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PHR SHRM

Modul e ' Four '


Module Four
Total Rewards
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SOCIETY FOR HUMAN
RESOURCE MANAGEMENT

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TOTAL REWARDS
Contents
Introduction 4-1
Section 4-1: Key Compensation Legislation 4-4
Legislation Affecting Compensation 4-6
Section 4-2: Total Rewards and the Strategic Focus of the Organization 4-40
Definition of a Total Rewards System 4-42
Objectives of a Total Rewards System 4-42
Section 4-3: Compensation Structure 4-50
J ob Evaluation 4-52
J ob Evaluation Methods 4-52
Pay Surveys 4-61
Data Analysis 4-63
Pay Structure 4-67
Section 4-4: Compensation Systems 4-76
Payroll Function and Systems 4-78
Base-Pay Systems 4-84
Pay Variations 4-91
Pay Adjustments 4-93
Differential Pay 4-95
I ncentive Pay 4-99
Pay Plans for Select Employees 4-110
Controlling Costs 4-117
Section 4-5: Introduction to Benefit Programs and Key Benefits Legislation ... 4-122
I ntroduction to Employee Benefit Programs 4-124
Benefit Needs Assessment 4-124
Legislation Affecting Benefits 4-127
Tax and Accounting Organizations Affecting Compensation and
Benefit Programs 4-167
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TOTAL REWARDS
Section 4-6: Government-Mandated Benefits 4-172
Benefits Required by Statute 4-174
Social Security/Medicare 4-174
Unemployment I nsurance 4-180
Workers' Compensation 4-182
Section 4-7: Deferred Compensation Plans 4-186
Deferred Compensation 4-188
Qualified Deferred Compensation Plans 4-188
Nonqualified Deferred Compensation Plans 4-201
Qualified Domestic Relations Orders (QDROs) 4-204
Section 4-8: Health-Care Benefits 4-208
Health-Care Benefits 4-210
Types of Health-Care Plans 4-210
Types of Health-Care Funding 4-213
Key Medical Insurance Terms 4-215
Controlling Health-Care Costs 4-217
Consumer-Directed Health Care 4-219
Flexible Benefit Plans Under Section 125 4-223
Section 4-9: Other Nonstatutory Benefits 4-230
Other Nonstatutory Benefits 4-232
Disability Benefits 4-232
Life I nsurance 4-235
Long-Term Care I nsurance 4-236
Severance Package 4-237
Supplemental Unemployment Benefits (SUB) 4-237
Paid Leave 4-238
Paid-Time-Off (PTO) Bank 4-240
Care of Dependents 4-240
Transportation Assistance : 4-241
Tuition Reimbursement 4-242
Prepaid Legal I nsurance 4-242
Tax Treatment of Benefits 4-242
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TOTAL REWARDS
Section 4-10: Compensation and Benefit Programs for
International Employees 4-246
I nternational Assignee Compensation and Benefits Issues 4-248
Compensation 4-251
Benefits 4-256
Section 4-11: Evaluating the Total Rewards System and
Communicating It to Employees 4-264
Evaluating the Effectiveness of Strategies and Programs 4-266
Communicating with Employees 4-267
Self-Service Technologies 4-269
Bibliography 4-273
Glossary 4-276
Index 4-287
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Acknowledgments
SHRM acknowledges the contributions of its volunteer leaders and staff members who have served as
subject matter experts for the 2011 Learning System.
Module subject matter experts
Wendy Bliss, J .D., SPHR
Principal, Bliss & Associates
Colorado Springs, Colorado
Deborah Keary, SPHR
Human Resources Director,
Society for Human
Resource Management
Alexandria, Virginia
J ennifer Loftus, SPHR-CA, GPHR,
CCP, CBP, GRP
National Director, Astron Solutions
New York, New York
Lynn C. Outwater, J .D., SPHR
Managing Partner, J ackson Lewis LLP
Pittsburgh, Pennsylvania
Gayle Porter, PhD, SPHR, GPHR
Professor of Management
Rutgers, The State University
School of Business
Camden, New J ersey
Nancy Volpe, SPHR, GPHR
Chief People Officer
Center for People Solutions LLC
Grandville, Michigan
For past contributions
Cornelia Gamlem, SPHR
President, GEMS Group Ltd.
Herndon, Virginia
Gary Kushner, SPHR, CBP
President and CEO, Kushner
and Company
Portage, Michigan
Michael Losey, SPHR, CAE
President and CEO, Society for
Human Resource Management
(retired)
President, MikeLosey.com
Fleming Island, Florida
Dr. Fraya Wagner-Marsh, SPHR,
GPHR
Department Head, Department of
Management, Eastern Michigan
University
Ypsilanti, Michigan
For test question contributions:
Brenda J imenez, SPHR
Senior Consultant
Diversity
Verizon Communications
Basking Ridge, New J ersey
Gena J ones, DM, SPHR
Assistant Vice President for Human
Resources
Texas Tech University Health
Sciences Center
Lubbock, Texas
Randy McCamey, PhD, SPHR
Associate Professor of Management
and Human Resources
Tarleton State University
Stephenville, Texas
For legal compliance:
J onathan A. Segal
Partner, Duane Morris LLP
Philadelphia, Pennsylvania
Linda B. Hollinshead
Partner, Duane Morris LLP
Philadelphia, Pennsylvania
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TOTAL REWARDS
Introduction
This module discusses the total rewards system in terms of its primary
categoriesdirect compensation and indirect compensation.
Figure 1 identifies sample components of a total rewards system.
Rewards Examples
Compensation (direct) Wages, commissions, bonuses
Benefits (indirect) 401 (k), life insurance, short-term disability coverage,
health insurance, dental insurance, vacations,
noncash rewards, perquisites
Location City or suburbs; nearness to transportation, shopping,
restaurants
Flexibility Work attire, schedules, work-at-home opportunities
Social interaction Friendly workplace
Stability Employment and rewards packages that do not
change dramatically in content or value from year to
year
Status/recognition Respect and prominence due to work contributions
Work variety Opportunities to experience different job tasks,
responsibilities, and project opportunities
Workload Work that can be accomplished in time allotted
Work importance Value of work to organization or society
Authority/control/
autonomy
Ability to influence others and control one's own
destiny
Advancement Opportunities to get ahead
Work conditions Hazard-free workplace
Development
opportunities
Formal and informal training to learn new knowledge/
skills/abilities related to the job
Personal growth After-hours parenting classes, lunch-hour sessions for
self-improvement
Figure 1. Sample Components of a Total Rewards System
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TOTAL REWARDS
Note that the total rewards system an organization offers to its employees
goes beyond financial issues and incorporates all aspects of the work
environment.
Module 4: Total Rewards examines how to develop/select, implement/
administer, and evaluate compensation and benefits programs that support
the organization's strategic goals, objectives, and values.
The module begins with an examination of the legislation that affects
compensation programs.
Next, a total rewards system is positioned as an intrinsic part of the
organization's strategic direction, and the module focuses on how the HR
professional can leverage total rewards as a competitive advantage.
After exploring the legal and strategic frameworks impacting compensation
programs, the module details methods for determining internal and external
j ob value.
The module then moves into the organization to help the HR professional
better understand the payroll function and its vital role in the administration
of compensation and benefits. The module also explores a variety of methods
for delivering cash compensation to employees, including base pay
adjustments and variable compensation. Legislation affecting benefit
programs is covered.
Specific compensation and benefit programs are the focus of most of the
remainder of the module, including compensation and benefit packages for
international employees.
The module ends with a discussion of how to evaluate the total rewards
system and communicate the benefits of that system to employees.
While the module includes legal content, it should not be construed as legal
advice or as pertaining to specific factual situations. No general statement of
law, no matter how seemingly simple, can be applied to any particular factual
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TOTAL REWARDS
situation without a full, careful, and confidential analysis of all relevant facts,
the employer's policies and practices, and the applicable federal, state, and local
laws of the jurisdiction(s) in which the employer operates.
Progress checks are included at the end of each section in the module to help
you monitor your learning. These will be more useful if you check your
written responses against the recommended answers and the content of the
section.
The content in this module accounts for 16% of the PHR examination (36
questions) and 12% of the SPHR examination (27 questions).
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Total Rewards
4. 1
Key Compensation Legislation
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-1
A
4
HR responsibilities related to this section include:
Ensure that compensation and benefits programs are
compliant with applicable federal, state, and local laws
and regulations.
This section is designed to increase your knowledge of:
Federal, state, and local compensation, benefits, and tax
laws.
Organizational documentation requirements to meet
federal and state requirements.
TOTAL REWARDS Section 4 1
Legislation Affecting Compensation
Federal, state, and local governments play a significant role in the management
of employee compensation. Legislation on all levels has been enacted to
establish a minimum wage, govern overtime pay, protect employees from wage
discrimination, and determine how compensation is taxed.
The federal government sets minimum standards relative to how much and how
employees are paid in the following legislation:
Davis-Bacon Act and related acts
Copeland "Anti-Kickback" Act
Walsh-Healey Act
Service Contract Act
Fair Labor Standards Act
Portal-to-Portal Act
Equal Pay Act
Age Discrimination in Employment Act
Work Opportunity Tax Credit
Lilly Ledbetter Fair Pay Act
Davis-Bacon Act, 1931
The Davis-Bacon Act and related acts require contractors and subcontractors on
certain federally funded or assisted construction projects in excess of $2,000
each in the U.S. to pay wages and fringe benefits at least equal to those
prevailing in the geographic area where the work is performed. The Wage and
Hour Division of the U.S. Department of Labor issues two types of wage
determinations:
A general determination defines wage rates and fringe benefits determined
by the Wage and Hour Division to be the prevailing standards in a specific
geographic area for the type of construction described.
A project determination is a wage determination issued at the specific
request of a contracting agency.
The law applies to laborers and mechanics who are employed on a particular
project. Trainees and apprentices may be paid less than the predetermined rates
under certain circumstances.
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TOTAL REWARDS Section 4 1
Copeland "Anti-Kickback" Act, 1934
The Copeland "Anti-Kickback" Act, as amended, precludes a federal
contractor or subcontractor from in any way inducing an employee to give up
any part of the compensation to which he or she is entitled under his or her
contract of employment. The criminal and civil penalties include a maximum
five-year prison term, a $5,000 fine, or both.
Walsh-Healey Act, 1936
The Walsh-Healey Act of 1936 extended the concept of prevailing wage (as
stated in the Davis-Bacon Act) to manufacturers and suppliers of goods for
federal government contracts in excess of $10,000 each. The act also requires
that time and a half be paid to nonexempt employees for work exceeding 40
hours in a workweek.
The' Defense Authorization Bill of 1986, however, excluded federal
contractors from overtime pay requirements after eight hours of work in a .
day. In this case, time and a half must be paid only for hours in excess of 40
per week. ~ - ,
Service Contract Act, 1965
The Service Contract Act extended prevailing wage rate and benefit
requirements to employers providing services (other than construction
services, which are covered by the Davis-Bacon Act) under federal
government contracts in excess of $2,500 each. According to the act, service
employees include guards, watch persons, and people engaged in a
recognized trade or craft.
Fair Labor Standards Act (FLSA), 1938
The Fair Labor Standards Act (FLSA) of 1938, commonly referred to as the
Wage and Hour Law, is the broadest piece of labor legislation in the U.S. It was
designed to protect workers and address conditions that burdened the American
economy during the Great Depression.
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TOTAL REWARDS Section 4 1
FLSA compliance requirements
The FLSA applies to enterprises with employees who:
Engage in interstate commerce.
Produce goods for interstate commerce.
Handle, sell, or work on goods or materials that have been moved in or produced
for interstate commerce.
The FLSA applies to employers with at least $500,000 in annual dollar volume of
business. However, there are some exceptions.
The FLSA covers the following organizations regardless of the dollar volume of
their businesses:
Hospitals
Institutions primarily engaged in the care of the sick, aged, mentally ill, or
disabled who reside on the premises
Schools for children who are mentally or physically disabled or gifted
Preschools, elementary and secondary schools, and institutions of higher
education
Federal, state, and local government agencies
Employees of companies that do not meet the $500,000 annual dollar volume test
may also be covered by the FLSA if they are individually engaged in interstate
commerce, the production of goods for interstate commerce, or an activity that is
closely related and directly essential to the production of such goods. These
employees may be covered in any workweek during which they engage in this work.
Under certain circumstances, the FLSA may also cover domestic service workers,
such as day workers, housekeepers, chauffeurs, cooks, or full-time babysitters.
Employee status versus independent contractor status
An employer has no ongoing obligations under FLSA to self-employed
independent contractors. Therefore, it is critical that the organization clearly
identify .which of its workers are employees (covered by FLS.A regulations)
and which are independent contractors (not covered by FLSA regulations).
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TOTAL REWARDS Section 4 1
Module 2: Workforce Planning and Employment discusses independent
contractors as a type of flexible staffing alternative.
The distinction between employees (who receive Form W-2) and
independent contractors (who receive Form 1099) is not philosophical or
always apparent. Titles or labels affixed to particular workers often are
misleading and should not be relied upon to determine a worker's
classification.
The following are some critical tests for an independent contractor:
Ability to set own hours and determine sequence of work
Working off-site
Working by the project rather than having a continuous relationship with
the employer
Being paid by the j ob
Opportunity for profit and loss
Furnishing own tools and training
Being self-employed and holding oneself out as such
In a Wage and Hour Division Opinion Letter, the federal Department of Labor
(DOL) considered the following factors when determining a contractor
relationship:
The nature and degree of control retained or exercised by the alleged
employer
The amount of the alleged contractor's investment in facilities and
equipment
The permanency of the relationship
Opportunities for profit or loss by the alleged contractor
The extent to whi ch the services in question are an integral part of the
alleged empl oyer's business
The degree of independent initiative, judgment, and skill required to
perform the work
The I RS uses 11 main tests and organizes them into three mai n groups:
behavioral control, financial control, and the relationship of the parties.
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TOTAL REWARDS Section 4 1
Behavioral control. Facts that show whether the business has a right to direct
and control how the worker does the task for which the worker is hired include
the type and degree of the following:
Instructions the business gives the worker. An employee is generally
subject to business instructions about when, where, and how to work. All of
the following are examples of types of instructions about how to do work:
When and where to do the work
e What tools or equipment to use
What workers to hire or to assist with the work
Where to purchase supplies and services
e What work must be performed by a specified individual
What order or sequence to follow
The amount of instruction needed varies among different jobs. Even if no
instructions are given, sufficient behavioral control may exist if the
employer has the right to control how the work results are achieved. A
business may lack the knowledge to instruct some highly specialized
professionals; in other cases, the task may require little or no instruction.
The key consideration is whether the business has retained the right to
control the details of a worker's performance or instead has given up that
right.
Training the business gives the worker. An employee may be trained to
perform services in a particular manner. I ndependent contractors ordinarily
use their own methods.
Financial control. Facts that show whether the business has a right to control the
business aspects of the worker's job include the following:
The extent to which the worker has unreimbursed business expenses.
I ndependent contractors are more likely to have unreimbursed expenses than
are employees. Fixed ongoing costs that are incurred regardless of whether
work is currently being performed are especially important. However,
employees may also incur unreimbursed expenses in connection with the
services they perform for their business.
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TOTAL REWARDS Section 4-3
The extent of the worker's investment. An employee usually has no
investment in the work other than his or her own time. An independent
contractor often has a significant, substantive investment in the facilities he
or she uses in performing services for someone else. However, a significant
investment is not necessary for independent contractor status.
The extent to which the worker makes services available to the
relevant market. An independent contractor is generally free to seek out
business opportunities. I ndependent contractors often advertise, maintain a
visible business location, and are available to work in the relevant market.
How the business pays the worker. A regular wage amount for an hourly,
weekly, or other period of time usually indicates that a worker is an
employee, even when the wage or salary is supplemented by a
commission. An independent contractor is usually paid by a flat fee for the
job. However, it is common in some professions, such as law, to pay
independent contractors hourly.
The extent to which the worker can realize a profit or loss. Since an
employer usually provides employees a workplace, tools, materials,
equipment, and supplies needed for the work and generally pays the costs
of doing business, employees do not have an opportunity to make a profit
or loss. An independent contractor can make a profit or loss.
Type of relationship. Facts that show the parties' type of relationship include the
following:
Written contracts describing the relationship the parties intended to
create. This is probably the least important of the criteria, since what really
matters is the nature of the underlying work relationship, not what the parties
choose to call it. However, in close cases, the written contract can make a
difference.
Whether the business provides the worker with employee-type benefits,
such as insurance, a pension plan, vacation pay, or sick pay. The power to
grant benefits carries with it the power to take them away, which is a power
generally exercised by employers over employees. A true independent
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TOTAL REWARDS Section 4 1
contractor will finance his or her own benefits out of the overall profits of the
enterprise.
The permanency of the relationship. If the company engages a worker with
the expectation that the relationship will continue indefinitely rather than for a
specific project or period, this is generally considered evidence that the intent
was to create an employer-employee relationship.
The extent to which services performed by the worker are a key aspect of
the regular business of the company. If a worker provides services that are a
key aspect of the company's regular business activity, it is more likely that the
company will have the right to direct and control his or her activities. For
example, if a law firm hires an attorney, it is likely that it will present the
attorney's work as its own and would have the right to control or direct that
work. This would indicate an employer-employee relationship.
Complete information can be downloaded from www.irs.gov/pub/irs-
pdf/p 15a.pdf.
Exempt employees versus nonexempt employees
Once the employer has determined that a worker is an employee and is covered
by the FLSA, the next step is to determine if the employee is exempt or
nonexempt as defined by the FLSA. Figure 2 shows the path the employer
follows to determine worker status.
Figure 2. Determining Worker Status
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TOTAL REWARDS Section 4-3
The exempt/nonexempt distinction is important. Under the FLSA, exempt
employees are excluded from the minimum wage and overtime pay
requirements of the law. To qualify for exemption, these employees must
work in a bona fide manner in positions such as executive, administrative,
professional, and outside sales positions. In general, they must meet certain
tests regarding their job duties and must be paid on a salary basis at not less
than $455 per week. Nonexempt employees are not excluded from
minimum wage pay requirements and are entitled to overtime pay.
Most workers who are paid less than $23,660 per yearor $455 per weekare
guaranteed minimum wage and overtime protection and classified as nonexempt
employees under the FLSA. Any employee compensated on an hourly basis is
automatically considered a nonexempt employee under the FLSA, except for
certain computer employees discussed later. Before determining an employee's
exemption status, employers should also refer to the applicable state law.
Employees are entitled to the advantages and rights under both state and federal
law.
FLSA exemptions. Generally, in order for an employee to be exempt, three
requirements must be met: (1) minimum salary, (2) paid on a salary basis
(without improper deductions; see the discussion of improper deductions later in
this section), and (3) exempt duties.
The issue of "primary duty" is an important part of the exemption. A "primary
duty" is the main or most important duty of the position. Although no particular
percentage of exempt duties is required, the lower the percentage of exempt
duties, the greater the legal risk if challenged.
Conversely, if more than 50% of an employee's time is spent performing
exempt work, the employee is more likely to be considered exempt. However,
there is no 50% requirement under federal law.
In 2004, the Department of Labor issued regulations on the FLSA's white-collar
exemptions. The following categories of employees are referred to as white-
collar exemptions: executive, administrative, professional, highly compensated,
computer, and outside sales. These employees are exempt from overtime pay.
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TOTAL REWARDS Section 4 1
To qualify for the executive exemption, the employee must:
Have a primary duty involving management of an enterprise or a
customarily recognized department or subdivision of the enterprise.
Customarily and regularly direct the work of at least two or more other
full-time employees or their equivalent.
Have the authority of the employer to hire or fire other employees, or the
employer gives the employee's suggestions and recommendations as to
the hiring, firing, advancement, promotion, or any other change of status
of other employees particular weight.
Generally, in order to fall within this exemption, the employee must give
recommendations pertaining to employees whom the executive customarily and
regularly directs. Occasional suggestions are not enough to meet this requirement.
To qualify for the administrative exemption, an employee must have a
primary duty involving performance of office or nonmanual work directly
related to the management or general business operations of the employer or
the employer's customers. It must include the exercise of discretion and
independent judgment with respect to matters of significance.
The regulations also attempt to clarify "matters of significance," noting that
the phrase refers to the level of importance or consequence of the work
performed. An example of a position in this category would be an internal
auditor of a firm who runs a one-person department and reports directly to the
board of directors.
Aii employee does not exercise discretion and independent judgment with
respect to matters of significance merely because the employer will
experience financial losses if the employee fails to perform the job properly
or because the employee operates very expensive equipment.
The professional exemption is divided into two categories: learned
professionals and creative professionals.
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TOTAL REWARDS Section 4-3
Learned professionals
The learned professional exemption encompasses jobs with a primary duty
of the performance of work requiring advanced knowledge, defined as work
predominantly intellectual in character and including work requiring the
consistent exercise of discretion and judgment. The advanced knowledge
must also be in a field of science or learning and is customarily acquired by
a prolonged course of specialized intellectual instruction.
The "specialized intellectual instruction" requirement restricts the
exemption to professions where specialized academic training is a standard
prerequisite for entrance into the profession. An academic degree, such as a
bachelor's or master's degree in a specialized area, is the best evidence that
an employee satisfies this requirement. However, the exemption may also be
available, under certain limited circumstances, to employees in such
professions who attained their advanced knowledge through a combination
of work experience and intellectual instruction. It is important to note,
however, that having a specialized degree alone will not guarantee that an
employee meets the learned professional exemption. The employee must
still have, as his or her primary duty, the performance of work requiring the
advanced knowledge.
The exemption is not available for occupations that are usually performed
* with general knowledge acquired by an academic degree in any field or ,
> knowledge acquired through an apprenticeship or for occupations in which
most employees acquire their skill by experience. Doctors, lawyers,
' __ teachers, engineers,' scientists, pharmacists, dental hygienists, accountants,
" architects, theologians, and registered or certified medicaltechnologists
are among the occupations that will usually meet the requirements of the
learned professional exemption. -
The minimum salary and salary basis requirements for this exemption do not
apply to doctors, lawyers, and teachers.
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Creative professionals
To qualify for the creative professional exemption, an employee must meet
minimum salary requirements and must have a primary duty performing
work that requires invention, imagination, originality, or talent in a
recognized field of artistic or creative endeavor.
This exemption includes fields such as music, writing, acting, and
v graphic arts.
J ournalists may qualify for this exemption if their primary duty is work
requiring invention, imagination, originality, or talent. This may include
investigative interviews; writing editorials, opinion columns, or other
commentary; analyzing or interpreting public events; and performing on
the air in radio, television, or other electronic media.
The regulations also provide a special exemption for highly compensated
employees (HCEs).
