Discretionary Employee BenefitsKaren S. Markel, Ph.D., SPHR .docx

Discretionary Employee Benefits
Karen S. Markel, Ph.D., SPHR 2010
Learning Objectives
At the completion of this section of the module, students
will be able to:
Identify the issues in discretionary benefits design and
implementation.
Define the types of discretionary benefits.
Identify the relationship between various discretionary benefits
programs and relevant federal law.
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Module note: This module explores discretionary health,
medical and retirement benefits. There are other types of
discretionary benefits that employers may offer (paid time off,
disability, tuition reimbursement, etc.) that are not explicitly
addressed here.
Design and Implementation Considerations
Session 1
Session 1 Learning Objectives
After completing this session, students will be able to:
Define discretionary benefits.
Understand what benefits should be offered in most
organizations.
Understand benefits administration.

Know how to communicate benefits offerings to employees.
Determine if a benefits program is accomplishing its purpose.
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Benefits Examples
Vacation leave
Sick leave
Social Security
Dental insurance
401(K) plans
Vision insurance
Pensions
Health insurance
Prescription drug insurance
Medicare
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Ask students which benefits they think are considered
discretionary.
Answer: All but Social Security and Medicare are considered
discretionary. Social Security and Medicare are mandated by
law.
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Discretionary Benefits Defined
Discretionary benefits are those benefits that are not
mandated by law.

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Discretionary benefits are benefits that are offered to employees
by their employer voluntarily (i.e., not mandated through law).
While these benefits are offered voluntarily, their
administration and design are often regulated by law
(Martocchio, 2008). Examples of these benefits include pay for
time not worked, health and medical insurance and retirement
plans.
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What Benefits to Offer?
To determine which benefits to offer, the following must be
considered:
Alignment with the organization’s total rewards strategy.
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The organizational decision to offer discretionary benefits
should take a variety of factors into consideration, both in the
design and in the implementation.
Ask students to define “total rewards.”
Total rewards typically include monetary compensation plus
other, nonmonetary benefits.
Discretionary benefits can be viewed as part of an
organization’s overall total rewards strategy and should align
with the goals of that program. Employers should develop
written strategic benefits plans that align with overall

compensation and corporate strategy.
According to Adamik (2007), the plan should include specific
goals and objectives with metrics to evaluate achievement.
Proposed metrics should be measurable, quantifiable and
focused on those things management defines. To obtain
management support, there should be a return-on-investment
(ROI) analysis for each goal or recommendation. For example, a
wellness initiative to provide flu vaccines may have a goal to
reduce illness-related absenteeism by 10 percent. Employers
should include in their strategies the frequency with which they
examine employee benefits needs and costs as well as the ROI
(most commonly, on an annual basis).
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considered:
The financial imperative:
Real cost of the benefit.
Tax incentives.
Cafeteria plans.
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Many discretionary benefits translate into monetary
compensation for employees. For example, if an employer pays
the entire medical premium for an employee (and his or her
dependents), it can amount to a significant savings in take-home
pay to the employee. Like the savings to employees, employers
also receive tax incentives for offering certain benefits to their
workers.

The U.S. Internal Revenue Code (IRC) is the set of regulations
pertaining to taxation and includes multiple regulations for
required and discretionary benefits. For certain employer-
provided benefits to qualify as tax deductible, employers must
meet additional requirements set forth in the Employee
Retirement Income Security Act (ERISA) of 1974. Under
ERISA, the benefits must meet the nondiscrimination rule that
prohibits employers from giving preferential treatment to key
and highly compensated employees as defined in the IRC
(Martocchio, 2008).
As part of the overall compensation budget, employers
determine what benefits the organization can afford and what
makes sense for their employees. Employers have options about
how to manage the costs of many of these benefits. For
example, employers can share costs with their employees or
delay eligibility until the employee has reached a predetermined
tenure with the organization.
For example, to decrease employee turnover, employers can
delay eligibility in profit-sharing retirement plans until the
employee has been with the company for several years (these
retirement programs are discussed later in this module).
Employees are more likely to stay with an organization if
receiving a benefit requires a certain period of time on the job.
Similarly, employers can require employees who participate in a
tuition reimbursement program to remain with the organization
for a set period of time after graduation or be required to pay
the organization back some (if not all) of the covered expenses.
Again, how employers determine benefit eligibility and cost
sharing should align with their overall benefits strategy. In
many cases, organizations can also share the premiums of
various benefits as a cost-cutting measure. Employers may also
want to consider organizational cash flow in benefits design.

For example, many organizations prefer benefits with
predictable costs, rather than programs where costs fluctuate
month to month or year to year (Adamik, 2007).
Cafeteria plans have increased in popularity recently because of
increasing health care costs and the diverse needs of employees.
In these plans, employers contribute money into an individual
account for each employee and the employee can elect
discretionary benefits options based on his or her needs. This
can be an effective way to manage the choice of discretionary
benefits if an employer has a wide variety of employee needs
and employer indifference about which benefits are chosen.
These plans help employees conceptualize the overall value of
their benefits and minimize duplicate or unneeded benefits. One
drawback to this approach is that depending on the number of
benefits offered, there can be an increased burden to manage.
The more benefits offered requires increased management
responsibilities for the plan manager. These plans are subject to
complex coverage and nondiscrimination testing as required by
law and can be challenging to pass in light of certain
organizational demographics (Rosenbloom, 2005).
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considered:
Employee characteristics:
Demographics.
Union status.
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Ask students what types of benefits they might like offered in

the workplace. The class’ demographics will influence the
response. Use the class’ demographics (e.g., age) to illustrate
how different demographic groups value different benefits. If
concerned about confidentiality, the instructor may want to
solicit responses anonymously through paper submissions from
students.
Employee demographics
Various discretionary benefits are valued differently by
employees, and these differences should inform employers in
what benefits to offer. Employers should examine the
demographic trends in their workforce and their relevant labor
markets to make sure their benefits programs align with their
current and future workforce. For example, employers with a
predominantly older workforce (over the age of 45) may want to
offer better retirement benefits instead of a tuition
reimbursement program, which may appeal more to younger
workers. Organizations located in geographic areas that
necessitate costly and timely commutes may want to offer
transportation support benefits.
Union status
Organizations with unions will often offer their nonunion
employees benefits comparable to those negotiated through
collective bargaining agreements.
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considered:
Benchmarking: What benefits do our competitors offer?
Line of sight: Employee perceptions about the value of the
benefit.
Return on investment (ROI).

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Benchmarking
Employers must also consider the types of benefits competitors
offer their employees. For example, if teachers at one school
district have a generous tuition reimbursement program, then
nearby districts may want to offer similar programs to remain
competitive, especially with new graduates who would be
interested in using the program to further their education (as
often required for continued employment).
Employers often benchmark their total rewards programs
against their competition to see how their strategy compares
with others (this is illustrated in this module’s suggested
exercise). In some cases, benchmarking also occurs within the
same organization (in large organizations) and with
organizations unlike them depending on the intent of the
comparison information. For example, employers may want to
offer similar benefits packages available for organizations
within a geographic region if that is relevant to their labor
market and rewards strategy.
Line of sight
Like any component of a total rewards program, discretionary
benefits can change employee behavior. For example, benefits
designed to offer bonuses or additional contributions to an
individual’s retirement account based on organizational
performance measures may encourage employees to be more
productive (or reduce costs), because better organizational
performance directly benefits each employee (receiving an
individual bonus or reward). A more comprehensive health
insurance program that encourages preventative care may result
in healthier employees with decreased absenteeism rates due to
common illnesses.

As previously discussed, not all benefits offer the same
perceived value to the employer or employee. From the
employee’s perspective, a benefit may not be important to that
individual (like dependent eligibility for an employee who does
not have any dependents). Employers must consider whether the
return of offering such a benefit outweighs the cost. An
interesting issue employers should consider is the line of sight
between offering the benefit and the employee (Murphy, 2009).
The line of sight is the distance employees perceive between
their actual work and receiving the benefit, with the intent that
offering the benefit will change employee behavior. For
example, employee ownership benefits (e.g., stock options) may
not increase employee productivity if employees cannot see the
relationship between their work and stock value. In this
instance, benefit communication can decrease the line of sight.
Return on investment
An employer should calculate the return on investment for each
benefit. The employer should consider if certain benefits
offerings have the desired change in behavior and/or benefit
(like decreased turnover or absenteeism). An organization may
offer a comprehensive health insurance program that covers
preventative care to decrease absenteeism due to illness. For
some calculations, an actuary may be used to develop
mathematical models of benefit effectiveness that take these
complicated factors into consideration. Employers can use
surveys or focus groups to assess employee perspectives on
benefits as well as line-of-sight issues.
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Benefits Administration
Four basic principles apply to good benefits plan administration
(Murphy, 2009):
Plans should be simple and easy to understand.

