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Chapter 9: Discretionary Benefits

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1 Chapter 9: Discretionary Benefits
Copyright © 2017 Pearson Education, Inc.

2 Copyright © 2017 Pearson Education, Inc.
Learning Objectives 9-1. Discuss the origins of discretionary benefits Explain the three categories of discretionary benefits Summarize legislation that pertains to discretionary benefits Discuss the fundamentals of designing and planning the benefits program Explain the benefits and costs of discretionary Copyright © 2017 Pearson Education, Inc.

3 Discretionary Benefits Overview
LO 9-1 Discretionary Benefits Overview In 2014: $15,000 per employee, on average 23% of total payroll costs, on average Copyright © 2017 Pearson Education, Inc.

4 Discretionary Benefits Overview
LO 9-1 Discretionary Benefits Overview Discretionary benefits: Are offered at the will of each company Employees view them as entitlements Employers reinforce the entitlement mentality by awarding them regardless of performance Copyright © 2017 Pearson Education, Inc.

5 Origins of Employee Benefits
Historically, legally-required benefits provided a form of social insurance Industrialization during late 19th and early 20th centuries and Great Depression led to design of initial social insurance (welfare) programs, aimed at: Preventing destitution of unemployed or injured Stabilizing well-being of dependents Enabling retirees to maintain subsistence income Copyright © 2017 Pearson Education, Inc.

6 Origins of Employee Benefits
As a result, employer sponsored health insurance became common. Further “legitimization” occurred with the National Labor Relations Act of 1935, allowing for employee bargaining for benefits Employees have historically viewed benefits as entitlements, however with rising benefits costs, increased foreign competition, and a deep economic recession, the cost may be shared or shifted to the employee Copyright © 2017 Pearson Education, Inc.

7 Categories of Discretionary Benefits
LO 9-2 Categories of Discretionary Benefits Protection programs: provide family benefits, promote health, and guard against income loss caused by such catastrophic factors as unemployment, disability, or serious illnesses Paid time-off: provides employees time off with pay for such events as vacation Services: provide enhancements such as tuition reimbursement and day care assistance to employees and their families Copyright © 2017 Pearson Education, Inc.

8 Income Protection Programs
LO 9-2 Income Protection Programs Disability insurance: includes both short- and long-term disability care Life insurance: protects employees’ families by paying a specified amount to an employee’s beneficiaries upon the employee’s death Retirement programs: provides income to employees and their beneficiaries during some or all of their retirement Copyright © 2017 Pearson Education, Inc.

9 Short-Term Disability
LO 9-2 Short-Term Disability Less than six months duration Unable to perform job Benefit: 50% to 100% of pretax income Conditions Recovery from injuries Recovery from surgery Treatment of an illness requiring any hospitalization Pregnancy Copyright © 2017 Pearson Education, Inc.

10 Copyright © 2017 Pearson Education, Inc.
LO 9-2 Long-Term Disability Six months to life Unable to perform any job qualified for Benefit: 50% to 70% of pretax pay 6 to12 month waiting period Other benefits used first Copyright © 2017 Pearson Education, Inc.

11 Copyright © 2017 Pearson Education, Inc.
LO 9-2 Life Insurance Pays employees’ beneficiaries upon employees’ death May also include Accidental death Dismemberment benefits Copyright © 2017 Pearson Education, Inc.

12 Copyright © 2017 Pearson Education, Inc.
LO 9-2 Life Insurance Types Term life insurance: provides protection to employees’ beneficiaries only during a limited period based on a specified number of years Whole life insurance: does not terminate until payment is made to beneficiaries Universal life insurance: provides protection to employees’ beneficiaries based on the insurance feature of term life insurance and a separate savings feature Copyright © 2017 Pearson Education, Inc.

13 Copyright © 2017 Pearson Education, Inc.
LO 9-2 Retirement Programs Provide income to employees and their beneficiaries during some or all of their retirement Three types: Defined benefit plans Defined contribution plans Hybrid plans Copyright © 2017 Pearson Education, Inc.

14 Copyright © 2017 Pearson Education, Inc.
LO 9-2 Defined Benefit Plans Guarantee retirement benefits specified in the plan document (also referred to as pension plans) Usually expressed in terms of a monthly sum equal to a percentage of a participant’s preretirement pay multiplied by the number of years he or she has worked for the employer Benefit is fixed by a formula Copyright © 2017 Pearson Education, Inc.

15 Defined Benefit Plans (cont’d)
LO 9-2 Defined Benefit Plans (cont’d) Level of required employer contributions fluctuates from year to year Level depends on the amount necessary to make certain that benefits promised will be available when participants and beneficiaries are eligible to receive them Copyright © 2017 Pearson Education, Inc.

16 Defined Contribution Plans
LO 9-2 Defined Contribution Plans Employees, employers, or both make annual contributions to separate accounts established for each participating employee, based on a formula contained in the plan document Contributions are usually invested in a variety of ways such as in company stock, bonds, or money market accounts Copyright © 2017 Pearson Education, Inc.

