1. Topic 13. Employee Benefit Plans BUS 200 Introduction to Risk Management and Insurance Jin Park

2. Overview Regulations Group Life Insurance Benefits Disability Insurance Benefits Health Care Benefits Retirement Plans (Pension Plans) Other Benefit Plans

3. Regulations Age Discrimination in Employment Act (ADEA) of 1967  Prohibits employers from forcing employees to retire at any age.  Provides employers an option to change some benefits for older workers Civil Rights Act of 1978  Requires employers to provide some benefits for pregnancy and related medical conditions Americans with Disabilities Act (ADA) of 1990  Forbids employers with more than 15 employees from discriminating against disabled persons in employment Family Medical Leave Act (FMLA) of 1993  Requires employers to grant an eligible employee unpaid leave for family medical related reasons

4. Regulations Employee Retirement Income Security Act (ERISA) of 1974  Purpose To protect the benefits of retirement plan participants To prevent discrimination in favor of HCEs  Regulates the design, funding, and communication aspects of private, qualified retirement plans. Economic Growth Tax Relief and Reconciliation Act (EGTRRA) of 2001  To amend some of ERISA’s shortfalls  Increases the retirement saving limits Annual benefits under a defined benefit plan is increased to $160,000. Annual additions under a defined contribution plan is increased to $40,000  Mandates faster participant vesting in 401(k) plans  Increases the portability and flexibility in plan funding and design  Includes a sunset provision

5. Regulations Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1986  Amendment to the ERISA  Provides certain former employees, retirees, spouses and dependent children the right to temporary continuation of health coverage at group rates  Usually 18 months Health Insurance Portability and Accountability Act (HIPAA) of 1996  Protects health insurance coverage for workers and their families when they change or lose their jobs

6. Group Life Insurance Benefits The oldest of the employer sponsored employee benefit program One to five times of an employee’s salary Group term life insurance – paid by employer  Premium for the first $50,000 of coverage  Premium for greater than $50,000 of coverage Group universal life insurance – paid by employee Premium is determined on the basis of group’s characteristics

7. Disability Insurance Benefits Provides economic security for employees who can’t work due to injury or illness Group short-term disability (STD) plan  An elimination period of one to seven days  From 7 days up to 2 years (depends on plan)  65 to 75 percent of income is replaced Group Long-term disability (LTD) plan  An elimination period is often equivalent to the benefit period for the STD plan.  May have a gap in coverage, if a LTD plan’s elimination period is longer than a STD plan’s benefit period.  The benefit period is until 65 or lifetime.

8. Health Care Benefits On a Group Health Insurance Basis  one insurance policy covering a group of people  Choices by employees are usually limited Traditional Indemnity Insurance  6% of total health care market, it used to be 96% in twenty years ago  Complete freedom of choice of providers  Fee-for-service plan  A role of an insurer is to indemnify the insured for covered losses  High cost

9. Health Care Benefits Managed Care 1. HMO – Health Maintenance Organization Low cost, but limited choices Primary care physician (PCP) Not all physicians participate in HMO’s A referral by the PCP is required to see other physicians Service by the out-of-network provider is not covered Group Practice Association and Staff Model HMO’s Individual Practice Association HMO’s

10. Health Care Benefits Managed Care 2. PPO – Preferred Providers Organization A group of doctors and hospitals that work under one umbrella (called the PPO), to provide medical services at a discount to the PPO participants. Providers are paid on a discounted fee-for-service basis. PPO participants may utilize any doctor they wish, like traditional indemnity plan as long as the doctor is in the PPO. At the point of service (or when an insured needs medical service), the insured has a choice to  stay in the network with more complete coverage; or  go outside of the network, but the payment by PPO is limited or less.

11. Health Care Benefits Managed Care 3. POS – Point of Service A combination of HMO and PPO developed by HMO’s to compete with PPO. See Table 17.1 on page 420.

12. Retirement Plans Defined Benefit (DB) Plans  The benefit amount at retirement is defined  Retirement benefit amounts are determined by a formula Final average formula Career average formula  Employers take all investment risk  No individual employee’s retirement account  New type of a DB plan: Cash Balance Plan Hypothetical individual employee accounts with a fixed employer contribution rate Employer credits a certain percentage of employees’ salary into their hypothetical accounts with a guaranteed minimum rate of return.

13. Retirement Plans Defined Contribution (DC) Plans  The contribution amount is defined, but the benefit amount available at retirement varies.  The benefit available at retirement depends on The contribution amount The length of covered service Investment return on the retirement funds Retirement age  Money Purchase Plan  Profit Sharing Plan  401(k) Plan  ESOPs – Employee Stock Ownership Plans