Bảo hiểm - Chapter 17: Employee benefits: group life and health insurance

Chapter 17Employee Benefits: Group Life and Health InsuranceAgendaFundamentals of Private Retirement PlansDefined Benefit PlansDefined Contribution PlansSection 401(k) PlansSection 403(b) PlansProfit-sharing PlansRetirement Plans for the Self-EmployedSimplified Employee PensionSimple Retirement PlansFunding Agency and Funding InstrumentsFundamentals of Private Retirement PlansPrivate retirement plans have an enormous social and economic impactThe Employee Retirement Income Security Act of 1974 (ERISA) established minimum pension standardsThe Pension Protection Act of 2006 also has had a significant impact on private pension plansPrivate plans that meet certain requirements are called qualified plans and receive favorable income tax treatmentThe employer’s contributions are deductible, to certain limitsInvestment earnings on the plan assets accumulate on a tax-deferred basisExhibit 17.1 The Benefits of Starting Early in a Tax-Deferred Retirement PlanFundamentals of Private Retirement PlansA qualified plan must benefit workers in general and not only highly compensated employees, so certain minimum coverage requirements must be satisfiedUnder the ratio-percentage test, the percentage of non-highly compensated employees covered under the plan must be at least 70% of the percentage of highly compensated employees who are coveredUnder the average benefits test:The plan must benefit a reasonable classification of employees and not discriminate in favor of highly compensated employees The average benefit for the non-highly compensated employees must be at least 70% of the average benefit provided to all highly compensated employeesFundamentals of Private Retirement PlansMost plans have a minimum age and service requirement that must be metUnder current law, all eligible employees who have attained age 21 and have completed one year of service must be allowed to participate in the planNormal retirement age is the age that a worker can retire and receive a full, unreduced pension benefitAge 65 in most plansAn early retirement age is the earliest age that workers can retire and receive a retirement benefitThe deferred retirement age is any age beyond the normal retirement age Employees working beyond age 65 continue to accrue benefits under the planFundamentals of Private Retirement PlansA benefit formula is used to determine contributions or benefitsIn a defined-contribution formula, the contribution rate is fixed, but the retirement benefit is variableIn a defined-benefit plan, the retirement benefit is known, but the contributions will vary depending on the amount needed to fund the desired benefitThe amount can be based on career-average earnings or on a final average pay, which generally is an average of the last 3-5 years earningsUnder a unit-benefit formula, both earnings and years of service are consideredSome plans pay a flat percentage of annual earnings, while some pay a flat amount for each year of serviceSome plans pay a flat amount for each employee, regardless of earnings or years of serviceFundamentals of Private Retirement PlansVesting refers to the employee’s right to the employer’s contributions or benefits attributable to the contributions if employment terminates prior to retirementA qualified defined-benefit plan must meet a minimum vesting standard:Under cliff vesting, the worker must be 100% vested after 5 years of serviceUnder graded vesting, the worker must be 20% vested by the 3rd year of service, and the minimum vesting increases another 20% for each year until the worker is 100% vested at year 7Faster vesting is required for qualified defined-contribution plans to encourage greater employee participationEmployer contributions must be 100% vested after 3 yearsThe worker must be 20% vested by the 2rd year of service, and the minimum vesting increases another 20% for each year until the worker is 100% vested at year 6Fundamentals of Private Retirement PlansFunds withdrawn from a qualified plan before age 59½ are subject to a 10% early distribution penaltyThere are some exceptions to this rule, for example if the distribution is:Made because the employee has a qualifying disabilityMade to an employee for medical care up to the amount allowable as a medical expense deductionPension contributions cannot remain in the plan indefinitelyDistributions must start no later than April 1st of the calendar year following the year in which the individual attains age 70½If the participant is still working, the distributions can be delayedThe rule does not apply to IRAs and Roth IRAsFor 2009, the minimum distribution rules are temporarily waived.Fundamentals of Private Retirement PlansMany qualified private pension plans are integrated with Social SecurityIntegration provides a method for increasing pension benefits for highly compensated employees without increasing the cost of providing benefits to lower-paid employeesEmployers must follow complex integration rules, such as the excess method.A top-heavy plan is a retirement plan in which more than 60% of the plan assets are in accounts attributed to key employeesTo retain its qualified status, a rapid vesting schedule must be used for nonkey employeesCertain minimum benefits or contributions must be provided for nonkey employeesTypes of Qualified Retirement PlansA wide variety of qualified plans are available today to meet the specific needs of employers The two basic types of plans areDefined benefit plansDefined contribution plansDifferent rules apply to each type of planDefined Benefit PlansRecall: in a defined benefit plan, the