The Handbook of Employee Benefits: Health and Group Benefits 7/E / Edition 7

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Overview

Written by a team of top experts in the field, The Handbook of Employee Benefits offers

everything you need to know about designing and implementing health and group benefit

programs that benefit both the individual employee and the company as a whole.

Retaining all the information that has made this the go-to resource for HR and benefits

professionals for nearly three decades, the seventh edition of The Handbook of Employee Benefits

contains brand-new chapters on:

  • Health-care Cost Containment
  • Managing and Measuring Care

    Management Intervention Programs

  • Business Uses of Life Insurance
  • Prescription Drug Plans
  • Medicare Part D
  • Self-Funded Arrangements and

    Captive Insurance Companies

  • Small Company Benefits
  • Multi-Employer Plans

Businesses are functioning on tighter budgets, health care is getting more expensive, and

employees are placing increasing importance on quality benefits packages. Add to this

the complexities of important new legislation and your job is more difficult than ever.

Required reading for benefits professionals in every industry, The Handbook of Employee

Benefits is the only resource you need to build health and group benefits programs that

are in line with the realities of today’s business environment.

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Product Details

  • ISBN-13: 9780071745987
  • Publisher: McGraw-Hill Professional Publishing
  • Publication date: 5/26/2011
  • Edition description: New Edition
  • Edition number: 7
  • Pages: 1008
  • Sales rank: 670,411
  • Product dimensions: 6.40 (w) x 9.10 (h) x 2.30 (d)

Meet the Author

Jerry S. Rosenbloom, Ph.D., is the Frederick H. Ecker emeritus professor of insurance and risk management at the Wharton School. His areas of research include employee benefits, financial planning, financial services, risk, and risk management.

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Read an Excerpt

THE HANDBOOK OF EMPLOYEE BENEFITS: Health and Group Benefits


By Jerry S. Rosenbloom

McGraw-Hill

Copyright © 2011 The McGraw-Hill Companies, Inc.
All right reserved.

ISBN: 978-0-07-176309-7


Chapter One

The Environment of Employee Benefit Plans Jerry S. Rosenbloom

In the United States, employee benefits are an extremely important part of an employee's financial security. Once considered to be "fringe" benefits because of their relatively small magnitude, this cannot be said today of employee benefits, which may account for over 35 percent of an individual's total compensation. In many firms, that percentage is even higher. Furthermore, many new types of employee benefits have come onto the scene in recent years as employers compete for a talented workforce, and benefits have become much more of a strategic consideration for many firms. Moreover, with the passage of the Patient Protection and Affordable Care Act (PPACA) on March 23, 2010, many new questions for employee benefit plans, particularly in the health care area, have and will continue to emerge. To ensure that both employers and employees utilize employee benefit plans in the most effective manner requires a thorough knowledge of all aspects of benefit plan design, funding, and administration, including communications.

This chapter gives the necessary background for the rest of the volume by outlining what employee benefits are, the reasons for their growth, what they are intended to achieve from both the employer and employee perspectives, and what makes such plans work.

EMPLOYEE BENEFITS DEFINED

Employee benefits are a part of almost every employee's total compensation—that is, "all forms of financial returns and tangible services and benefits employees receive as part of an employment relationship."

Broad View of Employee Benefits

Many definitions of employee benefits exist, ranging from the broadest to the most narrow. In the broad view, employee benefits are virtually any form of compensation other than direct wages and might be defined broadly to include the following:

1. Employer's share of legally required payments (Social Security and Medicare, unemployment insurance, and workers' compensation benefits)

2. Payments for time not worked (e.g., paid rest periods, paid sick leave, paid vacations, holidays, parental leave, and the like)

3. Employer's share of medical and medically related payments

4. Employer's share of retirement and savings plan payments

5. Miscellaneous benefit payments (including employee discounts, severance pay, educational expenditures, and child care, among others)

Table 1-1 illustrates the relative importance of employer costs for benefits as a percentage of payroll for civilian workers, private industry, and state and local government. As the table indicates, employee benefits are intertwined with almost every facet of an individual's economic and financial security.

A More Limited View of Employee Benefits

The broad view of employee benefits encompasses both legally mandated benefits such as Social Security and other governmental programs and private plans, while the narrow view can be summarized as "any type of plan sponsored or initiated 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."

