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EXERCISE 21
CONTAINING THE COSTS OF BENEFITS
The bottom-line emphasis of this exercise on employee benefits is cost containment. Legislative
requirements of the 1970s in the funding of pension plans, coupled with the increasing liberal payout in
Workers’ Compensation (disability) claims and the never-ending upward spiral of health-care costs and
their resulting increase in health-care insurance premiums have left compensation and benefits specialists
in a quandary as to what to do in this area. Management, unable to let past practices continue, is making
changes in a number of areas.
A careful review of what is currently happening in the world of benefits identifies:
1. Extensive corporate activities in the area of employee contributions to the funding of
2. Increased use of co-insurance and the increasing size of deductibles in the insurance
plans;
4. Innovative approaches for supplying benefits to employees (including the use of flexible
or cafeteria benefits);
5. Large employers negotiating directly with health-care providers for services, bypassing
insurance carriers;
6. State and federal government initiatives to offer or to foster the development of health
The objectives of this exercise are to:
1. Expand awareness of health-care and total benefits options that can lead to reducing organization
costs and maintaining a high level of protection and services available to employees.
3. Contrast advantages and disadvantages of various cost containment options. These options may
include HMOs, PPOs, POS Plans, Consumer Driven Plans and VEBAs.
Teaching Hints
Many articles in management, human resources, and employee benefits journals and magazines
describe the problems related to this subject. Many of these articles provide examples of what
organizations are doing to contain the increased costs of benefits. An assignment may be for the students
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Additional Teaching Notes
A 501(c)(9) trust refers to the particular section of the Internal Revenue Code under which the
trust is set up. The trust is known as the Voluntary Employees’ Beneficiary Association (VEBA).
Internal Revenue Code section 501(c)(9) exempts from federal income taxation:
This statutory exemption has been in existence for more than 50 years and has been amended
only twice:
1. A 1942 liberalization clarifying that employers could contribute to the association as well as
employees.
In a 501(c)(9) trust, no part of the net earnings of the organization can inure to the benefit of any
private shareholder or individual other than through the payment of life, sick, accident, or other benefits.
The disposition of property to, or the performance of services for, any person for less than its cost to the
association, other than for the purpose of providing benefits, will constitute inurement. Further, the
payment to any member of disproportionate benefits will not be considered a benefit within the meaning
of “other benefits.” For example, the payment to highly compensated personnel of benefits which are
disproportionate in relation to benefits received by other members of the association will constitute
inurement. However, the payment to similarly situated employees of benefits, which differ, in kind of
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Answers to Assignment
1. HMO Benefits
The benefits may include:
a. Encourages preventative medicine
2. Containment of health-care costs requires a multi-factor program with the central feature being
flexible benefits program. Combined with flexible benefits are (1) increasing employee share/cost of the
medical insurance premium, (2) increasing deductible limits and co-insurance payments, and (3) checking
3. As mentioned in the exercise, more and more women of child-bearing age are active members of
the work force. Childcare is one of the most vexing problems facing parents of young children. Section
4. Advantages of a 401(k) plan: An employee can currently defer up to $14,000 per year or up to
$18,000 per year if age 50 or over (indexed based on annual change in CPI) that then can be put into an
5. The author has found that any products or services that help employees to gain more control over
their time and money are among the most well received alternative benefits. Consequently, Murray would
be wise to consider such benefits as:
Flex-time
Vacation buy-sell program (under Section 125)
Eldercare referral and/or assistance
Employee assistance program (EAP)