Sponsors (employer or benefit provider) should control the
administration expense of plans.
Where possible, allow employee choice to be part of the overall
plan.
Sponsors should allow employees to administer their own plans
by introducing information systems that enable benefit
selection, provide information and enrollment.
Source: Murphy, T.E. (2009). Benefits and Beyond: A
Comprehensive and Strategic Approach to Retirement, Health
Care, and More. Thousand Oaks, CA: Sage Publications.
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ERISA (discussed in more detail in later sessions) governs
many aspects of benefits plan administration. The
recommendations discussed on this slide are guidelines to
consider in general. For example, in general, plan
administration should be easy for employees to understand
(through conscientious documentation and information transfer)
and administer (easy enrollment and change processes).
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Outsourcing Administration
An employer may determine that benefits administration should
be handled (all or in part) by a third-party administrator. The
decision may be based on:
Subject matter expertise.
Economies of scale.
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After an employer has determined which benefits to offer, the
next decision is how to make these available to employees. For
example, is the benefits administration handled within the
organization or through a third-party administrator? An
employer may determine that benefits administration should be
handled (all or in part) by a third-party administrator. This
decision may be due to the third-party administrator’s expertise
or because of economies of scale (the outsourcing agency can
handle the administration at a lower cost than the employer). As
the complexity of benefits offerings and administration is
discussed, it is apparent that benefits administration is a
complex, regulated function that might be best handled by
subject matter experts outside the organization.
Benefits plan administration is regulated by ERISA, which also
determines what components of administration can and cannot
be outsourced to a third-party administrator. For example, an
employer cannot outsource what benefits to offer (design) or
eligibility determination. However, many of the other facets of
administration--plan communication, claim processing and plan
legal compliance--are appropriate to outsource.
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Communicating Benefits Information
Legal provision guided by ERISA and PPA.
According to Martocchio (2008), the elements of a sound
benefits communication program include:
What is communicated?
Who are the recipients of benefits information?
How are the benefits communicated?
How often are benefits communicated?

Source: Martocchio, J. J. (2008). Employee benefits: A primer
for human resource professionals, 3rd edition. New York:
McGraw-Hill Higher Education.
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Discretionary benefits communication is guided by law to
ensure that plan participants receive adequate notice about their
benefits and any changes to coverage. ERISA requires
employers to provide plan participants summary plan
descriptions (SPDs), summary material modifications and
summary annual reports. These provide basic benefits coverage
on a timely basis. The Pension Protection Act (PPA) of 2006
requires employers to notify employees if their employer-
sponsored retirement plans are underfunded according to federal
guidelines. The Consolidated Omnibus Budget Reconciliation
Act (COBRA) of 1985 requires that employees be notified when
their health insurance is cancelled and are offered continuation
of that coverage. In general, this law is meant to ensure that
employees are aware of what benefits they have elected, any
changes to the plans/elections and individual benefits
statements that detail their accrued benefits (e.g., in a
retirement program).
Although not required, some employers are starting to provide
detailed information to employees about the value of their total
rewards. For example, an individual report of what benefits they
have elected, the breakdown of premiums paid (e.g., possible
cost-sharing between employer and employee), who else is
covered on their plan, etc. These total rewards statements help
ensure that employees are informed about their employer-
provided benefits. These statements also show the additional

investment the employer is making aside from monetary
compensation in employees. Employers are increasingly making
these available through the organization’s intranet so employees
can generate these reports as often as they would like them.
While law often dictates the basic information that employees
receive, employers can provide additional information to
employees regarding their benefits. For example, an employer
who has invested in a health plan that covers preventative care
may want to remind employees of that benefit to encourage
participation (e.g., annual dental exams) and reduce more costly
benefit utilization (e.g., dental surgery).
Employers may want to make benefits information available to
all plan participants, not just employees. For example, although
not required by law, employee dependents covered under an
employee plan may also benefit from receiving detailed benefits
information. Employers may want to provide not only electronic
total rewards statements but also a paper copy sent home to
ensure that all covered employees and their dependents have
that information. Some employers provide additional resources
to communicate benefits information such as an automated
telephone system to deliver information to covered employees
relevant to their coverage.
Choosing the right medium to communicate benefits
information is challenging. Schlachtmeyer (2000) discusses
several issues to consider when deciding how to communicate
benefits information. If the information is complicated (like a
new flexible benefits program or a set of retirement fund
investment options), the approach may take place over a period
of time with a variety of media (meetings, newsletters, annual
enrollment materials, etc.). If the information is critical, an
employee meeting supplemented with printed material is most
appropriate. If the communication is new and exciting, use
flashier communication methods. If the communication centers

on benefits reductions, choose something more subdued (like a
meeting or a simple brochure).
ERISA requires that employees or their beneficiaries receive a
summary plan description (SPD) within 90 days of becoming a
plan participant. An SPD must also be provided by the plan
administrator on request, and it must explain the coverage
offered, how the plan operates, and the rights and
responsibilities of participants and beneficiaries (U.S.
Department of Labor, 2009).
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Is the Benefits Program Achieving Desired Results?
Before getting started, determine the measures of success.
Benefits providers can help the employer determine the
appropriate measures to use and conduct the necessary analysis.
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If an employer is strategic in developing a benefits program, the
metrics used to measure its effectiveness will already be in
place.
These measures evaluate the frequency of employees’ usage and
the cost of health insurance based on a review of insurance
claims and the quality of specific health care services
(Martocchio, 2008).
For example, one goal may be to improve health care benefits to
decrease absenteeism and chronic condition costs among the
workforce. An employer can review absenteeism rates due to
illness to assess the first indicator. With the health care
provider, HR can also determine where health care expenses are

being spent (e.g., chronic condition management vs. acute
condition manage).
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Exercise 1: Using Benchmarking Information
Using the data on the next slide, answer the following
questions:
Based on the information on the slide about understanding the
data, what should be considered when using the data to
generalize information?
You are using the data to determine how your organization
compares to others in a similar industry. What should you
consider about the data when making recommendations to
correct any significant discrepancies in benefits offered by your
organization and the findings from the report? What else
besides strategy, location and size might affect the utility of
using benchmarking data?
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Instructors may want divide students into groups to complete
this exercise.
As mentioned earlier in this session, to remain competitive,
employers often like to gather information about what benefits
their competitors offer their employees. This exercise uses
information from a SHRM benchmarking report on employer
health care plans. The exercise addresses not only interpreting
the results, but also gathering information about how to use this
data. Employers often gather benchmarking data when making

decisions about what benefits to offer, and this exercise
illustrates some of the types of information that may be
collected and used and what to consider when relying on this
type of data.
The next slide contains a few paragraphs from the report’s
cautionary remarks about using the data. The questions should
spark discussion about using benchmarking data to determine
what benefits to offer. Instructors should note that
benchmarking data is often customizable and that defining
characteristics that may affect the use of comparison data (like
geography, organizational size, industry and union status) is
imperative when requesting a benchmarking report.
Answers should include the discussion points from the slides in
this session on what benefits to offer (Slides 7-10).
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Understanding the Data
As you compare your data against the other organizations,
please keep the following in mind:
The report is based on data from the SHRM Customized
Benchmarking Database and contains data from a nonrandom
collection of U.S. organizations of all sizes and types. The
report is designed to target organizations that closely match
certain criteria, so a more focused and comparable analysis and
interpretation can be performed. Any interpretations of the data
should be kept within this context.
The information in the report should be used as a decision-
making tool rather than an absolute standard. Because
organizations differ in their total rewards strategy, location,
size and other factors, any two organizations can be well
managed, yet their health care measures may differ greatly. No
decision should be made solely based on the results of any one
study.

