CEBS: GBA 1, Module 1 (2023/2024) 100% Pass

CEBS: GBA 1, Module 1 (2023/2024) 100% Pass Employee Benefits All forms of financial returns and tangible services and benefits employees receive as apart of an employee relationship Broad View of Employee Benefits Virtually any form of compensation other than direct wages, including: 1. Employer's share of legally required payments (Social security and medicare, unemployment insurance and worker's compensation benefits) 2. Payment for time not worked (paid rest periods, paid sick leave, paid vacations, holidays, parental leave and the like) 3. Employers share of medical and medically related payments 4. Employer's share of retirement and savings plan payments 5. Misc. benefits payments (employee discounts, severance pay, educational expenditures, and childcare among others) Limited View of Employee Benefits Any type of plan sponsored or initiate unilaterally or jointly by employers and employees in providing benefits that stem from the employment relationship that are not underwritten by or paid for directly by government Reasons for Growth of Employee Benefits 1. Business Reasons 2. Collective Bargaining -Labor management relations act (LMRA) /Taft-Hartley Act 3. Favorable Tax Legislation 4. Efficiency of the Employee Benefits Approach 5. Other Factors Business Reasons To attract and retain capable employees; the employers competition may have benefit plans and it's necessary to have equal or better plans to attract and retain employees. Collective Bargaining Labor unions have had a historical impact on benefits, through collective bargaining. In 1948 the National Labor Relations Board (NLRB) ruled in the Inland Steel case that to bargain over wages included insurance and fringes such as pension benefits. Shortly after that W. W. Cross & Co. case ruled that wages included a health and accident plan The Labor Management Relations Act (LMRA) - Taft-Hartley Act Set forth the framework for various labor relations including employee benefits. It along with the Internal Revenue Code (IRC) established the distinction between retirement benefits and welfare benefits, such as life and health insurance. Favorable Tax Legislation 3 Major federal tax advantages associated with employee benefits are: 1. Most contributions to employee benefit plans by employers are tax deductible as long as they are reasonable business expenses. 2. With in certain limits these employer contributions are generally not considered income to employees 3. A certain type of retirement and capital accumulation plans, assets set aside to fund such plans accumulate tax-free to the employee until distributed Efficiency of the Employee Benefits Approach Employment based insurance coverage is convenient for employees, they do not need to search for individual coverage, and it is often less expensive. Providers and suppliers find it more convenient and simpler to communicate and market employee benefits through and employer Other Factors Wages stayed stagnant during WWII and the Korean War due to an imposition of limitations on the size of wage increases during the time. While wages were frozen, employee benefits were not. As a result, compensation of employees could increase by provision of larger benefits. The PPACA. Group Technique Enables insurance programs such as life and health insurance to name only two. Based on the group (rather than the individual) as the unit to be insured. The concept that makes this technique work is a prevent "Adverse Selection". Adverse Selection to reduce the possibility that less healthy individuals may join a group or be a larger percentage of the group than anticipated because of the availability of the insurance or other benefit. Characteristics of the Group Technique Provides some or all of the following: 1. Only certain groups eligible. While most groups qualify, this requirement is intended to make sure that the obtaining of insurance is incidental to the group seeking coverage. 2. Steady flow of lives through the group. The theory is that younger individuals should come into the group while older individuals leave, maintaining a fairly constant ratio. If the average age of the group increases substantially, costs could increase dramatically. 3. Minimum number of persons in a group. Typically no less than 10, designed to prevent less healthy lives from being a major part of the group or to spread expenses over a larger number of individuals. 4. A minimum portion of the group must participate. Employer paid (non contributory plans) 100% of eligible employees must be covered. If the plan is employee and employer shared cost (contributory) 75 % of the employees must participate. This prevents adverse selection and spreads the administrative cost. 5. Eligibility Requirements. Eligibility requirements are imposed to prevent adverse selection. The employer may have an eligibility period, or a period of time before the employee may participate in the benefit plan. 6. Maximum Limits for any one person. In some cases , maximum limits on the amount of life and health benefits may be imposed to prevent excessive amounts of coverage. 7. Automatic Determination of Benefits. Coverage of benefits is determined for all individuals in the group on an automatic basis, may be based on salary, or position. This prevents unhealthy lives from obtaining large amounts of benefit coverage. 8. A central and efficient administrative agency. The employer, because it maintains payroll and other employee information necessary to meet tax and record keeping requirements Setting Objectives in Employee Benefits -What are employee AND employer objectives? -What benefits should be provided under the plan? - What should be covered under the benefits plan? -Should employees have benefit options? -How should the benefits plans be financed? - How should the benefits plan be administered? - How should the benefit plan be communicated? Functional Approach to Employee Benefits An application of a systematic method of analysis to an employer's total employee benefits program. It analyzes the program as a whole in terms of its ability to meet various employees' (and others') needs and to manage loss exposures within the employer's overall compensation goals and cost parameters. Need for Functional Approach Reasons why the functional approach is considered to be an effective planning, designing and administration for employee benefits 1. Employee benefits are a very significant element of total employee compensation and are a very tax efficient way of compensating employees, they should be planned/organized to be effective in meeting employees needs 2. EB represent a large item of labor costs for employers, effective planning and avoidance of waste can be an important employer cost control measure 3. In past EB were often offered on a piecemeal basis, by applying the functional approach reviewing these plans or preposing changes can eliminate overlap and fill gaps 4. A systematic approach to EB can help a plan stay current, competitive and in compliance with regulatory requirements. This is even more important with the passing of the (PPACA) Patient Protection and Affordable Care Act. 5. The functional approach allows benefits to be integrated properly with each other. 