1. Chapter 9: Discretionary Benefits
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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
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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
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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
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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
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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
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7. Categories of Discretionary Benefits
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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
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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
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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
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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
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11. Copyright © 2017 Pearson Education, Inc.
LO 9-2
Life Insurance
Pays employees’ beneficiaries upon employees’ death
May also include
Accidental death
Dismemberment benefits
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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
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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
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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
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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
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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
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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
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18. Defined Contribution Plan Types
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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
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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
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20. Copyright © 2017 Pearson Education, Inc.
LO 9-2
Paid Time Off
Holidays
Vacation
Sick leave
Personal leave
Jury duty
Funeral leave
Military leave
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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
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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
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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
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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
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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
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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.
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27. Employee Assistance Programs
Provided for:
Alcohol or drug abuse
Domestic violence
Emotional impact of AIDS and other diseases
Clinical depression
Eating disorders
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28. Family Assistance Programs
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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
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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
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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
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31. Tuition Reimbursement
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Tuition Reimbursement
Promotes employee education
Full or partial coverage
Not the same as pay for knowledge
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32. Outplacement Assistance Programs
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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
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33. Outplacement Assistance Services
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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
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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
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35. Internal Revenue Code (IRC)
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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
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36. Employee Retirement Income Security Act of 1974 (ERISA)
Regulates the implementation of various employee benefits programs, including:
Medical
Life
Disability
Pension
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37. Nonqualified and Qualified Plans
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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.
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38. Minimum Standards for Qualified Plans
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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
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39. Minimum Standards for Qualified Plans (cont’d)
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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.
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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
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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
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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)
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43. Vesting Rules (cont’d)
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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
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44. Nondiscrimination Rules
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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
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45. Pension Protection Act of 2006
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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
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46. Design and Planning Issues
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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
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47. Discretionary Benefits Costs and Benefits
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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
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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
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49. Copyright © 2017 Pearson Education, Inc.
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