Source: Society for Human Resource Management. (2009).
Health care benchmarking report. Alexandria, VA: SHRM.
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Using the data from the table on the next slide, answer the
following questions:
What is the most common type of health care coverage?
Who is covered under this plan?
You are a benefits manager for an organization using this table
to compare your health care coverage to similar organizations.
Currently, you don’t offer opposite-sex domestic partner health
care coverage to your employees. Are you at a competitive
disadvantage? Why or why not?
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These questions reflect the type of data that may be included in
a health care plan benchmarking report. Basic information like
frequency (n) and coverage can provide initial starting points
for analysis.
Instructor’s note
Before starting this exercise, instructors may want to review the
information in the table and the different coverage options
detailed in the teaching notes on the next slide.
The most common type of health care coverage is for employees
only (n=101, 95%).
According to the report, only 26 organizations (26 percent)

offer opposite-sex domestic partner health care coverage.
Unless there is something unique about your organization (like
a higher-than-average number of employees who have opposite-
sex domestic partners), you are probably not at a competitive
disadvantage.
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Table 1Percentage of Organizations Providing Employee Health
Care CoveragePercentage of Organizations Providing Spouse
Health Care CoveragePercentage of Organizations Providing
Same-Sex Domestic Partner Health Care CoveragePercentage of
Organizations Providing Opposite-Sex Domestic Partner Health
Care CoveragePercentage of Organizations with Self-Funded
Health CarePercentage of Organizations with Specific Stop Loss
(SSL)
Coveragen1019139263930Percent95%92%39%26%40%81%
HEALTH CARE COVERAGE
AND SPECIFIC STOP-LOSS COVERAGE PREVALENCE
* To ensure that the data are seen as credible, data for metrics
with an “n” of less than 5 are not displayed.
Source: Society for Human Resource Management, (2009).
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“ n ”
The letter “n” in tables and figures indicates the number of
respondents to each question. Therefore, when it is noted that
“n = 25,” it means that there were 25 respondents.
Health Care Coverage and Specific Stop-Loss Coverage
Prevalence
Percentage of Organizations Providing Employee Health Care
Coverage
This percentage represents employers that offer health care

coverage as an employee benefit. It is calculated by dividing
the number of employers that offer health care coverage by the
total number of employers participating in the survey,
regardless of whether they offer health care coverage.
Percentage of Organizations Providing Spouse Health Care
Coverage
This percentage represents employers that offer spouse health
care coverage as a benefit to their employees. It is calculated by
dividing the number of employers offering the benefit by the
total number of employers participating in the survey,
regardless of whether they offer spouse health care coverage.
Percentage of Organizations Providing Same-Sex Domestic
Partner Health Care Coverage
This percentage represents employers that offer same-sex
domestic partner health care coverage as a benefit to their
employees. This benefit recognizes family as an intimate,
committed relationship of two unrelated people of the same sex
that is the approximate equivalent of marriage, but does not
involve formal marriage. It is calculated by dividing the number
of employers that offer the benefit by the total number of
employers participating in the survey, regardless of whether
they offer the benefit.
Percentage of Organizations Providing Opposite-Sex Domestic
Partner Health Care Coverage
This percentage represents employers that offer opposite-sex
domestic partner health care coverage as a benefit to their
employees. This benefit recognizes family as an intimate,
committed relationship of two unrelated people of the opposite
sex that is the approximate equivalent of marriage, but does not
involve formal marriage. It is calculated by dividing the number
of employers that offer the benefit by the total number of
employers participating in the survey, regardless of whether
they offer the benefit.

Percentage of Organizations with Self-Funded Health Care
This percentage represents those employers whose health care is
self-funded by the organization. A self-funded health care plan
is one in which no insurance company or service plan collects
premiums and assumes risk. In a sense, the employer is acting
as its own insurance company, paying the medical claims
submitted by its employees. This percentage is calculated by
dividing the number of employers with self-funded health care
by the total number of employers participating in the survey,
regardless of whether their health care is self-funded.
Percentage of Organizations with Specific Stop-Loss (SSL)
Coverage
This percentage represents those employers that contract with a
third-party insurance provider to cover medical claims if they
exceed a specified dollar amount over a set period of time. It is
calculated by dividing the number of employers with stop-loss
coverage by the total number of employers participating in the
survey, regardless of whether they have stop-loss coverage.
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Using the data in the table on the next slide, answer the
following questions:
Your organization only offers employees one type of health
plan, and it is an indemnity plan. Your organization is
considering offering another health care plan to its employees.
Based on the data:
What percentage of employers responding to this survey offer
more than one plan?
What other health care plans might be attractive to employees?

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Instructors may want to define the key variables included in the
table on the next slide (detailed in those teaching notes) before
assigning this part of the exercise.
Fifty-seven percent of employers responding to the survey offer
two or more plans (35% + 22%).
The majority of employers offer a PPO (83 percent) or an HMO
(55 percent). It is interesting to note that of those offering a
PPO or HMO, more employees take advantage of the PPO (49
percent) than the HMO (24 percent). The instructor might want
to point out that employers may want to consider not only
whether to offer a benefit, but also its likelihood of being used
based on key organizational characteristics (like workforce
demographics) defined in the total rewards strategy.
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Table 2Percentage of Employees EnrolledPercentage of
Organizations Offering PlanNumber of Health Care Plans
Offeredn6798n98HMO24%55%1 Plan43%EPO1%4%2
Plans35%PPO49%83%3 or More
Plans22%POS9%23%Indemnity1%7%CDHP3%12%
EMPLOYEE PARTICIPATION AND PLANS OFFERED
* To ensure that the data are seen as credible, data for metrics
with an “n” of less than 5 are not displayed.
Source: Society for Human Resource Management. (2009).
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Health care plan types (e.g., HMO, EPO) will be addressed in
the next session of this module.
Employee Participation and Plans Offered
Percentage of Employees Enrolled
This percentage represents the number of employees in an
organization who have enrolled in an organization’s health care
plan. It is calculated by dividing the number of enrolled
employees by the total number of employees in the
organization, regardless of whether they enrolled in their
employer’s health care plan.
Percentage of Organizations Offering Plan
This percentage represents the number of employers that offer
at least one of the following health care plans: health
maintenance organization (HMO); exclusive provider
organization (EPO); preferred provider organization (PPO);
point of service (POS); indemnity; and consumer-driven health
plan (CDHP). It is calculated by dividing the number of
employers offering a specific plan by the total number of
employers who participated in the survey, regardless of whether
they offer a specific plan.
Number of Health Care Plans Offered
Organizations may offer a number of different health care plans
to meet the needs of their employee populations. This
percentage represents the number of employers that offer one or
more health care plans.
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Assessment: True or False Questions
1. Employers often outsource the administration of employee
benefits because it requires a specialized knowledge set.
2. Employees often consider what discretionary benefits are
available when deciding to work for an employer.

3. It is neither important nor legally required to inform
employees of their benefits offerings or elections.
4. If the right factors are considered, the choice of employee
benefits offered may lead to changes in employee behavior.
5. All employers place the same value on discretionary benefits.
6. It is ideal for employees to have a choice in the benefits they
receive.
7. Discretionary benefits are those employee benefits that are
mandated by law.
8. In an organization where the majority of employees are
between the ages of 20and 40, employees are more likely to
value benefits related to child birth and child care.
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Answer Key:
1. True
2. True
3. False
4. True
5. False
6. True
7. False
8. True
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9. Cafeteria plans have the least amount of flexibility for
employees in the variety of benefits employees receive.
10. Total rewards statements provide personalized data to
employees about the compensation and benefits received
through their employers (e.g., cost, elections, account balances).
11. There are no legal requirements that control the type and
frequency of benefits communication.
12. Employees often compare what similar organizations offer

in terms of employee benefits.
13. The timing of benefits communication is important to its
overall success.
14. Employers should align their benefits strategy as part of a
total rewards strategy.
15. The Internal Revenue Code does not offer tax incentives to
employers for certain discretionary benefits offerings.
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Answer Key:
9. False
10. True
11. False
12. True
13. True
14. True
15. False
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Assessment: Discussion Questions
What role(s) can discretionary benefits play in an organization’s
HR function?
What should an employer take into account when designing a
discretionary benefits program?
How should the program be communicated?
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What role(s) can discretionary benefits play in an organization’s
HR function?

Recruitment and retention.
Total rewards strategy.
Behavior change.
What should an employer take into account when designing a
discretionary benefit program?
Organizational and total rewards strategy.
What the competition offers.
Employee demographics.
Cost of the benefit.
Value to employees.
How should the program be communicated?
Adhere to legal requirements.
Clearly and concisely.
Timely.
Use the appropriate communication vehicles.
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Health and Medical Benefits
Session 2
After completing this session, students will be able to define the
following benefits and their relationship with appropriate law:
Insurance coverage options.
Major medical plans.
Other medical benefits:
Dental.
Vision.
Prescription drugs.
Employee assistance programs (EAPs).
Mental health and substance abuse programs.
Wellness programs.

