RMI 2101 Exam 3 Topics 8-11

Employee Benefits

compensation other than salary

total compensation=current wages (cash)+ value of EE benefits

Why is EE benefits important?

spend ↑ $$ on EE benefits approx -> 40% of payroll

attract and retain capable EEs

tax advantages

productivity and better relations w/ EEs

ER can take advantages of GI (Group Insurance)

Benefit Financing

Non-contributory, contributory, voluntary

Non-contributory

ER pays fulls cost, eligibility = participation

Contributory

ER and EE share cost, for EE to participate they must make a contribution

Voluntary

EE pays full amount

Section 125 (Cafeteria Plan)

ER sponsored that EEs can access certain taxable and non pretax benefits, EE contributes portion of their salary (no FICA, SUI, or Workers Compensation), IRS sets guidelines

Income Taxes

EE is sometimes not taxed on VALUE of ER provided benefits, method to compensate an EE tax free

Health Insurance Example

$5,000 or HI (Health Insurance) -> cost of $5,000

ER:

- HI and increase of $5,000 is same

- both are tax deductible

EE:

- choose $5,000

- creates tax liability

- if tax rate is 20% -> EE takes $4,000

FSA (Flexible Spending Account)

An EE reduces salary pre-tax and money is deposited into a FSA, "use it" or "lose it" rule

3 Types of FSA

1. Healthcare- medical prodcesures not covered by med. plan, co-pays

2. Dependent- child care, elder care

3. Transportation- public transit, parking

Mandated/ Compulsory Benefit

social insurance programs, mandated participation, ER is risk bearing, social security, workers' compensation, and unemployment

Group Insurance (GI)

insure whole group, no individual underwriting, experience rated

low claims=save in rates

high claims= penalized

premium/rate is based on past claims

provides incentive to control losses

Advantages of GI

rates are lower than II (individual insurance), commissions are lower, ER helps collect $

Methods to Control Adverse Selection

1. Waiting Periods; PD an EE has to work to be covered

2. Pre-existing condition exclusions (PCEs)

3. Minimum participation requirements

4. Minimum group size

5. Steady flow of persons through the group

6. The reason the group exists

Disadvantages to benefit plans

may be temporary

Issues

high cost of healthcare, ↑ inflation, ↑ premiums for ERs, ↑ cost for government, ↑ % of uninsured ppl (27 mill. bc of access problem)

2 party typical market transaction

supply and demand, consumer knows prices

3rd party healthcare market transactions

supply, demand, and financial entity that pays for HCGS

3rd party healthcare market transactions supply

providers of HCGS (doctors, hospitals, pharmaceutical companies, etc)

3rd party healthcare market transactions demand

consumer (patient, insured ppl)

lethal/ costly combination

- classic moral hazard

- increased quantity demanded for HCGS

- fee-for-service reimbursement of providers

- price patient sees < true cost

Law of Demand

when price goes down demand goes up

fee-for-service

provider is paid a fee

- incentive for provider -> supplier induced demand (provide more services)

- incentive for insured -> buy more based on degree of cost sharing

Indemnity Plans

1980 -> 95% of EEs, 2024 -> 3% of EEs

- insured person has complete freedom of choice of providers

- insurer role= pay for covered losses

Indemnity Plans; What you pay

- premiums

- copays

- coinsurance

Copays

fixed cost each time you buy healthcare services

Coinsurance

% of bill that you pay (80/20) (u pay 20, they pay 80)

Indemnity Plans; What it covers

room cost of hospital, surgeon's fees, fullow up visits -> from hospital stay

Gaps in Coverage

non-hospital based expenditures not covered (prescriptions, MRI, x-rays, etc.)

Major Medical Plan

for inpatient and outpatient

- pays for routine, non hospital based expenses that are NOT covered by indemnity plans

- ↑ limits for hospital stays

- broad coverage -> few exclusions

- features for cost sharing (deductibles and coinsurance)

Health Maintenance Organization (HMO)

removes incentives under fee-for-service plans to do more, does not always pay providers more for doing more, providers of HCGS are at financial risk

Disadvantages of HMO

less freedom to choose providers, may have to change providers to join HMO, no coverage for out of plan utilization

Preferred Provider Organization (PPO)

a health care plan that contracts with health care professionals to provide services at a reduced fee and gives patients financial incentives to use network providers, most popular

Consumer-Directed Health Plan (CDHP)

health care plan that encourages individuals to locate the best health care at the lowest possible price, designed for people to make decisions on health and wellness based on consumerism

Why CDHP?

behavior is responsible for 50% of cost, forces awareness of cost

3 components of CDHP

1. Health Reimbursement Account (diff than FSA)

- HDHP -> for catastrophic losses

- HSA-> for day to day health care costs

- funds roll over year to year

2. ER offers a high deductible health plan (HDHP)

- ↑ out of pocket costs

- ↑ deductibles

3. insurer makes info available to insured to help make better decisions

Medicare

A federal program of health insurance for persons 65 years of age and older, federally funded and federally administered

Medicaid

A federal (60% funds) and state assistance program that pays for health care services for people who cannot afford them, state administered -> benefits and eligibility varies state to state

Patient Protection and Affordable Care Act

obamacare, dependents covered to age 26, lifetime limits banned, all preventive cares and checkups are free

Obamacare (OG plan to pay for it)

taxes 40% on high cost (cadillac) HI plans, $2,000 penalty to ERs who don't offer HI

Obamacare (how it was actually payed for)

cost shifting to EEs, $2,000 penalty, medicare tax income (extra 0.9% taxt -> $200,000 (single), $250,000 (married)

Retirement Risk

The risk that we will outlive our retirement assets.

