• Based upon the readings, conduct external research and apply what you have learned. Do you agree or disagree with the company’s approach? The paper should be at least 1 page. Be sure to include references

Part Two: Retirement, Health Care and Life Insurance

Chapter Four: Employer-Sponsored Retirement Plans

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Learning Objectives

In this chapter, you will gain an understanding of:

how employer-sponsored retirement plans are defined.

differences between qualified plans and nonqualified plans.

features of defined benefit plans and defined contribution plans.

specific types of defined contribution plans.

features of various hybrid plans.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

4 – ‹#›
Overview
Start by defining retirement plans and then looking at qualified and nonqualified plans.
Next is defined benefit plans including requirements, rules, and limits.
Followed by defined contribution plans including different types of plans.
Last is the different types of hybrid plans.
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Defining and Exploring Retirement Plans
First, two brief definitions.
A defined benefit plan guarantees retirement benefits, usually expressed in an annual sum.
Sometimes referred to as pension plans.
A defined contribution plan is when employees annually contribute to their individual account.
Employers may match contributions.
Participants receive amounts based on the performance of the selected financial plan investments.
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Origins of Employer-Sponsored Retirement Benefits
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Timeline in the United States

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1759 – the first plan was for families of Presbyterian ministers.

1875 – the first private sector plan was at the American Express Company.

Revenue Act of 1921 –growth was due to favorable tax treatment and wage controls.

National Labor Relations Act of 1935 – made retirement plans a bargaining subject.

Trends in Retirement Plan Coverage and Costs
55% of workers participated in a company-sponsored retirement plan in 1992-1993.
Declining to 49% in 2016.
Defined benefit plans have decreased and defined contribution plans have increased.
1992-93 – 32% participated in defined benefit plans and 35% in defined contribution plans.
2016 – 15% participated in defined benefit plans and 44% in defined contribution plans.
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4 – ‹#›
Trends in Retirement Plan Coverage and Costs
Two important factors for these trends are:
Industry characteristics
Goods-producing, capital intensive industries offer higher pay and retirement plans.
Service industries pay lower wages and offer less generous benefits, including retirement plans.
Union status
Unions secured high wages and benefits through the early 1980s and maintain lucrative benefits though costs have resulted in freezes or termination of pension plans.
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Exhibit 4.1
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Characteristics of Qualified Retirement Plans

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Qualified vs. Nonqualified Plans
Participation Requirements.
Age 21 and one year of service (1,000 work hours).
Coverage Requirements.
Qualified plans do not favor highly compensated employees or key employees.
Ratio percentage test, or
Average benefit test.
Defined benefit plans must meet U.S. Department of Treasury participation standards.
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Qualified vs. Nonqualified Plans
Vesting Rules.
Vesting – an employee’s nonforfeitable rights to retirement plan benefits.
Defined benefit plans – employees vest in a specific annual amount, each year after retirement.
Defined contribution plans – employees vest in net employer contributions.
Title I of ERISA requires companies follow an allowed schedule for vesting rights:
Cliff vesting or six-year graduated schedule.
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Qualified vs. Nonqualified Plans
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Vesting Rules

4 – ‹#›
Cliff vesting

Grants employees 100% vesting after no more than three years from initial participation.

Six-year graduated schedule

Allows workers to become 20% vested after two years and continue vesting at 20% each year until fully vested after six years.

Qualified vs. Nonqualified Plans
Accrual Rules.
Specify the rate at which participants earn benefits.
Nondiscrimination Rules: Testing.
Prohibit favoring highly compensated employees.
Fulfilled using
safe harbors or a
facts-and circumstances testing.
Top-Heavy Provisions.
Non-key employees receive a minimum benefit or a minimum contribution and a special vesting schedule.
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4 – ‹#›
Qualified vs. Nonqualified Plans
Minimum Funding Standards.
Ensures employers contribute the minimum amount necessary to provide promised benefits.
Social Security Integration.
Or permitted disparity rules – employers may consider SS benefits within their defined benefit plan.
Contribution and Benefit Limits.
Benefit limits – maximum annual amount employee may receive from a qualified defined benefit plan.
Contribution limits apply to defined contribution plans.
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Qualified vs. Nonqualified Plans
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Plan Distribution Rules