17 Copyright © 2017 Pearson Education, Inc.
LO 9-2 Contribution Sources Employee contributions: expressed as a percentage of wage or salary Employer contributions (company match): expressed as a percentage of an employee’s contributions up to a specified limit Copyright © 2017 Pearson Education, Inc.

18 Defined Contribution Plan Types
LO 9-2 Defined Contribution Plan Types Section 401(k) plans (pre-tax contributions and taxable withdrawals) Roth 401(k) plans (post-tax contributions and non taxable withdrawals) Section 403(b) and 457 plans (similar to 401(k) plans, but for non profit and government employment, respectively) Deferred profit sharing plans Copyright © 2017 Pearson Education, Inc.

19 Copyright © 2017 Pearson Education, Inc.
LO 9-2 Hybrid Plans Combine features of traditional defined benefit and defined contribution plans Cash balance plans are defined benefit plans that define benefits for each employee by reference to the amount of the employee’s hypothetical account balance Copyright © 2017 Pearson Education, Inc.

20 Copyright © 2017 Pearson Education, Inc.
LO 9-2 Paid Time Off Holidays Vacation Sick leave Personal leave Jury duty Funeral leave Military leave Copyright © 2017 Pearson Education, Inc.

21 Copyright © 2017 Pearson Education, Inc.
LO 9-2 Paid Time Off Clean-up, preparation, or travel time Rest period “break” Lunch period Integrated time off policies Sabbatical leave Volunteerism Copyright © 2017 Pearson Education, Inc.

22 Integrated Paid Time Off Policies
LO 9-2 Integrated Paid Time Off Policies Combine holiday, vacation, sick leave, and personal leave policies into a single paid time off policy Provide individuals the freedom to schedule time off without justifying the reasons Copyright © 2017 Pearson Education, Inc.

23 Copyright © 2017 Pearson Education, Inc.
LO 9-2 Sabbatical Leaves Paid time off for professional activities Common in college and university settings for faculty members who meet minimum service requirements Outside academia  Usually limited to professional and managerial employees Copyright © 2017 Pearson Education, Inc.

24 Copyright © 2017 Pearson Education, Inc.
LO 9-2 Volunteerism Causes Improving literacy Providing comfort to terminally ill patients Serving food at shelters for individuals who cannot afford to feed themselves Serving as a mentor to children who do not have one or more parents Spending time with elderly or disabled residents of nursing homes who may no longer have living friends or family Copyright © 2017 Pearson Education, Inc.

25 Copyright © 2017 Pearson Education, Inc.
LO 9-2 Services Employee assistance programs Family assistance programs Flexible scheduling and leave Day care Tuition reimbursement Transportation services Copyright © 2017 Pearson Education, Inc.

26 Copyright © 2017 Pearson Education, Inc.
LO 9-2 Services Outplacement assistance Wellness programs Smoking cessation Stress management Weight control and nutrition programs Financial education A sample of these services will be reviewed. Copyright © 2017 Pearson Education, Inc.

27 Employee Assistance Programs
Provided for: Alcohol or drug abuse Domestic violence Emotional impact of AIDS and other diseases Clinical depression Eating disorders Copyright © 2017 Pearson Education, Inc.

28 Family Assistance Programs
LO 9-2 Family Assistance Programs Help employees provide elder care and child care Making referrals to on-site child or elder care centers Company-sponsored day care programs Copyright © 2017 Pearson Education, Inc.

29 Copyright © 2017 Pearson Education, Inc.
LO 9-2 Flexible Scheduling Compressed work weeks (e.g., 9-hour days or 19-hour days) Flextime Job sharing Copyright © 2017 Pearson Education, Inc.

30 Copyright © 2017 Pearson Education, Inc.
LO 9-2 Day Care Companies subsidize child or elder day care: Elder care: self-help, meals, and entertainment activities for the participants Child care: supervision, preschool preparation, and meals Copyright © 2017 Pearson Education, Inc.

31 Tuition Reimbursement
LO 9-2 Tuition Reimbursement Promotes employee education Full or partial coverage Not the same as pay for knowledge Copyright © 2017 Pearson Education, Inc.

32 Outplacement Assistance Programs
LO 9-2 Outplacement Assistance Programs Required due to: Layoffs due to economic hardship Mergers and acquisitions Company reorganizations Changes in management Plant closings or relocation Elimination of specific positions, often the result of changes in technology Copyright © 2017 Pearson Education, Inc.

33 Outplacement Assistance Services
LO 9-2 Outplacement Assistance Services Personal counseling Career assessments and evaluations Training in job search techniques Resume and cover letter preparation Interviewing techniques Training in the use of basic workplace technology Copyright © 2017 Pearson Education, Inc.

34 Copyright © 2017 Pearson Education, Inc.
LO 9-2 Wellness Programs To help keep health costs low: Weight loss and nutrition Stress management Smoking cessation Cardiovascular fitness Copyright © 2017 Pearson Education, Inc.