3 Types of total compensation/benefits policies that employer adopt 1. Average Compensation/Benefits Policy- follows the prevailing compensation/benefits level in a firm's industry or community or both 2. High Compensation/Benefits Policy- Attempt to attract higher levels of management, technical and general employee talent 3. Low Compensation/Benefits Policy- Lower than average and more modest in scale Compensation/Service-Oriented Benefit Philosophy These companies relate employee benefits primarily to compensation or service, or both, in designing benefit plans with in the constraints of any nondiscriminatory rules Needs Oriented Benefits Philosophy Focus on the needs of employees and their dependents, employers with this philosophy typically would design benefit plans primarily on this basis. Steps used in applying the functional approach 1. Classify employees (and dependents) needs or objectives in a logical functional category. 2. Classify the categoryof persons the employer may want to protect 3. Analyze the benefits presently available under the plan in terms or functional categories of needs or objectives, in terms of regulatory requirements and possibly mandatory coverages. 4. Determine and gaps or overlapping of benefits or both provided from all sources under the plan and other benefit plans in terms of functional catagories of needs and persons to be protected. 5. Consider recommendations for changes in the employers present employee benefit plan to meet any gaps in benefits and to correct any overlapping of benefits, including possible use of the flexible benefit (cafeteria plan) approach 6. Estimate the costs or savings from each of the recommendations made in step 5 7. Evaluate alternative methods of financing or securing the benefits recommended above, as well as the employee benefits plan's existing benefits 8. Consider other cost-saving techniques in connection with the recommended benefits or existing benefits and ( i.e. plan cost-containment strategies) 9. Decide upon the appropriate benefits, methods of financing, sources of benefits as a result of the preceding analysis 10. Implement the changes 11. Communicate benefit changes to employees 12. Periodically reevaluate the employee benefit plan Types of Needs & Exposure to loss that may be covered under EB Types of employee/dependent needs & exposures to lose that may be covered under employee benefit plans: 1. Medical expenses incurred by active employees, by their dependents , by retired (or certain otherwise terminated, suspended or temporarily not in service) employees or former employees and by their dependents 2. Losses due to employees' disability (short term and long term) 3. Losses resulting from active employees' deaths, from their dependents' deaths and from the death of retired (or certain otherwise terminated, suspended or temporarily not in service) employees or former employees 4. Retirement needs of employees and their dependents 5. Capital accumulation needs or goals (short term and long term) 6. Needs arising from unemployment or from temporary termination or suspension of employment 7. Needs for financial counseling, retirement counseling and other counseling services 8. Losses resulting from property and liability exposure and the like 9. Needs for dependent care assistance (e.g. childcare or elder care services) 10. Needs for educational assistance for employees themselves or four employees' dependents or for both 11. Needs for custodial care expenses (long-term care) for employees or their dependents or for retired employees or their dependents 12. Other employee benefit needs or goals (such as a desire to participate in corporate stock plans or other longer-term incentive programs) Persons who can be covered by EB package Firm may want to include the following to extend coverage for their employee benefits 1. Active full time employees 2. Dependents is active full time employees 3. Retired former employees 4. Dependents of retired former employees 5. Disabled employees and their dependents 6. Surviving dependent of deceased employees 7. Terminated employees and their dependents 8. Employees (and their dependence) who are temporarily separated from the employer's service, such as during layoffs, leaves of absence, military duty, strikes and so forth 9. Individuals other than full-time active employees (For example, part-time employees, directors and so forth) PPACA Patient Protection and Affordable Care Act (Obamacare) Replacement Ratios The retirement income objective might be expressed in terms of some percentage of the estimated final pay of an employee. Can be used for disability plans as well. All income must be considered, social security, various capital accumulation benefits and retirement plans Protection-Oriented Benefits Consist of medical expense benefits, life insurance benefits and short- and long- term disability benefits that protect employees and their dependents against serious loss exposure that could spell financial disaster. Usually have shorter probationary periods Accumulation-Oriented Benefits Pension plans, profit sharing plans, savings or thrift plans and so forth, reward an employee for relatively long service with an employer. Usually have longer probationary periods. Contributory/Noncontributory benefit plans Making a plan contributory will impact employee participation & how well the plan meets the employee needs. If participation in a contributory plan is mandatory, this may create an employee relations problem. Many contributory plans vary the levels or types of benefits in accordance with the degree of employee contribution Benefits in Action 1: Atlas Industry Case Study