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Events triggering mandatory distribution

Termination of services

10th anniversary of commencing the plan

Three allowable distribution methods

Lump sum

Annuities – a series of payments for life

Employee reaches retirement age

Payments from a trust fund

Qualified vs. Nonqualified Plans
Qualified Survivor Annuities.
Provides spouses with a qualified joint and survivor annuity (QJSA) or a qualified preretirement survivor annuity (QPSA).
Qualified Domestic Relations Orders.
Qualified domestic relations orders (QDROs) provides benefits in the event of a divorce.
Plan Termination Rules and Procedures.
Plan termination rules – protect employees who participated in a terminated plan.
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Defined Benefit Plans
Defined benefit plans guarantee retirement benefits specified in the plan document.
Benefit is an annual sum equal to a percentage of preretirement pay multiplied by years of service.
Disbursed in equal monthly payments.
Benefit is fixed by a formula.
The level of required employer contributions fluctuates from year to year based on investment performance and life expectancy.
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4 – ‹#›
Defined Benefit Plans
Flat benefit formula
Flat amount formula – each employee receives a flat dollar amount.
Flat percentage formula – the dollar amount is based on an employee’s pay.
May lead to resentment as years of service are not acknowledged.
Unit benefit formula
Recognize length of service.
Annual benefits based on age, years of service, and final average wages/salary.
Specifies annual retirement benefits as a percentage of final average salary.
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4 – ‹#›
Defined Benefit Plans
Nondiscrimination Rules: Testing.
Must meet several uniformity criteria, as well as one additional safe harbor criterion.
Uniform normal retirement benefit.
Uniform post-normal retirement benefit.
Uniform subsides.
Uniform vesting and service crediting.
No employee contributions.
Period of accrual.
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4 – ‹#›
Defined Benefit Plans
Accrual Rules.
Accumulated benefit obligation is the present value of benefits based on a designated date.
To avoid backloading, use one of these three rules
The Three Percent Rule – accrued benefit cannot be less than 3% of the normal retirement benefit.
The 1331/3 Percent Rule – accrual rate cannot exceed 1331/3% of accrual rate of previous year.
The Fractional Rule – apples to early termination and requires benefit be proportional to the normal benefit.
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4 – ‹#›
Defined Benefit Plans
Top-Heavy Provisions.
Non-key employees receive an accrued benefit of a percentage times employee’s average pay.
Minimum Funding Standards.
ERISA imposes strict funding requirements.
Benefits Limits.
The IRC sets a maximum annual benefit equal to the lesser of $215,000, or 100% of the highest average pay for three consecutive years.
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Defined Benefit Plans
The PBGC’s program recognizes three types of plan terminations:
Distress terminations,
Involuntary terminations, and
Standard terminations.
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Defined Contribution Plans
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Overview

4 – ‹#›
Defined contribution plans

Salary reduction agreements

Forfeitures

Companies set up an account for each participating employee.

Permit an employer to defer a percentage of pay into employee’s account.

Come from accounts of employees who terminated their employment prior to vesting.

Defined Contribution Plans
Individual Accounts.
Three possible contribution sources.
Employee contributions – usually a percent of pay.
Employer contributions – matching contributions.
May make a full or partial match.
Forfeitures from unvested former employees.
Investments of Contributions.
ERISA requires a fiduciary be named with several responsibilities, including prudence.
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4 – ‹#›
Exhibit 4.6
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Conditions Relieving Fiduciary of Responsibility with Employee Participation in Investments