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Health care programs, specifically for major medical coverage,
are the most commonly offered and most expensive component
of an employer’s benefits program (WorldatWork, 2007). The
details of the various types of health and medical benefits are
detailed in this session.
Health care benefits play an important role in the employment
relationship. Employees value these plans and often are
attracted to and retain employment with employers who offer
good employer-sponsored medical and health benefits.
Employers enjoy healthier employees who have reduced
absenteeism rates due to illness (Martocchio, 2008).
Coverage
Single or family?
Employee (and dependents).
Individual or group?
Individual and the insurance provider.
Group of employees through a single contract.
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Employee coverage
For each type of health and medical benefit discussed, the
employee determines who is covered under the benefit. The
most common decision to make is between single and family
coverage. Single coverage extends benefits only to the
employee. Family coverage offers benefits to the employee and
his or her family members as defined by the plan (Martocchio,

2008).
Type of Insurance Coverage
Employees may be covered under an individual or group
insurance policy. In an individual insurance policy, the policy is
defined between the individual and insurance provider who
jointly determine the scope of the policy, employee coverage
(single or family) and the cost, often based on a health
screening (like a medical examination and health history). In a
group insurance policy, coverage extends to a group of
employees (and as appropriate, their dependents) through a
single contract. Insurance providers issue these contracts to
professional associations, labor unions and other groups
designated to provide health insurance. Unlike individual
insurance policies, these policies cover all individuals
regardless of health status (Martocchio, 2008).
26
Major Medical Benefits
Fee-for-service.
Managed care:
Health maintenance organizations (HMOs).
Preferred provider organizations (PPOs).
Point-of-service organizations (POSs).
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Employers have a variety of options to offer employees to cover
preventive, routine and catastrophic medical conditions.
Employers may decide to expand their plans to include
prescription drug services, medical equipment and appliances,
additional nursing and ambulance services (Martocchio, 2008).

The most common types of major medical health insurance
plans are fee-for-service and various forms of managed care
plans: health maintenance organizations (HMOs), preferred
provider organizations (PPOs) and point-of-service plans
(POSs). Most health care benefits plans are some type of
managed care plans. These plans limit employees’ choices of
medical service providers and, as a result, are often thought to
be more cost-effective.
27
Fee-for-Service
Traditional fee-for-service medical plans are available through
many employers but at a declining rate. These plans offer the
greatest freedom of choice in selecting health care providers.
Deductible.
Co-insurance.
Out-of-pocket maximum.
Lifetime benefit maximum.
Employers may elect to self-fund the insurance vs. purchasing
from a benefits provider.
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Fee-for-service plans offer the greatest freedom of choice in
selecting health care providers. Traditional fee-for-service
medical plans are available through many employers but at a
declining rate (WorldatWork, 2007). In fee-for-service plans,
employees pay a deductible after base benefits are exhausted.
These plans pay benefits on a reimbursement basis. Over a
specified period, employees must pay for services (i.e., meet a
deductible) before they are eligible to receive covered benefits.
Typically, deductibles are either a fixed dollar amount or

calculated as a percentage of annual earnings (either by an
earnings range or as a percentage of income) (Martocchio,
2008).
Co-insurance
Once the deductible is met and insurance benefits begin, co-
insurance often begins. Co-insurance defines the contribution
amount that the covered individual must contribute to various
medical services. In most cases, the covered individual must
contribute 20 percent of the total covered expense (Martocchio,
2008).
Out-of-pocket maximum
Most fee-for-service plans have an out-of-pocket maximum
provision that defines a fixed dollar amount beyond the
deductible of covered expenses. For example, if a plan has an
out-of-pocket maximum of $1,500 per year, then the covered
individual cannot be required to contribute more than $1,500
beyond the deductible for expenses covered under the plan. This
maximum is intended to minimize out-of-pocket costs for the
covered individual in the case of a catastrophic or chronic
illness that necessitates extensive and costly medical care.
Lifetime benefit maximum
An additional component of many fee-for-service plans is a
lifetime benefit maximum where a limit is set on the amount of
eligible benefits a covered individual can receive over his or her
lifetime. Some plans may have a similar maximum amount of
expenses on an annual basis. Plan providers often impose these
restrictions as a measure to protect themselves from expenses
that result from chronic or catastrophic events.
The decision to self-fund
Employers may also offer a fee-for-service plan as a self-funded
plan. Employers often elect to self-fund their major medical
fee-for-service plan when the costs of providing benefits in this

manner (versus through an insurance provider) are lower.
28
Managed Care Plans
Health Maintenance Organizations (HMOs)
An HMO provides comprehensive health care coverage to plan
participants through a network of physicians and hospitals.
Traditionally, HMOs require a referral from the individual’s
primary physician to receive care from a specialist.
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If no referral is obtained, the individual will have to pay for the
service without a referral as detailed in the medical plan. HMOs
operate on a prepaid system versus the reimbursement system
used in fee-for-service plans.
In an HMO, covered individuals often pay a pre-defined co-
payment for various services (e.g., physician office visits,
hospital admissions, prescription drugs and emergency room
services).
29
Managed Care Plans
Preferred Provider Organizations (PPOs)
PPOs delineate services between in-network and out-of-network
providers.
Covered individuals receive a higher reimbursement when using
services from physicians and hospitals in the plan’s network.
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PPOs share some of the features of fee-for-service plans and
HMOs. For example, there are often deductibles and out-of-
pocket maximums like those from a fee-for-service plan, but
service co-payments like those in an HMO. PPOs become more
cost-effective by encouraging plan participants to use medical
service providers in their network. Plan participants must pay
higher out-of-pocket expenses when using providers outside the
network through different co-insurance rates. For example, co-
insurance rates using network providers are typically 10-20
percent and while those rates increase to 60-80 percent for out-
of-network providers (Martocchio, 2008).
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Managed Care Plans
Point-of-service (POS) plans
POS plans are a hybrid between an HMO and a PPO.
Covered individuals need a referral to see in-network
specialists.
The costs of services from an out-of-network provider are
higher than from an in-network provider.
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31
Dental Insurance
Most dental plans have four components:
Preventive and diagnostic.
Basic services.
Major services.
Orthodontia.

Often provide 100 percent reimbursement for preventive and
diagnostic services and are not subject to a deductible.
This coverage is to encourage covered individuals to have
routine dental care that may prevent more costly services in the
future. Deductibles can apply to all other services.
Source: WorldatWork (2007)
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Typically, orthodontia (braces) is not covered under most dental
plans or might only apply to dependent children. Like major
medical programs, dental plans are moving to a managed care
approach where plans are structured like HMOs or PPOs in
delivering dental services.
32
Vision Insurance
Vision care plans typically provide coverage for routine eye
exams every two years and a bi-annual, flat-dollar amount for
frames or lenses.
Source: Martocchio (2008)
Like major medical and dental plans, vision insurance plans are
also offered in a variety of formats similar to fee-for-service or
managed care options.
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33
Prescription Drug Insurance
These programs are either part of the major medical benefit or
managed by a pharmacy benefits manager.
Employers often manage the costs of the programs through
various co-payment formulas. For example:
Benefit TierCo-payment Amount1: Generic drugs$8-102: Brand
drugs$10-153: Lifestyle drugs$15-404: Mail orderThree-month
supply for maintenance drugs. Payment equals to 1-2 months
supply.
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Prescription drug benefits are increasing in popularity and cost
(WorldatWork, 2007).
A pharmacy benefits manager is typically separate from the
primary health plan and addresses the prescription drug plan.
These plans apply exclusively to drugs that state or federal laws
require to be dispensed by a licensed pharmacist (Martocchio,
2008). Those drugs dispensed during a hospital stay or long-
term care are typically excluded from these plans but included
in major medical coverage as part of hospitalization coverage

benefits.
In an effort to manage the costs of these plans to employers,
this insurance can be structured like a fee-for-service or
managed care plan or can be a mail-order program. The fee-for-
service and managed care programs have similar features that
have already been discussed. For example, covered individuals
may have a lower prescription co-payment when purchasing
generic versus name brand drugs. Lifestyle drugs are those that
treat non-life-threatening but often chronic conditions (e.g.,
acne, baldness). Another cost-cutting strategy is to encourage
covered individuals to secure their prescriptions through a mail-
order pharmacy for ongoing prescriptions. The drug benefit plan
often dictates which prescriptions must be obtained through
mail-order or local pharmacy (Martocchio, 2008).
34
Employee Assistance Plans (EAP)
EAPs provide professional counseling through a third-party
provider.
Typically accessed in a confidential manner (e.g., toll-free
number or a web site).
Employees who reach out for these services are treated in a
private manner and their issues are not addressed with the
employer.
Often addresses short-term problems, and any longer-term
conditions (e.g., depression, stress) are referred to the
appropriate resource (like a mental health provider).
These plans can also offer assistance with locating resources
(e.g., childcare providers).
Many large employers offer EAP services.
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35
Mental Health and Substance Abuse Benefits
Mental Health
Many employers provide mental health benefits to their
employees as part of their health insurance program.
These benefits may include in- or out-patient mental health
services, psychological testing and necessary psychiatric drugs.
Mental Health Parity Act of 2007
Substance Abuse Benefits
These benefits are similar to mental health coverage but are
targeted to substance abuse treatment and recovery.
This benefit is often part of an employee’s health insurance
program.
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Mental health benefits
These benefits are typically well-defined in terms of the type of
treatment covered (i.e., in-patient or out-patient), the number of
sessions covered (on an out-patient basis) and the rate of
reimbursement. For example, an individual who needs mental
health treatment may only have a certain number of session of
out-patient therapy per year covered, and the reimbursement
rate is typically much greater than that of non-mental or
substance abuse treatment (e.g., out-of-pocket is typically
between 40-50 percent of treatment costs) (Martocchio, 2008).
The Mental Health Parity Act of 2007 set parity requirements
for mental health plans offered with a health plan that offers
medical and surgical benefits. Under the law, the financial
requirements applicable to mental health benefits can not be