retirement benefit is known in advance, but the contributions vary depending on the amount needed to fund the desired benefitPlans typically pay benefits based on a unit-benefit formulaA firm may give an employee past-service credits for prior serviceA worker’s retirement benefit is guaranteedThe investment risk falls on the employerThese types of plans have declined in relative importance because they are more complex and expensive to administer than defined contribution plansDefined Benefit PlansContributions to defined benefit plans are limited:For 2009:The maximum annual benefit is limited to 100% of the worker’s average compensation for the three highest consecutive years or $195,000, whichever is lowerThe maximum annual compensation that can be counted in the contribution of benefits formula for all plans is $245,000Defined Benefit PlansThe Defined Benefit amount can be based on career-average earnings or final average payFormulas include: Unit-benefit formula considers both earnings and years of serviceFlat percentage of annual earningsFlat dollar amount for each year of serviceFlat dollar amount for all employeesDefined Benefit PlansThe Pension Benefit Guaranty Corporation (PBGC) is a federal corporation that guarantees the payment of vested benefits to certain limits if a private pension plan is terminatedFor plans terminated in 2009, the maximum guaranteed pension at age 65 is $4500 per monthMany traditional defined benefits plans are substantially underfunded at the present timeDefined Benefit PlansA cash-balance plan is a defined-benefit plan in which the benefits are defined in terms of a hypothetical account balanceActual retirement benefits will depend on the value of the participant’s account at retirementEach year, a participant’s “hypothetical” account is credited with a pay credit, which is related to compensation, and an interest creditThe employer bears the investment risks and realizes any investment gainsMany employers have converted traditional defined-benefit plans into cash-balance plans to hold down pension costsDefined Contribution PlansIn a defined contribution plan, the contribution rate is fixed by the actual retirement benefit is variableFor example, a money purchase plan is an arrangement in which each participant has an individual account, and the employer’s contribution is a fixed percentage of the participant’s compensationContributions to defined contribution retirement plans are limited:For 2009, the maximum annual contribution to a defined-contribution plan is 100% of earnings or $49,000, whichever is lowerWorkers age 50 or older can make an additional catch-up contribution of $5000 per yearDefined Contribution PlansMost newly installed qualified retirement plans are defined contribution plansCost to employer is lower because they do not grant past-service creditsDisadvantages to the employee include:Employees can only estimate their retirement benefitsInvestment losses are borne by the employeeSome employees do not understand the factors to consider in choosing investmentsSection 401(k) PlansA Section 401(k) plan is a qualified cash or deferred arrangement (CODA)Typically, both the employer and the employees contribute, and the employer matches part or all of the employee’s contributionsMost plans allow employees to determine how the funds are investedEmployees can voluntarily elect to have part of their salaries invested in the Section 401(k) plan through an elective deferralContributions accumulate tax-free, and funds are taxed as ordinary income when withdrawals are madeFor 2009, the maximum limit on elective deferrals is $16,500 for workers under age 50A firm must satisfy an actual deferral percentage test to prevent discrimination in favor of highly compensated employeesExhibit 17.2 Permissible Actual Deferral Percentages (ADPs) for Highly Compensated Employees (HCE)Section 401(k) PlansIf funds are withdrawn before age 59½, a 10% tax penalty applies, with some exceptionsThe plan may permit the withdrawal of funds for a hardshipIRS recognizes four reasons for hardship:To pay certain unreimbursable medical expenseTo purchase a primary residenceTo pay post-secondary education expensesTo make payments to prevent eviction or foreclosure on your homeThe 10% tax penalty applies, but plans typically have a loan provision that allows funds to be borrowed without a tax penaltyIn a Roth 401(k) plan, you can make contributions with after-tax dollars, and qualified distributions at retirement are received income-tax freeFinancial Meltdown and Declining 401(k) BalancesThe recent financial crisis has greatly affected employees’ retirements accountsThe stock market experienced one of its worst declines in historyEmployees with 401(k) accounts and other tax-deferred retirement accounts lost trillions of dollarsFinancial planners advise employees to:Gradually reduce the proportion of common stocks in 401(k) accountsConsider a life cycle fundConsider annuitizing part or all of 401(k) assetsReevaluate buy and hold strategiesDiversify out of company stock as you get older and closer to retirementDeferred Contribution PlansThe Pension Protection Act of 2006 contains provisions that affect 401(k) plans:Higher contribution limits made permanentEmployers can automatically enroll eligible workersPlan provider is allowed to give investment adviceNew limits on the time employers could require employees to hold company stock before it can be soldSection 403(b) plansA Section 403(b) plan is a retirement plan designed for employees of public educational systems and tax-exempt organizationsEligible employees voluntarily elect to reduce their