35 Internal Revenue Code (IRC)
LO 9-3 Internal Revenue Code (IRC) Regulations pertaining to all forms of taxation in the United States such as income tax, but it may grant tax breaks by encouraging particular activities (e.g., retirement plan contributions) The IRC reduces a company’s taxable income by the amount it contributes to qualified retirement plans The IRC also reduces an employee’s taxable income by the amount s/he contributes to a qualified retirement plan Copyright © 2017 Pearson Education, Inc.

36 Employee Retirement Income Security Act of 1974 (ERISA)
Regulates the implementation of various employee benefits programs, including: Medical Life Disability Pension Copyright © 2017 Pearson Education, Inc.

37 Nonqualified and Qualified Plans
LO 9-3 Nonqualified and Qualified Plans Nonqualified plans: refer to pension plans that do not meet at least one of the minimum standard provisions of the Employee Retirement Income Security Act (presented shortly). Neither employee nor employer contributions are permitted on a pretax basis. Qualified plans: meet all of the minimum standard provisions, which permits employer and employee contributions to be made on a pretax basis. Copyright © 2017 Pearson Education, Inc.

38 Minimum Standards for Qualified Plans
LO 9-3 Minimum Standards for Qualified Plans ERISA specifies 13 minimum standards: Participation requirements Coverage requirements Vesting rules Accrual rules Nondiscrimination rules: testing Key employee and top-heavy provisions Minimum funding standards Copyright © 2017 Pearson Education, Inc.

39 Minimum Standards for Qualified Plans (cont’d)
LO 9-3 Minimum Standards for Qualified Plans (cont’d) Social Security integration Contribution and benefit limits Plan distribution rules Qualified survivor annuities Qualified domestics relations orders Plan termination rules and procedures We briefly review four standards: participation, coverage, vesting, and nondiscrimination. Copyright © 2017 Pearson Education, Inc.

40 Copyright © 2017 Pearson Education, Inc.
LO 9-3 Participation Employees must be allowed to participate in pension plans after they have reached age 21 and completed 1 year of service (based on 1,000 work hours) These hours include all paid time for performing work and paid time off Copyright © 2017 Pearson Education, Inc.

41 Copyright © 2017 Pearson Education, Inc.
LO 9-3 Coverage Employers may not exclude employees after participation criteria have been met Employers may not disproportionately favor highly compensated employees, who we define in Chapter 11 on executive compensation Copyright © 2017 Pearson Education, Inc.

42 Copyright © 2017 Pearson Education, Inc.
LO 9-3 Vesting Rules Vesting is an employee’s non forfeitable rights to pension benefits Companies must grant full vesting rights to employer contributions on one of the following two schedules (next slide) Copyright © 2017 Pearson Education, Inc.

43 Vesting Rules (cont’d)
LO 9-3 Vesting Rules (cont’d) Cliff vesting: employers must grant employees 100% vesting after no more than three years of service Six-year graduated schedule: employers grant vesting rights gradually, 20% after two years, then 20% each year until 100% vested Copyright © 2017 Pearson Education, Inc.

44 Nondiscrimination Rules
LO 9-3 Nondiscrimination Rules Prohibits employers from discriminating in favor of highly compensated employees in contributions or benefits, availability of benefits, rights, or plan features Employers may not amend pension plans so that highly compensated employees are favored Copyright © 2017 Pearson Education, Inc.

45 Pension Protection Act of 2006
LO 9-3 Pension Protection Act of 2006 Designed to strengthen protections for employees’ company-sponsored retirement plans in two ways: Defined benefit plans: the Pension Benefit Guarantee Corporation makes it more difficult for employers to skip making required payments to insure these plans Defined contribution plans: enable companies to enroll their employees automatically in these plans Copyright © 2017 Pearson Education, Inc.

46 Design and Planning Issues
LO 9-4 Design and Planning Issues Who receives coverage Whether to include retirees in the plan Whether to deny benefits to employees during their probationary period Financing benefits Degree of employee choice in determining benefits Cost containment Communication Copyright © 2017 Pearson Education, Inc.

47 Discretionary Benefits Costs and Benefits
LO 9-5 Discretionary Benefits Costs and Benefits Promotes competitive advantage Promotes employee behaviors with strategic value Attracts quality employees Meets the needs of a diverse workforce Discretionary benefits can distinguish a company from its competition Copyright © 2017 Pearson Education, Inc.

48 Discretionary Benefits Costs and Benefits
LO 9-5 Discretionary Benefits Costs and Benefits Tax advantages: Can translate into cost savings Companies pursuing differentiation strategies might invest more in research and development or other valuable pursuits Companies pursuing lowest cost strategies might be able to lower prices Copyright © 2017 Pearson Education, Inc.

49 Copyright © 2017 Pearson Education, Inc.
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. Copyright © 2017 Pearson Education, Inc.


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