more restrictive than those of substantially all medical and
surgical benefits covered by the plan. In addition, the treatment
limitations applicable to mental health benefits cannot be more
restrictive than those applied to substantially all medical and
surgical benefits covered by the plan. It also prohibits an
insurance plan from establishing separate cost-sharing
requirements that are applicable only with respect to mental
health benefits (Govtrack.us, 2009) .
36
Wellness Programs
These are lifestyle programs designed to improve long-
term employee well-being and might include weight loss,
smoking cessation, exercise and stress management.
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These programs are often offered to employees at no or minimal
cost to encourage healthy habits (which can often reduce
benefits costs).
37
Consolidated Omnibus Budget Reconciliation Act of 1986
(COBRA)
Eligible employers must allow employees, spouses and their
dependent children to continue their health care benefits if that
coverage is lost due to a qualifying event.
Those who continue benefits under COBRA:
May have to pay the entire cost of the insurance premium.
May have to pay up to an additional two percent of the premium
for benefits administration costs.
Plan participants and beneficiaries must be sent an election

notice not later than 14 days after the plan administrator
receives notice that a qualifying event has occurred. The
individual has 60 days to decide whether to elect COBRA
coverage. The person has 45 days after electing coverage to pay
the initial premium.
Source: U.S. Department of Labor, 2006
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COBRA requires most group health providers to provide
temporary continuation of health care coverage that otherwise
would have been terminated. It is an amendment to the
Employee Retirement Income Security Act of 1974 (ERISA),
the Internal Revenue Code and the Public Health Service Act.
COBRA payments are often more affordable for participants
than subscribing to individual health insurance. However, those
payments are typically more than other plan participants’
benefits costs.
Qualifying events
The most common qualifying events include death of the
covered employee; termination (except for gross misconduct);
divorce or separation; and a dependent child who is no longer
viewed as a dependent under the health care plan’s definition.
38
Health Insurance Portability and Accountability Act of 1996
(HIPAA)
HIPAA is another amendment to ERISA and applies to most

employers who offer group health plans.
HIPAA was intended to eliminate discrimination in health care
coverage and portability, regardless of medical history or
claims.
It was amended in 2003 to ensure that appropriate privacy
measures are in place concerning the use and disclosure of
protected health information.
Source: U.S. Department of Labor
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According to HIPAA, a pre-existing condition is one for which
medical advice, diagnosis, care or treatment was recommended
or received during the six-month period before an individual’s
enrollment date in his or her health insurance plan. Group
health plans and issuers can not exclude an individual’s pre-
existing medical condition from coverage for more than 12
months after an individual’s enrollment date.
HIPAA also gives individuals who are losing group health
coverage and who have at last 18 months of creditable coverage
without a break in coverage of 63 days or more the right to buy
individual health insurance coverage that does not impose a pre-
existing condition exclusion period (U.S. Department of Labor,
2006).
Protected health information includes medical records and all
individually identifiable health information received,
maintained and released by a covered entity.
39
Health and Medical Benefits Cost Management
Shift to managed care plans.

Push expenses to employees.
Provide incentives to manage chronic conditions.
Reduce benefits.
Health Care Flexible Spending Accounts: Employee pre-
tax contributions for annual medical expenses.
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Employers face continued increased costs for health and
medical benefits programs. To manage these costs, employers
are implementing a variety of strategies.
Shift to managed care plans: Many employers that offer both
fee-for-service and managed care plans provide incentives to
use the managed care plan. For example, employees may not
have to share any premium costs when enrolled in the managed
care plan.
Push at least a portion of cost increases to employees: There are
several examples of how employers share the cost of health and
medical benefits with their covered employees.
Employees may have to contribute pre-tax dollars toward
insurance premiums.
Employees may have co-payments. These co-payments are
usually for office visits, prescription drugs and emergency room
visits. In the case of prescription drug programs, there may be
an additional incentive to use generic drugs when appropriate.
Provide incentives for employees to manage chronic conditions.
Through the use of wellness programs and other medical
screening, employees are encouraged to maintain healthy habits
(e.g., quit smoking, maintain ideal body weight, manage high
blood pressure).
Reduce benefits: In some cases, employers must examine
whether certain benefits programs are cost effective and align

with their benefits strategy. Although this option is not
typically welcomed by employees, in some cases, it is necessary
to manage overall benefits costs.
Health Care Flexible Spending Accounts
Employees can offer health care flexible spending accounts to
employees to help them make pre-tax contributions for
anticipated qualifying annual medical expenses like co-
payments, prescription or over-the-counter medication. The only
cost to the employer in offering this benefit is the cost of its
administration. This benefit provides employees the opportunity
to contribute pre-tax dollars to an account earmarked for
approved (but not reimbursable) health care expenses. The IRC
defines what approved expenses are. Contributions to these
accounts cannot be rolled over from one tax year to the next.
40
Exercise: Part 1
The National Compensation Survey (administered by the U.S.
Bureau of Labor Statistics) conducts an annual survey about
health care benefits.
Based on the March 2008 Employee Benefit Survey (available at
http://www.bls.gov/ncs/ebs/benefits/2008/ownership/private/tab
le05a.pdf), answer the following questions:
What employee segment (civilian, private, state and local
government) has the most access to medical care? What
percentage of that population actually participates in medical
care plans? Is that percentage higher or lower than you
expected?
What employer segment has the lowest employer share of
premium?

41
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The exercise can be conducted in class where the instructor
accesses the web site and asks the class to answer the questions
(30 minutes). The exercise could also be assigned as homework
for students to submit during the next session. The exercise has
students examine two tables from the survey and find relevant
information.
Note: The first table also details benefit take-up rates, which
are the rates in which employees who have access to a benefit
actually subscribe. While the premium cost to employees is not
available from the table, students may find the take-up rates an
interesting concept to note.
What employee segment (civilian, private, state and local
government) has the most access to medical care? What
percentage of that population actually participates in medical
care plans? Is that percentage higher or lower than you
expected?
Employees with state and local governments have the most
access to medical care (87 percent), while 73 percent of the
employee population actually participates. State and local
government employees also have the greatest access to dental
care (55 percent).
What employer segment has the lowest employer share of
premium?
The private segment has the lowest employer share of the
premium for all workers (81 percent) and the employee share
(19 percent).
41
Exercise: Part 2

Based on the March 2008 Employee Benefit survey table
(available at
http://www.bls.gov/ncs/ebs/benefits/2008/ownership/private/tab
le01a.pdf ) that details information about private-sector
employers that offer retirement and health care benefits, answer
the following questions:
Are larger or smaller employers (based on the number of
employees) more likely to offer health care benefits?
Which organizations are more likely to offer health care
benefits: goods or service-producing organizations?
Organizations in which type of service-producing industry are
most and least likely to offer health care benefits?
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Are larger or smaller employers (based on the number of
employees) more likely to offer health care benefits?
Employers with more employees are the most likely (97
percent) to offer health care benefits.
Which organizations are more likely to offer health care
benefits: goods or service-producing companies?
Service-producing organizations are slightly more likely to
offer health care benefits (62 percent versus 60 percent).
Organizations in which type of service-producing industry are
most and least likely to offer health care benefits?
Organizations in the utility industry are the most likely to offer
health care benefits to their employees (98 percent).
Organizations in the leisure and hospitality industry are the
least likely to offer health care benefits to their employees (41
percent).
42