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Defined Contribution Plans
Nondiscrimination Rules: Testing.
Must meet one of two safe harbor conditions:
A uniform allocation formula, or
A uniform points allocation formula for profit-sharing.
Accrual Rules.
Accrued benefit equals individual account balance.
Top-Heavy Provisions.
Companies must contribute to non key-employee accounts equal to either 3% of annual pay or the highest contribution made to key-employee accounts.
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4 – ‹#›
Defined Contribution Plans
Minimum Funding Standard.
Less complex than defined benefit plans.
The standard is met when account contributions meet the minimum amounts specified in the plan.
Contribution Limits.
Annual addition is the annual maximum amount.
Includes additions from all three sources.
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4 – ‹#›
Types of Defined Contribution Plans
401(k) Plans.
Permits employees to defer part of their pay to an individual account.
Only private-sector or tax-exempt employers may sponsor these plans.
Three tax benefits.
Employees do not pay income tax until withdrawn.
Employers deduct contributions from taxable income.
Gains are not taxed until funds are distributed.
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4 – ‹#›
Types of Defined Contribution Plans
Roth 401(k) Plans.
Differ in two ways.
An employee pays income tax on their contributions.
Upon retirement, withdrawals are not taxed.
Profit-Sharing Plans.
Distribute a portion of profits to employees.
Starts with a profit-sharing pool.
Maximum annual contributions are limited.
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4 – ‹#›
Types of Defined Contribution Plans
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Profit-Sharing Plans

4 – ‹#›
Employer Contributions

Fixed first-dollar-of-profits formula

Graduated first-dollar-of-profits formula

Allocation Formulas

Equal payments

Proportional payments based on annual salary

Profitability threshold formulas

Proportional payments based on contribution to profits

Types of Defined Contribution Plans
Stock Bonus Plans.
A kind of profit-sharing paid in employer stock instead of cash.
Employee Stock Option Plans (ESOPs).
Provides shares of company stock to employees.
Nonleveraged ESOPs
Leveraged ESOPs
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4 – ‹#›
Types of Defined Contribution Plans
Savings Incentive Match Plans for Employees (SIMPLEs).
Small companies meeting certain criteria may establish accounts as IRAs or 401(k) plans.
Section 403(b) Tax-Deferred Annuity Plans.
A TDA is available to nonprofit organizations.
Section 457 Plans.
Nonqualified plans for government employees.
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4 – ‹#›
Hybrid Plans
Combine features of traditional defined benefit and defined contribution plans.
Many employers have replaced traditional defined benefit plans with hybrid plans.
“golden handcuffs”
The traditional approach was not conducive to attracting valuable employees due to younger worker mobility.
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4 – ‹#›
Exhibit 4.8
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Comparison of Features of Pension Equity Plans and Cash Balance Plans

4 – ‹#›
Hybrid Plans
Cash balance plans differ from 401(k) plans.
Participation – cash balance plans do not require a contribution but 401(k) plans do.
Investment risks – the employer managers a cash balance plan and employees manage 401(k) plans.
Life annuities – unlike 401(k) plans, cash balance plans are required to offer benefits as annuities.
Federal guarantee – the PBGC has authority over defined benefit plans but not defined contribution plans.
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

4 – ‹#›
Hybrid Plans
Concerns about Cash Balance Plans.
Possible favorable treatment of younger workers.
Converting tradition defined benefits to cash balance plans.
Target Benefit Plans.
Calculate benefits on a formula that uses income and years of service.
The targeted benefit amount may differ based on the investment performance of the plan’s assets.
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

4 – ‹#›
Hybrid Plans
Money Purchase Plans.
Defined as contribution plans because the benefit is based on the account balance.
However, they face funding requirements of defined benefit plans.
Age-Weighted Profit-Sharing Plans.
Defined contribution plans because benefit amounts fluctuate with investment performance.
Consideration of age is a defined benefit plan feature.
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

4 – ‹#›
Summary
The chapter started by defining retirement plans and then looking at qualified and nonqualified plans.
Next it defined benefit plans including requirements, rules, and limits.
Followed by defined contribution plans including different types of plans.
Last was the different types of hybrid plans.
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

4 – ‹#›

Part Two: Retirement, Health Care, and Life Insurance

Chapter Five: Employer-Sponsored Health-Care Plans

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

5 – ‹#›

Learning Objectives

In this chapter, you will gain an understanding of:

health-care plan concepts.

federal and state laws influencing employer-sponsored health insurance practices.

health-care plan design alternatives, including fee-for-service, managed care, and consumer-driven approaches.

other health-related benefits

retiree health-care benefits.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