Highly compensated employees performing office or nonmanual work
. and paid total annual compensation of $100,000 or more (which must
include at least $455 per week paid on' a salary or fee basis) are exempt
from the FLSA if they customarily .and regularly perform at least one of -
1
the duties of an exempt executive, administrative, or professional
employee identified in .the standard tests for exemption.
Rules relating to computer employees were once scattered throughout the
FLSA regulations. All these regulations are now in one section.
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TOTAL REWARDS Section 4-3
Computer employees must meet the salary minimum but may do so with either
a salary of $455 per week or $27.63 per hour. I f the employee is paid on a
salary rather than hourly basis, the employee's pay cannot be subject to
deductions inconsistent with the salary basis requirement. Additionally, the
employee's primary duties must fall into one of four categories:
Application of systems analysis techniques and procedures
Design,; development, documentation, analysis, creation, testing, or
modification of computer systems or progranis
Design documentation, testing, creation, or modification of computer
programs related to machine operating systems
A combination of these duties
To qualify for the outside sales exemption, an employee must:
Have a primary duty involving making sales (as defined in the FLSA) or
obtaining orders or contracts for services or for the use of facilities for
which a consideration will be paid by the client or customer.
Customarily and regularly be engaged away from the employer's place or
places.of business.
Outside sales employees are not subject to the minimum salary and salary
basis requirements needed to qualify for the other exemptions.
Improper deductions and safe harbor. Employers that make improper
deductions from an otherwise exempt employee's salary will lose the exemption
if facts demonstrate that the employer did not intend to pay employees on a
salary basis. The regulations list a number of factors to consider for purposes of
determining whether an employer has a practice of making improper
deductions. For example, an exempt employee's pay cannot be subject to
deductions for illness or disability in less than full-day increments. The only
narrow exception is if the absence is due to a serious health condition or other
qualifying event covered by the Family and Medical Leave Act.
I f facts demonstrate that the employer has an actual practice of making improper
deductions, then the employer loses the overtime exemption for all employees in the
same j ob classification working under the individuals responsible for the improper
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deductions during the time period in which the improper deductions were made.
However, when the improper deductions are either isolated or inadvertent, the
employer will not lose the exemption as long as it reimburses the employees for the
improper deductions.
A safe-harbor provision prevents an employer from losing an overtime
exemption for improper pay deductionsregardless of the reason for the
=
improper deductionswhere the employer:
Has a "clearly communicated policy": that prohibits improper pay
deductions and includes a complaint mechanism- "
Reimburses employees for any improper deductions.
Makes a good-faith effort to comply in the future.
While the DOL has stated that a written policy is the best evidence of an
employer's good-faith efforts to comply with the regulations, a written policy is
not required. However, the employer must communicate the policy to employees
prior to the impermissible deduction.
The "clearly communicated" standard could be met by providing a copy of the policy
to all newly hired employees, by publishing the policy in a company handbook or on
an intranet, or, for small businesses, through an oral statement to employees.
Blue-collar workers and veteran status. The DOL has defined blue-collar
workers and veterans in the following manner.
| Blue-collar workers are defined as those who perform work involving
* repetitive operations with their hands, physical skill, and energy. The DOL
has stated that individuals in these positions will not be exempt no matter
how highly they are compensated.
Example: Mechanics, plumbers, electricians, maintenance workers,
production workers, and construction workers are among the positions
identified as blue-collar.
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The DOL has stated that military training is generally not sufficient to meet the
requirements of the professional exemption. This is because the learned
professional exemption applies only to employees in occupations that have
attained recognized professional status. Thus, veterans working in traditionally
blue-collar positions will not find themselves subject to the white-collar
exemption because of their military training and/or experience.
Specific jobs. The regulations provide several examples of positions that qualify
for overtime and those that are exempt.
Each of these provisions once again states that exemptions are based not on j ob
titles but on j ob duties. Thus, while the specific j obs listed are likely to fall into
the categories suggested by the DOL, case-by-case analysis will still be
necessary. The j ob description becomes a key document for determining FLSA
status. Therefore, organizations need to keep their j ob descriptions up-to-date to
ensure that they accurately reflect j ob duties.
See Module 2: Workforce Planning and Employment for more on j ob descriptions.
Examples include the following.
First respondersFirst responders, including police, fire fighters,
paramedics, correctional officers, park rangers, and other similar workers,
will generally not be exempt from overtime payments because their primary
duty is not management and a specialized degree is not usually required.
Insurance adjustersSubject to the case-by-case caveat, these individuals
are likely to be administratively exempt if their duties include activities such
as interviewing the insured, witnesses, and physicians; inspecting property
damage; making recommendations regarding coverage of claims;
negotiating settlements; and making recommendations regarding litigation.
Financial service industry workersAgain, subject to case-by-case analysis,
these individuals are likely to be administratively exempt if their duties include
collecting and analyzing information regarding a customer's income, assets,
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investments, or debts; advising the customer regarding advantages and
disadvantages of different financial products; marketing, servicing, or
promoting the employer's financial products; or other similar duties.
Human resources employeesThese individuals are likely administratively
exempt if their job duties include formulation, interpretation, or
implementation of employment policies or if the employee works as a
management consultant who studies business operations and proposes changes
in the organization. However, if the HR employee does not have discretion and
independent judgment, he or she will not be exempt.
NursesRegistered nurses, licensed by an appropriate state board, will
most likely qualify for the learned professional exemption if they are paid
on a salary basis. However, licensed practical nurses and similar health-care
providers would not be exempt because possession of a specialized degree is
not a standard prerequisite for the occupation.
Technologists and techniciansThese individuals will generally not
qualify for the learned professional exemption because the occupations are
not of recognized professional status. Examples include veterinary
technicians, ultrasound technicians, and engineering technicians.
Overtime pay
I I S All nonexempt workers must be paid overtime pay1.5 times their regular
rate of pay for hours worked in excess of 40 in any workweek. The regular
L " -
1
rate of pay includes basic pay plus nondiscretionary bonuses, shift premiums,
production bonuses, and commissions. It does not include other supplemental
earnings such as .discretionary bonuses,..employers
5
contributions to benefit
plans,-pay for unworked hours, or small noncash gifts on special occasions
iJ.IIP'
1
*' -
!' 7 .(generally valued under $25, such as a holiday turkey).
The FLSA requires that overtime be paid on time worked, not time
compensated. Therefore, no overtime need be paid on sick pay, holiday pay,
vacation pay, jury duty pay, or similar compensation for unworked days. Some
organizations, however, do voluntarily treat such time as time worked for the
purpose of determining overtime pay.
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A workweek is any fixed, recurring period of 168 consecutive hours (7 days x 24
hours = 168 hours). An employer's workweek may begin on any day of the week,
but it must be consistent from week to week. An employer may have different
workweeks for different locations and/or classifications of employees. For
instance, truck drivers required to deliver material by Mondaythe beginning of
the workweek for othersmay have a workweek that starts on Sunday.
Time worked as it applies to overtime. Since overtime covers only time
actually worked, a key question is when the workday actually begins and ends.
If the employee is preparing to work but not yet doing anything productive, do
these hours need to be included in the overtime calculation?
The FLSA did not initially define the term "hours worked" and, consequently,
Congress amended the act; the general rules are now defined by the Portal-to-
Portal Act, which is the next law covered in this section.
It is important to recognize that the law says that the employer "shall not
permit" employees to work overtime (over 40 hours per workweek) without the
payment of an overtime premium. The intent was to discourage overtime and
promote employment as a Depression-recovery mechanism. The employer is
prevented from using the defense that the employee volunteered to work
overtime. As such, employers must be cautious and not allow nonexempt
employees to volunteer to work overtime without prior management approval. If
a nonexempt employee works unauthorized overtime, the employee must be
paid for that time but may also be subject to discipline.
Additionally, employers must be sure that nonexempt employees are fully
relieved of their duties during lunch or other breaks and that lunch and other
breaks are of the length of time required under federal and state law. For
example, nonexempt employees who answer business e-mails while eating
lunch at their desks may be owed compensation not only for the time that is
worked but also for the entire break perioddepending on the amount of work
that is performed during that break. Again, while an employee who works
during a break is entitled to be compensated for such time, the employee may
also be subject to discipline.
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Compensatory time as it applies to overtime. I n general, overtime must be
paid in cash. At the present time, compensatory time is not allowed for
nonexempt employees in the private sector, which includes those
organizations not controlled by the government, such as privately owned
. businesses and not-for-profit organizations.
However; public-sector employers, generally comprising entities of the
federal, state, and local governments; may grant compensatory time off
("comp" time) instead of cash in certain-circumstances. The FLSA requires
that compensatory time be earned at a rate of not less than one and one-half
hours for cach hour of employment for which overtime compensation is
required.
Public safety employees (e.g., police and fire fighters), individuals engaged in
certain emergency response activities, and certain seasonal employees can
accumulate up to 480 hours of compensatory time; other public employees can
accumulate up to 240 hours of compensatory time.
Other FLSA regulations
Along with employee status, the FLSA regulates the following.
Child labor provisions. The FLSA restricts the hours and conditions of
employment for minors. It protects children under 18 years of age from
"oppressive" conditions of employment.
Employers should obtain a proof-of-age certificate approved by the Wage and
Hour Division of the DOL; this certificate is usually issued by the appropriate
state agency. The general rule is that minors who are employed are not allowed
to perform tasks that may be detrimental to their health or physical and mental
safety.
Figure 3 summarizes FLSA regulations regarding the employment of minors.
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Age FLSA Regulations
Under age 14
Prohibited from most nonfarm work
May be employed by parents, except in hazardous industries,
manufacturing, or mining
Certain jobs permitted (for example, actors, newspaper carriers)
Ages 14-15
During school hours, cannot work more than three hours/day, 18
hours/week
During school vacations, cannot work more than eight hours/day,
40 hours/week
Hours restricted to 7:00 a.m. to 7:00 p.m. (to 9:00 p.m. from
J une 1 to Labor Day)
Ages 16-17
Prohibited from working on hazardous jobs such as operating
trash binders or shredders or material-handling equipment
No other restrictions
Figure 3. Employment of Minors
States may pass more restrictive laws, so HR professionals whose organizations
employ minors should be aware of their state's laws. In all cases, when state and
FLSA regulations differ, the regulation that most benefits the employee takes
precedent.
On May 20, 2010, the U.S. Department of Labor's Wage and Hour Division
published a final rule on nonagricultural child labor. The intent of the new
regulations, which went into effect on J uly 19, 2010, is to enhance the safety of
workers ages 14 through 17 while providing these workers additional
opportunities to develop job-related skills and successfully enter the workforce.
The regulations introduce several new changes to child labor considerations,
including the following.
Under the new regulations, children aged 14 and 15 can work in an expanded
number of industries and jobs, including advertising, banking, computer
programming, drawing, and teaching. Under certain circumstances, minors
aged at least 15 years are also allowed to work as lifeguards at swimming
pools and amusement parks.
The new regulations expand the work-study program option to students
enrolled in a college-preparatory curriculum. The work-study option is
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TOTAL REWARDS Section 4 1
intended to help these students fund their college costs and realize their
academic potential.
In addition to expanding the list of approved industries and jobs, the new
regulations have also limited the industries and jobs in which 14- and 15-
year-olds can work. The regulations now prohibit door-to-door sales by
children under the age of 16. This prohibition includes not only the direct
sales activity itself but also supporting work normally associated with door-
to-door sales, such as loading and unloading vans and stocking sales kits.
This prohibition, however, does not apply to unpaid volunteers working for
charitable purposes, nor to work performed in an employer's exterior
facilities, such as a parking lot or garden center.
The new regulations provide an expanded and/or clarified list of hazardous
industries in which employment for workers under 18 is prohibited, including
construction, poultry slaughtering, and forest fire fighting.
Minimum wage. On May 25, 2007, President George W. Bush signed into law
the Fair Minimum Wage Act. This legislation raised the minimum wage to $7.25
per hour by J uly 2009, in three phases:
Phase 1: Beginning on J uly 24, 2007, the minimum wage became $5.85/hour.
Phase 2: Beginning on J uly 24, 2008, the minimum wage became $6.55/hour.
Phase 3: Beginning on J uly 24, 2009, the minimum wage became $7.25/hour.
This minimum wage applies to all employees who meet the current criteria set
forth in the Fair Labor Standards Act. The FLSA requires employers to pay
covered nonexempt employees at least the federal minimum wage for all hours
worked up to 40 in a workweek.
Exceptions include but are not limited to:
Employees younger than 20 years old, during their first 90 consecutive
calendar days of employment.
Tipped employees. Employers of tipped employees must pay a cash wage of at
least $2.13 per hour if they claim a tip credit against their minimum wage
obligation. If an employee's tips combined with the employer's cash wage of
at least $2.13 per hour do not equal the minimum hourly wage, the employer
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must make up the difference. States may have higher rates for tipped
employees.
Full-time students who are employed in retail or service establishments,
agriculture, or institutions of higher education, but only if the employer first
obtains a certificate from the appropriate regional office of the DOL's Wage
and Hour Division, under the Full-time Student Program.
Student learners who are students at an accredited school, college, or
university who are at least 16 years of age and who are employed on a part-
time basis pursuant to a bona fide vocational training program, but only if the
employer first obtains a student learner certificate from the appropriate
regional offi ce of the DOL's Wage and Hour Division.
Workers whose earning or productive capacity is impaired by physical or
mental disability. These workers may be paid less than the standard mi ni mum
wage, but only if the employer first obtains a certificate from the appropriate
regional offi ce of the DOL's Wage and Hour Division.
Businesses need to display the Department of Labor's required "Federal
Minimum Wage" poster. Employers can get a free copy by visiting the
Department of Labor Web site, www.dol.gov.
Record keeping. Under its record-keeping provisions, the FLSA requires that
an employer retain certain information regarding its employees for a set period
of time. Refer to Section 2-11 of Module 2: Workforce Planning and
Employment for more information regarding the keeping of employee records.
Other administrative concerns. The FLSA also addresses the following
issues.
Enforcement
The Wage and Hour Division of the DOL has broad powers to enforce
the FLSA minimum-wage and overtime provisions or prevailing rates
for contractors subject to the Davis-Bacon Act and the Service Contract
Act (which were covered earlier in this section).
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Investigating claims
Any employee covered by the FLSA may initiate a complaint. An
investigator will visit the work site of the claimed infraction and review the
employer's pay practices and status determinations. A conference between
the investigator and representatives of the employers will be held to discuss a
settlement. If none is agreed to, the employer can be taken to court by either
the secretary of labor or the employees who are owed unpaid back wages.
' "Penalties
An employer who violates the FLSA's requirements to pay overtime is
liable to an employee in the amount of the unpaid overtime compensation
as well as an additional, equal amount as liquidated damages. The statute
of limitations under the FLSA is generally two years, but the time period
can be extended to three years if there has been a willful violation. In
addition to an award of unpaid wages, the employee is also entitled to
recover reasonable attorneys' fees and costs incurred in bringing the
action. An employee may not bring suit if he or she has been paid back
wages under the supervision of Wage and Hour Division of the U.S .
Department of Labor or if the secretary of labor has already filed suit to
recover the wages. Criminal penalties of not more than $10,000 and six
months' imprisonment may also be imposed for certain willful violations.
Under the FLSA, a violation is willful generally if the employer knew or
showed reckless disregard as to whether its conduct violated the law. -
When state laws differ
While the FLSA defines a great deal about the employer-employee
relationship, there are many aspects regarding employee compensation and
benefits that are either not covered by the FLSA or that are also governed by
state law. For instance, questions such as pay frequency, severance or vacation
pay, and the disposition of unclaimed wages (escheat laws), if regulated at all,
are governed by the states, usually under their own state wage and hour laws.
In addition, some states have passed legislation that is more generous than the
federal guidelines. For example, a state may require a higher minimum wage
than the federal government.
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A general rule is: Whenever state and federal laws differ, follow the regulation
that most benefits the employee. Thus, if the state mi ni mum wage is $7.50 and
the federal minimum is $7.25, employers in that state must pay employees at
least $7.50 per hour. Conversely, if the federal mi ni mum wage is higher than
the state mi ni mum wage, the employer must pay the federal minimum wage. If
the state does not have a minimum wage, the employer must pay the federal
minimum wage. Mi ni mum wage requirements are made more complex by the
fact that some municipalities have instituted "living wage" ordinances that
stipulate pay rates that exceed both state and federal minimums.
It is important to look at state law not only with regard to nonexempt
employees but also with regard to exempt employees. There are a number of
ways in which state law may be more restrictive than federal law in terms of
whether an employee is exempt. For example:
Certain exemptions under federal law may not be recognized under state
law. Some states do not recognize the highly compensated executive
exemption and/or the computer exemption.
Even if an exemption is recognized under federal and state law, percentage
limitations on nonexempt work that no longer apply under federal law still
may apply under state law. Plus, there may be a higher minimum salary
requirement in some states with regard to certain exemptions.
Equally important, the potential damages may be greater under state law.
For example, in some states, the penalties for willful violations are even
greater (for example, up to 30 days' pay for each violation, regardless of
how small the violation may be).
The legal publisher Commerce Clearing House has prepared a list of tips for
employers regarding regulations under the Fair Labor Standards Act. This list
can be accessed at cch.com/press/news/2004/20040329h.asp.
Portal-to-Portal Act, 1947
The Portal-to-Portal Act amended the FLSA and defined general rules for
hours worked. Frequent claims for overtime arise from periods before and after
work as well as work taken home by nonexempt personnel. Many of these
situations continue to be determined case by case in the courts. Following are
some guidelines included in the Portal-to-Portal Act and its amendments.
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On-call/standby time
If the employer restricts an employee's activities and does not allow any
persona] business, then the hours are included in overtime. The FLSA does not
require employers to pay overtime when an employee is off the premises and
on call (asked to stay by the phone or respond to a beeper), as long as the
employee generally is not otherwise restricted.
Federal district courts, however, may differ in their interpretation. Generally,
the more restricted an employee's freedom is, the more likely the time will be
considered compensable working time.
Preparatory/concluding activities
Certain types of preparatory and concluding activities must be compensated, and
others need not be. The general test is whether the activity is performed solely for
the employer's benefit and is an indispensable part of the empl oyee's j ob activities
(e.g., putting on safety gear, making deliveries for the employer on the way home).
On November 8, 2005, the Supreme Court ruled in IBP, Inc., v. Alvarez that all
time spent donning or doffing unique safety gear is compensable and that the
FLSA requires payment of affected employees for all time spent walking between
changing and production areas.
The Supreme Court also held that the employees' predonning waiting time is not
compensable under the FLSA. The Court reasoned that such waiting was
sufficiently removed from the employer's production processes so that it could not
be reasonably considered "integral and indispensable" to a "principal activity."
Nonetheless, the Court suggested that, if an employer requires its workers to report
to a changing area at a specific time and protective gear is unavailable to those
workers for reasons beyond the workers' control, such time spent waiting for the
gear to become available would likely be compensable under the FLSA.
Changing in and out of uniforms is a growing litigation issue. Generally speaking, an
employee must be paid for the changing time if he or she is required to change in
and out of his or her uniform at work; ordinarily the employee does not have to be
paid for such changing time if he or she has the option to wear his or her uni form to
and from work but elects to change at work solely for his or her convenience.
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Waiting time
An employer does not have to pay an employee when the employee arrives at
work early and is waiting for the workday to begin. However, the employee
cannot be doing casual work without pay. For example, clerical employees who
arrive early and who, during that time, "help out" other employees or go to their
own workstation and perform job-related duties such as checking their e-mail,
turn noncompensable time into time that must be compensated. In addition, the
clock starts as soon as the shift begins, even if there is no work.
Similarly, if waiting time occurs in the middle of the shift (e.g., if a machine
breaks down), the waiting time is generally compensable. If the employee
reports to work, is immediately sent home for lack of work, and performs no
work, the employer is not, in general, required to pay the employee.
Meals and breaks
The act does not require an employer to provide rest or meal breaks to non-
minors. Rest periods of five to 20 minutes are considered hours worked. Bona
fide meal periods of 30 minutes or longer, during which the employee is relieved
of duty, are not considered hours worked. However, as a matter of enforcement,
the Department of Labor may scrutinize closely any break that is less than 30
minutes, regardless of whether the break is characterized as a rest or a meal break.
Travel time
Specific guidelines for travel time are as follows.
The amendment tp "the Portal-to-Portal Act known as the Employee ; '
Commuting Flexibility Act of 1996 clarifies that commuting time is not
s
paid work tinie, even when the employee is using a company vehicle.
However, nonexempt employees .who drive vehicles that contain
essential tools or equipment of the employer from their homes to work
sites may be working while traveling and should receive travel pay.
Travel from home to a customer's site in response to an emergency call
after the regular workday is work time. "
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Employees who travel in the course of a workday, such as from one work
location to another, are entitled to compensation for their travel time. Travel to
work-related meetings is compensable.
Travel out of town may also comprise work. When an employee who
normally works at one location is sent out of town on a single-day trip, the
time spent traveling is work time. However, the employer may consider the
time spent traveling to and from the airport or other transportation terminal in
the morning and evening to be the equivalent of the home-to-work commute
and not compensable work time.
An employee who travels away from home overnight is not working when he
or she is a passenger on an airplane, train, boat, bus, or automobile outside of
regular work hours. Any time that the employee spends traveling as a
passenger on a weekend will be counted as work time if the travel cuts across
the hours that the employee would normally work during the week. Any time
that an employee spends working while a passenger must be counted and paid
as work time. Figure 4 provides an example of paid time vs. unpaid time for
an employee who travels overnight for a weekend conference.
Day Activity
Friday Travels to conference and
works en route
Saturday Works at conference
Sunday Travels from conference
and does not work en route
Paid time
Unpaid time
11811
NHK
A M B l
7 8
AM
9 10 11 12 1 2 3 4 5
PM
Normal Work Hours
Time
Total Paid
Hours
I
5
| 12
4
6 7
Figure 4. Example of Compensationfor Weekend WorkTrip
All travel that is compensable by contract, custom, or practice must be counted as
work time, regardless of the above limitations on counting travel as work time.
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Training time
Training time is generally included in the calculation of hours worked.
However, the time spent at a conference, meeting, or seminar does not have to
be compensated if four conditions are met: " '
Attendance is voluntary.
Attendance is outside of normal working hours.
The event is not directly job-related.
The employee performs no productive work during this period.
Therefore, if non-English-speaking employees who do not need to communicate
with English-speaking people to do their jobs voluntarily take classes in English
as a second language during nonwork hours and perform no productive work
during that time, the time is not compensable under FLSA.