This narrow definition of employee benefits will be the one primarily used in the Handbook. This is not in any way meant to imply that legally required benefits are unimportant. On the contrary, these benefits are extremely important and must be considered in employee benefit plan design and in integrating private employee benefit plans with the benefits provided by governmental bodies. This interrelationship is stressed throughout the book. In addition to benefits provided through government bodies and those provided through the employment relationship, benefits provided by an individual for his or her own welfare or that of his or her dependents are also described when appropriate. This so-called tripod or three-legged stool of economic security underlies the foundation of individual and family financial security.

REASONS FOR THE GROWTH OF EMPLOYEE BENEFIT PLANS

Numerous reasons exist for the evolution of employee benefit plans from a fringe benefit to a major component of financial security today. They stem from external forces as well as the desire of employers and employees to achieve certain goals and objectives.

Business Reasons

A multitude of business reasons explain why employee benefit plans were established and why they have expanded greatly. Employers want to attract and retain capable employees. Having employee benefit plans in place helps to serve this objective. Also, in many cases, an employer's competition has certain benefit plans, and it is necessary to have equal or better plans to attract and retain employees. Moreover, employers hope that corporate efficiency, productivity, and improved employee morale will be fostered by good benefit plans. Concerns for employees' welfare and social objectives have also encouraged employers to provide benefits.

Collective Bargaining

Through the collective bargaining process, labor unions have had a major impact on the growth of employee benefit plans. The Labor Management Relations Act (LMRA), which is administered by the National Labor Relations Board (NLRB), requires good-faith collective bargaining over wages, hours, and other terms and conditions of employment. A notable event occurred in 1948 when the NLRB ruled that the meaning of the term wages includes a pension plan, and this position was upheld in the landmark case of Inland Steel Co. v. National Labor Relations Board in the same year. Shortly thereafter, in 1949, the good-faith bargaining requirements were held to include a group health and accident plan (W.W. Cross & Co. v. National Labor Relations Board). As a result of these two decisions, it was clearly established that the LMRA provisions applied to both retirement and welfare benefit plans, and their subsequent growth has been substantial.

The LMRA, or Taft-Hartley Act, as it is commonly known, has also played significant roles in the development of employee benefit plans. Along with the Internal Revenue Code (IRC), it established the distinction between retirement benefits and welfare benefits such as life and health insurance. Additionally, the statute sets forth the basic regulatory framework under which both of these major categories of benefits are to be jointly administered with the collective bargaining process. As such, it is the legislative basis on which jointly trusteed benefit plans are founded. (See Chapter 33.)

Favorable Tax Legislation

Over the years, the tax laws have favored employee benefit plans. Such preferential tax legislation has greatly encouraged the development of employee benefit plans as well as helping to shape their design, because many plans seek to maximize the tax advantages or lessen the tax consequences of various employee benefit plans. The main tax benefits of employee benefit plans are as follows: (1) most contributions to employee benefit plans by employers are deductible as long as they are reasonable business expenses; (2) contributions from employers within certain limits on behalf of employees generally are not considered income to employees; and (3) on certain types of retirement and capital accumulation plans, assets set aside to fund such plans accumulate tax-free until distributed. Some additional tax benefits may be available when such distributions are made. All in all, favorable tax legislation has had a great impact on the development and expansion of employee benefit plans.

Efficiency of the Employee Benefits Approach

Following the Industrial Revolution, the aggregation of employees and employers in cities and in business firms made it possible for the employee benefits concept to flourish by covering many employees under one contract. The simplicity and convenience of providing coverage to people through their place of employment made sense from many standpoints. Employee benefits providers and suppliers, such as insurance companies, banks, and various types of health care coverage providers, all found the marketing of such benefits through the employer to be a cost-effective and administratively efficient channel of distribution.

Other Factors

Many other factors have contributed to the growth of employee benefit plans. One such factor was the imposition of limitations on the size of wage increases granted during World War II and the Korean War. While wages were frozen, employee benefits were not. As a result, compensation of employees could effectively be increased by provision of larger benefits. The result was a major expansion of employee benefits during these two periods.

