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CHAPTER 19
Employee Benefits
I. SUGGESTED CLASSROOM TIME: 100–120 MINUTES
II. CHAPTER OVERVIEW
The role of employee benefits in providing lifelong security from various perils is an
important subject to most Americans. Students should be aware of what employee benefits
are, the role and objective of employee benefits in the workplace, and the types of benefits
usually provided. Because most students will have some form of employee benefit package
provided by their employer as a part of a compensation package, students are interested in
what will be included in the package. Benefit packages include health benefits, dental
III. LECTURE OUTLINE
A. Introduction to Employee Benefits
1. Definition—define employee benefits—anything received as value other than
wages; one part of the tripod of economic security
2. Benefits included in the definition (see Figure 19–1)
3. Increasing importance of employee benefits—costs of benefits, employee reliance
4. Federal laws covering employee benefits
a. The Social Security Act
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B. The Goals of the Government, Employer, and Employee
1. The government
a. Social and industrialization considerations
b. Approach—free enterprise versus democratic socialist versus communist
2. The employer
3. The employee
a. Tax deferral—postpone tax; earn interest on dollars normally paid in tax.
C. Insured Employee Benefits
1. Nondiscrimination rules—Section 89 (Repealed Late 1989) with new rules written
2. Qualification rules to receive tax benefits plan
a. Must be in writing
3. General features
a. Group insurance—master contract
D. Group Life Insurance
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1. No savings component; usually provided through annual term
E. Group Disability Income Insurance
1. Short-term sick leave plans
2. Long-term plans
F. Group Health Insurance
1. Social problems
a. Should coverage be universal?
2. Group health insurance contracts—similar provisions and coverage described in
health insurance chapter
a. Employees and eligible dependents typically covered
3. Major medical
a. High policy limits
b. Deductible
4. General provisions of group health insurance contracts
a. No coverage for custodial care
b. No coverage for physical exams
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5. The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA)—
Employees are allowed to continue health benefits for up to 36 months after a
qualified separation from employment.
6. The Family and Medical Leave Act (FMLA)—allows employees to leave the job for a
G. Insured Pension Plans
1. Definitions—pension plan, retirement, normal retirement age, replacement ratio,
qualified versus nonqualified, defined benefit versus defined contribution
2. Requirements for qualified plans
H. Federal Regulation of Pension Plans
1. ERISA (The Employee Retirement Income Security Act of 1974)
a. Reporting and disclosure requirements
2. ADEA (The Age Discrimination in Employment Act of 1967 as amended)
a. Prohibits age discrimination in age group 40—70
3. Civil Rights Act of 1964
I. The Role of Insurance in Pension Plans
1. Accumulation phase versus liquidation phase
2. Allocated versus unallocated funding—use of trusts
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J. Current Issues in Pension Plans
1. The decline of defined benefit plans
a. Employer has no further liability after contributing to a defined contribution
plan.
4. The underfunding of pension plans
a. Changes in assumptions can easily cause under-funding of defined benefits.
Example is an increase in the interest rate earning assumption.
K. Profit Sharing, 401(k), 403(b), and Cafeteria Plans
1. Profit sharing—defined contribution plan
L. Individual Retirement Account (IRA)
1. Passed as part of the Employee Income Security Act of 1974 (ERISA)
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3. Deductible and nondeductible contributions can be made—maximum limit, subject
to change, is $5,000 (2012) of earned income.
4. Deductible contribution eligibility
a. Single people not covered by an employer-sponsored plan
5. Rollovers
6. Taxation
a. Portion attributable to deductible amount is taxed; all investment income
M. Roth IRA
1. Contributions to a Roth are not tax deductible.
2. Withdrawals are tax free when withdrawn.
IV. ANSWERS TO REVIEW QUESTIONS
1. Define the term employee benefits and describe some of the benefits
included in this category. Employee benefits are considered to be any transfer of
value received by an employee that is other than cash wages. The category includes
2. Why is it important to learn about employee benefits? Individuals need to
learn about their employee benefits in order to plan for the various life contingencies.