5 – ‹#›
Overview
The chapter begins with basic definitions, followed by a review of the origins and costs of employer-sponsored plans.
Key regulations pertaining to health-care plans are considered.
Specific types of employer-sponsored plans are reviewed, such as:
fee-for-service plans, managed care plans, consumer-driven health care, and retiree health care benefits.
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Defining and Exploring Health-Care Plans
Health-care plans covers the cost of services promoting sound mental/physical health.
Employers can offer these benefits using:
Fully insured plans – contractual relationship with one or more insurance companies to provide services for employees and qualified dependents.
Self-funded plans – the employer chooses benefits to offer, pays for claims, and assumes risk.
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5 – ‹#›
Defining and Exploring Health-Care Plans
Fully insured plans.
Insurance companies assume the risk for paying medical claims, and insurers administer the plan.
Understand the difference between:
Individual coverage – a person purchases health insurance outside the employment setting for themselves and their dependents.
Group coverage – an employer-sponsored health-care plan extends coverage to most or all employees.
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5 – ‹#›
Exhibit 5.1
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Types of Group Plans

5 – ‹#›
Defining and Exploring Health-Care Plans
Fully insured plans.
The insurance policy specifies the amount the insurer pays for medical claims.
Employers pay a premium to establish and maintain health-care plans.
How do insurers determine premiums?
Plan providers use mortality tables and morbidity tables as well as experience ratings to determine terms and premium amounts – known as underwriting.
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5 – ‹#›
Defining and Exploring Health-Care Plans
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Fully insured plans – determining premium

5 – ‹#›
Mortality tables

Indicate yearly probabilities of death based on such factors as age and sex

Morbidity tables

Express annual probabilities of the occurrence of health problems

Experience ratings

Specify the incident, type, and financial cost of insurance claims for groups

Defining and Exploring Health-Care Plans
Under self-funded plans, the employer offers benefits, pays claims, and assumes all the risk.
Self-funding makes sense when covering employee medical expenses is less than insurance coverage.
Another distinction applying to both fully insured and self-funded plans is:
Single coverage – covered employees receive benefits.
Family coverage offers benefits to the covered employee and qualified dependents.
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5 – ‹#›
Defining and Exploring Health-Care Plans
Companies can offer health-care coverage by:
Fee-for-service plans,
Alternative managed care plans,
Consumer-driven health care.
Any can be fully insured or self-funded.

U.S. health care is a multiple-payer system
more than one party is responsible for coverage.
A single-payer system, also called universal health-care systems are
administered and regulated by the government.
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5 – ‹#›
Origins of Health-Care Benefits
Predecessors appeared in the late 1800s for mining and railroad workers.
The Great Depression in the 1930s gave us:
Social Security Act of 1935,
Widespread unemployment,
Non-profit Blue Cross was established, and
For-profit companies began fee-for-service plans.
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5 – ‹#›
Origins of Health-Care Plans
World War II gave us wage freezes.
Benefits expanded to promote productivity.
Welfare practices were established.
Among those were health-care plans.
In the 1960s:
Government amended the Social Security Act and established Medicare and Medicaid.
Demand exceeded supply causing inflation of health care costs.
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5 – ‹#›
Origins of Health-Care Plans
In the 1970s:
ERISA protected employees’ interests.
Health Maintenance Act of 1973 (HMO Act) provided financial incentives for offering HMOs.
Health insurance was discretionary, until:
The Patient Protection and Affordable Care Act (PPACA) required employers to offer health care.
The PPACA also required individuals to have health insurance.
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5 – ‹#›
Health-Care Coverage and Costs
Employees
Employer-sponsored health-care provides employees with the means to afford expensive health-care services.
In 2015, 70% of private-sector employees used some form of employer-sponsored health-care plans.
Employers
Companies stand to gain in at least two ways.
There should be less absenteeism leading to higher productivity, service quality, and morale.
Should help employee recruitment and retention.
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5 – ‹#›
Health-Care Coverage and Costs
Average monthly premiums in March, 2015:
Single coverage: $390.79/employee and $496.96/union member.
Family coverage: $961.22/employee and $1,263.16/union member.
Since the 1980s, many plans extend coverage to unmarried opposite sex or same sex partners.
In 2015, 32% and 37% respectively, had access to health care benefits.
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5 – ‹#›
Health-Care Coverage and Costs
Employee contributions varied considerably.
Single coverage:
overall, employees contributed 22% of the cost with
union workers contributing 13%, and
the lowest paid contributing 27%.
Family coverage:
overall, employees contributed 32% of the cost with
union workers contributing 16%, and
the lowest paid workers contributing 41%.
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5 – ‹#›
Health-Care Coverage and Costs
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Since 1984, costs have increased more than 450% because of:

