© 2010 South-Western, a part of Cengage Learning All rights reserved.

Chapter Objectives After studying this chapter, you should be able to Describe the characteristics of a sound benefits program. Indicate management concerns about the costs of employee benefits and discuss ways to control those costs. Identify and explain the employee benefits required by law. Discuss suggested ways to control the costs of health care programs. Describe benefits that involve payment for time not worked. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Chapter Objectives (cont’d) After studying this chapter, you should be able to Discuss the recent trends in retirement policies and programs. Indicate the major factors involved in the management of pension plans. Describe the types of work/life benefits that employers may provide. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Requirements for a Sound Benefits Program Strategic Benefits Planning Allowing for Employee Involvement Benefits for a Diverse Workforce Providing for Flexibility Communicating Employee Benefits Information © 2010 South-Western, a part of Cengage Learning. All rights reserved.

The Chief Objectives of Benefits Programs Improve employee work satisfaction Meet employee health and security requirements Attract and motivate employees Reduce turnover Maintain a favorable competitive position © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Providing for Flexibility Flexible Benefits Plans (Cafeteria Plans) Benefit plans that enable individual employees to choose the benefits that are best suited to their particular needs. A basic or core benefits package of life and health insurance, sick leave, and vacation ensures that employees have a minimum level of coverage. Employees use “credits” to “buy” whatever other benefits they need. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Flexible Benefits Plans: Advantages and Disadvantages FIGURE 11.1 Flexible Benefits Plans: Advantages and Disadvantages ADVANTAGES Employees select benefits to match their individual needs. Benefit selections adapt to a constantly changing (diversified) workforce. Employees gain greater understanding of the benefits offered to them and the costs incurred. Employers maximize the psychological value of their benefits program by paying only for highly desired benefits. Employers limit benefit costs by allowing employees to “buy” benefits only up to a maximum (defined) amount. Employers gain a competitive advantage in the recruiting and retention of employees. DISADVANTAGES Poor employee benefits selection results in unwanted financial costs. There are certain added costs to establishing and maintaining the flexible plan. Employees may choose benefits of high use to them that increase employer premium costs. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Communicating Benefits Information In-house publications (employee handbooks and organizational newsletters) Group meeting and training classes Audiocassettes/videotapes Bulletin boards Payroll inserts/pay stub messages Specialty brochures Employee self-service systems (ESS) © 2010 South-Western, a part of Cengage Learning. All rights reserved.

1 Crafting an Effective Benefits Communication Program © 2010 South-Western, a part of Cengage Learning. All rights reserved.

2 A Personalized Statement of Benefits Costs © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Benefits Issues Concerns of Management Union demands for additional benefits Benefits offered by other employees Tax consequences of benefits Rising costs of providing benefits © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Concerns of Management The High Cost of Providing Benefits According to a 2007 U.S. Chamber of Commerce study, the cost of employee benefits averaged 42.7 percent of payroll. The average distribution of these benefits was $21,527 per employee per year. Shifting Benefit Costs to Employees Shared Responsibility Employers to require employees to pay part of the costs of certain benefits (e.g., copayments or higher deductibles), especially medical coverage. Employees are paying a larger part of their retirement programs through contributory pension plans or 401(k) saving plans. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Types of Employee Benefits Required By Law Discretionary Social Security Health care Unemployment Insurance Payment for time not worked Workers’ Compensation Supplemental Unemployment Benefits Unpaid leave (FMLA) Life and LT care insurance Retirements and pensions © 2010 South-Western, a part of Cengage Learning. All rights reserved. 6

Social Security Insurance Social Security Act (1935) A payroll tax on both employees and employers Old Age and Survivors Insurance (OASI) Provides long-term disability benefits Must work 40 quarters in an occupation covered by Act to qualify for benefits Benefits paid are determined by an individual’s life-time earnings © 2010 South-Western, a part of Cengage Learning. All rights reserved. 5

Unemployment Insurance Federal payroll tax on employer and employee Tax is refunded to states which individually administer unemployment compensation programs. Benefit weekly amounts vary from state to state. Involuntarily unemployed workers are eligible for up to 26 weeks of unemployment benefits. Benefit is based on an employee’s recent earnings. Unemployed workers are required to seek “suitable employment.” © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Workers’ Compensation Insurance Federal- or state-mandated insurance Funded by an employer payroll tax Provided to workers to defray the loss of income and cost of treatment due to work-related injuries or illness. Factors influencing the employer’s insurance rate: The risk of injury or illness for an occupation Each state’s level of benefits for injuries sustained by employees varies. The company’s frequency and severity of employee injuries (the company’s experience rating). © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Workers’ Compensation Insurance Injury is a cost of doing business Covers Employers Covers Employees Assumed employment risk Cost of injury Negligent co-workers Temporary, Permanent, Partial or Total Disability Contributory negligence Survivor’s Insurance © 2010 South-Western, a part of Cengage Learning. All rights reserved. 6

