies maintain control over costs while also enabling employees to make greater choices about health care

May allow employers to lower costs by selecting plans with higher employee deductibles



Flexible Spending Accounts (FSAs)
--permit employees to pay for specified health care costs that are not covered by employer’s insurance plan
--During the enrollment period, employees may elect an amount of pay they wish to allocate to FSA; these are Pre-Tax dollars; this $ then used to reimburse employees for expenses incurred (that aren’t covered and that qualify for repayment)

Advantages: ability to make contributions pre-tax
Disadvantages: Use it or Lose it; any money set aside that is not used is lost


Health Reimbursement Accounts (HRAs) [like the 401k of consumer driven health care plans]
--Employers make contributions, not employees
--Employees are permitted to carry over unused account balances from year to year
--Employer may offer HRAs as well as FSAs & use of these accounts is not limited to participation in high-deductible health care plans


Health Savings Accounts (HSAs)
--Permits eligible individuals to establish HSAs to help employees pay for medical expenses
--Employer or Employee or both may contribute to the maximum limit; employee contributions are pre-tax
--Offered with High-Deductible Health Insurance Plans which require substantial deductibles but low out of pocket maximums

Advantages:
--Individually owned and therefore portable; employee can take it with them after employment relationship ends
--Subject to inflation-adjusted funding limits
--Does not limit employee choice; employee may receive medical services from doctors, hospitals, and other health care providers of choice and may choose type of medical services they purchase