5 – ‹#›
Longer life expectancies

Aging baby boomers

Medical advances

Tendency to treat death as unnatural

Types of Medical Expense Benefits
Hospitalization benefits defray expenses associated with treatment in hospitals.
Plans distinguish between:
Inpatient benefits cover expenses associated with overnight hospital stays.
Outpatient benefits cover hospital expenses not requiring overnight stays.
Plans describe the extent of coverage based on a schedule of benefits.
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5 – ‹#›
Types of Medical Expense Benefits
Surgical benefits pay for necessary surgical procedures, not usually elective surgeries.
Plans pay expenses according to a schedule of usual, customary, and reasonable charges.
Defined as not more than the physician’s usual charge,
within the customary range of fees charged in the locality,
and reasonable based on the medical circumstances.
Patients must pay any overage expenses.
Physician benefits pay physician fees when in the hospital or when visiting the office.
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5 – ‹#›
Regulation of Health-Care Plans
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Federal Regulations – Main Actions

5 – ‹#›
HMOA

ERISA

ADA

PPACA

IRS

Regulation of Health-Care Plans
Health Maintenance Organization Act of 1973.
HMOs are regulated at federal and state level.
Employee Retirement Income Security Act of 1974.
Amendments include COBRA, HIPAA, and
Women’s Health and Cancer Rights Act of 1998.
The American with Disabilities Act of 1990.
EEOC oversees enforcement of the ADA.
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Regulation of Health-Care Plans
The Patient Protection and Affordable Care Act of 2010 (PPACA)
is a comprehensive law mandating health insurance coverage and sets minimum standards for insurance.
The individual mandate requires individuals have health insurance, either employer-sponsored or by purchasing coverage independently.
The employer mandate requires companies with at least 50 employees offer affordable health insurance to its full-time employees.
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5 – ‹#›
Regulation of Health-Care Plans
PPACA.
Employers can avoid penalties by offering minimal coverage to full-time employees and dependents.
Covers at least 60% of expected costs.
Limits employee contributions to 9.5% of income.
Is available to at least 95% of full-time employees.
Distinguishes between health plans that existed prior to enactment and those from after the date.
Grandfathered plans and newer non-grandfathered.
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5 – ‹#›
Regulation of Health-Care Plans
PPACA.
Grandfathered plans can lose status if modified by:
Changing insurance carriers for individuals.
Changing coinsurance amounts.
Increase fixed-amount copayments.
Copayments are nominal payments an individual makes as a condition of receiving services
Increase fixed-amount cost sharing.
Decrease costs paid by the employer by 5% or more.
Eliminate benefits specific to health conditions.
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5 – ‹#›
Regulation of Health-Care Plans
Reducing or eliminating essential benefits can cause a grandfathered plan to lose its status.
Ambulatory patient services.
Emergency services.
Hospitalization.
Maternity and newborn care.
Pediatric services.
Mental health and substance use disorder services.
Prescription drugs.
Rehabilitation services and devices.
Laboratory services.
Preventative and wellness services and chronic disease management.
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5 – ‹#›
Regulation of Health-Care Plans
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Companies are known to either “pay or play.”

5 – ‹#›
$2160/year

Failing to offer coverage.

$3240/year

Failing to offer affordable coverage.