Extension and Portability of Health Coverage The Consolidated Omnibus Budget Reconciliation Act of 1986 (COBRA) Mandates that employers make health coverage—at the same rate the employer would pay—available to employees, their spouses, and their dependents on termination of employment, death, or divorce. The coverage must be offered for between 18 and 36 months depending on qualifying guidelines. Health Insurance Portability and Accountability Act (HIPAA) of 1996 Grants employees the right to switch medical insurance between former and present employers with no gap in coverage regardless of preexisting health condition once the employees have earned twelve service credits at the former employee © 2010 South-Western, a part of Cengage Learning. All rights reserved.

The Family and Medical Leave Act (FMLA) Provisions: An employer must grant an eligible employee up to 12 workweeks of unpaid leave in a 12-month period for the following reasons: Birth of and care for a newborn child. Adoption or foster care placement of a child. Care for an immediate family member Serious health condition of the employee. Employees retain their health benefits and have the right to return to their job or an “equivalent job.” Those caring for service members are entitled to up to 26 weeks of leave, © 2010 South-Western, a part of Cengage Learning. All rights reserved.

“Your Rights”: Another Federally Required Poster 4 “Your Rights”: Another Federally Required Poster Note: Other federally required posters are reproduced in Chapters 3, 9, and 12. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

The Older Workers Benefit Protection Act Older Workers Benefit Protection Act (OWBPA) Prohibits age-based discrimination in early retirement and other benefit plans by imposing strict guidelines on employers who seek to have employees sign release forms waiving their right to pursue age discrimination claims under the ADEA. The waiver must be voluntary and written in a manner that is understandable to the parties involved. Employees have the right to consult with an attorney before signing the waiver. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Healthcare Cost Containment Health Maintenance Organizations (HMOs) Organizations of physicians and health-care professionals that provide a wide range of services to subscribers and dependents on a prepaid basis. Preferred Provider Organization (PPO) Is a group of physicians establish an organization that guarantees lower healthcare costs to the employer. Allows employees to select their doctor of choice from a list of participating physicians. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Cost Containment (cont’d) Consumer-Driven Health Plan (CDHP) Is a high-deductible medical insurance plan financed by employer contributions to an employee’s limited individual healthcare spending account Also known as: Defined-contribution health plans Medical savings accounts (MSAs) Health savings accounts (HSAs) Flexible spending accounts (FSAs) Health reimbursement accounts (HRAs). © 2010 South-Western, a part of Cengage Learning. All rights reserved.