Equal Pay Act (EPA), 1963
The'Equal Pay Act (EPA) of 1963, technically an amendment to the FL SA,'
prohibits unequal pay for equal or "substantially equal" work performed by
men and women. Once a pay disparity is established between a male worker
and a female worker performing substantially equal jobs, the burden of proof
shifts to the employer to j usti fy its actions., ^ _ -
The law has been enforced by the Equal Employment Opportunity Commission
(EEOC) since its creation. Key provisions define equal work, discriminatory
actions, and exceptions.
Equal work
Equal work is defined by equal skills, equal effort, equal responsibility, and
equal working conditions.
Figure 5 provides definitions of the factors.
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Equal Work Factors
Skills Experience, training, education, and ability required to perform a
job
Effort Physical or mental exertion needed for performance of a job
Responsibility Extent to which an employer depends upon the employee to
perform the job as expected, with emphasis on accountability
Working
conditions
Physical surroundings and hazards of a job, including
dimensions such as inside versus outside work, excessive heat
or cold, and fumes and other factors relating to poor ventilation
Figure 5. Equal PayAct Definitions
The law does not address comparable worth, a theory that goes beyond pay
equity. Comparable worth deals with pay differentials between women and
men who perform comparablebut not equalwork. Comparable worth
looks at different jobs that women and men hold that require comparable
skills, effort, responsibility, and working conditions. For example, according
to the theory of comparable worth, clerical workers (who are primarily
female) should be in the same salary range as parking lot attendants (who are
primarily male).
Although the Equal Pay Act does not require consideration of comparable
worth; some states require all public jurisdictions such as school districts to
Discriminatory actions
Under the Equal Pay Act, a plaintiff would have aprima facie case (i.e., the
minimum amount of evidence an employee must demonstrate in order to state a
claim as a matter of law) if she or he received a lower wage than members of
the opposite sex for performing work that requires substantially the same skills,
effort, and responsibilities under similar working conditions, all performed at
the same location.
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Exceptions
The employer can defend its pay disparity by showing that the pay disparity
was based on:
A seniority system.
A merit system.
A difference in the quality or quantity of work.
Geographic work differentials.
Any factor other than gender. s
Not permitted are defenses such as union rules or prevailing pay for the market.
Age Discrimination in Employment Act (ADEA), 1967
The Age Discrimination in Employment Act (ADEA) was discussed in
Section 2-1 of Module 2: Workforce Planning and Employment. It is worth
noting here that, as with the Equal Pay Act, seniority systems or the use of
factors other than age are permissible. However, a pay system that pays for
performance must not be discriminatory against older workers.
In addition, employers may establish a mandatoiy retirement age of 65 or more
for certain highly paid executives.
Work Opportunity Tax Credit (WOTC)
The Work Opportunity Tax Credit (WOTC) is a federal tax credit that
encourages employers to hire people from targeted groups of j ob seekers. The
Tax Relief and Health Care Act of 2006 eliminated the Welfare-to-Work Tax
Credit (a tax credit to encourage employers to hire long-term welfare
recipients), merging the program into the WOTC, and also updated the target
group categories. The Small Business and Work Opportunity Act of 2007
effectively extended the WOTC through August 31, 2011.
The WOTC is federally administered by the DOL 's Empl oyment and Training
Administration (ETA) and the I RS.
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Employers who hire individuals from the following 12 categories are eligible
for the WOTC:
Long-term TANF (Temporary Assistance for Needy Families) recipients
Other TANF recipientsMembers of a family that is receiving or recently
received TANF benefits
Qualified veteransVeterans who are disabled (in some instances) or a
member of a family that is receiving or recently received food stamps
Qualified food stamp recipients18- to 39-year-old members of a family
who receive food stamps
Designated community residents18- to 39-year-old residents who live in a
federally designated area: Empowerment Zones (EZs), Renewal
Communities (RCs), or Rural Renewal Counties (RR.Cs)
Summer youth employees16- to 17-year-olds who live in an EZ or RC
area
Vocational rehabilitation referrals
Qualified ex-felons
Supplemental Security I ncome (SSI) recipients
Hurricane Katrina employees (This group does not require certification by
the state workforce agencies.)
Unemployed veteransCertain veterans who are certified to have been
discharged or released from active duty at any time during the five-year
period ending on the hire date and to have received unemployment
compensation for not less than four weeks during the one-year period ending
on the hiring date
Disconnected youthsI ndividuals certified to be 16 to 24 years of age and
who, during a designated period, are not regularly employed, are not
regularly attending school, and are not readily employable by reason of
lacking a sufficient number of basic skills
For more information on the WOTC, go to the U.S. Department of Labor's
Employment and Training Administration Web site, at www.doleta.gov/
business/incentives/opptax.
Lilly Ledbetter Fair Pay Act, 2009
In 2009, President Obama signed the Lilly Ledbetter Fair Pay Act into law. The
law overturned a 2007 Supreme Court decision, Ledbetter v. Goodyear Tire &
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TOTAL REWARDS Section 4 1
Rubber Co. In that decision, the Supreme Court found that plaintiffs could not
file pay discrimination lawsuits more than 180 days after the employer issued
the first allegedly discriminatory paycheck.
Under the Ledbetter Act, the statute of limitations resets as the employer issues
each allegedly discriminatory paycheck. Additionally, the open-ended nature of
the law's coverage of unlawful employment practices, which include
compensation decisions or "other practices," suggests that employees and their
families or heirs could file a discrimination lawsuit against an employer
regarding benefits such as salary-based defined benefit retirement plan and
defined contribution retirement plan payouts and salary-based life insurance
proceeds.
Due to the potential for legal exposure under the law, proactive organizations
will identify and remedy any potentially discriminatory pay practices.
Discriminatory pay practices include basing pay decisions on a person's
belonging to a protected class, such as race, religion, color, gender, national
origin, age, disability, or veteran status. Employers should review their
documentation and record retention practices related to compensation decisions
to ensure that they have the ability to show that pay disparities that may give
rise to discrimination claims are the result of lawful factors.
Figure 6 summarizes the key issues for legislation related to compensation.
Legislation Key Issues
Davis-Bacon Act
and related acts
Established prevailing wage and benefit requirements for
contractors on certain federally funded or assisted construction
projects
Copeland "Anti-
Kickback" Act
Precludes a federal contractor or subcontractor from in any way
inducing an employee to give up any part of the compensation
to which he or she is entitled under his or her contract of
employment
Walsh-Healey Act Extended the concept of prevailing wage to employers who
manufacture or supply goods under government contracts and
required payment of overtime pay (at a rate of time and a half)
for hours worked in excess of 40 in a workweek
Figure 6. KeyLegislationAffecting Compensation(continued next page)
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TOTAL REWARDS Section 4 1
Legislation Key Issues
Service Contract Act Extended prevailing wage rate and benefit requirements
to employers providing services under federal
government contracts
Fair Labor Standards
Act (FLSA)
Commonly referred to as the Wage and Hour Law;
regulates employee status, overtime pay, child labor,
minimum wage, record keeping, and other wage-related
administrative concerns
Portal-to-Portal Act Defines general rules for hours worked
Equal Pay Act (EPA) Prohibits wage discrimination by requiring equal pay for
equal work
Age Discrimination in
Employment Act
(ADEA)
Prohibits age discrimination as well as discrimination
against certain older workers by performance-based pay
systems
Work Opportunity Tax
Credit (WOTC)
Tax credit to encourage employers to hire people from
targeted groups
Lilly Ledbetter Fair Pay
Act
States that the statute of limitations on pay
discrimination lawsuits resets as each allegedly
discriminatory paycheck is issued
Figure 6. KeyLegislationAffecting Compensation(concluded)
Note that this chart is i ntended to be a qui ck reference tool and, as such, does
not provi de enough i nformati on to be used as a defi ni ti ve reference. Ref er to
this modul e as wel l as your state and local l aws for compl ete i nformati on
regardi ng l egal compl i ance. Any ti me you are unsure as to how an act appl i es to
i ndi vi dual empl oyees or si tuati ons, contact your state l abor department or l egal
counsel .
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TOTAL REWARDS Section 4-3
Progress Check
Directions: Choose the best answer to each question.
1. Which of the following acts requires organizations holding federal construction contracts to
pay laborers and mechanics the prevailing wage of the employees in the locality where the
work is performed?
( ) a. Davis-Bacon Act
( ) b. Walsh-Healey Act
( ) c. Copeland Act
( ) d. Fair Labor Standards Act
2. Under the FLSA, which of the following employees must be paid overtime?
( ) a. A janitor who worked 30 hours during the workweek and was paid for 12 hours of
vacation time
( ) b. A vice president in charge of operations who worked 50 hours in a week
( ) c. A nonexempt employee who worked 45 hours in a week
( ) d. A dock worker who worked 40 hours, including 10 hours on a holiday
3. Which of the following statements is true under the provisions of the Fair Labor Standards
Act?
( ) a. Public employees may elect to accumulate comp time rather than be paid in cash
for overtime.
( ) b. Private employers cannot limit the number of hours an employee works based on age.
( ) c. Severance and vacation pay are regulated by the FLSA.
( ) d. FLSA regulations take precedence over state regulations with regard to minimum
wage when state wages are higher.
4. When calculating overtime, the employer must include the time for an employee who
( ) a. spends two hours at home, waiting for a call to report to work.
( ) b. arrives one hour early for the shift and waits in the employee waiting area.
( ) c. arrives at 8:00 as scheduled but cannot begin work because the needed delivery
doesn't arrive until 10:00.
( ) d. must commute one hour each way from home to the plant.
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TOTAL REWARDS Section 4 1
5. Which of the following issues is NOT a consideration when determining equal work under
the Equal Pay Act?
( ) a. Skills
( ) b. Gender
( ) c. Effort
( ) d. Responsibility
6. Which of the following acts sets minimum wages, child labor standards, and overtime pay
provisions for workers?
( ) a. Davis-Bacon Act
( ) b. Walsh-Healey Act
( ) c. Copeland Act
( ) d. Fair Labor Standards Act
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TOTAL REWARDS Section 4-3
Progress Check Answers
1. a (p. 4-6)
2. c (p. 4-20)
3. a (p. 4-22)
4. c (p. 4-29)
5. b (p. 4-31)
6. d (p. 4-36)
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Total Rewards
4. 2
Total Rewards and the Strategic
Focus of the Organization
HR responsibilities related to this section include:
Develop, implement, and evaluate compensation
policies/programs and pay structures based upon internal,
equity and external market conditions that support the
organization's strategic goals, objectives, and values.
This section is designed to increase your knowledge of:
Total rewards strategies.
The interrelationships among HR activities and programs
across functional areas.
Impact of total rewards on'recruitment and retention.
TOTAL REWARDS Section 4 1
Definition of a Total Rewards System
The termtotal rewards refers to all forms of financial and nonfinancial returns
that employees receive from their employers. This section looks at the
objectives of total rewards systems from an organizational or internal focus and
from the perspective of external forces. Later sections of the module examine
two parts of total rewardsdirect compensation (pay systems) and indirect
compensation (benefit and recognition programs). Typical examples of these
forms of compensation are listed in Figure 7. Note that direct compensation
programs focus on cash-based rewards, while indirect compensation programs
typically focus on noncash rewards.
Indirect Compensation
Legally required benefits
Retirement income replacement programs
Disability insurance and income protection
Hospital and medical benefits
Deferred pay
Pay for time not worked
Unpaid leave
Flexible benefit plans
Recognition and achievement awards
(noncash)
Perquisites
Figure 1. Types of Compensation
Objectives of a Total Rewards System
Every organization's total rewards system must be compliant with local, state, and
federal laws and regulations and be cost-effective and affordable for the organization.
Organizations have a set amount of income coming in, and those funds must be
spread over a variety of company needs, such as capital assets, research and
development, purchase of raw materials, taxes, marketing, and compensation.
This means that HR professionals need to realize that there is only so much
money available for pay systems, benefits, and recognition programs.
Direct Compensation
Base pay
Differential pay
Short-term incentive pay
Long-term incentive pay
Pay programs for selected employees
(e.g., sales, professors)
Recognition and achievement awards
(cash)
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TOTAL REWARDS Section 4-3
Assuming that the total rewards system is legal and affordable, its basic
objective is to provide the employer and the employees with an approach for
compensating employees that is:
Compatible with the organization's mission and strategy.
Compatible with the corporate culture.
Appropriate for the workforce.
Externally equitable.
Internally equitable.
Effective in recruiting and retaining employees.
Each organization's strategy drives the balance of these six elements. Other
issues such as social and economic factors also affect an organization's total
rewards system, and many organizations do external scanning to assess those
factors.
Organization's Mission and Strategy
All organizations, regardless of their type of business, profit margins, size, or
private or public status need to have their rewards system support the
organization's mission and strategy. Therefore, the first consideration in
developing a total rewards system is to review the organization's mission and its
business strategy.
Larger and more mature organizations generally have a strategic business plan
that outlines the basic directions and goals that guide the organization over time.
The total rewards system should be an outgrowth of that plan and the
organization's HR strategy and should be adjusted to accommodate updates to
that plan. Smaller and newer companies may not formally define their strategies.
In this case, the HR professional may consider other indicators, such as where the
organization is in its life cycleis it downsizing or expanding, acquiring or being
acquired, profitable or unprofitable?
An employer must generate sufficient revenue to cover expenses. Generally, if
the labor market is very competitive (demand for talent exceeds supply), there is
upward pressure on pay levels.
The degree of market competition, the level of product demand, and industry
characteristics all have an influence on total rewards packages, as does the stage
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TOTAL REWARDS Section 4 1
at which the organization is in its life cycle. But large or small, an organization's
rewards package should support organizational goals and objectives. A total
rewards system should attract the right people to the right jobs and provide
appropriate performance incentives to produce engaged employees.
Corporate Culture
No matter what the size of the company is or where it is in its life cycle, the
compensation system must fit the organization's corporate culture and
fundamental assumptions about employees. Organizations typically take one of
two basic approaches toward employees.
Entitlement-oriented
Some organizations foster a caring, paternalistic feeling and want
employees to feel that they are a "part of the family." It follows, then,
that employees are entitled to benefits such as health care, employee
assistance, disability insurance, or cost-of-living pay adjustments as a
condition of employment.
In this culture, less emphasis is put on individual employee contributions,
initiative, and responsibility.
Contribution-oriented
Other organizations see employees as contributors. Their compensation
programs are more performance-driven, stressing and recognizing the
contributions that individual employees make to the firm.
These compensation systems emphasize performance-based pay,
incentives, and shared responsibility for benefits. For example, the firm
might have a matching 401(k) program rather than a defined benefit
pension program.
Workforce
The rewards program must also fit the workforce. An organization with entry-
level or unskilled workers may have a very different rewards package than a
company with experienced, highly educated professionals.
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It is not uncommon for the total rewards package in the unionized segment of an
organization's workforce to focus more on salary and benefits as outlined by the
union contract. In contrast, rewards packages for nonunion employees may
focus more on salary combined with direct and indirect incentives based on
individual employee effort; however, nonunion salaries are affected by and may
be higher than otherwise expected as a result of union wage increases.
One way to keep in touch with employees' needs and preferences is by
conducting surveys to assess their attitudes as well as current and long-term
needs. An analysis of the profile of the workforce and its characteristics will
help the organization understand those needs it must satisfy.
External Equity
Another consideration to address when developing a total rewards system is how
to maintain external equity to attract and retain employees. External equity
involves comparing an organization's compensation levels and practices to those
of other organizations that are in the same market and compete for the same
employees. Companies want to be able to recruit the best suited employees while
maintaining a positive bottom line.
For pay purposes, there are at least three primary factors that define the
relevant labor markets. Companies compete for employees with other
companies who share their:
Industry-Both companies have similar products or services.
OccupationBoth companies employ workers with the same experience
i .or skills. '
LocationBoth companies employ workers in the same geographical
area. " -
Based upon what is known about those markets and competitors, organizations
typically decide to match, lead, or lag the market with regard to compensation.
Match the market.
An organization may choose to match the market and pay approximately the
same wages and offer a benefits package similar to that of the competition.
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TOTAL REWARDS Section 4 1
This is the most common approach and is sometimes referred to as being
externally competitive. When using salary survey data, matching the market
typically equates to the 50th percentile of the market.
Lead the market.
Some organizations strive to lead the market and recruit and retain the most
desirable talent from the labor pool by offering higher salaries and/or better
benefits. They believe that higher-quality employees are more productive,
thereby offsetting the higher salaries. When using salary survey data,
leading the market typically equates to the 75th percentile of the market.
Lag the market.
Other organizations deliberately, out of economic necessity or to control
labor costs, lag the market and establish their pay rates or benefits levels
below those offered by other employers. Reduced labor rates may enable the
organization to offset other higher costs such as purchasing, distribution, or
sales expenses. Organizations may also be able to lag the market when the
supply of talent is greater than demand. When using salary survey data,
lagging the market typically equates to the 25th percentile of the market.
The correct strategy will depend on how critical employees are to the
organization's success and the degree to which the organization can afford to
fund a particular strategy. It is likely that an organization will use a
combination of these strategies. For critical jobs, an organization may choose
to lead the market; in other areas, they may use a match strategy.
Refer to Section 1-4 of Module 1: Strategic Business Management for an in-
depth discussion of environmental scanning.
Internal Equity
An organization cannot effectively recruit new employees or retain existing
ones without internal equity. Employees need to see a basic correlation
between what they bring to the company in the way of education, experience,
productivity, and other skills or efforts and how the company rewards them or ;
what the company provides to them. j
i
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I nternal equity means that unique j obs are appropriately compensated by the
organization as performance or j ob differences result in corresponding
differences in pay rates. As such, having internal equity helps the employer:
Meet employees' needs for a fair wage and adequate benefits.
Recognize employees' contributions to the organization.
Reward equal work with equal pay.
Not discriminate against protected classes.
Recruitment and Retention
An organization's total rewards system must positively contribute to recruiting
and retaining employees. I f an organization finds that its turnover is higher than
desired or that it is unable to attract suitable talent, the organization should
examine its total rewards program. While there are many factors that influence
an organization's ability to attract and retain talent, such as managerial staff and
physical location, the total rewards program should be reviewed to determine if
components of the program do not support the organization's goals.
Section 2-9 of Module 2: Workforce Planning and Employment contains
additional information on the impact of total rewards on recruitment and
retention.
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TOTAL REWARDS Section 4 1
Progress Check
Directions: Choose the best answer to each question.
1. Which of the following would be considered direct compensation?
( ) a. Unpaid leave
( ) b. Deferred pay
( ) c. Cash bonus
( ) d. Perquisites
2. Which of the following would be considered indirect compensation?
( ) a. Granting a spot bonus to a salaried employee for extra hours worked at a
convention
( ) b. Paying the difference between jury duty pay and the employee's regular wages
( ) c. Paying individual bonuses to team members for meeting critical project deadlines
( ) d. Awarding organization-paid cruises to top performers in a sales contest
3. Which of the following philosophies would an entitlement-oriented organization embrace?
( ) a. Lifelong employment
( ) b. Individual rewards
( ) c. Bringing in new talent
( ) d. Performance-driven pay
4. What is a major advantage of an organization having internal equity?
( ) a. It is a sure way to eliminate gender bias.
( ) b. It lowers the amount the organization spends on salaries.
( ) c. It guarantees that all employees have the same benefits.
( ) d. It allows organizations to fairly recognize unique jobs.
5. An HR manager reviews widely published salary data to ensure that company compensation
is superior to regional competition. A potential outcome of this lead compensation
philosophy is
( ) a. less likelihood of securing federal contracts.
( ) b. improved ability to attract and retain scarce-skill employees.
( ) c. increased need for pay openness in the organization.
( ) d. fewer categories of nonexempt employees who will qualify for paid overtime.
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Progress Check Answers
1. c (p. 4-42)
2. d (p. 4-42)
3. a (p. 4-44)
4. d (p. 4-47)
5. b (p. 4-46)
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lota I Rewards
4.3
Compensation Structure
Si V*
HR responsibilities related to this section include:
Develop, implement, and evaluate compensation
policies/programs and pay structures based upon internal
equity and external market conditions that support the
organization's strategic goals, objectives, and values.
This section is designed to increase your knowledge of:
J ob evaluation methods.
J ob pricing and pay structures.
External labor markets and/or economic factors.
Qualitative and quantitative "methods and tools for
analysis, interpretation, and decision-making purposes.
TOTAL REWARDS Section 4 1
J ob Eval uati on
Job evaluation is a systematic determination of the relative worth of j obs within
the organization; it is concerned with the value of a j ob to the organization. The
j ob evaluation process determines the relative worth of each j ob by establishing a
hierarchy of jobs. J ob evaluations are done after the j ob analysis, which focuses
on j ob descriptions and specifications, is complete.
See Section 2-6 of Module 2: Workforce Planning and Employment to review
j ob analysis concepts.
J ob evaluation supports the need for the total rewards system to further the
organization's strategic objectives and is intertwined with the organization's concern
for internal pay equity. Organizations frequently find it difficult to balance these
concerns as they strive to maintain a positive bottom line and meet the needs and
expectations of their workforce. Understanding the market(s) in which they operate
and using data gained through surveys help the organization maintain external equity.
Job Evaluation Methods
J ob evaluation methods can be either nonquantitative or quantitative:
Nonquantitative methods try to establish a relative order of j obs.
Quantitative methods try to establish how much more one j ob is worth
compared to another j ob by using a scaling system.
I n both cases, j obs can be compared to each other or to an outside standard.
Figure 8 shows a comparison of the different methods of j ob evaluation in terms
of how they are categorized. Each method is then discussed in detail.
Nonquantitative Methods Quantitative Methods
J ob-to-job comparison J ob ranking Factor comparison
J ob-to-predetermined-
standard comparison
J ob classification Point-factor method
Source: Adapted from Frederick S. Hills. Compensation DecisionMaking. Chicago: The Dryden Press, 1987.
Figure 8. Comparisonof Job Evaluation Methods
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TOTAL REWARDS Section 4-3
Nonquantitative Methods
Nonquantitative methods are often referred to as whole-job methods, as they
, evaluate the entire job and place different jobs in hierarchical order without a
numeric value being assigned to each job. As a result, one can tell that J ob A
is valued more than J ob B but not how much more it is valued.
Two common nonquantitative methods include job ranking and j ob
classification.
J ob ranking
Job ranking involves establishing a hierarchy of jobs from lowest to highest
based on each j ob's overall value to the organization. Ranking evaluates the
whole job, rather than parts of it, and compares one j ob to another.
If there are many jobs to evaluate, apaired-comparison method may be used
in which each job is compared with every other job being evaluated. The job
with the largest number of "greater than" rankings is the highest-ranked job, and
so on. A matrix is used to compare all possible pairs of jobs. To make the
comparison, you would:
1. Select the jobs to be rated.
2. Compare each j ob to the other jobs and indicate the favorable comparison.
3. Total favorable comparisons.
4. Rank jobs.
5. Compare rankings.
J ob ranking is a fairly quick, inexpensive method and is easily explained to
managers and employees. However, it may not be clear why one j ob is valued
over another, and there may not be much of a differential between jobs, making
the ranking ineffective. In addition, j ob ranking is not usually feasible when
evaluating a large number of positions.