Some have argued that various legislative actions over the years have encouraged employee benefit plans not only through providing favorable tax treatment but also by the government's "moral suasion" that, if such benefit plans were not established voluntarily by employers and employees, additional governmental programs might result. With the enactment of health care reform through the PPACA legislation, many questions have arisen concerning this concept. Also, allowing employee benefits to be integrated with governmental benefits has enhanced the private employee benefit approach by taking into consideration benefits provided by governmental plans in benefit plan design.

Development of the group approach to certain employee benefits has helped expand the employee benefit mechanism. The techniques utilized in the group selection process made it possible for employers to provide benefits that previously could only be provided on an individual basis with coverage often determined by individual medical selection.

GROUP TECHNIQUE

The group technique enables insurance programs such as life insurance and health insurance, to name only two, to be written as employee benefit plans. Unlike individual insurance, group insurance is based on a view of the group rather than the individual as the unit to be insured. Usually, individual insurance eligibility requirements are not required for group insurance written under an employee benefit plan. The concepts that make the group technique work are all designed to prevent "adverse selection"—that is, to reduce the possibility that less-healthy individuals may join a group or be a larger percentage of a group than anticipated because of the availability of insurance or other benefits.

Characteristics of the group technique of providing employee benefits include 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. Thus, a group should not be formed solely for the purpose of obtaining insurance.

2. Steady flow of lives through the group. The theory behind this concept is that younger individuals should come into the group while older individuals leave it, thus maintaining a fairly constant mortality or morbidity ratio in the group. If the group does not maintain this "flow through the group" and the average age of the group increases substantially, costs could increase dramatically.

3. Minimum number of persons in a group. A minimum number of persons, typically 10, must be in a group to be eligible for group benefits. However, this requirement has been liberalized to the point where two or three individuals in a group may obtain coverage. This minimum-number provision is designed to prevent less healthy lives from being a major part of the group and to spread the expenses of the benefits plan over a larger number of individuals.

4. A minimum portion of the group must participate. Typically, in group life and health insurance plans, if the plan is noncontributory (solely paid for by the employer), 100 percent of eligible employees must be covered. If the plan is contributory (employer and employee share the cost), 75 percent of the employees must participate. The rationale for this provision is also to reduce adverse selection and spread the expense of administration.

5. Eligibility requirements. Frequently, eligibility requirements are imposed under group plans for the purpose, once again, of preventing adverse selection. An employee must be actively at work on the first day of eligibility. The employer may have a period of time, called the eligibility period, before the employee may participate in the benefit plan. Certain benefit plans may require an elimination or waiting period to elapse before an employee receives a benefit for which he or she is eligible. Also, if employees do not join when eligible and want to enroll at a later date, some form of medical information may be required.

6. Maximum limits for any one person. In certain cases, maximum limits on the amount of life or health benefits may be imposed to prevent the possibility of excessive amounts of coverage for any particular unhealthy individual.

7. Automatic determination of benefits. To prevent unhealthy lives in a group from obtaining an extremely large amount of a particular benefit or benefits, coverage is determined for all individuals in the group on an automatic basis. This basis may be determined by an employee's salary, service, or position, it may be a flat amount for all employees, or it may be a combination of these factors.

8. A central and efficient administrative agency. To keep expenses to a minimum and to handle the mechanics of the benefit plan, a central and efficient administrative agency is necessary for the successful operation of an employee benefit plan. An employer is an almost ideal administrator because it maintains the payroll and other employee information necessary in meeting tax and record-keeping requirements.

Over the years, many of the requirements just described have been liberalized as providers of employee benefits have gained experience in handling group employee benefits, and because of the competitive environment. Nevertheless, the basic group selection technique is important in understanding why employee benefits can work on a group basis and how any problems that exist might be corrected.

OVERALL EMPLOYEE BENEFIT CONCERNS

As previously noted, because employee benefits provide such an important dimension of financial security in our society, some overall questions need to be asked to evaluate any existing or newly created employee benefit plan. While later chapters in this Handbook analyze benefit design, cost, funding, administration, and communication issues, some principles permeate all these areas and need brief mention early in this text.

What are the Employer and Employee Objectives in Establishing the Plan?