Assessed per full-time employee

Regulation of Health-Care Plans
PPACA.
In 2020, the Cadillac tax will apply to high-cost employer-sponsored health plans
Those annually costing more than $10,200 for single coverage or $27,500 for family coverage.
There has been much controversy over PPACA.
Some claim the individual mandate is unconstitutional.
U.S. Supreme Court disagreed.
A second challenge centered on the legality of tax subsidies to individuals purchasing health care.
Again, the U.S. Supreme Court upheld the law.
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5 – ‹#›
Regulation of Health-Care Plans
Tax Regulations.
The IRC allows companies to take deductions for providing health plans or paying claims directly.
Rules differ for insurance plans and self-funded plans.
Companies may take deductions for their contribution to health plan premiums
as long as there is no preferential treatment to highly compensated employees.
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5 – ‹#›
Regulation of Health-Care Plans
State Regulations.
Every state has laws regulating fully insured plans, overall addressing four areas of responsibility:
Extending coverage to particular services, treatments, and health conditions.
Reimbursing recognized health care providers.
Who must be covered.
Length of time coverage must be available to employees after they leave the company.
National Association of Insurance Commissioners (NAIC) addresses issues for each state.
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5 – ‹#›
Health Plan Design Alternatives
The U.S. Bureau of Labor Statistics uses several criteria to distinguish between fee-for-service plans and managed care plan.
A prepaid plan pays health-care providers a fixed amount according to the number of individuals covered by the plan.
An indemnity plan reimburses either the health-care provider or the patient.
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5 – ‹#›
Exhibit 5.3
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How the National Compensation Survey Determines the Type of Medical Plan Employers Offer

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Fee-for-Service Plans
Fee-for-service plans pay a cash benefit either to the employee or to the health care provider.
Pay benefits on a reimbursement basis.
Participants may select any licensed physician, surgeon, or medical facility.
These plans do not rely on networks of health-care providers.
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Managed Care Plans
Managed care plans emphasize cost control by limiting choice of doctors and hospitals.
Three common forms of managed care:
Health Maintenance Organizations (HMOs),
Preferred Provider Organizations (PPOs),
And Exclusive Provider plans (EPOs),
Point-of-Service (POS) plans.
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Health Maintenance Organizations (HMOs)
Described as prepaid plans because:
Fixed periodic enrollment fees cover members
If services are with a provider in the network
And approved.
Either fully covered or requires a copayment.
Open-access HMOs also require network providers but will cover:
Emergency care outside the network.
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Exhibit 5.4
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Role of Primary Care Physicians

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Types of Health Maintenance Organizations
Prepaid group practices may be:
Staff model HMOs own the medical facilities.
Group model HMOs contract with physicians and cover multiple specialties.
Network model HMOs contract with two or more independent practices and pay a capped fee.
Individual practice associations (IPAs) are partnerships of independent physicians, health professionals and group practices.
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Preferred Provider Organizations (PPOs)
A preferred provider organization (PPO),
is where a select group of providers agree to provide services to a given population at a lower level of reimbursement.
In return, the physician’s are guaranteed a minimum patient load.
An exclusive provider organization is similar to a PPO but more restrictive.
Pay on a reimbursement basis and do not require a primary care physician.
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Point-of-Service Plans
A point-of-service (POS) plan combines features of fee-for-service plans and HMOs.
Almost identical to PPOs but require a primary care physician, similar to HMOs.
Employees pay a copayment, similar to HMOs.
Employees can receive care outside the network, similar to fee-for-service plans.
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Exhibit 5.7
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Health-Care Plan Types and Features Based on the U.S. Bureau of Labor Statistics Criteria

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Features of Health-Care Plans
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Health-care plans share a number of common features.

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Deductible

Coinsurance

Out-of-Pocket Maximum

Preexisting Condition Clauses

Preadmission Certification

Second Surgical Opinions

Lifetime and Yearly Limits

Features of Health-Care Plans
Employees must pay for services, or meet a deductible, before the plan pays for benefits.
Coinsurance refers to the percentage paid by the insured, after meeting the deductible.
Most plans specify the maximum amount the insured must pay per calendar year.
Known as out-of-pocket maximum.
A preexisting condition is one treated previous to, and excluded from, coverage.
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Features of Health-Care Plans
Plans require preadmission certification of medical necessity for hospitalization.
Second surgical opinions reduce unnecessary surgical procedures, and costs.
Lifetime limits refers to the maximum amount a plan would cover.
Yearly limits refer to the maximum amount a plan would cover each year.
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Consumer-Driven Health Care
Battling against raising costs, employers are increasingly adopting a:
consumer-driven health-care plan (CDHP) which combines a pretax payment account with a high-deductible health plan.
High-deductable health insurance plans (HDHPs) require higher deductibles and low out-of-pocket maximums.
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Consumer-Driven Health Care
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CDHPs are referred to as three-tier systems.