1. One strategy employers can use to manage increasing health
care costs is to push some of that cost to employees through co-
payments.
2. Under COBRA, employees who are fired for gross
misconduct can continue their benefits at no charge.
3. In an HMO, employees do not need to go through their
primary care physicians to see a specialist.
4. Many employers include preventive care in their health care
benefits with the hope that increased preventive care will lead
to healthier employees and lower overall health care costs.
5. In a PPO, covered individuals pay the same costs for health
care services regardless of whether they receive services in or
out of the network of acceptable providers.
6. Vision insurance often covers eye surgery, not just routine
care.
7. Employers may choose to self-fund their major health care
plan if it is more economical than purchasing group insurance.
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Answer Key:
1. True
2. False
3. False
4. True
5. False
6. False
7. True
43
8. Because of the aging workforce at ABC Corporation, the
company started offering lunchtime seminars on managing

diabetes, high blood pressure and common ailments for older
people. These seminars are examples of components of a
wellness program.
9. HIPAA does not address issues related to medical record
privacy.
10. Traditional fee-for-service medical plans offer covered
individuals the most
freedom in choosing health care providers.
11. Low employee deductibles are one strategy employers can
use to defray healthcare costs.
12. Dental insurance plans are often structured like major
medical HMOs.
13. Mental health benefits often include in- or outpatient mental
health services.
14. Alex’s boss learned that Alex is having some personal
problems that are affecting his behavior and demeanor at work.
Alex’s boss contacts her HR department for advice, and they
suggest reminding Alex of the services available through the
organization’s employee assistance plan (EAP). An EAP could
address Alex’s needs.
15. PPOs do not delineate services between in-network and out-
of-network
providers.
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Answer Key:
8. True
9. False
10. True
11. False
12. True
13. True
14. True
15. False

44
Why are employers moving away from traditional health care
plans?
What are some of the pros and cons of offering health care
benefits to employees?
How are employers managing the rapidly increasing costs of
health care benefits?
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Why are employers moving away from traditional health care
plans?
Rising costs associated with fee-for-service plans.
What are some of the pros and cons of offering health care
benefits to employees?
Attracts and retains employees (pro).
Costly (con).
Healthier employees have lower absenteeism rates due to illness
(pro).
How are employers managing the rapidly increasing costs of
health care benefits?
Shifting the burden to employees (e.g., co-payments).
Moving to managed care plans.
Reducing benefit offerings.
Offering incentives to better manage employee health.
Offering wellness programs.
45
Retirement Benefits
Session 3

After completing this session, students will be able to define the
following benefits and their relation to appropriate law:
Defined benefit plans.
Defined contribution plans [401(k), profit-sharing, stock plans,
403(b)].
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47
Social Security Act of 1935
The Social Security system was created through the Social
Security Act of 1935. The system has four distinct types of
benefits:
OA: Retirement income in “old age.”
S: Survivor income.
D: Disability income.
HI: Health insurance benefits.
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For this module, we will focus on OA benefits.
According to the Social Security Administration (www.ssa.gov):
When individuals work and pay Social Security taxes, they earn
credits toward Social Security retirement benefits. The number
of credits needed to receive retirement benefits depends on
when they were born. If they were born in 1929 or later, 40
credits (10 years of work) are needed. If they stop working

before then, the credits will remain in their Social Security
records. If they return to work later, they can add more credits
to qualify. No retirement benefits can be paid until they have
the required number of credits.
The amount of an individual’s retirement benefit payment is
based on how much he or she earned during the working career.
Higher lifetime earnings result in higher benefits. If there were
some years when the individual did not work or had low
earnings, the benefit amount may be lower than if he or she had
worked steadily.
The benefit payment also is affected by the age at which an
individual retires. If the individual retires at age 62 (the
earliestpossible retirement age for Social Security), the benefit
will be lower than if he or she waits until later to retire.
(Explained in more detail on next slide).
48
Social Security Act of 1935
Retirement benefits
The earliest age that an individual can receive OA benefits is
62.
Individuals who retire early may do so, but they are subject to a
reduction in benefits depending on the age they wish to receive
benefits relative to their full retirement age.
Individuals are also eligible for increased benefits beyond full
retirement age depending on their year of birth.
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For an interesting aside: Go to the Social Security web site at
http://www.socialsecurity.gov/retirement/1960.html and review
how these individuals’ percentage of benefits will be reduced if

they retire before the age of 67 (which is their full retirement
age).
Another option is to have students go to the Social Security web
site (http://www.ssa.gov) and have them calculate their
retirement benefits. To do this, they should click “Retirement,”
then select “Calculate Your Benefits” and choose the quick
calculator to determine their benefit amounts.
49
Employer-Sponsored Retirement Plans
Employee Retirement Income Security Act of 1974 (ERISA).
Internal Revenue Code.
Defined benefit.
Defined contribution:
401(k), 403(b).
Profit sharing.
Stock options.
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An employer-sponsored retirement plan is a set of conditions
made by an employer to provide retirement-type benefits to
employees. These plans fall into two categories :
Defined benefit (commits a certain financial payment to an
employee based on a pre-determined formula).
Defined contribution (payment is determined by the overall
value of the employee’s account at the time of electing to
receive benefits).
These plans are regulated by ERISA and the Internal Revenue
Code (IRC). This will be discussed in detail on the next slides.
The IRC provides favorable tax treatment to plan sponsors and
beneficiaries. Plan contributions made by the sponsor can be

tax-deductible; plan assets can grow without being taxed.
50
ERISA (1974)
Requires plans to provide participants with information about
plan features and funding.
Outlines certain fiduciary responsibilities for those who manage
and control plan assets.
Requires plans to establish grievance and appeals processes for
participants.
Includes provisions to give participants the right to sue for
benefits and breaches of fiduciary duty.
ERISA established the Pension Benefit Guarantee
Corporation (PBGC).
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Plan Information
ERISA requires that summary plan descriptions (SPDs) are used
as the basic written communication to provide employees and
their beneficiaries with information about the benefits provided,
requirements for obtaining benefits, limitations on benefits, etc.
While employee communications are beneficial to both the
organization and employees, the complexities involved in the
legal requirements of what is to be contained in an SPD may be
an onerous task for many employers.

In preparing SPDs, keep the following in mind:
The SPD should be written so the average plan participant can
understand it. The plan administrator should consider the levels
of comprehension and education of typical plan participants and
the complexity of terms of the plan.
The SPD should advise participants and their beneficiaries of
their rights and obligations under the plan.
All aspects of the plan should be clearly stated to avoid
misleading statements or omission of facts. This applies not just
to the content of the information, but to captions and type size
as well. Advantages and disadvantages should be equitably
presented.
If 10 percent or more of the employees are literate in the same
non-English language, assistance must be provided to help with
understanding the plan
(http://moss07.shrm.org/Research/Articles/Articles/Pages/CMS_
000024.aspx Accessed July 3, 2009).
Fiduciary Responsibilities
Plan fiduciaries must act solely in the interest of plan
participants and their beneficiaries. The fiduciary must act for
the exclusive purpose of providing benefits and defraying
reasonable administrative expenses, and with the skills and
diligence necessary (Murphy, 2010).
Grievance and Appeals
Plan participants, beneficiaries and the U.S. Labor Department
have the right to file a lawsuit in the U.S. District Courts for
injunctive relief or damages and penalties against a benefit plan
and its fiduciaries that are in violation of ERISA. Before filing
a lawsuit, however, participants or beneficiaries are obligated to
follow the plan’s internal claims procedure and attempt to
resolve the complaint.
PBGC
The PBGC provides insured benefits to participants whose

defined benefit pension plans are underfunded and terminated.
PBGC is a federal agency created by ERISA to protect pension
benefits in defined benefit plans. In the event that a plan is
terminated without the necessary funds to pay the promised
benefits, PBGC’s insurance will pay benefits (levels are limited
by law). Organizations whose plans are protected pay premiums
for this insurance. Plans are insured even if the employer fails
to pay the required premiums.
www.pbgc.gov/about/wrfaqs.html#what_is
51
Internal Revenue Code
Extends favorable tax treatment to plan sponsors (employers)
and beneficiaries (employees).
Plan contributions made by the sponsor can be tax-deductible.
Plan assets can grow without being taxed.
Plan accruals for participants are tax-deferred until received.
Sets maximum annual contribution levels.
Source: Murphy (2009)
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In general the IRC’s objective is to make sure that plans are
nondiscriminatory in coverage; do not disproportionately
provide a tax-favored refuge for high-compensation employees,
or allow employees to exclude excessive amounts of earned
income from taxation.
52
Defined Benefit Plans
Defined benefit plans commit certain financial payments to

employees based on pre-determined formulas (typically using
employee age, tenure and annual salary).
From an employer’s perspective, this type of plan is the most
expensive because employers must make contributions to
guarantee certain benefit levels regardless of overall retirement
plan investment success.
These plans are also referred to as ‘pensions.’
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53
Defined Contribution Plans
Unlike defined benefit plans, defined contribution plans do not
guarantee certain financial payments; rather, the payment is
determined by the overall value of the employee’s account at
the time he or she elects to receive benefits.
Employees make their own decisions (usually among a set of
pre-determined options) regarding investment options (e.g.,
degree of investment fund risk and type).
There are several different types of defined contribution plans
determined either by the type of organization or profit or stock
contributions.
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401(k), 403(b), Section 457 plans
These defined contribution plans offer several benefits to
employers and employees. Employees can make pre-tax
contributions into their accounts.
Employers can take tax deductions for contributions they make
to employee plans.