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TOTAL REWARDS Section 4 1
J ob classification
Job cl assi fi cati on i nvol ves groupi ng j obs into a predetermi ned number of
grades or cl assi fi cati ons, each havi ng a cl ass descri pti on to use for j ob
v
compari sons. The best-known cl assi fi cati on system is the General Schedul e
(GS) system used by the federal government.
The GS system is separated into 15 grades. The j ob cl assi fi cati ons for the fi rst
three posi ti ons, GS-1, GS-2, and GS-3, are shown in Fi gure 9.
J ob Class Descriptions for General Schedule Positions
GS-1, GS-2, and GS-3
Grade GS-1 includes those classes of positions the duties of which are to perform, under
immediate supervision with little or no latitude of the exercise of independent judgment
A. The simplest routine work in office, business, or fiscal operations or;
B. Elementary work of a subordinated technical character in a preprofessional,
scientific, or technical field.
Grade GS-2 includes those classes of positions the duties of which are:
A. To perform, under immediate supervision, with limited latitude for the exercise of
independent judgment, routine work in office, business, or fiscal operations or
comparable subordinate technical work of limited scope in a professional, scientific,
or technical field, requiring some training or experience; or
B. To perform other work of equal importance, difficulty, and responsibility, and
requiring comparable qualifications.
Grade GS-3 includes those classes of positions the duties of which are:
A. To perform, under immediate or general supervision, somewhat difficult and
responsible work in office, business, or fiscal operations or comparable subordinate
technical work of limited scope in a professional, scientific, or technical field,
requiring in either case
i. Some training or experience;
ii. Working knowledge of a special subject matter; or
iii. To some extent, the exercise of independent judgment in accordance with
well-established policies, procedures, and techniques; or
B. To perform other work of equal importance, difficulty, and responsibility, and
requiring comparable qualifications.
Figure 9. GS-1, GS-2, GS-3Job Class Descriptions
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TOTAL REWARDS Section 4 3
Classes may be described further by naming benchmark jobs that fall into
each class and defining reference points. A benchmark j ob has the following
characteristics:
The essential functions and knowledge, skills, and abilities (KSAs) are
well known, relatively stable, and agreed to by the employer.
They represent the entire range of jobs in the hierarchy to be evaluated.
A sizable portion of the workforce is employed in these jobs.
The jobs are common across.a number of different employers.
External pay rates for the jobs are an acceptable basis for setting wages:
J ob classifications are effective tools for grouping a large number of jobs
together and are understandable to employees. However, they are difficult
to use when jobs overlap, since j ob classifications look only at the whole
job.
Quantitative Methods
Quantitative job evaluation methods evaluate .specific factors on a scale and
provide a score that indicates how valuable one j ob is compared to another....
Examples of quantitative methods include:
Point-factor method.
Factor comparison method.
Point-factor method
A commonly used j ob evaluation method is the point-factor method, which
involves using specific compensable factors to evaluate relative j ob worth.
Compensable factors reflect the dimensions along which jobs are perceived to
add value to the organization. They flow from the work itself and the strategic
direction and culture of the business.
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Various systems can be used to identify compensable factors. Two well-
known examples are the Hay Plan and the Factor Evaluation System.
The Hay Plan, or Guide Chart-Profile method, uses a standardized set of
compensable factors such as know-how, problem solving, and
accountability.
The Factor Evaluation System (FES), developed by the U.S. government
during the 1970s, includes factors such as knowledge required,
supervisory controls, guidelines, complexity, scope and effect, personal
contacts, purpose of contacts, physical demands, and the work
environment.
-Although the factors selected for point-factor j ob evaluation may vary among
organizations, the compensable factors included in the Equal Pay Act and Title
VI I of the Civil Rights Act should be addressed.
These include:
Skill.
Responsibility.
Effort.
Working conditions.
Supervision of others.
The compensable factors should:
Reflect the actual work being done.
Be supported by documentation such as j ob descriptions.
Reinforce the organization's strategic plan and culture.
Be valued by all affected parties (stakeholders).
Be reviewed annually.
Figure 10 is an example of how a certain organization looked at one
compensable factor: skill. Note that in this example there are different degrees
of skill mastery, which are reflected by the assigned points.
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TOTAL REWARDS Section 4-3
Degree Levels Points
1 Knowledge of simple, routine tasks. Skill to operate simple
equipment. Requires no previous training or experience.
60
2 Knowledge of basic procedures and operations. Skill and
judgment to apply procedure or operate equipment.
Requires moderate degree of experience or previous
training.
120
3 Knowledge of standardized, moderately complex
procedures. Skill to apply procedures or operate varied
equipment. Requires training and experience.
180
4 Knowledge of technical or special procedures to perform
complex assignments. Requires considerable training and
experience. Requires judgment to operate and adjust
varied equipment to perform standard or specialized
procedures.
240
5 Knowledge of an extensive body of procedures or
operations. Requires special skills based on extensive
training and experience. Independent judgment is
required.
300
Figure 10. Analysis of Skill Factor
Once an anal ysi s has been compl eted for all compensabl e factors, the resul t
is a tabl e si mi l ar to Fi gure 11, whi ch gi ves the compl ete range of poi nts
rel ated to the factors. I n thi s case, the fewest poi nts a j ob can be worth is 220
(determi ned by addi ng the poi nts in Col umn 1). The most poi nts a j ob can be
worth is 1,100, determi ned by addi ng the maxi mum number of poi nts for
each factor (Col umn 5).
Factors Degrees/Points
1 2 3 4 5
Skill 60 120 180 240 300
Responsibility 60 120 180 240 300
Effort 50 100 150 200 300
Working conditions 30 60 100 100 100
Supervision of
others
20 40 60 80 100
Figure 11. Points Related to All Compensable Factors
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TOTAL REWARDS Section 4 3
Figure 12 shows an example of how one job, J ob C, was rated and received
610 points. In this case, the factor totals were determined by adding the
circled points.
Factors Degrees/Points for J ob C
1 2 3 4 5
Factor
Totals
Skill
60
CL2CT) 180 240 300 120
Responsibility 60 120 180 ( J u T ) 300 240
Effort 50 100 200 300 150
Working conditions 30
C3E>
100 100 100 60
Supervision of
others
20 60 80 100 40
Total 0 220 150 240 0 610
Figure 12. Points Assigned to Job C
Based on the assigned point values, J ob C's relative worth can be compared to
the other jobs in its range. This is the goal of a point-factor analysis.
The results might look as shown in Figure 13.
Job A Job B ( j ^ b c ) Job D Job E
I X X A I
220 300 400 500 600 700 800 900 1,100 i
Points - I
i
!
Figure 13. Final Results of Point-Factor Analysis j
i
I
i
The points often determine what pay grade the j ob is assigned. For example, j
based on the point-factor analysis, an organization might designate or define j
i
Grade 4 jobs as those with 520 to 619 points. Therefore, J ob C (610 points) j
would be a Grade 4 job. j
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TOTAL REWARDS Section 4-3
A discussion of pay ranges (later in this section) will examine how the
minimum and maximum salary for all Grade 4 jobs is determined.
Factor comparison method
The factor comparison method is more complex than; ranking, classification,
or the point-factor method and is rarely used.
It involves the ranking of each j ob by each selected compensable factor and
then identifying dollar values for each level of each factor to develop a pay
rate for an evaluated job.
Figure 14 shows how the compensable factors are related to dollar amounts to
determine an hourly rate for J obs A and B.
Skill Responsibility Effort Working Conditions
Su
P
ls,on
5.40 A A A
4.80 A A
4.20 B B B B
3.90 B
J ob A =$5.40 +4.80 +5.40 +4.80 +5.40 = $25.80/hour
J ob B =$4.20 +4.20 +4.20 +4.20 +3.90 = $20.70/hour
Figure 14. Factor ComparisonMethod
The factor comparison method is best used in the limited instances when wages
are steady over time and the organization uses a flat rate for each job. It is
sometimes used as part of a labor contract.
As with any tool, there are advantages and disadvantages to the various j ob
evaluation methods. Figure 15 on the following page shows a comparison
between the different methods.
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Method/
Comparison
Uses Advantages Disadvantages
Nonquantitative
J ob ranking/
job-to-job
Best suited to small organizations
where a hierarchical ordering of jobs will
suffice and resources are lacking for a
complex system
Simplest and quickest
method
Inexpensive
Not appropriate for evaluating a large number of
positions
Puts jobs into sequence but doesn't determine the
relative value of one job compared to another
Doesn't measure differences between jobs
Not as reliable as other methods because of its
subjectivity
Relies on judgment of evaluators
J ob classification/
job-to-
predetermined-
standard
Quantitative
Point-factor
method/
job-to-
predetermined-
standard
Often used with government and public-
sector positions
Best suited to large organizations with
many jobs and limited resources to
commit to the evaluation process
Best suited to organizations desiring a
systematic procedure for evaluating
each job
Best suited to organizations with time
and resources to develop a custom
evaluation system
Has better chance of success when
jobs aren't greatly affected by
inflation/market conditions
Understandable by
employees
Classifications can
change as duties and
responsibilities do
Produces reasonably
objective and defensible
results
Provides documentation
and an audit trail
Yields suitable results if
used consistently
No audit trail
Looks only at whole job
Ambiguous; overlapping grade descriptions
Only as good as the grade descriptions
Relies on judgment of evaluators
Complex and time-consuming
Difficult to explain to employees
Requires thorough job documentation, including job
descriptions and thorough job analyses
Relies on some degree of judgment by evaluators
Factor
comparison
method/
job-to-job
Best suited to organizations with time
and resources to develop a custom
evaluation system
Has better chance of success when
jobs are not greatly affected by
inflation/fluctuating market conditions
Produces reasonably
objective and defensible
results
Provides documentation
and an audit trail
Complex and time-consuming
Difficult to explain to employees
Requires thorough job documentation, including job
descriptions and thorough job analyses
Relies on some degree of judgment by evaluators
Difficult to maintain when market rates change
Figure 15. JobEvaluation Methods
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TOTAL REWARDS Section 4-3
Market-Based Evaluation
Evaluating jobs on the basis of their external market values (market-based
evaluation) is not a true job evaluation system, but market rates can be used to
develop a job-worth hierarchy. J obs are priced in the labor market(s) in which
the organization wants to be competitive. These prevailing rates are used to
represent the relative "worth" of the jobs. Once a hierarchy is developed around
benchmark market rates, the remaining jobs are typically placed into the
hierarchy based on whole-job comparisons to benchmark jobs.
One of the key questions is deciding the point of reference for comparison.
When matching jobs with the competition, compare duties, scope, and reporting
relationshipsnot titles, since they are often misleading. The match can be:
Focused on the industry or focused on the specific job.
Within markets of the same size, profitability, sales/assets, geographic area, or
industry.
Local, regional, or national.
Matches often derive from the market(s) to or from which an organization attracts
or loses talent.
The advantages and disadvantages of market-based evaluations are listed in Figure
16.
Advantages
Consider external competition while
initially de-emphasizing internal equity
to ensure success in attracting and
retaining talent
Are well suited to organizations where
it is vital to maintain competitive market
position
Disadvantages
Reliant on survey data, which must be
available for a significant number of the
organization's jobs
Less legally defensible than job-content
approaches
Don't recognize internal job importance
Figure 16. Advantages and Disadvantages of Market-Based Evaluations
Pay Surveys
To be competitive and affordable, an organization's pay structure must be designed
and priced properly. Many organizations rely on surveys as a systematic way to
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TOTAL REWARDS Section 4 1
collect the information to help them evaluate/classify positions, adjust pay range
structures to remain competitive, and present salary information to top management.
Pay surveys collect information on prevailing market rates and include topics such
as starting wage rates, base pay, pay ranges, overtime pay, shift differentials, and
incentive plans.
Internal Versus External Surveys
Once an organization has decided that a pay survey is needed, a decision must be
made as to how the survey should be designed and conducted. The organization has
two choices. It may develop and conduct an internal survey, or it may look to an
external source.
Internal surveys
When an organization has available resources and expertise and wants maximum
control over the survey technique and data analysis, they may choose to sponsor a
custom survey. The advantage of an in-house survey is the ability to tailor the
design, administration, data analysis, and reporting specifically for the organization.
When opting for an internal survey, an organization should contract with an
outside consulting group or independent consultant to design the survey and
process all data received in a confidential fashion. While the organization still
maintains control over the internal survey, using an outside person places less
demand on organizational resources and ensures compliance with the Department
of J ustice antitrust guidelines. For some organizations, enlisting the help of a
consultant can alleviate potential concerns about survey credibility; the
recommendations from a person outside the organization may be more acceptable.
External surveys
Organizations have different options available if they choose to use an already
available external pay survey. National surveys of many j obs and industries are
widely available through the U.S. Department of Labor (DOL) and the Bureau
of Labor Statistics (BLS). If using such external published data, the organization
must be certain that it knows how the data was generated and when.
Web sites may publish compensation survey results by occupation and location.
One example is the BLS Web site (www.bls.gov/bls/proghome.htm). Other
Web sites are listed in this module's bibliography.
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TOTAL REWARDS Section 4-3
Other external survey options are available. Professional member groups such
as the Society for Human Resource Management, as well as consulting firms,
conduct surveys of wage/job data for a wide range of professions, industries,
and geographical areas. Depending upon the type of external survey, the
organization may have robust or limited participation and input.
Figure 17 illustrates the continuum of internal and external pay survey choices.
Internal custom
survey outsourced
to a consulting firm
External survey
outsourced to a
consulting firm
External survey
conducted by a
consulting firm
External
published
survey data
Internal External
Full control of the
survey (e.g., desi gn,
admi ni strati on)
Abi l i ty to:
Parti ci pate in survey
Provi de some i nput to
survey desi gn
Exampl e:
Local HR associ ati on
contracts with a
compensati on firm
Li mi ted parti ci pati on,
if any (e.g., may
submi t sal ary data)
No control /no i nput to
survey desi gn
Exampl es:
Mercer
Towers Watson
No parti ci pati on
No control /no i nput to
survey desi gn
Wi del y avai l abl e
May need to purchase
survey data
Exampl es:
DOL surveys
BL S surveys
SHRM surveys
Figure 17. Continuum of Pay Surveys
Choosing between internal and external surveys
Whether an organization chooses to conduct an internal or external pay survey
is determined by several factors. Key considerations include:
The internal time and expertise required.
The relevance/match of external surveyed jobs to the organization's jobs.
How current the external survey data is.
The expense associated with the type of survey.
The need for independent, credible findings.
Data Analysis
Organizations analyze survey data based on the circumstances of their market,
product, and employees. However, survey data must first be verified and may
need to be aged, leveled, and/or factored for geography.
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TOTAL REWARDS Section 4 1
When salary data is aged, movement in market rates is used to adjust
outdated data. For example; assume that pay movement or pay increases
are averaging 3% a year. If we used a salary data point from a source
with an effective date of one year ago, we would increase that number by
3% to account for the movement of salaries through time.
If a j ob on a survey is similar but not identical to one in the organization,
the data can be weighted or leveled for a better match. For example, if an
organization's benchmark position is at a supervisory level and it has less
responsibility than the survey's manager-level benchmark, the
organization may adjust; the surveyed wage by a percentage to
accommodate the difference. .
Some salary surveys do not provide data for a specific geographic area.
Since wage rates will vary by location, an organization should factor for
geography any national salary survey data for the local or regional
recruiting area to approximate local wage rates.
A quantitative analysis can be used to analyze data. This module refers to two
frequently used means to analyze the data found in pay surveysfrequency
distributions and tables and measures of central tendency.
A more complete discussion of quantitative analysis can be found in Section 1-5
of Module 1: Strategic Business Management.
Frequency Distributions and Tables
Frequency distributions and tables are used to sort salary data gathered from
several salary surveys. A frequency distribution is simply a listing of grouped
data, from lowest to highest; a frequency table shows the number of
incumbents who receive a particular salary.
Figure 18 shows a frequency distribution and table for a set of salary data.
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TOTAL REWARDS Section 4 3
Survey
Mean Number of
Survey
Salary Incumbents
A $55,000 2
B $60,000 1
C $65,000 2
D $70,000 5
E $75,000 1
Figure 18. Frequency Distribution and Table
Frequency tables can easily be converted to histograms for a graphic representation
of the data. Histograms are discussed in Module 3: Human Resource Development.
Measures of Central Tendency
Measures of central tendency are another way to analyze pay survey data.
Section 1-5 of Module 1: Strategic Business Management covered three
measures of central tendencymean (or average), median, and mode. The
following looks at the use of these measures and an additional central tendency
measure, the weighted average, along with quartiles and percentiles.
Average/mean
The arithmetic average, or mean, is the average score or value; survey data
processors calculate it in a number of ways.
The unweighted average, or raw average, gives equal weight to every survey
participant's salary in the survey, with no regard for other factors (such as the
number of incumbents). The unweighted average is used when participants
provide only the average salary data for a particular j ob rather than actual salaries.
The weighted average, or weighted mean, gives another picture of the data,
with the number of incumbents who receive each salary taken into account.
Based on the data shown in Figure 19:
The unweighted average is $65,000 ($325,000 5 company salaries).
The weighted average is $65,909 ($725,000 +11 company salaries).
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TOTAL REWARDS Section 4 1
r Numberof Annual Total
uompany |ncumbents Salary Salary
A 2 $55,000 $110,000
B 1 $60,000 60,000
C 2 $65,000 130,000
D 5 $70,000 350,000
E 1 $75,000 75,000
Totals: 5 companies 11 $325,000 $725,000
Figure 19. Salary Data for Unweighted and Weighted Average Figures
Median
The median, or 50th percentile, is the middle number in the range. In the left
side of Figure 20, where there are an odd number of data points, $70,000 is the
median salary, because five are less than that and five are greater. In the right
side of the figure, where there are an even number of data points, the median
salary is $67,500, determined by averaging the two middle numbers once the
data is arranged from lowest to highest salaries.
Salaries Salaries
$55,000 $55,000
$55,000 $55,000
$60,000 $60,000
$65,000 $60,000
$65,000 $65,000
$70,000 Median is $65,000 Median is $65,000 +
$70,000 $70,000 $70,000 $70,000 * 2 = $67,500
$70,000 $70,000
$70,000 $70,000
$70,000 $70,000
$75,000 $70,000
$75,000
Figure 20. Median
Mode
The mode, or most frequently occurring wage, may also be noted when
analyzing pay survey data. In the case of Figure 20, in both col umns of data the
mode is $70,000 because that salary, for five incumbents, appears most often.
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TOTAL REWARDS Section 4 3
Quartiles and percentiles
Quartiles and percentiles show dispersion, or how groups of data relate to each
other. Organizations use quartiles and percentiles to ascertain whether they lead,
lag, or match the external market.
For example, Figure 21 shows the range for one job grade as reported in a salary
survey.
0% 50%
First quartile Second quartile Third quartilc Fourth quartile
100%
$55,000
Entry wage
$60,000 $65,000
Midpoint
$70,000 $75,000
Maxi mum wage
Figure 21. Quartiles
Pay Structure
Once survey data is gathered and relative internal job values are established, the
pay structure for an organization can be developed. This involves establishing
pay grades and then calculating pay ranges.
Pay Grades
' Pay grades axe used to group jobs that have approximately the same relative
internal or external worth; in other words, all jobs within a particular grade
are paid the' same rate or within the same pay range.
' , "l " < I , - ' ... V . ' ' ' -
There are no fixed rules; the number of pay grades varies in response to:
The size of the organization.
The vertical distance between the highest- and lowest-level job.
How finely the organization defines jobs and differentiates between them.
The pay increase and promotion policy of the organization.
The slope of the pay policy line.
Administrative efficiency concerns.
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TOTAL REWARDS Section 4 3
The number of grades should be sufficient to permit the distinguishing of
difficulty levels but not so great as to make the distinction between two
adjoining grades insignificant. By using pay grades, management can develop a
coordinated pay system without having to determine a separate pay range for
each j ob in the organization.
Pay Ranges
Pay ranges set the upper and lower bounds of possible compensation for
individuals whose jobs fall in a pay grade; pay ranges are created for each
grade. The market data from surveys is used to establish the midpoint of the
pay range. The pay range midpoint will vary, depending on the organization's
promotion policy, pay increase policy, and other administrative considerations:
The organization then creates pay range minimums and maximums reflective
of both the organization's philosophy and the market data used to create the
range midpoint.
Range Spreads
To calculate the range spread for a job, subtract the minimum amount from the
range maximum and then divide that figure by the minimum.
Maximum - Minimum \
Minimum , - - ^ ' '
v
''
Example: The range spread for a job with a minimum annual salary of
$45,000 and a maximum of $65,000 is calculated as follows:
65,000 - 45,000 . . . . ...

1 1
= .444 or 44%
45,000
In organizations that vary range spread by level, typical range spreads are:
Nonexempt positions40%.
Exempt positions50%.
Executive positions60%.
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TOTAL REWARDS Section 4-3
In general, lower-level jobs typically have a narrow range between minimum
and maximum salaries, while the salary ranges for higher-level j obs will be
wider. This is because people in entry-level jobs have more promotion
possibilities and, therefore, tend to stay at the entry level for shorter periods
of time, while people in higher-level jobs tend to stay in their range for a
longer period of time. Also, the learning time to achieve "job rate"
(midpoint) competence is shorter for lower-level jobs.
There should be an overlap between pay ranges, which makes it possible for
an experienced person in a job in a lower grade to be paid more than an
inexperienced person in a j ob in a higher grade. Range overlap allows for
promotional opportunities without corresponding large salary increases that
violate the organization's pay increase policies.
Additionally, there should be a large enough midpoint difference between
pay ranges to avoid pay compression between an incumbent and his/her
supervisor.
Figure 22 shows a sample exempt pay structure using bimonthly salary
figures.
Grade Minimum Midpoint Maximum
Range
Spread
Midpoint
Difference
34 $3,519 $4,398 $5,278 50% 14%
33 $3,087 $3,858 $4,630 50% 14%
32 $2,708 $3,384 $4,061 50% 14%
31 $2,375 $2,969 $3,563 50% 14%
30 $2,083 $2,604 $3,125 50%
Figure 22. Sample Exempt PayStructure
Compa-ratios
When pay ranges are based on the target market rate, compa-ratios are an
indicator as to how actual wages match, lead, or lag behind the target market.
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TOTAL REWARDS Section 4 3
Section 4-2 of this module described the match, lead, or lag compensation
strategies.
Compa-ratios are computed by dividing the pay level of an employee by the
midpoint of the pay range.