Retirement Risk; Plan for Funds

1. Social Security

2. ER provided retirement benefits

3. individual savings

Retirement Risk: When you age

1. ↑ illness

2. long term care

3. ppl r living longer

Retirement Risk: Inflation

1. reduced purchasing power

2. ↑ prices

3. HCGS v sensitive to ↑ inflation

Taxes fund social security

payroll tax on ER and EE, every $ u pay in tax is matched by ER, if self employed -> u pay double

6.2% for OASD up to wage base level ($176100 in 2025 income cap)

1.45% for HI (Medicare)

extra 0.9% tax (single= $200,000, married= $250,000)

most ppl pay 7.65%

shows up on pay stubs as FICA taxes

intro to social security

started in 1935, medicare in 1965, OASDHI

Old Age (OA)

- Retirement benefits

- Amount based on earnings

- Normal retirement age is 67 (anyone born after 1960)

Survivors (S)

- widows/ widowers

- child's benefit

- lump sum death payments

Disabilities (D)

- if disabled or becomes disabled

- dependent (spouse/child)

- definition is strict

Medicare (HI)

- Part A & B= OG

- Part D= Prescriptions

- Part C= Medicare advantages bundled

Medicare Part A (aka Hospital Insurance or HI)

helps pay for care in a hospital or skilled nursing facility or for care from a home health agency or hospice

Medicare Part B (Medical Benefits)

doctors appointments, surgery, lab tests, x-rays, preventative exams

Medicare Part D (RX)

effective in 2006, Doughnut hole

doughnut hole

insurance coverage gap in Medicare Part D programs by which the patient must pay 100% of the cost of the medication

Funding of Social Security

1990 last hike in tax rate, IRS

future issues:

- pay as u go

- privatization of the system

Employer Provided Retirement Plans

-defined benefit Plan - aKa Traditional Pension Plan

- figuring out how much u receive at retirement

- EE doesn't know how much ER will pay every year

Defined Contribution Plan

- EE defers part of their salary thru pre-tax payroll

- ER matches it

- Profit company= 401K

- Non-profit company (Temple)- 403b

401k

$23,500 annually (2024), EEs have choice of investment

IRA & Roth

$7,000 annually

Rollovers

IRA CANNOT GO INTO A 401K, but every other combination works

IRA and 401K

- cannot be w/drawn before 59 1/2 except death or disability

- 10% penalty

- taxed on ordinary income

- after 59 1/2

- no penalty

- only taxed as ordinary income

Roth IRA: 1997 tax reform act

- no tax deductions

- interest= tax free

- withdrawals= tax free

- $7,000 annually

pension eligibility

-ERISA- establishes minimum standards for retirement plans provided by ERs in private industries

- min age 21

- min service required= 1 year

Normal Retirement Age (NRA)

earliest age EEs can retire, receive full benefits

Early Retirement

reduced benefits

Late Retirement

ER should increase benefits but not legally required

Vesting

EE is ALWAYS entitled to their own contributions, pension rights r non forfeitable -> regardless of continued employment w/ ER

What is your net worth?

Assets - Liabilities

Assets

what you own (money, possessions, home, auto, investments)

Liabilities

what you owe (student loans, credit card debt, monthly bills)

Income Sources

- job(s)

- parents/ gifts

- investments

- profit sharing from businesses

fixed expenditures

ones you have no control over (rent, insurance premiums, mobile phones, lonas)

variable expenditures

you have some control over (food, gas, groceries)

Retirement Strategies

- Start early (Now!!!)

- consider any money saved for retirement as gone

- max out ur 401k

- NEVER take out a loan from ur work

- gradually ↑ the % saved each yr for retirement

Annual fee

yearly fee to have the card (not all have them)

Credit limit

max amount you can owe on that card

billing cycle

time period during which you must make your monthly payment

late fee

A fee charged when a payment is not received on time.

over the limit fee

if you charge too much

interest rate

rate of interest u r paying on money u borrowed (avg credit card inrterest rate in U.S. is 19%)

Grace period

A time period (20-25 days) during which no finance charges will be added to your account

workers compensation

covers occupational disease and work related accidents, system is state by state basis, ER is held absolutely liable for injuries, EE cannot sue ER, EE receives swift and certain payments

features of state laws

1. loss of income benefits

2. medical expenses

3. rehabilitation

4. survivor benefits

Unemployment (SUI)

-federal program

-administered by states and state law

-Weekly cash benefit during periods of involuntary unemployment

-through "no fault of your own"

SUI Eligibility

-Earn qualifying wages

-Be able to work and be available for work

-Actively seek work

-Satisfy a waiting period

Purpose of SUI

-Safety net for unemployed workers

-Stabilize economy during recession

-Encourages employers to stabilize employment

Financing SUI

- Primarily ER payroll taxes

- EE tax (some states)

Issues of SUI

-Inadequate benefits

-States inadequately funded

-Waste, fraud, and administrative burdens

New Car

Easier to finance, latest tech, safety features, and economy, warranty

Used Car

Avoid massive depreciation, cheaper to insure, less barriers to entry, easy to get vehicle history, know what cars to avoid

Renting

flexibility, no down payment, less repair or maintenance (landlord does it)

Buying

build equity (rent can pay someone else’s mortgage), tax breaks, rent increases (mortgage does not), home can be a source of cash (tax shelter), freedom