The design of any employee benefit plan must start with the objectives for the benefit plan from the standpoint of both employer and employee.

What Benefits Should Be Provided Under the Plan?

There should be clearly stated reasons or objectives for the type of benefits to be provided. Benefits provided both under governmental programs and through purchase by employees should be considered.

Who Should Be Covered Under the Benefit Plan?

Should only full-time employees be covered? What about retirees or dependents? What about survivors of deceased employees? These and a host of similar questions must be carefully evaluated. Of course, some of these issues depend on regulatory and legislative rules and regulations.

Should Employees Have Benefit Options?

This question has become more assumed greater prominence for employee benefit plans because of the changing workforce. Additionally, with the growth of flexible benefits or cafeteria plans, employee choice continues to increase. Even in nonflexible benefit plan situations, should some choices may be given?

How Should the Benefit Plan Be Financed?

Several important questions need to be answered in determining the approach to funding an employee benefit plan. Should financing be entirely provided by the employer (a noncontributory approach) or on some shared basis by the employer and employee (a contributory approach)? If on a contributory basis, what percentage should each bear?

What funding method should be used? A wide range of possibilities exists, from a total insurance program to total self-funding, with many options in between. Even when one of these options is selected, further questions still remain concerning the specific funding instrument to be used. The cost of providing benefits has become a major area of concern for both employers and employees. Many methods of trying to contain employee benefit costs are discussed throughout this Handbook.

How Should the Benefit Plan Be Administered?

Should the firm itself administer the plan? Should an insurance carrier or other benefit plan provider handle the administration? Should some external organization such as a third-party administrator (TPA) do this work? Once the decision has been made, the specific entity must be selected.

(Continues...)



Excerpted from THE HANDBOOK OF EMPLOYEE BENEFITS: Health and Group Benefits by Jerry S. Rosenbloom Copyright © 2011 by The McGraw-Hill Companies, Inc.. Excerpted by permission of McGraw-Hill. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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Table of Contents

Part One: The Environment of Employee Benefit Plans; Chapter 1: The Environment of Employee Benefit Plans; Chapter 2: Functional Approach to Designing and Evaluating Employee Benefits; Chapter 3: Risk Concepts and Employee Benefit Plans; Part Two: Medical and Other Health Benefits; Chapter 4: Evolving Health Plan Designs; Chapter 5: Managing and Measuring Care Management Intervention Programs; Chapter 6: Health Care Cost Containment; Chapter 7: Consumer-Driven Health Plans; Chapter 8: Dental Plan Design; Chapter 9: Prescription Drug Plans; Chapter 10: Managed Behavioral Health Care Benefits; Chapter 11: Long-Term Care Insurance; Chapter 12: Disability Income Benefits; Part Three: Life Insurance Benefits; Chapter 13: Group Life Insurance Plans; Chapter 14: Applications/uses of life insurance; Part Four: Work/Life Benefits; Chapter 15: Work/Life Benefits; Chapter 16: Time-Off Benefits and Family and Medical Leave Programs; Chapter 17: Dependent Care Programs; Chapter 18: Selectied Additional Benefits; Chapter 19: Financial Planning as an Employee Benefit; Part Five: Social Insurance Programs; Chapter 20: Social Security and Medicare; Chapter 21: Workers' Compensation; Chapter 22: Fundamentals of Unemployement Compensation; Part Six: Employee Benefit Plan Administration; Chapter 23: Employee Benefit Plan Management; Chapter 24: Cafeteria Plan Design and Administration; Chapter 25: Fiduciary Liability Issues Under ERISA; Chapter 26: Communicating Employee Benefits Programs; Part Seven: Group and Health Benefit Plan Financial Management; Chapter 27: Federal Tax Law Requirements for Group Welfare Benefit Plans; Chapter 28: Alternative Insured Funding Arrangements; Chapter 29: Self-Funded Arrangements and Captive Insurance Companies;Part Eight: Employee Benefit Plan Issues; Chapter 30: Welfare Benefits for Reitrees; Chapter 31: Small Company Benefits; Chapter 32: Multi-Employer Plans; Chapter 33: Health Care Quality; Chapter 34: The Globalization of Employee Benefits; Chapter 35: Health Care Reform;

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