Rate
Compa-ratio
:
Midpoint
Example: Given a pay range with a minimum of $16/hour and a maximum of
$20/hour, the midpoint is $18/hour. The compa-ratios for employees A, B, C,
and D would be calculated as follows.
Employee A earns $16/hour. $16
.89 or 89 /o
$18
Employee B earns $16.50 n_ n o o .
$16.50/hour. ^^
=
'
9 2 0 r 9 2 /

Employee C earns $18/hour. $18 = Qr
$18
Employee D earns $19/hour. $19 _ 1 0 6 o r 10g0/
$18 ~ '
r
Compa-ratios below 100% (expressed as a compa-ratio of less than 1.00)
means that employees are paid less than the midpoint. This may occur when
an employee is:
1
, ."
New to the j ob or organization.. , _
A poor performer. * ,
Working for a company that adopts a lag strategy with regard to pay.
Compa-ratios above 100% (1.00) mean that wages exceed the midpoint. This
is likely to occur when:
A company adopts a lead strategy with regard to pay.
Managers are not following salary-increase policies.
Employees are long-tenured and/or high performers.
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TOTAL REWARDS Section 4 3
Broadbanding

Some companies have found that when too many grades (with small midpoint
differences between them) are established, the compensation system becomes
overly complex and increasingly unmanageable. Broadbanding is a way to
a combine several salary grades or j ob classifications with narrow pay ranges
into one band with a wider range spread.
Figure 23 shows an example of minimums and maximums for each band.
$50,000 < > $105,000
$17,000 < $38,000
Figure 23. Broadbanding
Broadbanding has been successfully implemented in large, hierarchical
organizations that have attempted to flatten their organizations and remove
levels of management. For example, organizations that had eight levels of
management could eliminate four levels, widen the salary ranges of the
remaining four levels, and simply slot each manager into one of those ranges.
While broadbanding has several advantages, many organizations have difficulty
aligning broadbanding with their total rewards philosophy. Organizations
employing large numbers of professionals, for example, often have career
ladders consisting of many levels. It is typically unwise to collapse multiple
levels if they serve to provide a way to acknowledge and reward growth in
professional competence.
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Figure 24 lists some of the specific advantages and disadvantages of
broadbanding.
Advantages
Provides wider ranges than the
spread of a traditional pay range;
generally permits the movement
of individuals between jobs
without being overly limited by
pay ranges
Reduces the number of job
grades (e.g., from possibly 30 or
more to as few as five)
Supports de-layering efforts;
reduces the number of reporting
levels within an organization
Provides more autonomy to line
managers in salary and promotion
decisions
Enhances employee mobility as
employees can transfer without
requiring a change in assigned
pay range
Disadvantages
Reduces the value of ranges as
parameters for governing pay
rates
Affords less control for the
organization in salary and
promotion decisions
Creates overly broad salary
ranges; affords less control of
salary costs as there is no
mechanism to tie the salary
growth of individual employees to
the skills necessary for
advancement to the next higher-
level position
Makes it hard to justify salary
differential if two employees are in
the same broad salary band doing
similar work; can lead to the
perception of pay inequity and
increase the potential for pay
discrimination charges
Reduces the opportunity for
promotion; fewer salary ranges
lessens promotions to another
range, which can lead to retention
issues
Risks divergence from market pay
practices; paying too little relative
to the competitors could mean
higher employee turnover and
paying too much could mean
higher product or service costs
Figure 24. Advantages and Disadvantages of Broadbanding
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TOTAL REWARDS Section 4 3
Progress Check
Directions: Choose the best answer to each question.
1. Which of the following statements regarding job evaluation methods is correct?
( ) a. Quantitative methods are more easily explained to employees.
( ) b. Quantitative methods do not establish the relative order of jobs.
( ) c. Nonquantitative methods evaluate the whole job.
( ) d. Nonquantitative methods evaluate job worth.
2. Which of the following job evaluation methods would provide a small organization with a
quick and inexpensive way to compare one j ob to another?
( ) a. Ranking
( ) b. Paired comparison
( ) c. Point-factor
( ) d. Factor comparison
3. Which of the following j ob evaluation methods would be MOST appropriate for an
organization that has a large number of people with similar, defined j obs?
( ) a. Paired comparison
( ) b. Factor comparison
( ) c. J ob ranking
( ) d. J ob classification
4. The HR group gathered salary data but was unable to analyze it until the following year. Is
the data still considered usable?
( ) a. Yes, if the data is leveled.
( ) b. Yes, if the data is adjusted for wage inflation.
( ) c. Yes, if the jobs studied are still comparable.
( ) d. No, salary data over six months old is unusable.
5. Which of the following measures uses number of incumbents and salary?
( ) a. Weighted average
( ) b. Unweighted average
( ) c. Median
( ) d. Mode
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TOTAL REWARDS Section 4 1
6. What is the range spread for a j ob with a minimum salary of $60,000 and a maximum of
$90,000?
( ) a. 15%
( ) b. 33%
( ) c. 50%
( ) d. 67%
7. Which of the following job classes would typically have the greatest range spread?
( ) a. Production
( ) b. Customer service
( ) c. Supervisor
( ) d. Executive
8. What is the compa-ratio for an employee who earns $ 15 per hour where the salary range has
a midpoint of $12 per hour?
( ) a. 0.03
( ) b. 0.80
( ) c. 1.25
( ) d. 1.35
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TOTAL REWARDS Section 4-3
Progress Check Answers
1. c (p. 4-53)
2. a (p. 4-53)
3. d (p. 4-60)
4. b (p. 4-64)
5. a (p. 4-65)
6. c (p. 4-68)
7. d (p. 4-69)
8. c (p. 4-70)
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4-75
Total Rewards
4. 4
Compensation Systems
HR responsibilities related to this section include:
Administer payroll functions.
Develop, implement, and evaluate compensation
policies/programs and pay structures based upon internal
equity and external market conditions that support the
organization's strategic goals, objectives, and values.
Develop/select, implement/administer, and evaluate
executive compensation programs (for example, stock
purchase, stock options, incentive, bonus, supplemental
retirement plans). SPHR ONLY
This section is designed to increase your knowledge of:
Organizational documentation requirements to meet
federal and state requirements.
Technology, to support HR activities.
Employee records management.
Pay programs, (for example, incentive, variable, merit).
Executive compensation methods. SPHR ONLY
Noncash compensation methods (for example, stock
options, ESOPs). SPHR ONLY
TOTAL REWARDS Section 4 3
Payroll Function and Systems
Few employees understand the complexity involved in getting paychecks issued;
however, all employees expect their paychecks to be on time and accurate to the
penny.
The responsibilities of the payroll function go beyond , the timely and accurate
issuance of paychecks. The payroll function is also responsible for:
Compliance with federal, state, and local regulations.
Periodic reporting.
Record retention.
Control and security.
Subsequent content discusses the main tasks involved in completing and issuing
a paycheck, record keeping and retention, and payroll system configurations.
Completing Paychecks
I ssuing paychecks is a complex operation, one that could consume all the resources
in payroll, particularly in larger organizations. The following is a brief description
of some of the tasks the payroll function performs, sometimes on a daily basis.
Each of these tasks depends upon the expertise of skilled payroll administrators
who must remain current as to all federal and state laws affecting payroll.
Calculating employees' gross earnings
Gross earnings include regular wages plus additional earnings such as tips,
shift premiums, paid time off, bonuses, and overtime pay.
Determining taxable wages for federal and state purposes
The I RS defines taxable wages as all remuneration for services (including
noncash benefits) that is taxable when paid. However, determining what is taxable
and what is not can be complex and may change from one tax year to the next.
What are considered taxable wages for state tax varies from state to state.
Withholding federal and state taxes
Withholding taxes for federal purposes can be done in different ways. The
wage-bracket method is based on wage-bracket tables provided by the IRS. The
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TOTAL REWARDS Section 4-3
percentage method is used in computerized payroll. In either case, issues such
as pay frequency (weekly, biweekly, monthly, etc.) and withholding allowances
affect the amount of federal tax to withhold. If supplemental wages such as
bonuses or commissions are paid, they may be taxed differently. Again, state
taxes will vary between states.
Calculating Social Security tax and Medicare tax
The Social Security tax is a percentage (which changes periodically) of the
employee's salary up to a yearly maximum, with the employer matching that
amount. All employers are required to withhold and match up to the maximum
each year regardless of an employee's previous earnings with another employer.
Medicare taxes (also based on a percentage of wages) are withheld with no
yearly maximum. The employer matches Medicare taxes.
Withholding voluntary and involuntary deductions
Employees may authorize the payroll department to take amounts directly from
their paychecks. Such voluntary deductions include union dues, contributions
toward health insurance, some charitable contributions, and contributions to
retirement programs. Involuntary deductions, or wage attachments, include
items such as tax levies, court-ordered child support payments, and garnishments.
Involuntary deductions are withheld from paychecks before voluntary ones.
Payroll Record Keeping and Retention
Administering the payroll function includes keeping the organization in
compliance with its own internal policies as well as federal, state, and local
regulations. Doing that combined with issuing paychecks could cause payroll
to be buried in paperwork. Therefore, efficient payroll record-keeping practices
are key to having an effective payroll system.
An employer is required to keep a master file of employment records for the
federal government. In addition, employers need a master file with accurate
records to understand their labor costs and have an organized pay process. A
master file includes information such as:
Personal data on each employee, for example, name, gender, birth date, and
Social Security number.
Employment data on each employee, for example, hire date, hours worked
per day or week, and regular rate of pay.
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Tax and payroll data on each employee, including Form W-4, allowances
claimed, and marital status; timecards; and Form W-2 for individual income tax
purposes.
Form 1099 for independent contractors who provided $600 or more of services
during the previous year.
Payroll data for the organization, including Form 941 with total wages subject to
federal, state, and local income taxes; total remuneration; total Social Security tax
and Medicare tax withheld; payroll ledgers; worksheets; payroll reconciliation;
copies of payroll tax deposit information; and Form W-3 (Transmittal of I ncome
and Tax Statements sent to the Social Security Administration).
Under the Fair Labor Standards Act and the Age Discrimination in Employment
Act, employers must retain payroll records for two or three years, depending on
the record. Longer retention requirements may apply to state wage payment
laws. Moreover, employers may wish to retain payroll records at least as long as
the applicable state statute of limitations for contracts claims, which may be
longer than the federal FLSA or state wage payment statute of limitations.
Finally, employers should consult with their tax advisors. Some tax advisors
recommend that payroll records be retained for at least seven years from the
date of the tax filing to which they relate.
There is no federal requirement that the employer maintain a paper copy of
these records. Records may be maintained in any retrievable form. There is also
no requirement as to how often records must be updated; however, the more up-
to-date the records are, the more reliable they are. Accuracy and reliability
become very important if the Department of Labor investigates contested wages
or top management requests current data.
Note that the retention of payroll records differs from that for personnel files.
Unlike personnel files, payroll records do not need to be retained for the term of
employment plus a specified period of time after employment ends. Instead,
payroll records should be retained on a rolling basis beginning with the date on
which they were created.
After employment ends, payroll records should include a copy of the termination
notice; all wages, salaries, commissions, or other compensation paid to the
employee (e.g., vested vacation time, unused paid time off, sick pay); and any
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TOTAL REWARDS Section 4 3
deductions made for money the employee owed the company. Records should
reflect deductions made from final paychecks in accordance with local, state, or
federal law.
States vary in their own wage payment and collection laws. I n some states, the
statutes of limitations are much longer than federal requirements. For example,
New York has a six-year statute of limitations for wage and hour claims
(compared with the Fair Labor Standards Act's three-year requirement).
A comprehensive chart of record-keeping requirements appears in Section 2-11
of Module 2: Workforce Planning and Employment.
Payroll Systems
Given the enormous task involved with payroll and record keeping, most payroll
departments use a computerized payroll system. This allows the payroll function to:
Comply with federal tax rules, multistate taxing, and withholding, depositing,
and reporting requirements on a timely basis.
Reduce human error and possibly reduce labor costs by calculating wages, tax
withholding, and various tax complexities.
Provide management with timely, accurate reports.
Maintain control and security.
A computerized system relies on its hardware configuration and software choices.
Payroll system hardware
The basic configuration of a payroll system can vary. Payroll can:
Use a manual system.
Use a payroll service provider to provide turnkey payroll operation.
Have an in-house server.
Use a networked or online system.
The organization can also choose to combine the various alternatives for a
customized system. The organization may want to coordinate its payroll efforts
with the HRI S to minimize the chance for data processing error, eliminate
redundant data entry work, and ensure up-to-date human resource records.
Figure 25 describes some of the key advantages and disadvantages of the
various configurations.
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Advantages
Manual system
Not subject to mechanical systems failure.
Sometimes cost-effective for smaller payroll.
Disadvantages
Very time-consuming and labor-intensive;
only practical for small payroll.
Greater chance of error.
Payroll service provider/application service provider (ASP)/business process outsourcer
(BPO)/software as a service (SaaS)
Low fixed costs, no initial investment, no
maintenance.
Expandableadjust contract for more services,
if available.
No need for special facility for computers.
Processing costs within the organization's
budget for payroll expenditures.
User groups for networking.
Training and support for payroll and HR staff,
line managers, employees processing payroll
data.
Concerns about external security.
Need for acceptable response time to
questions or issues.
May not be flexible in responding to your
company's unique needs or changes.
May not be reliable; have no control over
breakdowns.
Your company remains liable for any errors.
In-house server
Scheduling flexibility.
Convenientcomputer located on your
premises.
You control the systemcomputer, software,
staff.
May be more reliable than manual systems and
payroll service providers.
Securityall file storage is accessible only to
selected people within the company.
May need climate-controlled room for the
computer.
High fixed costs.
Expansion may be difficult.
Requires additional staff to maintain
equipment.
System can become obsolete.
Risk of choosing equipment that does not
meet the organization's payroll needs for
data storage or processing speed.
Networked microcomputer system/Internet/intranet networked computer systems
Lower fixed costs than mainframe and
minicomputers.
Convenientcomputers located on your
premises.
You control the systemcomputers, software,
staff.
May be more reliable than manual systems and
payroll service providers.
Securityall file storage is accessible only to
selected people within the company.
Cost-effective resource and data sharing.
Enhanced communications capability.
Need cabling installed for networked or
Internet computer communication.
May need to identify a network
management function within the
organization to maintain the system.
May need outside vendors for initial
installation and subsequent expansion.
Incremental upgrades needed to forestall
obsolescence.
Source: American Payroll Association. PayTrain. San Antonio, Texas: American Payroll Association, 2009.
Figure 25. Comparisonof Payroll SystemsThe Hardware
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Payroll system software
No matter whi ch hardware confi gurati on the payrol l system uses, it is
dependent upon software. Organi zati ons have three software choi ces: 1) buy
off-the-shel f software, 2) buy a vendor-suppl i ed software package, or 3)
devel op thei r own customi zed software package. Fi gure 26 summari zes the key
advantages and di sadvantages of the vari ous software opti ons.
Advantages Disadvantages
Off-the-shelf software
Immediate use of the program.
Can be very inexpensive.
May be user-friendly.
Many choices available.
Generally updated quarterly or annually by the
manufacturer.
Vendor-supplied software
Immediate use of the program; less development
time except for needed modifications.
Significantly cheapertypically only 10% of
customized program development costs.
Functionally, you have a current system; vendor
must keep it updated.
Packages are designed to offer flexible user
options.
User group for networking.
Better documentation than most customized
systems.
Customized system
System can be tailored to your special
wants/needs.
It is your systemyou own, support, and control
it.
Can be designed to fit your existing computer
hardware.
Training may be simplified if staff is involved in
the development of the software program.
Generally available only for personal
computer-based systems.
Difficult or impossible to modify the
software.
May not meet all of your needs, especially
for a large payroll department.
Changes to the system may not be made
as quickly as you would like.
May require extensive training.
Not all your needs may be met by a
packaged program.
The size of your payroll may be too small
to justify the expense.
The package may require more computer
capacity than you have.
May be expensive to write code and hire
additional staff to support the program.
You are responsible for changing your
system to comply with all new
federal/state/local regulations.
As your needs change, the system may
not expand.
Analyst who wrote the program may leave
the company.
Potential lack of adequate documentation.
Source: American Payroll Association. PayTrain. San Antonio, Texas: American Payroll Association, 2009.
Figure 26. Comparisonof Payroll SystemsThe Software
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Overall considerations
No matter which hardware or software options the organization chooses for its
payroll system, there are other issues that must be considered.
People. It is the people who work with the system who determine its success
or failure. Their customers are the employees who depend on timely and
accurate paychecks and the organization that depends on an accurate and cost-
effective system. Optimal customer service from payroll depends on its people
being reliable, responsive, empathetic, and professional in all of their dealings
with the organization and its employees.
Security. It is important that the organization have a system of checks and
balances. Therefore, the same employees should not be used to both enter
payroll data and control the employee database. If an organization issues a
paycheck with an incorrect amount on it or an employee fraudulently issues a
paycheck to a fictitious employee, the organization is liable for that paycheck.
Compatibility. While a system of checks and balances is critical, the HRI S
and payroll systems must be compatible. They must be able to share data, and
changes to employee records made in one system should be reflected in the
other.
Base-Pay Systems
Once an organization has analyzed, evaluated, and priced its jobs and designed
its pay structure, the next step is to develop a pay determination system that
helps attract, motivate, and retain employees.
Most employees receive some type of base pay, either in the form of an
hourly wage (for each hour worked) or a salary (a uniform amount no matter
how many hours are worked).
Base-pay systems can be structured in a variety of ways: single- or flat-rate,
time-based step-rate, performance-based/merit pay, productivity-based, or
person-based.
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Single- or Flat-Rate System
In single-rate pay or flat-rate pay systems, each incumbent of a j ob has the
same rate of pay, regardless of performance or seniority. This system is
typically used for elected jobs in the public sector or union hourly workers.
The flat rate is often set to correspond to target market survey data relating to
the job. .
There may be a training wage in a flat-rate system. For example, a newly hired
factory worker may make $9/hour with a $0.50/hour raise after six months. All
other factory workers earn $9.50/hour.
Time-Based Step-Rate System
In atime-based step-rate pay system, the employee's pay rate is based on
longevity in the job. Pay increases occur on a predetermined schedule.
Employees are normally hired at or given promotional adjustments to the first
step, although people with qualifications greater than that required for the j ob may
be hired at a higher step. There are several types of time-based step-rate systems.
Automatic step-rate pay structure
In an automatic step-rate pay structure, the pay scale is typically divided into
four to seven steps that are 3% to 7% apart. At prescribed intervals, each
employee with the required seniority receives a one-step increase. This system
is most commonly used in union and public-sector environments.
Figure 27 shows a step-rate pay structure with four steps that are 7% apart.
Step 4:
Step 3: $24.50/hour
Step 2: $22.90/hour
Step 1: $21.40/hour
$20/hour
Figure 27. Automatic Step-Rate Pay Structure
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Step-rate with variability-based performance considerations
A step-rate system with variability-based performance considerations is similar
to the time-based system, but the size or timing of increases may vary if
performance is substantially above or below standard. For example, a very
competent employee could skip steps, e.g., move from Step 2 to Step 4.
Combination step-rate and performance structure
In a combination step-rate and performance structure, employees receive
increases on a step-rate basis up to the job rate. Above the j ob rate, increases to
higher steps are granted only for above-standard performance. This system
requires adequate resources to develop and administer a performance appraisal
system and communicate it to employees so that they understand how they can
earn performance-based increases.
Performance-Based/Merit Pay System
In a performance-based pay system, the employee's individual performance
is the basis for the amount and timing of pay increases. A performance-based
pay system is commonly called merit pay or pay for performance.
In a merit pay system, employees are typically hired at or near the pay range
minimum. Subsequent increases are tied to performance and the degree to
which j ob mastery is attained. Figure 28 provides an example of a merit
increase matrix.
Position in Range Before Increase
1st Quartile 2nd Quartile 3rd Quartile 4th Quartile
or Below
9- 10% 7- 8% 5- 6% 3- 4%
Successful 5- 6% 4- 5% 3- 4% 2- 3%
Needs 2- 3% 1- 2% 0- 1% 0%
Improvement
Unacceptable 0% 0% 0% 0%
Figure 28. Sample Merit Matrix
Performance
Rating
Outstanding
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Empl oyers usi ng a performance-based system must be abl e to defend
di fferences in sal ary i ncreases as wel l as the performance apprai sal methods
used to determi ne the di fferences. Wi thout such control s, performance-based
systems are di ffi cul t to defend, and supervi sors coul d rate empl oyees in a way
that generates the desi red wage regardl ess of actual work performance.
Fi gure 29 i denti fi es di ffi cul ti es in usi ng a meri t pay system and suggests ways
to make such a system more effecti ve.
Merit Pay
Difficulties in Using Merit Pay
The incentive value of the reward offered may be too small to
motivate performance.
The link between performance and rewards may be weak.
Merit raises are permanent increases in payroll costs.
Union contracts limit pay-for-performance decisions.
Managers may have limited personal control over organizational
performance.
Managers may be reluctant to distinguish between performance levels.
Performance appraisal definitions and guidelines may lack precision.
People may think their own performance is above average.
Merit pay runs contrary to intrinsic motivation in the work itself.
Guidelines for Effective Use of Merit Pay
Develop accurate performance appraisal systems.
Train supervisors in the mechanics of the performance appraisal
system and in the art of giving feedback.
Tie meaningful rewards closely to performance.
Use a wide range of increases to differentiate between performance
levels.
Figure 29. Merit Pay
Productivity-Based System
J n a product i vi t y- bas ed pay system, pay is determi ned by the empl oyee's
output.
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Examples include the straight piece-rate and differential piece-rate systems,
both of which are most frequently used in manufacturing industries.
Straight piece-rate system
With a straight piece-rate system, the employee receives a base wage rate and is
awarded additional compensation for the amount of output produced.
Example: An employee earns minimum wage plus 100 per item produced.
Differential piece-rate system
With differential piece-rate systems, the employee receives one piece rate up to
the standard and then a higher rate once the standard has been exceeded.
Example: An employee may be paid $8/hour plus 100 for each item up to
200, 110 for each item from 201 to 500, and 150 for each item over 500. If
the employee worked a 40-hour week and made 1,000 items, the base pay
would be $448.
Base wage: 40 x $8 =$320 Items 201 -500: 300 x . 11 = $33
Items 1-200: 200 x. 10 =$20 Items 501-1,000: 500 x. 15 = $75
A productivity-based system works best in work such as an assembly line when:
Units of output can be measured.
A clear relationship between employee effort and quantity of output exists.
The j ob is standardized, the work flow is regular, and delays are few or consistent.
Quality is less important than quantity, or, if quality is important, it is easily
measured and controlled.
Costs are known and precise.