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The third tier covers expense amounts above the deductible.

The second tier is the coverage gap, or the difference between the money in the pretax account and the plan’s deductible amount.

The first tier is an account allowing employees to pay for services using pretax dollars.

Consumer-Driven Health Care
Medicare Prescription Drug, Improvement and Modernization Act of 2003,
Permits establishment of health savings accounts (HSAs) for employees enrolled in an HDHP.
Employers may consider two other accounts to help defray costs of medical care:
Health reimbursement arrangements (HRAs)
Only the employer is able to fund HRAs, and
Flexible spending accounts (FSAs).
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Consumer-Driven Health Care
FSAs permit employees to pay health-care costs not covered by the insurance plan.
Employees elect the amount to allocate to the plan and use the money for expenses during the year.
A noteworthy drawback is the FSA is a “use it or lose it” provision.
Employers bear some risk from offering FSAs.
Risk-of-loss rules or uniform coverage requirements means employers are obligated to make the full amount of benefits available, regardless of occurence date.
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Other Health-Care-Related Benefits
Most health-care plans cover other benefits, often using separate plans, such as:
Dental care, vision care, prescription drugs, and mental health and substance abuse care.
Sometimes, employers rely on carve-out plans which is a contract agreement to provide such special services.
Usually, HMOs and PPOs manage such plans.
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Other Health-Care-Related Benefits
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Dental insurance may cover routine and necessary procedures.

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Dental fee-for-service plans

are similar to medical fee-for-service plans.

Dental service corporations

are nonprofits owned by state dental associations.

Dental maintenance organizations

or dental HMOs are most similar to HMOs.

Other Health-Care-Related Benefits
Vision insurance plans cover eye examinations, lenses, frames, and fittings.
Prescription drug plans cover the cost of drugs dispensed by a pharmacist.
Medical reimbursement plans reimburse some or all of the cost.
Prescription card programs offer prepaid benefits with nominal copayments.
Mail order prescription drug programs dispenses medications treating chronic conditions.
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Other Health-Care-Related Benefits
Two cost control features of prescription drug plans are: formularies and multiple tiers.
Formularies are lists of drugs proven appropriate and cost effective.
Multiple tiers specify copayments for specific prescriptions:
Generic,
Formulary brand-name medications, and
Non-formulary brand-name medications.
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Other Health-Care-Related Benefits
Mental health and substance abuse plans:
cover the costs of a variety of treatments but benefit amounts vary by type of disorder.
DSM-IV is used to diagnose mental disorders.
The Mental Health Parity and Addiction Equity Act of 2008 established parity requirements for mental health plans offered in conjunction with a group health plan.
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Other Health-Care-Related Benefits
Federal law does not require employers to provide maternity care benefits, but
influences how benefits are designed/implemented.
Pregnancy Discrimination Act of 1978 requires employers treat pregnancy as other disabilities.
FMLA allows 12 unpaid work weeks of leave.
Newborns’ and Mothers’ Health Protection Act of 1996 sets minimum standards for the length of hospital stays for mothers and newborns.
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Retiree Health-Care Benefits
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Since the 1980s, companies encountered a strong financial disincentive to provide health insurance benefits to retired employees for two reasons.

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Substantial increases in health care and insurance costs have created financial strain on employers.

Changes in company accounting practices made offering benefits to retirees less appealing.

Retiree Health-Care Benefits
The Financial Accounting Standards Board (FASB) implemented accounted standards.
Financial Accounting Standard (FAS) 106 changed how companies recognize the costs of non-pension benefits on financial balance sheets.
FAS 132 required disclosure of value and costs of retiree health-care programs.
FAS 158 requires further transparency for other postretirement employee benefits.
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Summary
The chapter began with basic definitions, followed by a review of the origins and costs of employer-sponsored plans.
Key regulations pertaining to health-care plans were considered, both federal and state laws.
Specific types of employer-sponsored plans were reviewed, such as:
fee-for-service plans, managed care plans, consumer-driven health care, and retiree health care benefits
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