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3. Describe the concept of the tripod of economic security as it applies to
4. How does the U.S. approach to providing society with economic security
differ from other national governments’ approaches? Each society approaches
5. Describe the employer’s goals in offering employee benefits. The employer’s
goals in offering employee benefits include taking advantage of tax benefits and
attracting, retaining, and motivating employees. The IRS allows the employer to
6. Why do employees prefer employee benefits to straight wage income?
Employees may prefer employee benefits to straight wage income for a variety of
7. What are two main objectives of federal employee-benefits legislation?
Briefly describe how these purposes are achieved. The two main objectives of
federal employee benefits legislation are: 1) The plan should not discriminate in favor
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8. Describe the four basic requirements for a benefit plan to be qualified for
tax benefits. To be qualified, the plan must be in writing, the plan must create legally
9. Explain some important characteristics of group insurance. Group insurance
is written using one master contract covering a specific group. The purpose of the
group cannot be to purchase insurance. It typically costs less than comparable
10. List three different approaches for determining a group life insurance
benefit. Life insurance amounts are typically not selectable by the employee in
11. How is group term life insurance taxed while the insured is alive? While the
insured is alive, no income is reported as long as the amount of life insurance is less
12. Most financial planners do not recommend that employees rely exclusively
on group life insurance for family survivor death benefits. Explain their
reasons. The reasons for encouraging employees to seek additional life insurance
13. What is an integrated group disability plan? An integrated group disability plan
is a plan that considers and coordinates its benefits with Social Security. Benefits are
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14. Give two different definitions of permanent disability. The definition of
disability may be quite different depending upon the disability income contract. There
15. What is the difference between short-term disability and long-term
disability? As an industry convention, short-term disabilities are those of two years
16. Identify some expenses typically excluded by group health insurance
contracts. The following expenses are generally not covered under group plans.
Coverage for custodial care is not paid for—when the insured is in a facility that is not
17. What is the most common approach used by employers to provide health
insurance to their employees? Group insurance plans are the most common
18. Describe the concept of self-funded health insurance. Some employers
19. Describe the main reason for qualifying pension plans from the view of the
employer. The main reason for an employer qualifying its pension plans is to benefit
20. Explain the difference between defined-benefit and defined-contribution
pension plans. Defined benefit pension plans indicate how much will be paid when a
person retires, for example, $10 per month per year of service or 2.5 percent per year
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21. List four requirements for qualifying a pension plan. There are generally four
requirements. Eligibility: All employees over the age of 21 with at least one full year of
22. Describe three of the federal laws that apply to pension plans.
1) The Employee Retirement Income Security Act of 1974 (ERISA): The goal is to
protect the rights of participants and provide for disclosure, fiduciary, minimum
23. What is the general rule regarding the taxation of pension benefits? As a
general rule, when a retired worker receives pension income, any portion attributable
24. Describe two important tax advantages accruing to people making IRA
contributions. Why would an employee be willing to make a non–
deductible contribution to an IRA? The advantage of participating in an IRA is
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25. Compare the tax advantages of the Roth IRA to the traditional IRA. The
26. What is an IRA rollover? A rollover occurs when money from one IRA or other
retirement plan is placed with a new trustee. A rollover occurs if an investor takes IRA
V. ANSWERS TO OBJECTIVE QUESTIONS
1. Which of the following rules does not apply to qualifying a benefit plan?
2. “Credibility” with respect to experience-rated group insurance premiums means the
3. Which of the following is not an exclusion common in group health insurance plans?
5. One advantage of tax deferral on qualified pension plan contributions is that
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6. HMOs charge employers a monthly fee called
7. In a _______ plan, an insurer provides coverage for many people under one master
contract.
8. Which of the following retirement plans does not allow the covered employee to reduce
his taxable income voluntarily by the amount he deposits into his retirement account
while earning tax-deferred investment income on the account balance?
VI. IDEAS FOR INSTRUCTORS AND TEACHING METHODS
1. Have students talk with their parents to determine their parents’ employee benefits
packages. In class, list these benefits on the board and try to estimate the costs of
2. Have an extended discussion about the social implications of employee benefit plans. If
these benefits are not supplied by employers, do they have to be supplied? Would
society supply them in other ways?
3. Have students clip current newspaper articles about the broad topic of employee
4. Discuss the impact of FASB #106 on the reported profits of our largest corporations. In
1992, for example, General Motors was forced to recognize over $20 billion in
liabilities for promising to fund the health care of retired workers.
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5. Discuss the pros and cons of establishing COBRA benefits for employees. Discuss the
6. Have students research the benefits of a Roth IRA versus a regular IRA with regard to
after-tax accumulations.