Because these systems emphasize quantity of work, quality factors such as numbers
of defects or returned products should be closely monitored.
$320 +$20 +$33 +$75 = $448
In person-based pay, employee characteristics rather than the job performed
determine pay. In such systems, two employees may perform similar tasks, but
the person with superior knowledge or skill mastery receives more pay.
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There are three basic types of person-based systems.
Knowledge-based systems
In a knowledge-based system, an employee's pay is based on the level of
knowledge he or she has in a field or defined domain. This approach is
dominant for compensating learned professions such as scientists or teachers,
although staff professionals may also be paid this way.
Skill-based systems
Skill-based systems link pay to the number of different skills an employee is
qualified to perform. Employees increase their pay by acquiring new skills, even
if they do not use the skills on their current assignment. For example, an
assembler may be able to operate more than one type of machine (cross
training). This type of system is most commonly used in a production
environment.
Competency-based systems
Competency-based systems link pay to the level at which an employee can
operate in defined "competencies" (e.g., directing others). This type of
system is commonly found when rewarding professional groups of
employees.
Section 2-6 of Module 2: Workforce Planning and Employment discusses j ob
competencies in more detail.
Figure 30 compares job-based and person-based systems.
J ob-Based Pay Plans Person-Based Pay Plans
Base pay Based on pay grade Based on employee skills
Pay increases Based on performance or
promotion
Based on skill acquisition
Procedures required to
determine base pay
Assess job content.
Value jobs.
Assign to pay grades.
Assess skills required by job.
Value skills required by job.
Assess skills demonstrated
by employee.
Figure 30. Job-Based PayPlans Compared to Person-Based PayPlans
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It is no smal l task to devel op an i ndi vi dual pay system that benefi ts both the
company and the empl oyee. Fi gure 31 provi des an overvi ew of the advantages
and di sadvantages of the base-pay systems di scussed in thi s secti on.
Advantages Disadvantages
Single- or
flat-rate
system
Works well for routine, simple jobs.
Implemented and administered
simply.
Does not reflect individual
performance, seniority, or skill
differences.
Time-based
step-rate
system
Best suited to routine jobs where
the qualifications of job incumbents
increase with time.
Enables an organization to reward
long-term employment.
Generally does not reflect the
varying rates at which
incumbents become proficient.
Does not reflect performance
differences, except for
unsatisfactory performance.
Can raise average pay levels
over time even if performance is
below average.
Performance-
based/merit
pay system
Works best where individual
performance is valued and
accurately measured.
Rewards and encourages superior
performance.
Requires well-documented
performance appraisal systems
on which managers have been
thoroughly trained.
Can be manipulated by
supervisors to benefit certain
employees over others.
May discriminate against
protected classes because of
subjectivity.
Productivity-
based
system
Works best where emphasis is on
quantity of work and outputs are
accurately measured.
Encourages high level of employee
productivity.
Ties pay to the volume of the work
performed.
May sacrifice quality of work
without careful supervision.
May lead to inflexibility in the
workforce because employees
may want to stay with the job for
which they are paid the most.
Person-
based
system
Works best where skill/ knowledge
levels are well defined and
development of employees is
valued.
Encourages a flexible and better-
trained workforce.
May reduce need for specialists.
Allows for the use of work teams
that are highly interdependent.
Can be costly in terms of both
administration and training.
May result in higher pay rates.
Skills/knowledge must be
effectively utilized to provide the
organization with an offset to
the higher pay rates.
May be more difficult to institute
cost controls.
Figure 31. Comparisonof Base-Pay Systems
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Pay structures must be reevaluated over time. Necessary changes must be made
to ensure that the ranges remain both internally equitable and externally
competitive. For example, at times individual employees are paid outside of the
established pay ranges. Red- and green-circle rates are examples. Other times,
pay compression may occur.
Red-Circle Rates
Red-circle rates are employee pay rates above the range maximum.
Red-circle rates can happen when long-term employees reach the maximum rate
in their range and have not been promoted. It can also occur if employees are
bumped down to a lower-level job (e.g., as an alternative to layoff) but their
salary is not reduced. Sometimes a red-circle rate is frozen until the pay
structure is increased enough so that the rate falls within the range. Sometimes
employees with red-circle pay rates will receive a lump-sum award equal to the
amount of a pay increase.
Another example would be a manager who is paid an annual salary of $65,000,
which is the top of that j ob range. The next job range is at a director level, and
there are no openings. In this case, bonuses can be used to increase the
manager's take-home pay.
If red-circle rates become common in the organization, this may be an
indication that the organization's pay ranges lag the market and need to be
reexamined.
Green-Circle Rates
Green-circle rates are the opposite of red-circle ratesan employee's pay
is below the minimum of th& range.
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Green-circle rates can happen when an organization promotes an employee or
"tries out" an employee who does not possess all the requisite KSAs. They can
also occur when an organization reviews and updates its pay rates, increasing
minimums as a result.
Generally, employees in this situation should be given pay raises to get them
into the range as soon as they meet the minimum requirements for the position.
Pay Compression
Pay compression, or salary compression, occurs when there is only a small
difference in pay between employees regardless of their experience, skills,
level, or seniority.
Pay compression typically occurs when:
Beginning salaries are raised due to increases in the minimum wage or
inflation. Therefore, new hires can make the same as employees in the same
j ob with more experience who began at a lower wage.
Labor market pay levels increase more rapidly than an employer's pay
adjustments. An example would be hiring an inexperienced electrical
engineer at or close to what more experienced engineers earn because of
escalation in competitive hiring rates. If the inexperienced engineer is paid
more than the more-experienced engineers, pay compression occurs.
There is not enough difference between pay levels. This situation allows an
employee making overtime to have a larger net pay than that of the
supervisor even though the base pay of the employee is less than that of the
supervisor.
Unionized pay increases overtake supervisory and nonunion rates. In this
case, a union employee's base pay is greater than or equal to the nonunion
supervisor's base pay.
To counteract the effects of pay compression, organizations can:
Match the market in pay rates for all employees, not just new hires.
Keep nonunion pay rates in sync with union rates.
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Provide bonuses to nonunion employees.
Provide other benefits to employees affected by pay compression.
Continuously evaluate survey data and update pay ranges accordingly.
Provide incentive plans for managers.
Increase the amount of time off awarded to managerial employees as an
additional reward program.
Reduce the amount of overtime hours provided to nonexempt employees.
Provide longevity bonuses.
Monitor salaries for inflation.
Pay Adjustments
Some organizations integrate performance appraisals and pay adjustments by
using a pay adjustment matrix similar to that in Figure 32 to guide decisions on
salary increases. In this example, someone who is in the lower half of the range
and who has a performance appraisal rating of "fully meets standards" would be
eligible for a 3% to 4% raise.
Position of Pay Position of Pay
Performance Rating Rate in Range: Rate in Range:
Below Midpoint Above Midpoint
Outstanding 7-8% 5-6%
Significantly exceeds standards 5-6% 3-4%
Fully meets standards 3-4% 1-2%
Does not fully meet standards 0% 0%
Figure 32. PayAdjustment Matrix
Other pay adjustment techniques include the following.
Cost-of-Living Adjustments (COLAs)
A cost-of-living adjustment (COLA) is a periodic compensation payment
given to all eligible employees without regard to company profitability,
employee productivity, or other performance factors.
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COLAs are often based upon the consumer price index (CP1). The CPI is an
instrument that measures the change over time for costs of a group of goods and
services in a geographic area. Tying budgets or pay to the CPI is called
indexing. However, some argue that while the CPI changes, an individual's cost
of living does not change accordingly and different employees experience
different costs of living.
COLA payments are sometimes paid as a lump sum, either quarterly or at some
other specified time. They are usually not included as compensation for the
purposes of computing vacation, holiday pay, or other payments or benefits;
they may need to be considered in calculating the regular rate of pay for
overtime purposes.
Employees and unions have maintained that increases in living costs j usti fy
corresponding pay increases to enable employees to maintain their real wages,
especially during inflationary periods. Many employers, however, try to not
extend COLA increases or, if they exist, discontinue the practice because
experience has shown that employers may lose control of wage costs and their
relationship to local wage markets.
General Pay Increase
A general pay increase is given to all employees (or a class of employees such
as office or production workers) based on local competitive market
requirements. Such an increase is awarded regardless of employee performance.
The compensation increase is not directly linked to the cost of living and is
more likely to reflect the employer's ability to fund such compensation
increases.
Seniority
The time spent in an organization, or seniority, can also be the basis for pay
adjustments. When seniority is used, employees may be required to be
employed for a set period of time before they are eligible for pay increases, or
they may receive pay increases automatically after a set time in the j ob.
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In union environments, promotions are often based upon seniority, and layoffs
follow a "last hired, first fired" philosophy. Nonunion organizations usually
mix seniority with performance when determining promotions, pay increases,
or layoffs.
Lump-Sum Increases (LSI)
Other organizations use alump-sum increase (LSI ), or performance bonus,
method to reward employees. An LSI is a one-time payment of all or part of a
yearly pay increase. An employee's base wage rate is typically not adjusted by
this increase. The advantage to this approach is that other wages and benefits
linked to the base rate, such as overtime, shift premium, and benefits such as
sick pay and life insurance, are not impacted.
Market-Based Increases
Organizations need to attract as well as maintain key employees. Therefore,
they may use market-based salary increases to be competitive in attracting new
talent or to retain current employees. These salary increases are usually added to
base pay and may be called equity increases.
Differential Pay
Differential pay depends upon logistics surrounding execution of job duties
and is not added to the employee's base pay. This practice allows organizations
to better control their labor costs and tie performance and pay together. There
are two ways to differentiate pay: by when the employee works and by where
the employee works
Time-Based Differential Pay
Some employees receive time-based differential pay, or '^different rate of
pay depending on when they work; With the exception of overtime, the
differential pay systems discussed here are generally not required by Fair
Labor Standards Act regulations. However, any overtime premium must also
be applied to the differential pay.
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For more information on FLSA regulations and overtime, refer to Section 4-1 in
this module, "Key Compensation Legislation."
Shift pay
Some employees receive supplemental pay when they work less-desirable
hours, such as a second or third shift. Shift pay may be a flat amount per hour
or a percentage of their base.
Emergency-shift pay
Certain types of industries pay emergency-shift pay, or extra pay when
employees are called in for an emergency.
Example: During a power outage, electric utility employees often receive
additional pay.
Premium pay
Some employers pay premium pay, or overtime at a higher rate, for working
holidays or vacation days, for the sixth or seventh day of straight time, or after
eight hours in a day. Such policies may be voluntary, specified in a union
contract, or required by state law (e.g., California).
Example: If the employee making $30/hour was paid double time for
working holidays and worked a regular week that included Thanksgiving
Day, base pay would be calculated as:
32 hours at $30/hour plus 8 hours at $60/hour
(32 x $30) +(8 x $60) =$960 +$480 =$1,440
Hazard pay
In some industries, employees earn hazard pay for working in an environment
that, from a safety or health point of view, is considered to be more risky. For
example, hazard pay may be earned by an employee on international assignment in
a war zone or an employee working with dangerous chemicals on a daily basis.
On-call or call-back pay
Some organizations pay employees on-call or call-back pay. On-call pay is
given if an employee can be called in but is not actually working. With call-
back pay, the organization pays extra when the person is called back for an
extra shift in the same workday.
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Reporting pay
In some cases, reporting pay is given to employees who arrive for work as
scheduled but who find, upon arrival, that no work is available.
Travel pay
Nonexempt employees are typically paid travel pay for time they spend
traveling to work assignments. Even if travel occurs outside of working hours,
time must be tracked to conform with the provisions of the FLSA.
A complete discussion of travel time is included in the description of the Portal-
to-Portal Act, which can be found in Section 4-1 of this module, "Key
Compensation Legislation."
Overtime pay
As noted earlier, the FLSA requires employers to pay nonexempt employees 1.5
times their regular rate of pay when they work more than 40 hours in a
workweek. The following example shows how overtime is calculated on base
pay-
Example: An employee makes $30/hour and worked 43 hours in a
week. The employee's gross earnings would be calculated as follows:
40 hours at regular rate +Remaining hours at 1.5 times regular rate
(40 x $30) +(3 x (1.5 x $30)) =$1,200 +(3 x $45) =
$1,200 +$135 = $1,335
While the FLSA overtime rate is 1.5 times the regular rate of pay, some
employers choose to pay other overtime rates. Employers may, at their
discretion, pay more than the FLSA requires, but they may not pay less.
The FLSA requires that organizations use the average of weekly earnings
(including differentials and nondiscretionary bonuses) to calculate overtime.
Example: A nonexempt employee makes $20/hour and worked 43 hours in
a week, resulting in three hours of overtime. The employee also receives a
shift premium of 10% of base rate for all hours worked.
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The employee's gross earnings for the week would be:
Regular pay =43 hours x $20 = $860.00
Plus shift differential =10% of $20 =$2 x 43 hours) = $86.00
Total = $946.00
Adjusted pay (total
straight time divided
by all hours worked) =$946-^43 = $22
Overtime premium
(adjusted pay x .5 x
overtime hours) =$22 x .5 =$11; $11 x 3 =$33 $33.00
Gross earnings (regular
pay +shift differential
+overtime premium) =$860 +$86 +$33 = $979.00
Geographic Differential Pay
A second type of differential pay, geographic differential pay, is based on
where an employee works. Organizations with facilities in different locations
often need to tailor their compensation programs to the pay differences in local
labor markets. These geographic differences occur between different cities or
regions within the U.S. and between the U.S. and other countries where the
organization is located.
Differentials for labor costs
To remain competitive, the base-pay structure may need to be modified to
account for different wage rates or cost-of-living factors in different areas of the
U.S. Without such adjustments, an organization may find itself
overcompensating employees in some areas and undercompensating employees
in others.
In an area where labor rates are low, positions might be easily filled, but the
company would have higher labor costs than its competitors. Where labor rates
are high, it may be difficult to fill positions, thus sacrificing productivity. To
avoid these problems, many companies design different pay structures for
different locations.
Differentials to attract workers to certain locations
Some work locations are less desirable than others. Some employers pay extra
when employees accept assignments in remote locations or places where the
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climate or quality of life makes people reluctant to work there, such as an
offshore oil platform.
Differentials for foreign pay
Organizations with offices in foreign countries must take into account culture,
education, technology, climate, taxes, and a host of other differences when
structuring their pay systems. Section 4-10 in this module addresses
compensation programs for international employees.
Incentive paypaying for performance beyond normal expectationsis
designed to motivate employees to perform at higher levels.
Some performance measures used for incentives include:
Company-wide profits.
Business unit/function/group rewards.
Nonfmancial measurements (such as customer satisfaction).
Organizational performance.
The HR professional should consult with the payroll department as to the tax
ramifications for the organization before implementing any incentive pay
plan. Incentive pay may also be a factor in determining an employee's
regular rate of pay for overtime purposes. Additionally, nonprofit
organizations must be sure that payouts under incentive plans are included in
the annual budget so that the incentive program does not alter the
organization's not-for-profit tax status.
Requirements for Incentive Pay
Not all companies are ready to embrace incentive pay plans. To utilize these
plans effectively, the organization as a whole must meet certain conditions,
the plan must address certain criteria, and the necessary processes must be in
place.
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Organizational conditions
For an incentive pay plan to be effective, the organization must be able to
afford the plan. In addition, the following organizational conditions must be
met.
The base pay must be fair and equitable.
Organizations must be prepared to seriously look at their compensation
levels prior to developing an incentive pay plan. Incentive compensation is
successful only if the staff is compensated competitively. An incentive
plan is not the way to shore up a base compensation system that is
internally or externally inequitable.
Strategic planning must be in place.
Companies use strategic planning to develop business goals and
objectivesnormally measured in sales volume, expenses, profitability,
customer satisfaction, on-time delivery, and percentage of rejected work.
These organizational goals must be clear, consistent, quantifiable, and
measurable to lessen business inconsistency and allow the company to
predict future business activity with some level of reliability. If a
company has constant leadership turnover and changes in management
and strategic direction, it is difficult to set and measure goals. In this case,
it is best to wait until the organization has been reengineered or has
settled into a more predictable process.
The organization must be committed to the plan.
It takes time, energy, and constant fine-tuning to incorporate an incentive
plan. An articulate manager or CEO must champion the plan to
incorporate it into the corporate culture. In addition, incentive plans
require commitment to constant coaching and training. Companies must
support this learning by reinforcing incentive plan concepts through
recognizing employee behaviors that support the desired results and
emphasizing measured output to evaluate performance and success.
Organizations need to look carefully at the potential impact of any plan to
make sure that it has the intended effect. It can take several years to put a
completely redesigned culture and reward system in place.
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Plan criteria
While the organization itself must meet the outlined conditions and be culturally
ready to implement an incentive pay system, the plan itself must fulfill the
following criteria.
The plan must be in concert with other organizational programs.
For example, an incentive plan to encourage the retention of existing clients
should not contradict sales compensation programs that reward the number
of new customers.
The plan must be in the line of sight.
Incentive pay plans and performance measures for top management, middle
management, and nonmanagement employees should reflect the results that
an employee can control. Employees must be able to influence the
attainment of the goal and see the direct results of their efforts. This concept
is called line-of-sight. For example, the customer help line has little impact
on reducing the amount of waste in production, so they shouldn't be
compensated on the basis of waste reduction. They can, however, complete
shipping requests correctly or increase customer satisfaction, so those could
be a basis for compensation.
The plan must have a sunset clause.
The incentive pay plan should be in effect for an identified time period and
have a defined end. This condition is called a sunset clause.
The plan must incorporate short- and long-term perspectives.
Incentive pay can be structured to reward short-term accomplishments (for
example, sales goals for the current year) or long-term results (such as
meeting strategic goals). Short-term rewards allow a better match between
cause and effect but may not encourage employees to think about long-term
results.
Organizations may want to overlap short- and long-term incentives. An
overlapping system may make it difficult for a key performer to leave the
organization without significant loss of money (sometimes called the golden
handcuffs approach).
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Necessary processes
Assuming that the organizational conditions already discussed are in place and
the plan is set up properly, an organization must also assess its readiness by
looking at its internal processes.
Communication channels must be effective and ongoing.
How openly a company communicates is determined by its corporate
culture. Incentive plans cannot solve problems of mistrust, low morale, or
management problems and will break down if there are barriers between
management and employees. Therefore, effective communication is a
prerequisite for a successful incentive plan.
An articulate manager or CEO must be available to drive the communication
of the plan, and communication must be ongoing. Employers will need to
share information on how the business is run and how pay is determined. This
doesn't mean that pay levels should be posted on the bulletin board, but
companies should explain why they developed a certain plan. I ncentive plans
must be communicated in writing and in one-on-one and group meetings.
Research prior to designing a plan can establish whether communication in
an organization is working. Employees have to understand the plan and
change their behavior appropriately. There must be buy-in from all
employees, not just from managers. A successful performance-based pay
plan informs the employee at the beginning of the performance period of
what is expected, how much is expected, and what the dollar payout will be
for different levels of performance.
A credible measurement process must be in place.
Incentive plans will fail if management and employees do not understand or
believe in the reliability of the reported results. I ncentive plans are effective
only if the infrastructure, policies, and procedures of the company will
support the measurement used in designing incentives.
Figure 33 summarizes the organizational issues that must be met, the plan
essentials that are integral to the plan, and the processes the organization needs
to have in place before incentive pay plans can be successful.
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Organizational Issues Plan Essentials Process Needs
Base pay is equitable. Plan is in concert with other Communication
Strategic planning is in
total rewards programs. channels are
place. Goals are in line of sight. effective.
The organization is Plan includes a sunset Credible
committed to clause. measurements are
supporting the Plan incorporates short- and
used.
incentive plan.
long-term perspectives.
Figure 33. Factors Affecting the Success of anIncentive Pay System
Types of Incentive Pay Plans
It is unlikely that an incentive pay plan that works in one organization will be
equally effective in another organization. Incentive plans must be tailored to fit
each organization; one size does not fit all.
However, there are three basic types of incentive pay plans:
Individual incentive plans
Group incentive plans
Organization-wide incentives
Individual incentive plans
The purpose of individual incentive pay plans is to improve individual performance.
Such plans must be win-win in nature and available to all employees in the group.
One caution is that individual incentive pay needs to be separate from base pay.
When incentives and base pay become commingled, the incentive pay may cease
to be viewed as a reward and may become an entitlement. Having base pay that is
equitable lessens the chance that the loss of an incentive will be viewed as
punishment.
Individual incentive pay plans include piece rates, commissions, cash awards,
and recognition programs.
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Piece rates. Straight piecework and differential piecework allow workers who
are more productive to earn more money.
Commissions. Sales personnel are often paid a commission, which is an
amount based on a percentage of sales (measured either in units or dollars).
Some salespeople work on straight commissionthey have no base salary,
although they may be allowed a draw (an amount advanced on future
commissions). Others have a base salary and earn commissions on top of that
set amount.
Cash awards. Cash awards provide employees with extra cash compensation
based on performance. Always paid as a lump sum, these awards may be:
Discretionary bonusesbased on an evaluator's assessment.
Performance-based incentivesmeasured against predetermined
objectives.
Formula-based incentivestypically based on a percentage of profits.
Recognition programs. Gifts, awards, trips, prizes, and other forms of merit
awards are used to recognize individuals for their performance, special
contributions, or length of service. Laws vary as to the tax implications of
these rewards, so the HR professional will need to contact the internal payroll
specialist or legal department before setting up a recognition program.
Figure 34 illustrates the advantages and disadvantages of individual incentive
plans.
Advantages
Maximize individual performance
Help identify training needs for individuals
Highlight performance for employer and
employee
Cause employees to focus attention on
business operations and goals
Broaden employees' knowledge from
immediate job activities to entire business
Disadvantages
May create employees who do not
feel linked to a team, department, or
division
May lead to destructive competition
May have tax ramifications for
employer or employee
May cause quality to suffer if not
accounted for in the plan
Figure 34. Advantages and Disadvantages of Individual Incentive Plans
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Group incentive plans
When it is difficult to measure individual performance, or when cooperation is
needed to complete a task, an organization may decide to pay incentives to a
group of individuals. Such plans may be designed around short-term or long-
term achievements. Tailored to fit the organization's unique circumstances,
many of these plans incorporate both financial and nonfinancial measures (such
as quality) to determine when a team receives an incentive award.
Examples of group incentive plans include gainsharing plans and group
performance incentives.
Gainsharing plans. In gainsharing plans, a portion of the gains an organization
realizes from group effort is shared with the group. For example, when an
organizational profitability goal is met, each group member receives the same
cash reward. Since these plans are customarily linked to increases in
productivity and not necessarily the company's profitability, this approach is
different than a profit-sharing plan.