401(k) plans are for private-sector employees.
Plans for employees of public educational institutions are
referred to as 403(b) plans.
Section 457 plans are for government employees.
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Profit sharing and stock ownership plans
Employers often use profit sharing plans to distribute money to
employee retirement accounts using a predetermined formula
based on organizational financial performance measures.
Employer sponsors of profit sharing retirement plans often fund
those accounts with company stock.
Employees’ shares grow each year as the plan sponsor deposits
company stock.
Employees receive all the benefits of stock ownership (e.g.,
dividends and voting rights).
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56
Defined Benefit vs. Defined
Contribution Plans
Defined Benefit
Benefit is known.
Cost is unknown.
Employer bears financial risk.
Generally higher benefits for long-service employees.
Defined Contribution
Benefit is unknown.

Cost is known.
Employee bears financial risk.
Can provide substantial benefits to short-service employees.
Source: WorldatWork (2007) p. 419
57
SHRM© 2010
For this slide, instructors may want to remove the headings and
ask students which characteristics apply to which type of plan.
57
Implementation Issues
Benefit formulas
Most retirement plans use formulas to determine employee
eligibility, company contributions and employee benefits.
Vesting
Determines when employees are eligible to receive
contributions made to the plan.
Cliff schedules typically mean that covered individuals are
eligible for the benefits/contributions after a certain time
period, but no benefits before that time period has passed.
Graded or gradual schedules offer partial benefits with company
tenure and full vesting at a certain time period.
58
SHRM© 2010
Vesting ensures that if an employee has served the required
number of years with the organization to receive the benefit, the
employer sponsor cannot forfeit the benefits. The sponsor may
impose age requirements (e.g., must be at least age 55) to
receive payment, but the benefit entitlement cannot be forfeited.
ERISA mandates certain maximum vesting periods (shown on
next two slides).

58
ERISA Maximum Vesting Schedules Effective After 2002After
Year(s)123% Vested00100
Defined Contribution PlansYear123456% Vested020406080100
Three-Year Cliff
Six-Year Graduated
Source: Murphy (2009) (p. 265)
59
SHRM© 2010
Ask students about the various vesting schedules presented:
What percentage of retirement benefits is a plan participant
eligible for after two years in each vesting schedule?
0 % under cliff schedule.
40% under graduated schedule.
59
ERISA Maximum Vesting Schedules Effective After 2002After
year(s)12345% Vested0000100
Defined Benefit PlansYears0-33-44-55-66-77%
Vested020406080100
Five-Year Cliff
Seven-Year Graduated
Source: Murphy (2009) (p. 265)
60
SHRM© 2010
Ask students about the various vesting schedules presented:
What percentage of retirement benefits is a plan participant
eligible for after two years in each vesting schedule?
0 % under cliff schedule.

0% under graduated schedule.
60
Pension Protection Act of 2006 (PPA)
The PPA increased minimum funding requirements for pension
plans and strengthened the pension insurance system.
Employers must provide more frequent information to
employees about their employer-sponsored retirement plan
accounts and notify them of any underfunding problems.
61
SHRM© 2010
A defined benefit plan benefits statement must include the plan
participant’s specific, non-forfeitable (i.e., funds guaranteed)
benefit accruals and an estimate of retirement income at certain
ages. These statements must be distributed at least every three
years and the sponsor must notify participants of the
availability of such statements every year.
For defined contribution plans, in cases where the participant
directs the investments, a statement of investment accounts and
current balances must be distributed quarterly to participants.
The benefits statement must include the value of the
participant’s investments and information regarding the
importance of investment diversification.
Source: Murphy, 2009
61
Exercise: Part 1
The Employee Benefits Research Institute (EBRI) conducts a
retirement confidence survey annually to examine trends and
attitudes about retirement benefits and plans. Go to the survey

web site (http://www.ebri.org/surveys/rcs/ ) and answer the
following questions.
Based on the EBRI’s survey results for 2009, what are workers’
expectations for retirement? Have they changed and why?
62
SHRM© 2010
Instructor’s note
This exercise could be done in class or as a homework
assignment to be submitted during the next class period. If done
in class, the suggested time is 30 minutes. The exercise may
require one hour of additional time for students if assigned as
homework. The exercise could also be given to student groups
to reduce overall time and then debrief as a class.
Based on the survey results for 2009, what are workers’
expectations for retirement? Have they changed and why?
Many workers say they will postpone their retirement due
primarily to the poor economy, but other factors have caused
this decline in confidence and include job loss, stock market
losses and concerns about Social Security. In addition to
postponing retirement, the percentage of workers planning to
continue working during retirement has increased significantly
(from 63% to 72%).
62
Exercise: Part 2
Discuss the gender comparisons regarding retirement confidence
and expectations for the past two years.
63
SHRM© 2010

Discuss the gender comparisons regarding retirement confidence
and
expectations for the past two years.
According to the 2009 Gender Comparisons Among Workers
Fact Sheet,
men are more likely than women to say they are very confident
about several of the financial aspects of retirement (Figure 6).
Men are more likely to be very confident about having enough
money to take care of basic expenses, medical expenses and
long-term care, and that the Medicare system will continue to
provide benefits equal to those received by retirees today
(Figure 6).
Among those who have changed their expected retirement age
in the past 12 months, women (13 percent) are more likely than
men (5 percent) to expect to retire sooner and at a younger age
than before.
According to the 2008 Gender Comparisons Among Workers
Fact Sheet,
men are more likely than women to say they are very confident
about the
various financial aspects of retirement (Figure 6). Men are
likely apt to be
very confident about having enough money to live comfortably
throughout
retirement; about having enough money to take care of basic
expenses,
medical expenses, and long-term care; that they are doing a
good job of
preparing financially for retirement; and that the Social Security
system will continue to provide benefits equal to those received
by retirees today

(Figure 6).
Men are more likely to agree that they (and their spouse) will
not live long enough to use up all of their savings (53 percent of
men versus 38 percent of women). Men and women are equally
likely to expect to work for pay in retirement (62 percent of
men versus 63 percent of women).
63
Exercise: Part 3
Describe the confidence level and expectations for Social
Security.
64
SHRM© 2010
Describe the confidence level and expectations for Social
Security.
Sixty-seven percent of workers said they are not too confident
or not at all confident that Social Security will continue to
provide benefits of at least equal value to the benefits retirees
receive today. Skepticism about Social Security has fluctuated
slightly, but it has remained at about the same level for the past
five years. It remains below the level measured in 1994, when
77 percent of workers were not confident that benefit levels
would be preserved (Figure 1).
b. Today’s workers are less likely to expect Social Security
income in retirement (81 percent total major and minor source
of income) than today’s retirees are to report having Social
Security income (92 percent total; Figure 3).

c. Workers are also half as likely to expect Social Security to
provide a major share of their income in retirement (32 percent)
compared with the percentage of today’s retirees who say Social
Security makes up a major share of their income (68 percent)
(Figure 3). However, EBRI research found in 2007 that 60
percent of those age 65 or older received at least 75 percent of
their income from Social Security. (See EBRI Databook on
Employee Benefits, Chapter 7, retrieved October 23, 2009, at
www.ebri.org/pdf/publications/books
/databook/DB.Chapter%2007.pdf.)
64
1. Employer sponsors of profit-sharing retirement plans often
fund those accounts with company stock.
2. The earliest that an individual can receive “old age” Social
Security benefits is age 62.
3. Employers do not receive any tax incentives for making
financial contributions to their employees’ 401(k) plans.
4. A defined contribution plan guarantees a predetermined
benefit at retirement.
5. A vesting schedule determines when an employee is
eligible to receive certain benefits.
6. Employees pay taxes on contributions to their employer-
sponsored retirement plans at the time of the contribution.
7. The Social Security Act of 1935 created employer-
sponsored retirement plans.
65
SHRM© 2010
Answer Key:
1. True
2. True
3. False
4. False

5. True
6. False
7. False
65
8. Most retirement plans use a formula to determine employee
eligibility, employer contributions and employee benefits.
9. The Internal Revenue Code is one law that regulates
retirement plans.
10. A cliff vesting schedule typically means that a covered
individual is eligible only after a certain time period to receive
full benefits.
11. Defined benefit plans are more expensive to employers than
defined contribution plans.
12. Social Security benefits are received on a graduated scale.
13. In a defined contribution plan, employees often have
discretion over how their funds are invested among a set of
predetermined options.
14. Stocks are never used as contributions to retirement
accounts.
15. The government offers an incentive through increased
Social Security benefits by delaying payment receipt at the time
of eligibility.
66
SHRM© 2010
Answer Key:
8. True
9. True
10. True
11. True
12. True