salaries by a fixed amount, which is then invested in the planEmployers may make a matching contributionThe plan can be funded by purchasing an annuity from an insurance company or by investing in mutual fundsIn 2009, the maximum limit on elective deferrals for workers under age 50 is $16,500Employers have the option of allowing employees to invest in a Roth 403(b) plan Profit-Sharing PlansA profit-sharing plan is a defined-contribution plan in which the employer’s contributions are typically based on the firm’s profitsThere is no requirement that the employer must actually earn a profit to contribute to the planThe plan encourages employees to work more efficientlyFunds are distributed to the employees at retirement, death, disability, or termination of employment (only the vested portion), or after a fixed number of yearsFor 2009, the maximum employer tax-deductible contribution is limited to 25% of the employee’s compensation or $49,000, whichever is lessRetirement Plans for the Self-EmployedRetirement plans for the owners of unincorporated business firms are commonly called Keogh plansContributions to the plan are income-tax deductible, up to certain limitsInvestment income accumulates on a tax-deferred basisAmounts deposited and investment earnings are not taxed until the funds are distributedThe maximum annual contribution into a defined-contribution Keogh plan is limited to 20% of net earnings after subtracting ½ of the Social Security self-employment taxFor 2009, if the plan is a defined-benefit plan, a self-employed individual can fund for a maximum annual benefit equal to 100% of average compensation for the three highest consecutive years of compensation, or $195,000, whichever is lowerRetirement Plans for the Self-EmployedSome requirements for Keogh plans include:All employees at least age 21 and with one year of service must be included in the planCertain annual reports must be filed with the IRSSpecial top-heavy rules must be metAn individual 401(k) retirement plan combines a profit sharing plan with an individual 401(k) planTax savings are significantThe plan is limited to self-employed individuals or business owners with no employees other than a spouseFor 2009, the plan allows a maximum contribution of 25 percent of compensationTotal profit-sharing contributions and salary deferral for an individual under age 50 cannot exceed $49,000Simplified Employee Pension A simplified employee pension (SEP) is a retirement plan in which the employer contributes to an IRA established for each eligible employeeThe annual contribution limits are substantially higherPopular with smaller employers because they involve minimal paperworkIn a SEP-IRA, the employer contributes to an IRA owned by each employeeMust cover all workers who are at least age 21 and have worked for at least three of the past five yearsFor 2009, the maximum annual tax-deductible contribution is limited to 25% of the employee’s compensation or $49,000, whichever is less SIMPLE Retirement PlansSmaller employers are eligible to establish a Savings Incentive Match Plan for Employees, or SIMPLE planLimited to employers that employ 100 or fewer employees and do not maintain another qualified planSmaller employers are exempt from most nondiscrimination and administrative rules that apply to qualified plansCan be structured as an IRA or 401(k) planFor 2009, eligible employees can elect to contribute up to 100% of compensation up to a maximum of $11,500Employers can contribute in one of two ways:Under a matching option, the employer matches the employee’s contributions on a dollar-for-dollar basis up to 3% of the employee’s compensation, subject to a maximum limitUnder the nonelective contribution option, the employer must contribute 2% of compensation for each eligible employee, subject to a maximum limitFunding Agency and Funding InstrumentsA funding agency is a financial institution that provides for the accumulation or administration of the funds that will be used to pay pension benefitsThe plan is called a trust-fund plan if it is administered by a commercial bank or individual trusteeIf the funding agency is a life insurer, the plan is called an insured planIf both funding agencies are used, the plan is called a split-funded planA funding instrument is a trust agreement or insurance contract that states the terms under which the funding agency will accumulate, administer, and disburse the pension fundsFunding Agency and Funding InstrumentsUnder a trust-fund plan, all contributions are deposited with a trustee, who invests the funds according to the trust agreementThe trustee does not guarantee the adequacy of the fund, the principal itself, or interest ratesA separate investment account is a group pension product with a life insurance companyThe plan administrator can invest in one or more of the separate accounts offered by the insurer These accounts are popular because pension contributions can be invested in a wide variety of investments, including stock funds, bond funds, or similar investmentsFunding Agency and Funding InstrumentsA guaranteed investment contract (GIC) is an arrangement in which the insurer guarantees the interest rate for a number of years on a lump sum depositThese contracts are popular with employers because of interest rate guarantees and protection against the loss of principalAn investment guarantee contract is similar to a GIC, except that the insurer receives the pension funds over a number of years, and the guaranteed interest rate for the later years is only a projected rateThese contracts are appealing to employers who expect interest rates to rise in the future