One popular and widely used form of gainsharing was developed by labor
leader J oseph Scanlon in the 1930s and is perhaps the best-known type of group
incentive plan. In this plan, workers earn an incentive for increasing
productivity. The Scanlon plan involves three key features:
A philosophy of participatory management
Administration by a committee of employees and management
Formulas for calculating the amount of the incentiveusually a percentage
of pay.
Note that in the Scanlon plan the organization does not need to be profitable for
workers to earn the incentive.
The Rucker Plan was popular in the 1940s and is based on the premise that
shared rewards come from the difference between labor costs and the sales
value of production. It involves a more complex formula than a Scanlon plan. A
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ratio is calculated that expresses the value of production required for each dollar
of the total wage bill.
Another noteworthy approach to gainsharing is the I mproshare plan (I mproved
Productivity through Sharing), an industrial engineering-based productivity
measurement and sharing plan developed in the 1970s. This plan uses past
production records to establish base performance standards. The organization
and its employees share in a 50/50 division of all productivity gains.
Group performance incentives. Group performance incentives reward group
members for meeting or exceeding performance standards, often in an
egalitarian manner. (Each person receives the same percentage of pay or flat
dollar award.) The performance criteria can be quantitative or qualitative, and
performance standards are predetermined. Some group plans are based on
assessments by customers, while higher levels of management determine others.
Figure 35 shows some of the advantages and disadvantages of group incentives.
Advantages
Help build teamwork
May work in situations where
individual contributions are difficult to ,
measure
Can facilitate equalizing pay between ,
employees on the same level, if
desired
Disadvantages
May shelter a poor performer
Can demotivate high performers
Individual training needs can be
masked
Individual performance is obscured
Employees may find it difficult to see
how they contribute to the group's
success
Figure 35. Advantages and Disadvantages of Group Incentive Plans
Organization-wide incentive pay plans
Many companies use organization-wide incentive plans to reward overall
- resultseither in profit-sharing plans, performance-sharing plans, or stock-
based plans.
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Profit-sharing plans. The intent of profit-sharing plans is to allow employees
to "partner" with management and reap the direct benefits of profitability.
Types of profit-sharing plans include the following.
Cash profit-sharing plans
In cash profit-sharing plans, payments are provided in addition to the normal
rate of pay, based on the organization's profitability. These payments are
considered direct pay and are taxed accordingly.
Deferred profit-sharing plans
In deferred profit-sharing plans, the employer contributes a percentage of
profits to employee accounts in a qualified, tax-deferred retirement plan.
The value of the deferred account is distributed in the manner and at the
time provided for in the governing plan document. Distributions are taxed in
accordance with the applicable provisions of the Internal Revenue Code.
(These plans are governed by the Employee Retirement I ncome Security Act
and the Internal Revenue Code.)
See Section 4-5 in this module, "I ntroduction to Benefit Programs and Key
Benefits Legislation," for more information on the Employee Retirement
I ncome Security Act (ERI SA). See Section 4-7, "Deferred Compensation
Plans," for more information on profit-sharing plans governed by ERI SA.
Some compensation experts question whether profit-sharing plans truly encourage
superior performance. The antidiscrimination provisions of the Internal Revenue
Code prevent such plans from being structured as pure incentive programs.
Furthermore, prolonged recession and restructuring can make it difficult for
workers to achieve the plans' goals, regardless of how hard they work.
Performance-sharing plans. Another organization-wide approach is
performance-sharing plans. These plans use predetermined criteria and
standards to measure results and, based on that, they create a fund available for
incentive awards. The criteria can be factors other than profits, such as quality
and customer satisfaction. Such plans can be used in the public sector and not-
for-profit organizations as well as private organizations.
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The following content onnoncashcompensationmethods has beenidentified bythe
HR Certification Institute inthe bodyof knowledge as pertaining to SPHR certification
only. Questions related to this content will appear onthe SPHR examonly.
Stock-based plans. Benefit plans providing employees with a means of
acquiring employer stock are designed to encourage employees to invest in the
company and thus to give them, as shareholders, a financial stake in the future
success of the firm. Company stock may be purchased or earned.
Stock plans may merely facilitate employee purchases of employer stock
through payroll contributions (employee stock purchase plans) or may be
structured as a form of ERI SA-governed qualified retirement plan (employee
stock-ownership plans, or ESOPs). Types of stock-ownership plans include
nonleveraged and leveraged ESOPs.
Nonleveraged ESOPs
In a nonleveraged ESOP, the employer contributes stock or cash or provides
employee discounts to buy stock. The stock is then allocated to accounts of
the employees. Nonleveraged ESOPs are intended to provide employees
with an ownership stake in the company at a relatively low cost to the
company and to help create a market for the employer's stock. They are
similar to stock bonus plans in that accounts for employees consist of
employer stock.
Leveraged ESOPs
In a leveraged ESOP, the employer borrows money from a financial
institution or the plan sponsor to finance the company stock rather than
contribute the cash or stock directly. The employer establishes a trust, called
an employee stock-ownership trust. The stock bought with the loan is
allocated to the individual accounts of employees. Over time, the company
makes payments to the trust to repay the amount borrowed. Sometimes this
approach is utilized in tandem with seeking employee wage or other
concessions.
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While ESOPs have many benefits, they are not necessarily a good means of
incentive pay because they do not meet the line-of-sight criterion. That is,
employees may not see a link between their actions (working harder, being
more efficient, cutting costs, etc.) and stock prices. Factors that affect the
company's health may be too long-term, complex, and out of the control of
employees to be good motivators. In addition, inasmuch as the value of
participants' ESOP account balances is linked to the sponsor's share price, the
volatility of the market may cause the value of the account to fluctuate.
Nevertheless, many large companies use ESOPs as part of their stock-based
incentive plans because of the following benefits:
Creates an ownership stake among employees
Can provide a relatively low-cost benefit to employees
Provides a ready buyer for the company's stock
Provides some protection against possible takeover attempts
Can provide some tax advantages for the employer
Provides a source of capital gains income for employees
Stock option plans are another popular method to encourage eligible participants
to take a long-term interest in the success of a public company. Participants are
given the right to purchase stock for a certain period of timeusually five to ten
years. Participants usually gain vesting rights to exercise a predetermined
percentage of the total stock option allocation each year. The option to buy the
stock is for a stated price (usually the stock's fair market value when the option
is granted).
Depending on the type of stock option, the company may or may not be able to
take a tax deduction for the cost of the option and the participant is taxed, or
declares a loss, at the time he or she exercises the option or when the stock is
actually sold.
Option grants are memorialized in written award agreements entered into
between the plan sponsor and the participant.
This concludes the SPHR-level content onnoncashcompensation methods.
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Rather than having a set pay plan for everyone, specific categories of employees
may be compensated differently. Organizations may develop separate pay plans
for executives, direct sales personnel, professionals, and outside directors.
The following content onexecutive compensationprograms has beenidentified bythe
HR Certification Institute inthe bodyof knowledge as pertaining to SPHR certification
only. Questions related to this content will appear onthe SPHR examonly.
Executives
Executives as a group make up the highest level of management in an
organization. Two factors are distinctive about most executive pay plans. First,
in an executive's total direct compensation package, which comprises total
annual cash compensation plus the annualized value of long-term incentives,
incentives usually account for a greater share of the package than for other
employees. Second, incentives are generally linked to the performance of the
entire organization or the major units/businesses. I ncentives are typically
linked to company profitability, but they may also be linked to nonfmancial
measures such as customer satisfaction or meeting nonfmancial strategic
objectives such as corporate restructuring or gaining market share. In not-for-
profit organizations, incentives may be linked to financial results, such as
increasing organizational revenues or meeting the annual budget, as well as
nonfmancial measures, such as program results and customer satisfaction.
Most executives receive a package that includes the following.
Base salary
Base salary is usually "guaranteed," while other forms of compensation are "at
risk"dependent on performance factors.
Annual incentives
Annual incentives range from 20% to 200% of an executive's base salary.
Under the Tax Act of 1993, a publicly held company may not deduct for
corporate tax preparation more than $1 million per year for remuneration paid to
any single "covered employee" (i.e., typically the CEO and the four other
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highest-paid employees). Performance-based compensation, such as cash
bonuses or equity-based compensation, as narrowly defined by the act, is not
subject to the $1 million deduction limit.
Perquisites
Perquisites, or "perks," are special privileges for executives, such as club
memberships, company cars, reserved parking spots, executive dining rooms,
box seats for professional athletic events, and similar noncash entitlements.
However, with the passage of the 1993 Tax Act, the tax advantages of most of
these perks to both the corporation and the executive have been greatly
diminished, and moves toward more equal treatment of executives and staff
employees have lessened their popularity.
Parachutes
Parachutes, or golden parachutes, are clauses written into executive contracts
that provide special payments to key executives who might lose their position or
be otherwise disadvantaged if another company took control of the organization
through a merger or acquisition. This change-of-control provision is necessary
because both companies will have executives in chief roles, or C-suite
executives, and will need only one incumbent for each role. These clauses
typically provide for accelerated payments to executives, vesting in
nonqualified retirement plans, or other privileges.
The IRS has published golden parachute regulations to provide detailed
1
-
guidance on the tax consequences and other considerations relating to ' '
parachute payments. - ' -
The rules governing such payments are very complex, but, asageneralrule,
to the extent that these severance payments equal or exceed three times the
executive's total compensation, they:
Will subject the executive to an excise tax in addition to income taxes on
the payment. , , . .
May not be deductible by the employer.
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Long-term incentives
Long-term incentives typically take the form of deferred compensation plans,
long-term cash plans, or stock-based plans. Long-term cash plans are similar to
short-term incentive plans except that the measurement period is typically two
to five years. Some organizations pay out awards annually, based on a "rolling
average" of results, while others avoid this approach, believing that this makes
the plan look too much like a short-term plan.
The following are commonly used stock-based plans for executives and other
key personnel.
Stock option plans. Stock options may qualify as incentive stock options
(ISOs), which are subject to potentially favorable treatment by the I RS, or they
may be nonqualified stock options (NQSOs).
The tax benefit of I SO treatment is difficult to obtain and requires, among other
things, that optionees retain shares that they acquire for at least one year. The
tax benefit is often greatly limited by the applicability of the alternative
minimum tax. For these reasons, many companies issue only NQSOs.
I SOs cannot be issued to nonemployees, such as nonemployee members of a
company's board of directors (outside directors), and are also limited by
complex statutory rules regarding the number of shares that can be subject to an
I SO, further limiting their usefulness.
In general, options provide optionees with the ability to acquire a stock during a
period after the option becomes vested and before it expires at a fixed price
(generally the fair market value of the shares on the date the option was
granted). This approach is an effective way of providing the upside of stock
ownership without the optionees having to invest any of their own funds. It
should be noted that while some companies issue options with below-market
exercise prices (which generally creates an unfavorable accounting treatment),
an option with a price that is below fair market will now result in penalties
being imposed on the optionee under certain recently changed provisions of
Code Section 409A, which treats such options as a form of nonqualified
deferred compensation.
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Stock purchase plans. Stock purchase plans are broad-based plans available to
most or all of a public company's employees. They are required to be broad-
based if they are intended to qualify for favorable tax treatment.
Some publicly traded employers also have arrangements for stock purchase
plans for executives and directors that are not intended to meet code
requirements. Such plans can provide executives or directors with an
opportunity to invest in the company's stock either at a discount or without
payment of brokerage commissions. Restrictions on the ability of a publicly
traded company to make loans to officers under the Sarbanes-Oxley Act of 2002
and the accounting consequences of discounted stock sales may limit the
desirability and flexibility of these arrangements.
Phantom stock. Phantom stock arrangements are generally used when a
company does not view ownership of real equity by its executives as desirable
but seeks to create some of the incentives that go along with having executives
feel aligned with the company's owners. Often non-publicly traded
corporations, as well as employers that are not coiporate entities, find that a
phantom stock arrangement is a helpful means of creating incentives for key
employees. Such plans can mimic the economics of a stock option (discussed
above) or a restricted stock grant (discussed next).
Often a phantom stock arrangement that mimics an option grant is referred to as
a stock appreciation right (SAR), while arrangements that mimic a restricted
stock are referred to as a phantom stock award. Because of the changes in the
tax rules related to nonqualified deferred compensation plans and the likelihood
that a phantom arrangement will be characterized as such a plan, great care must
be exercised in establishing these arrangements to avoid running afoul of the
complex rules on permissible distributions of deferred compensation that have
been incorporated into the code.
Restricted stock grants. Unlike a stock option, a restricted stock grant does not
require an employee or executive to actually purchase the stock. In addition, a
restricted stock grant can be given to nonemployees, such as outside directors of
the company. It is essentially a transfer of stock or gift to an executive or
member of a company's board of directors, with forfeiture provisions that result
in a possible loss of the shares if certain requirements are not met.
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The most typical forfeiture condition is a requirement that the recipient be
continuously employed or continuously serving as a member of the board until
some specified date in the future. Often this date is four or five years out, with
provisions for graded vesting. (For example, 20% of the grant might become
vested on each of the first five anniversaries of the date the grant was made.)
This type of arrangement aligns the executive or board member with
shareholders and also works as a retention device.
While stock options have value only if the stock goes up in value, a restricted
stock grant has real value even if the stock remains stable, since the stock was
essentially a gift. Executives can vote the shares and receive all dividends but
cannot sell the stock until the specified time period has passed or vesting has
occurred. Some mix of options and restricted stock grants may provide a
valuable means of structuring a long-term incentive arrangement that retains key
personnel and rewards them for remaining employed and preserving or
increasing stock values.
Restricted stock units. A grant of restricted stock units (RSUs) is very much
like a phantom stock arrangement because:
The grantee does not have actual equity ownership.
This arrangement is not generally used by companies that are not publicly
traded.
The ultimate payout to the grantee is in the form of a future transfer of stock.
The main reason to use the RSU is to control the timing of the grantee's income,
as the arrangement is treated as a type of nonqualified deferred compensation
arrangement where payment is in stock rather than cash. Care must be taken to
comply with the complex rules of Code Section 409A.
RSUs can be helpful in deferring compensation of key executives (e.g., the CEO
of a publicly traded company) to a date that is after they have retired, avoiding
the limitations on deductibility of compensation that can be imposed on public
companies under Code Section 163(m).
Performance grants. Public companies can also benefit from linking stock-
based compensation to company performance. If done properly, such an
arrangement can qualify as performance-based compensation, which avoids the
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TOTAL REWARDS Section 4-3
deduction limitations that can be imposed under Code Section 162(m). Such
arrangements can also motivate recipients to achieve goals that are valuable to
the company and its shareholders. The accounting consequences of such
arrangements can be tricky, and care should be taken to get the views of the
company's accountants.
This concludes the SPHR-level content onexecutive compensation programs.
Direct Sales Personnel
Most organizations compensate their direct sales force in one of three ways:
straight salary, straight commission, or salary plus commission and/or bonus. In
addition, salespeople often receive car and expense allowances, company cars,
club memberships or allowances, or other noncash perquisites.
Straight salary plans
Straight salary plans are the least-used compensation package for direct
salespeople. They are, however, appropriate when:
The sales staff spends a significant amount of time servicing customers
rather than securing sales, for example, training a distributor's sales force,
participating in trade shows, or handling customer inquiries.
It is difficult to measure sales performance.
The nature of the sales process makes it impossible to separate one
individual's efforts from those of the support people who also help secure
the sale.
There is a long sales cycle.
Straight commission plans
In the case of straight commission plans, the salesperson's entire salary is based
upon commission. Straight commission plans are most appropriate in the
following situations:
When the organization's objectives are to motivate sales volume (even if
that means less service)
When it is important to hold down the cost of sales
When competitors also compensate through commission-only systems
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Sometimes organizations that use a straight commission plan provide an entry-
level sales representative with a nonrecoverable draw or a guaranteed
commission for a set period of time, usually six months to one year. This means
that if the commissions earned during the time period do not equal or exceed the
draw amount, the salesperson does not owe the company the difference. After
that time, the salesperson does not need to repay the draw and goes on a regular
commission plan.
Salary plus commission/bonus
Salary plus commission/bonus is the most widely used means to compensate
sales personnel. This is because:
Traditionally, salespeople are thought to have been motivated by financial
gain.
Salary plus commission systems allow organizations to directly reward
those behaviors that best support their organizational strategy.
Salary plus commission systems are adaptable and allow organizations to
recalibrate the plan to fit current conditions.
Competitors may use a salary plus commission/bonus sales strategy.
Professionals
Another special compensation challenge is appropriately compensating
professionals. Almost all professionals are primarily oriented to their chosen
fields and to their career progressions in that field. Consequently, the pay
system must reward career progression, and a promotional structure must be
developed.
A dual-ladder career progression allows professionals to earn as much
' in'senior technical positions as they would on a management track (see
Section 3-6 in Module 3: Human Resource Development).
Maturity curves correlate pay with time spent in the professional field.
They are most frequently used for teachers and research-focused scientists,
engineers, and other technical personnel.
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Outside Directors
Members of boards of directors are compensated in a variety of ways:
Base pay or retainer
Incentives, usually for attending meetings, chairing a committee, or other
services
Benefits such as liability and life insurance
Perquisites similar to those offered executives
Nonqualified stock options/grant plans
Nonqualified deferred compensation programs
Controlling Costs
Controlling costs is a major concern for all organizations and is crucial to their
longevity. Organizations can control compensation system costs and keep the
system from growing out of control by setting maximum/minimum ranges that
govern pay decisions, using a formal budgeting process, and auditing the
system.
Setting ranges
Setting pay rangesthe upper and lower bounds of possible compensation for
jobs that fall within each pay gradeis one of the most common ways for an
organization to contain and predict labor costs. Once ranges are established,
calculating compa-ratios can help HR managers determine if compensation
policies are being implemented as intended. Ranges and compa-ratios are
discussed more fully in Section 4-3 of this module.
Budgeting
A formal budget process helps ensure that future financial expenditures are
coordinated and controlled. There are two basic approaches to budgeting:
Top-downTop management sets a budget and line managers make the
necessary personnel decisions to make it work. This is the more customary
approach.
Bottom-upThe employees' compensation package for next year is
forecasted to determine the organization's total labor budget. A bottom-up
system is rarely used since it offers no way to control costs.
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Budgeting methods are discussed in Section 3 of Module 1: Strategic Business
Management.
Auditing
Pay ranges and a budget cannot be effective without ongoing monitoring of the
expenditures. Some areas that require special attention include the following:
Administrative process
Policy compliance, both organizational and regulatory
Adequacy of documentation and record keeping
Overall results
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Directions: Choose the best answer to each question.
1. Which of the following statements regarding payroll is correct?
( ) a. Social Security taxes are matched and withheld by the employer up to a yearly
amount.
( ) b. Medicare taxes are matched and withheld by the employer up to a yearly amount.
( ) c. Voluntary deductions are withheld from employee paychecks before involuntary
deductions.
( ) d. Employers must retain paper copies of their payroll records.
2. Which of the following statements about flat-rate systems is true?
( ) a. They are used most often for bargaining unit jobs.
( ) b. They are used most often for professional jobs.
( ) c. They are used most often in privately held organizations.
( ) d. They are the most cost-effective approach.
3. A compensation method related to an employee's individual performance is known as
( ) a. an incentive pay plan.
( ) b. a Scanlon plan.
( ) c. a step plan.
( ) d. a merit pay plan.
4. Which compensation system guarantees an employee a base wage and then pays an
additional amount for each unit produced?
( ) a. Straight piece-rate system
( ) b. Differential piece-rate system
( ) c. Production bonus system
( ) d. Commission system
5. Which of the following statements about person-based pay systems is true?
( ) a. They pay higher performers more aggressively.
( ) b. They pay more to employees with long service.
( ) c. They pay employees for what they are capable of doing, not for what they
currently do.
( ) d. They work best in companies with a few professional employees.
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6. An employer has redesigned its pay structure, and a position has a pay range for the grade
of $9.10 to $12.75 per hour. What term would apply to an employee in this position who is
earning $8 per hour?
( ) a. Red-circle rate
( ) b. Green-circle rate
( ) c. Broadbanded
( ) d. Career-banded
7. Two consecutive years of mandated 10% increases in the minimum wage would probably
result in which of the following?
( ) a. Compression between the lowest-paid workers and more skilled workers for a
retail trade employer
( ) b. Less pressure on the available pool of discretionary funds for pay increases for
most employers who have minimum-wage employees
( ) c. Reduced leverage of employees making one to two times the minimum wage in
asking for larger pay increases
( ) d. Increased pressure for larger pay increases among employees making one to two
times the minimum wage
8. Gainsharing is a type of
( ) a. profit sharing.
( ) b. individual incentive plan.
( ) c. group incentive.
( ) d. commission.
9. An advantage of a stock-based (equity-based) compensation plan is that it
( ) a. encourages participants to think more like owners.
( ) b. provides certain income to participants.
( ) c. is preferred by participants over equivalent amounts of cash.
( ) d. has no cost; the equity market creates the value.
10. What should be the compensation basis for a sales representative whose time is spent
acquainting potential customers with the company's product line and providing technical
assistance?
( ) a. Commission
( ) b. Volume (sales) incentive
( ) c. Base salary that represents a large percentage of compensation
( ) d. Sales of new products
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Progress Check Answers
1. a (p. 4-79)
2. a (p. 4-85)
3. d (p. 4-86)
4. a (p. 4-88)
5. c (p. 4-88)
6. b (p. 4-91)
7. a (p. 4-92)
8. c (p. 4-105)
9. a (p. 4-109)
10. c (p. 4-115)
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Introduction to Benefit
Programs and Key Benefits
Legislation
Total Rewards
4.5

4
i-iimiSk
HR responsibilities related to this section include:
Conduct benefits programs needs assessments.
Develop/select, implement/administer, and evaluate
benefit programs that support the organization's strategic
goals, objectives, and values.
Ensure that compensation and benefits programs are
compliant with applicable federal, state, and local laws
and regulations.
This section is designed to increase your knowledge of:
Qualitative and quantitative methods and tools for
analysis, interpretation, and decision-making purposes.
Benefits programs.
Federal, state, and local compensation, benefits, and tax
laws.
Organizational documentation requirements to meet
. federal and state requirements. . .
Fiduciary responsibility related to total rewards
management. SPHR ONLY
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TOTAL REWARDS Section 4-4
Introduction to Employee Benefit Programs
In addition to direct compensation, employers also provide employees with
indirect compensation, commonly known as employee benefits.
Benefit programs are designed to reward continued employment, promote
loyalty, and enable employees to live healthier, less worrisome lives.
4
On a large scope, benefit programs are part of the "social contract" between the
government, employers, and employeesa contract to protect the financial and
physical well-being of workers and their families. Indirect pay programs also
benefit employers. They:
Help organizations recruit and retain talent.