13. True
14. False
15. True
66
What laws are important in the provision and regulation of
retirement benefits?
What are some pros and cons to offering defined benefit (DB)
or defined contribution (DC) plans from the employee and
employer perspectives?
How does the government provide incentives for individuals to
delay the receipt of their Social Security benefits?
67
SHRM© 2010
1. Question: What laws are important in the provision and
regulation of retirement benefits?
Answers:
The Social Security Act of 1935 provides old-age retirement
income.
ERISA provides initial regulation of employer-sponsored
pension plans.
The Income Tax Code provides tax incentives for both
employer and
employee contributions. Retirement income is taxable.
The Pension Protection Act of 2006 provides minimum funding
standards
for pension plans and strengthens the pension insurance system.
2. Question: What are some pros and cons to offering defined

benefit (DB) or defined contribution (DC) plans from the
employee and employer perspectives?
Answer:
Employee
Pro
Guaranteed benefit amount (DB).
Tax-deferred earnings (both).
Con
Uncertain benefit amount (DC).
Often self-managed (DC).
Employer
Pro
Less expensive to provide than DB (DC).
Tax incentives for contributions (both).
Con
Most costly to fund (DB).
Challenging to manage (both).
3. Question: How does the government provide incentives for
individuals to delay the receipt of their Social Security
benefits?
Answer: Increase the age of full retirement.
67
Business Law
Principles
and Practices 8e
Chapter 2: The Legal System in the United States and Its
Constitutional Foundation

The Role of the Judiciary
in the United States
Judicial Branch of the US government settles disputes by
interpreting and enforcing law.
Courts impose punishment (criminal cases) or award damages to
the injured party (civil cases).
© 2011 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as permitted in a license distributed with a certain product
or service or otherwise on a password-protected website for
classroom use.
2
Structure of the U.S. Judiciary
Federal court system established by the U.S. Constitution and
Congress.
State and local court system established in each state under
state law.
classroom use.
3
Levels of Courts
Trial courts.
Intermediate courts.
Courts of last resort.

classroom use.
4
Jurisdiction
Jurisdiction: the power to hear and decide a case.
classroom use.
5
Standing to Sue
Standing to sue: a person has legitimate issues giving him or her
the legal right to bring a lawsuit.
classroom use.
6
Appellate Courts

Appellate courts: courts that hear appeals of lower court
decisions.
classroom use.
7
Subject Matter Jurisdiction
General jurisdiction: a court can hear almost any case brought
before it.
Limited jurisdiction: a court can hear only certain kinds of
cases.
classroom use.
8
Personal Jurisdiction
Jurisdiction over the person: a court can hear and decide a case
because it has authority over the parties in the case, generally in
a geographic area.
classroom use.

9
Jurisdiction in Cyberspace
Long-arm statutes.
“Minimum contact” rule.
Cybercommunities.
classroom use.
10
Federal and State System
classroom use.
11
The State Court System
Established by state constitution and legislation.
Each system includes trial courts of both limited and general
jurisdiction, sometimes intermediate appellate courts, and
courts of last resort.

classroom use.
12
Trial Courts of Limited Jurisdiction
Traffic cases.
Minor civil and criminal cases.
Often called justice court, magistrate’s court, and municipal
court.
classroom use.
13
Small Claims Court
Small claims court: a court that hears minor civil cases
involving small amounts of money.
classroom use.
14

Small Claims Court
Advantages: technical rules of evidence and procedure are not
followed, legal representation is not required, and court action
is generally economically feasible because it does not involve
attorney’s fees.
classroom use.
15
Small Claims Court
Claim limitations up to $15,000.
Filing a claim is simple and can sometimes be done online.
Court procedures are informal but are still based on law.
Appeal rules depend on the State.
classroom use.
16
Commercial Claims Court
Commercial claims court: special lower court similar to small
claims court, that allows businesses to sue debtors up to a
certain limit.

classroom use.
17
Other Trial Courts of
Limited Jurisdiction
Can hear civil cases involving large sums of money.
Criminal cases involving felonies.
May have appellate jurisdiction.
Probate court.
classroom use.
18
Trial Courts of
General Jurisdiction
Broad authority to hear any case, civil or criminal.
Petty claims are discouraged.
Sometimes called superior court, court of common pleas, circuit
court, or district court.

classroom use.
19
Intermediate Appellate Courts and the Court of Final Resort
Appellate = Review.
Mistakes of law?
Arguments generally made by written brief.
Opportunities for successful appeal are limited and very costly.
classroom use.
20
Drug Courts
Drug Courts: courts that handle drug-related crimes.
Intended to substitute mandatory treatment for incarceration.
classroom use.
21
Mental Health Courts

Defendant is sentenced to treatment rather than jail.
Appearance in this court is strictly voluntary.
classroom use.
22
Federal and State System
classroom use.
23
The Federal Court System
Article III (Section 1) of the U.S. Constitution created the
Supreme Court and gave Congress the power to create inferior
federal courts and to determine their jurisdiction.
classroom use.
24

Federal Court Structure
U.S. Supreme Court is the highest court in the federal judiciary.
Trial courts and appellate courts are under it.
Under those are the specialized courts with limited jurisdiction.
classroom use.
25
Federal Trial Courts
U.S. District Courts.
Both general and original jurisdiction.
Each state has at least one district court, including bankruptcy
court.
Federal issues and diversity of citizenship.
classroom use.
26
Intermediate Courts of Appeal
The U.S. is divided into 12 circuits, each with a court of
appeals.
Circuits include three or more states.

13th district is authorized to hear appeals from federal courts of
any district.
classroom use.
27
U.S. Districts
classroom use.
28
Supreme Court
Highest court in the land.
Findings are virtually final
Writ of certiorari: grants permission for a case to be heard by
the U.S. Supreme Court.
There is no absolute right of appeal to this court.
classroom use.

29
Routes to the Supreme Court
classroom use.
30
Participants in the Legal System
Attorney: advocate for client, draft legal documents.
Judge: rules on and instructs the jury on points of law in trials.
Jury: a body of citizens that decides what really happened in the
dispute.
classroom use.
31
Constitutional Framework
of the U.S. Legal System
The legal system of the United States is unique. It combines
elements almost unknown in other countries.

classroom use.
32
Separation of Powers
The concept of independent branches of government.
Legislative: makes laws.
Executive: enforces laws.
Judicial: interprets laws.
Courts often “make law” by interpreting it.
classroom use.
33
Judicial Review
The power of a court to review the decisions of a lower court.
classroom use.
34

Accommodation of Interests
Acknowledgment of the equitable consideration of parties
involved in a dispute.
classroom use.
35
Litigation
Our legal system operates almost exclusively within the
framework of litigation: a lawsuit or legal action.
Courts may only answer questions brought before them in
lawsuits.
classroom use.
36
Bill of Rights
The first ten amendments to the U.S. Constitution.
With a few exceptions, the fourteenth amendment applies the
Bill of Rights to the states.

classroom use.
37
Business Law
Principles
and Practices 8e
Chapter 1: Foundations of Law and
the Role of Ethics in Business
Part I Objectives
After studying Part I, you should be able to:
1. Explain the term law.
2. Demonstrate a knowledge of the need for a legal system.
3. Trace the development of U.S. law from Roman law and the
English common law.
4. Demonstrate a knowledge of the primary sources of law in
the United States.
classroom use.

2
Part I Objectives
5. Discuss the differences between civil law and criminal law.
6. Determine what is appropriate ethical behavior in a business
environment.
7. Outline the structure of the federal and state court systems in
the United States.
8. Distinguish between a private wrong and a public wrong.
classroom use.
3
Part I Objectives
9. Demonstrate a knowledge of legal wrongs, both criminal and
civil.
10. Compare the procedures in a civil action and a criminal
action.
11. Recall the steps taken in a lawsuit from start to finish.
12. Evaluate alternative ways to settle disputes between two or
more parties other than by litigation (a lawsuit).
classroom use.
4

Why Laws are Important
Without law, history shows society resorts to violence.
Without system of rules and regulations, society would break
down and a primitive society would prevail.
5
The Nature of Law
Law can be defined as rules established and enforceable by a
government—federal, state, or local—to regulate the conduct of
individuals and groups in a society.
The rules that make up law are actually legal duties that are
imposed on people and that require them to act in a certain way.
classroom use.
6
Legitimate Functions of Law
classroom use.

7
Legitimate Functions of Law
Settlement of Disputes.
Protection of the Individual and Society.
Protection of Property.
Promotion of Worthwhile Social Objectives.
classroom use.
8
Development of Law
Roman Law:
Prior to Romans, most law was oral. The Romans developed the
concept of written codes (or laws) that everyone could know
and understand. The Roman Code was revised by Napoleon to
create the Napoleonic Code, used today in Europe and many
countries in Central and South America and Asia.
classroom use.
9

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