5 Employer Methods for Containing Health Care Costs Preadmission certification for surgical procedures Financial incentives for outpatient surgery and testing Mail-order prescription drug program and medical drug discount cards Mandatory second opinions for surgical procedures Alternative approaches to health care treatment such as herbal therapy or homeopathy Educational programs encouraging health care consumers to assume more responsibility and accountability for the cost and quality of their health care Promoting Web sites or printed materials that list common conditions, treatment, drug prices, and effectiveness Implementation of step therapy programs Multitier hospital coverage networks that allow employees to choose from a variety of hospitals with small, moderate, and steep copayments at the point of service Use of variable copayments (for example, $10 for physician and $25 for specialists) Consolidation of health care plans offered by employers Requiring employees to pay an additional cost if a working spouse refuses coverage from his or her employer Customized health care benefits design allowing employees to purchase riders to increase the level of benefits provided Promotion of wellness and employee assistance programs Automated benefits functions Dependent audits to rid benefit rolls of ineligibles Implementation of a disease management program © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Domestic Partner Benefits Domestic Partner (Apple Computer) A person over age 18 who shares living quarters with another adult in an exclusive, committed relationship in which the partners are responsible for each other’s common welfare. A standard definition of domestic partnership contains the following: A minimum age requirement A requirement that the couple live together A specification of financial interdependence A requirement that relationship be a permanent one A requirement that each not be a blood relative © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Payment for Time Not Worked Sick leave Severance pay Paid holidays Vacations with pay Time Not Worked © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Other Discretionary Benefits Supplemental Unemployment Benefits (SUBs) A plan that enables an employee who is laid off to draw, in addition to unemployment compensation, weekly benefits from the employer that are paid from a fund created for this purpose. SUB benefits are considered deferred compensation and not current earnings. The fund is derived from employer contributions based on the total hours of work performed by employees. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Retirement Programs Silver Handshake Preretirement Programs An early-retirement incentive in the form of increased pension benefits for several years or a cash bonus. Preretirement Programs Counseling Seminars Workshops Retirement tryouts © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Trends Affecting Retirement FIGURE 11.2 Trends Affecting Retirement The number of people age 65 and older tripled to about 34 million between 1940 and 1995. According to U.S. census projections, people age 65 and older are expected to number 86 million by 2050, an increase of 51 million since 2000. In 1960, 45.4 percent of male workers over age 65 were still in the labor force; in 1990, only 27.4 percent were still working. While the labor force participation rates of women between ages 55 and 64 have been rising, further increases are not expected. Eight baby boomers turn 50 every ten minutes. The U.S. net national savings rate was relatively stable at about 7 percent of GDP from 1951 to 1980. It has collapsed since 1980, most recently dropping to less than 1 percent of GDP. In 1900, the average life expectancy in the U.S. was 48; today, it is 80 for women and 75 for men. Virtually all of these gains can be attributed to improvements in public health and safety, such as clean water, refrigeration, seat belts, and routine vaccinations. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Types of Pension Plans Contributory plan Noncontributory plan Contributions to a plan are made jointly by employees and employers. Noncontributory plan Contributions to a plan are made solely by the employer. Defined-benefit plan The amount an employee is to receive upon retirement is specifically set forth. Defined-contribution plan The basis (amount) an employer contributes to the pension fund is specified. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Contemporary Pension Plan Options 401(k) Savings Plans A tax-deferred savings plan. Employees save through payroll deductions. Employers may match a portion of employee savings. Cash-Balance Pension Plans Employer contributes a percentage of employee’s pay each year. Account balance earns interest each year. Experts predict it will replace traditional pension plans. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Federal Regulation of Pension Plans Employee Retirement Income Security Act (ERISA) Private pension plans are subject to ERISA regulations that provides standards and controls for pension plans: Plans must comply IRS tax standards to qualify. Plans must meet actuarial standards to qualify for Pension Benefit Guarantee (PBGC) insurance. Plans must meet Department of Labor standards for treatment of plan participants. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Federal Regulation of Pension Plans Vesting A guarantee of accrued benefits to participants at retirement age, regardless of their employment status at that time. ERISA requires that plans must provide that employees will have vested rights in their accrued benefits after certain minimum-years-of-service requirements have been met. Pension Plans and Underfunding Inadequate funds to cover retirement obligations along with pension plan failures could overwhelm the PBGC. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Employee Services Employee Assistance Programs (EAPs) Services provided by employers to help workers cope with a wide variety of problems that interfere with the way they perform their jobs. Typically provide diagnosis, counseling, and referral for advice or treatment for problems related to alcohol or drug abuse, emotional difficulties, and financial or family difficulties. Child and Elder Care Care provided to a child or an elderly relative by an employee who remains actively at work. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Work/Life Benefits: Balancing Work and Home Needs FIGURE 11.3 Work/Life Benefits: Balancing Work and Home Needs Child care/elder care referral services Time off for children’s school activities Employer-paid on-site or near-site child care facilities Flexible work hours scheduling Health club and wellness programs Employer-accumulated leave days for dependent care Customized training programs Subsidized temporary or emergency dependent care costs Extended leave policies for child/elder care Educational reimbursement Sick-child programs (caregiver on call) Work-at-home arrangements/telecommuting Partial funding of child care costs Customized career paths Part-time work schedules © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Other Benefits and Services Awards Food Services Recreational and Social On-Site Health Services Credit Unions Legal Services Purchasing Assistance Financial Planning Transportation Pooling Housing and Moving © 2010 South-Western, a part of Cengage Learning. All rights reserved. 8

consumer-driven health plan contributory plan defined benefit plan defined contribution plan elder care employee assistance programs (EAPs) flexible benefits plans (cafeteria plans) health maintenance organizations (HMOs) noncontributory plan preferred provider organizations (PPOs) silver handshake supplemental unemployment benefits (SUBs) vesting workers’ compensation insurance © 2010 South-Western, a part of Cengage Learning. All rights reserved.