I ncrease the employee's commitment to the organizationa commitment
that then translates into improved productivity, work quality, and
competitiveness.
Provide tax-effective purchase of insurance and benefits.
Benefit Needs Assessment
Employee benefits are often a significant cost factor in an organization's total
budget and the reward package offered to employees. As with direct compensation,
the ability of the organization to attract and retain employees is dependent upon a
benefits package that meets the needs of employees, is cost-effective and
affordable, and complies with local, state, and federal laws and regulations.
It is incumbent on the HR professional to develop an employee benefits package
that fulfills the objectives of the employer and the employee. This is best
accomplished by gathering data through a needs assessment. Depending on the
organization, the assessment process may be formal or informal. The end result
should be that the benefits provided match the overall business strategies,
support the organization's mission and vision, and meet employee needs.
A benefits needs assessment includes a series of activities and culminates in a
gap analysis.
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Reviewing the organization's strategy
The organization's strategy with regard to its market has a direct effect on the
benefits it offers employees. Organizations that want to lead the market will
often offer their employees a more extensive benefits package than those
offered by organizations with a lagging or matching strategy.
Reviewing the organization's total rewards philosophy
Another consideration in assessing an organization's benefit needs is to look at
the organization's total rewards philosophy to understand how benefits fit into
that philosophy. Key considerations are how much can be spent on benefits and
the benefits' actual impact on the organization's cash flow. Benefits must be
balanced with the other elements in the total rewards program.
Analyzing the demographics of the employer's workforce
An organization's benefit plans must address the needs of various categories of
employees and their dependents from a number of perspectives, including full-
time versus part-time status, active versus retired status, age, marital status,
family status, and others.
Analyzing the design and utilization data on all benefit
plans
Types of benefits offered will vary, based upon employee lifestyle and
employee mix. Considerations include retirement, medical expenses, insurance,
dependent care assistance, and capital accumulation. Utilization data should
examine specific plan benefit usage (e.g., top 20 prescription drugs by number
of scripts and by cost). This data would then inform subsequent design changes
to a plan.
Gap analysis
The final step in a benefit needs assessment is to compare the organizational
needs (including budget), the employee needs, and the existing set of
benefits. The HR professional does a gap analysis to identify what the
organization's benefits package should and should not include.
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TOTAL REWARDS Section 4-4
Based on employee demographics (e.g., full-time, part-time, retired, seasonal)
and their need for different benefits (e.g., medical insurance, dependent care,
retirement, capital accumulation), current benefits themselves must be examined
to determine if the employees' benefit need is being met by the current benefit
offering.
For example, if capital accumulation is a benefit need, the existing 401(k) plan
may meet that need. But medical plans with a long waiting/eligibility period
may not cover the needs of many employees and could delay necessary
treatment, therefore worsening the condition and contributing to subsequent
greater cost. Such periods not only leave these employees vulnerable to
financial disaster but may also affect the organization's ability to recruit new
employees and control benefit cost levels.
A utilization review of current benefits can be done to determine which specific
parts of each benefit plan are being used by employees and whether that
utilization is in line with the organization's strategies.
Figure 36 summarizes some issues that may surface during a gap analysis and
suggests the action to take in response.
Findings Actions
Needs that are not being met by 3 Research new benefits or revise
existing benefits existing benefits.
Benefits that are not addressing
organizational or employee
needs
0 Drop or revise benefits that are not
meeting needs.
Benefits that overlap each other 0 Revise benefits that overlap or
conduct utilization review and keep
only the used benefit(s).
Benefits that are underutilized 0 Do further research and then drop or
revise underutilized benefits.
Benefits that are too costly but
are heavily used by employees
0 Institute cost-containment strategies
and reevaluate each benefit.
Figure 36. Gap Analysis Findings and Suggested Actions
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A benefits program based on assessment data allows HR to build a business
case for all important recommendations, including:
The type of benefits provided.
Who is covered under the plan (e.g., employees, dependents, retirees).
What options employees have (e.g., flexible spending accounts, cafeteria
plans).
How the plan will be financed and whether employees share in costs.
Who should administer the plan (e.g., the organization, an insurance earner,
a third-party administrator).
How the benefit plan will be communicated to all affected individuals.
Assessment data should ultimately enable HR to develop a benefits package that
is affordable for the organization and valued and used by employees.
Legislation Affecting Benefits
As noted in Section 4-1, federal, state, and local governments play a significant role
in the management of employee compensation. Legislation also affects employee
benefit programs. Federal and state governments mandate some benefits. Others,
such as retirement benefits, are not required but are highly regulated. In this
section, we'll address key legislation that impacts employee benefits
Legislation that deals primarily with employee retirement and health and welfare
plans includes:
Employee Retirement I ncome Security Act.
Retirement Equity Act.
Consolidated Omnibus Budget Reconciliation Act.
Health I nsurance Portability and Accountability Act.
Older Worker's Benefit Protection Act.
Unemployment Compensation Amendments.
Family and Medical Leave Act.
Uniformed Services Employment and Reemployment Rights Act.
Mental Health Parity Act.
Genetic I nformation Nondiscrimination Act.
Pension Protection Act.
Patient Protection and Affordable Care Act
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Legislation that deals primarily with the tax treatment of benefits includes:
Revenue Act.
Tax Reform Act.
Omnibus Budget Reconciliation Act.
Small Business J ob Protection Act.
Taxpayer Relief Act.
Economic Growth and Tax Relief Reconciliation Act.
Other related key legislation includes:
Securities and Exchange Act.
Sarbanes-Oxley Act.
Employee Retirement Income Security Act (ERISA), 1974
A pivotal piece of benefit legislation is the Employee Retirement Income
Security Act of 1974, usually called ERI SA. This act and its subsequent
amendments establish uniform minimum standards to ensure that employee
benefit plans are established and maintained in a fair and financially sound
manner. It is designed to protect the interests of participants in employee
benefit plans and their beneficiaries. Employers are not required to offer a
retirement or health and welfare plan, but if they do have one, it must conform
to the requirements of the Internal Revenue Code and ERI SA in order to
receive the tax advantages.
ERISA ensures, the uniformity of the minimum standards by virtue of the
1
fact that the federal ERISA law preempts any state laws that would relate to
or in-any Vay attempt to regulate [employee "benefit plans,'except for the
regulation of insurance. Most private-sector employee benefit programs are
subject to some provisions of ERISA. The legislation applies to and
regulates qualified private retirement plans and welfare plans such as
employer-sponsored group medical programs, group life insurance, and long-
term disability coverage. Many public-sector employers and churches are not
subject to ERISA.
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Enforcement and jurisdiction
Depending upon the subject matter involved, ERI SA confers regulatory and
enforcement jurisdiction upon the U.S. Department of Labor, the I nternal
Revenue Service, and the Pension Benefit Guaranty Corporation.
The DOL has jurisdiction over reporting, disclosure, and fiduciary
responsibility.
The IRS has jurisdiction over tax-related matters involving benefit plans
(funding, eligibility, etc.).
The Pension Benefit Guaranty Corporation (PBGC) insures payment
of certain pension plan benefits in the event that a private-sector defined
benefit pension plan lacks sufficient funds to pay the promised benefits.
Covered plans or their sponsors are required to pay premiums to the
PBGC. In turn, the PBGC guarantees payment of vested benefits (up to
a maximum limit) to employees covered by these pension plans. It does
not insure retirement plans that do not promise specific benefit
amountsdefined contribution plans such as profit-sharing or 401(k)
plans. '
The following content onfiduciaryresponsibility has beenidentified bythe HR
Certification Institute inthe bodyof knowledge as pertaining to SPHR certification only.
Questions related to this content will appear onthe SPHR examonly.
General rules under ERISA
ERI SA requires that employers follow a number of regulations.
An ERI SA plan must be operated for the exclusive benefit of the
participants and their beneficiaries. The employer sponsor must follow
the prudent person rule with respect to its handling, investment, and
management of the plan's assets. According to this rule, the employer
cannot take more risks than a reasonably knowledgeable, prudent
investor would under similar circumstances.
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Individuals may sue plan sponsors under ERI SA, the U.S. Supreme Court
ruled on February 20, 2008. J ames LaRue sued his former employer,
DeWolff, Boberg & Associates, claiming that DeWolff failed to carry out
certain changes to LaRue's 401 (k) investments requested before the stock
market's dip in 2001 and 2002. LaRue claimed that this omission depleted
his plan accounts by approximately $150,000 and constituted a breach of
fiduciary duty in violation of ERI SA.
The Supreme Court concluded that Section 502(a)(2) of ERI SA authorizes
recovery for fiduciary breaches that impair the value of plan assets in a
participant's individual account. The ruling opens employers and plan
administrators to suits by participants in defined contribution retirement
programs.
This concludes the SPHR-level content onfiduciary responsibility.
ERI SA establishes certain eligibility requirements for retirement plan
benefits. In general, the requirements are attainment of age 21 and
completion of 12 months of service, with only a few exceptions. An
organization cannot set the age for participation at more than 21 or the
service requirement at more than 12 months. However, an organization
can lower the age and service requirement thresholds. - . { -
ERI SA establishes minimum vesting requirements for retirement plans.
Vesting is the process by which a retirement benefit becomes nonforfeitable,
that is, when the employee is permanently entitled to a portion or all of his or
her benefit. Although an employee is always 100% vested in his or her own
contributions, employer matching and other employer contributions
customarily vest over time. Some plans provide for cliff vesting, whereby
such benefits become 100% nonforfeitable after passage of a certain number
of years; other plans provide for graded vesting, whereby the benefits
become incrementally nonforfeitable over a set period of years.
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The vesting requirements differ between defined benefit plans and defined
contribution plans.
Defined benefit plans. ERI SA requires that employer contributions to
defined benefit plans with cliff vesting must become 100% vested after no
longer than five years. Contributions to plans with graded vesting must
become 100% vested after no longer than seven years, and employees
must become vested at least 20% a year for each year of service beginning
with the third year of service.
Defined contribution plans. The Economic Growth and Tax Relief
Reconciliation Act (EGTRRA) and later the Pension Protection Act of
2006 modified the minimum vesting schedules for employer contributions
to defined contribution plans. Plans with cliff vesting must become 100%
vested after no longer than three years. Plans with graded vesting must
become 100% vested after no longer than six years, and employees must
become vested at least 20% per year of service, beginning with the second
year of service. -'
Defined benefit and defined contribution plans are discussed in more detail
in Section 4-7 of this module, "Deferred Compensation Plans." EGTRRA
is covered later in this section.
ERI SA also requires that benefit plans set forth the manner in which and
procedures by which claims for benefits are to be administered and appeals
of adverse benefit claims determinations are to be handled.
ERISA considerations
It is important for employers to be aware of the obligations they undertake when
they choose to maintain nonretirement benefit programs for their employees.
Health, life, and disability benefits, whether provided on a self-funded or fully
insured basis, are governed by ERI SA. Department of Labor regulations
mandate the implementation of benefit claims procedures and specify the
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precise content of various documents that employees are entitled to receive as
well as mandatory IRS filings.
ERI SA requires benefit plan sponsors to prepare and distribute summary plan
descriptions (SPDs) to participants. These written summaries of participant
rights, benefits, and responsibilities under the plans should be designed and
written so they are easily understood by the reader. Summary plan
descriptions must be issued at least once every five years.
If plans are modified in the interim years, sponsors may distribute summaries
of material modifications (SMMs) to participants to describe the changes, or
they may issue a new summary plan description. Participants must receive a
summary annual report (SAR) that contains financial information about the
plan.
In general, an annual report (Form 5500) must be filed with the IRS and made
available for participants to inspect. Form 5500 is required for employers that
sponsor qualified retirement plans and for employers that have at least 100
employees participating in health and welfare plans.
Accordingly, employers sponsoring benefit plans should not only consult with
their benefits professionals in regard to the design and administration of these
documents but should also obtain regular and ongoing advice on ERI SA benefit
plan compliance issues from qualified counsel.
Retirement Equity Act (REA), 1984
The Retirement Equity Act (REA) of 1984 provided certain legal protections
for spousal beneficiaries of qualified retirement plans.
Under REA as amended, married participants in plans that provide for an
annuity as the normal form of benefit cannot change their retirement plan
benefit distribution elections or spousal beneficiary designations or do an in-
service withdrawal without written spousal consent.
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Married participants who participate in defined contribution plans that do not
offer annuities as their normal form of payment (i.e., 401 (k) plan with a lump ,
sum distribution option) cannot change their spousal beneficiary designations
without written spousal consent but may change their withdrawal options (i.e.,
monthly, quarterly, or annual payments). Changing withdrawal options does not
require spousal consent.
REA also provides for qualified domestic relations orders (QDROs), which
are discussed in Section 4-7 of this module.
Consolidated Omnibus Budget Reconciliation Act (COBRA), 1985
Federal law does not require employers to provide health-care benefits to their
employees. However, employers who do provide such coverage and who
employ 20 or more people must allow for its continuation in the event such
coverage would end due to termination of employment, divorce, death of the
employee, etc. An exception to this general rule applies in the case of a person
whose employment is terminated due to gross misconduct.
The Consolidated Omnibus Budget Reconciliation Act (COBRA) of
1985 provides individuals and their dependents who otherwise would lose
their coverage due to a COBRA qualifying event with an opportunity to
pay to continue their group medical insurance coverage for 18 to 36 months
(sometimes longer), provided the individuals elect the continuation
coverage in a timely manner and pay the full cost of the coverage. In
addition, there may be a 2% administrative fee that the individuals pay. The
actual employer COBRA cost is the difference between employee
contributions for coverage and actual employee and dependent utilization
of the plan benefits. COBRA is expensive, given the employee requirement
to pay the total cost of the plan. Therefore, it is more likely that employees
will elect COBRA if they have a current or future need of health-care
services. This "adverse risk" customarily results in actual employer
COBRA costs greatly exceeding employee premiums received.
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The length of time COBRA coverage continues is determined by the type of
qualifying event. Figure 37 lists the qualifying events that can trigger COBRA
coverage and the length of time benefits are continued.
Maximum Length of
Event Continuation
(Months)
Termination of employment for gross misconduct 0
Termination of employment for any reason
other than gross misconduct 18
Reduction in hours 18
Employee is disabled at the time of reduction
in hours or termination 29
Divorce or death of the employed spouse 36
Dependent child loses eligibility status 36
Figure 37. COBRA Coverage
COBRA coverage generally ends when the employee or dependent ceases
paying premiums, becomes eligible for medical insurance from a new
employer, or gains Medicare coverage or when the employer terminates its
health-care plan (e.g., goes out of business). However, in some states there may
be continuation of COBRA options that would extend beyond COBRA's
minimum mandates.
COBRA regulations (2004)
On May 26, 2004, the DOL issued regulations regarding the timing and content
of COBRA notices. The rules became effective for plan years beginning on or
after November 26, 2004.
COBRA regulations regarding notices require HR professionals to:
Ensure that general and qualifying event COBRA notices reflect plan-
specific information.
Provide an initial, general COBRA notice within 90 days of the date the
employee or spouse becomes covered under your group health plan. If the
general notice is contained within the summary plan description, the
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TOTAL REWARDS Section 4-3
summary plan description should be mailed to the employee's residence
addressed to the employee and the spouse. In the event a spouse's last
known address is different from the employee's, the summary plan
description should be mailed to the employee and the spouse at his/her last
known address.
Establish reasonable notification procedures and include them in the
summary plan description so that qualified beneficiaries know:
Whom to contact.
What form the notice must take.
Deadlines for notification.
Communicate the notification procedures to all employees.
Provide a notice of unavailability of continuation of coverage in the event
the plan administrator determines that the individual is not entitled to
continuation of coverage. This notice must generally be provided within 14
days of the date you are informed of the qualifying event.
Notify individuals whose coverage ends before the maximum continuous
coverage period allowed. This can occur as a result of nonpayment, the
existence of additional coverage that does not impose a preexisting
condition exclusion, a covered employee's entitlement to Medicare, or the
employer ceasing to provide any group health plan for its employees.
Notify individuals whose COBRA coverage is ending of that fact and any
other continuation options available.
COBRA coverage expansion
The American Recovery and Reinvestment Act (ARRA), which President
Obama signed on February 17, 2009, includes significant changes to COBRA
continuation coverage rules. In general, ARRA offers COBRA premium
subsidies to some former employees and the employees' dependents. The new
COBRA provisions apply to employers that are obligated to comply with
COBRA. Generally, these include employers with 20 or more employees on
more than half of the business days in the previous year. In addition,
employers with fewer than 20 employees may be required to offer the subsidy
if the state in which they operate mandates various levels of continuation
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coverage through a "mini-COBRA" statute that meets the requirements set
forth in ARRA.
Some key provisions include the following:
COBRA subsidy. The federal government will subsidize up to 65% of the
COBRA premium charged to an "assistance eligible individual" (AEI ) for a
maximum of nine months. The COBRA premium subsidy is provided by the
employer or plan sponsor to the AEI and then recouped as a credit on the
organization's quarterly payroll withholding tax returns (i.e., Forms 941).
Eligibility. Under ARRA, "assistance eligible individuals" are individuals
who are or were otherwise eligible for COBRA continuation coverage, who
lost coverage under their employer-sponsored group health plan due to an
involuntary termination of employment between September 1, 2008, and
December 31, 2009, and who elect COBRA coverage either during the
original COBRA election period or the special election period stipulated by
ARRA. An AEI may be a covered employee or a covered spouse or
dependent child who became a qualified beneficiary because of the
involuntary termination of the covered employee. Qualified individuals who
declined COBRA coverage prior to ARRA's enactment are to be given an
additional 60 days to elect coverage after they receive notification of the
special election period.
ARRA does not fully explain what constitutes "involuntary termination."
However, the language in the act and in IRS Notice 2009-27 suggests that a
layoff as well as an involuntary termination for cause qualifies as an
"involuntary termination" under ARRA unless it amounts to a gross
misconduct situation.
Alternative COBRA coverage options. Under COBRA, an AEI generally
can only continue the same coverage option he or she was receiving on the
day before the date of the qualifying event. ARRA permits (but does not
require) group health plans to allow eligible individuals to elect alternative
coverage. For example, an AEI may select a lesser amount of coverage.
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Notification requirements. Employers will need to temporarily amend their
current COBRA election notices to include general information about the
availability of the premium subsidy and, if applicable, the option to enroll in the
alternative coverage.
The ARRA COBRA provisionseven though currently temporarycreate
many issues for employers and HR professionals and affect an employer that
sponsors a group health plan for employees and has involuntarily terminated an
employee on or after September 1, 2008.
See the discussion of HI PAA below for information on extension terms
modifying COBRA.
One of the changes enacted by the federal Patient Protection and Affordable
Care Act of 2010 is the requirement that group health plans provide coverage to
dependent children up to age 26. Generally, this requirement applies to all plan
years beginning on or after September 23, 2010, or J anuary 1, 2011 for calendar
year plans. At the time of publication, the IRS had issued only interim final
regulations regarding dependent child coverage mandate rules. As such, benefit
plan administrators and HR professionals should check with their legal counsel
for the most current regulations regarding both active employee and COBRA
coverage for dependent children up to age 26.
Complying with COBRA is a complex endeavor. There are statutory penalties
under both the I nternal Revenue Code and ERI SA for noncompliance. Failure to
comply with COBRA could subject an employer to serious penalties as well as
payment for incurred medical expenses. Employers subject to COBRA should
seek expert guidance from either counsel, consultants, their group medical
insurance vendors, or outside claims administrators to ensure that they are
COBRA-compliant.
Health Insurance Portability and Accountability Act (HIPAA), 1996
The Health Insurance Portability and Accountability Act (HIPAA) made
changes to ERI SA, the I nternal Revenue Code, the Public Health Service Act,
and COBRA.
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One core aspect of the HI PAA legislation is health coverage portability and
accessibility; The purpose of the law is to ensure that individuals who leave
(or lose) their jobs can obtain health coverage even if they or a member of ;
their immediate family has a serious illness or injury or is pregnant.
HI PAA:
Limits exclusions for preexisting conditions. Health plans are prohibited
from limiting or denying coverage for more than 12 months for a condition
diagnosed or treated during the previous six months of coverage.
Guarantees renewability of health coverage to employers and individuals.
As long as premiums are paid, health insurers must renew coverage.
Allows people to change jobs without having to worry about loss of
coverage by making coverage without preexisting exclusions possible.
Restricts the ability of employer sponsors of group health plans to impose
actively-at-work requirements as preconditions for health plan eligibility.
Establishes antidiscrimination rules for participants in group health plans.
Employers and insurers are prohibited from charging higher premiums or
denying coverage because of poor health or genetic information.
Clarifies treatment of long-term care expenses as medical expenses for the
purpose of tax deductibility.
I ncreases the tax deduction for health insurance expenses of self-employed
individuals.
Provides an exemption from the 10% excise tax on premature individual
retirement account (I RA) withdrawals for distributions taken after 1996 if
used to pay medical expenses in excess of 7.5% of adjusted gross income.
I ncludes provisions for dealing with health-care fraud and abuse,
requirements for employers who offer mental health coverage, and
requirements for insurers paying for postpartum maternity stays.
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J I1PAA makes some changes to the rules regarding COBRA:
Individuals who have had employment-based coverage for at least 18
months and who are ineligible for or who have exhausted COBRA
coverage are ensured availability of coverage without preexisting
condition limitations i f there is less than a 63-day break between the end
of coverage and obtaining new coverage.
The act clarifies that all qualified beneficiaries are entitled to purchase
the additional 11 months of continuation coveragefor a total of 29
monthsif they are disabled at the time of termination. It also provides
an extension if the beneficiary is disabled at any time during the first 60
days .of COBRA coverage.
The preexisting condition limitation to COBRA was cut off.
The. definition of qualified beneficiary was changed to include newborns
and adopted children of covered employees during COBRA continuation.
One of the most common critiques of HI PAA is that it is not adequately enforced.
The Health I nformation Technology for Economic and Clinical Health (HI TECH)
Act, enacted as part of the American Recovery and Reinvestment Act of 2009,
made several changes to HI PAA designed to improve its enforcement. The
HI TECH Act established a federal standard for security breach notifications
relating to the unauthorized dissemination of protected health information (PHI ).
The HI TECH Act requires covered entities, business associates, and vendors of
personal health records to notify, in the event of a breach of any PHI , each
individual whose PHI has been disclosed (or is reasonably believed by the
covered entity to have been disclosed) without authorization.
HIPAA Privacy Rule
The HI PAA Privacy Rule applies to health plans, health-care providers that
transmit health information in electronic form, and health-care clearing-houses.
Note that it does not apply, per se, to employers. However, if an employer is the
sponsor of a health-care plan for its employees, it may be the de facto entity that
must comply with this rule. Most covered entities were required to comply by
April 14, 2003. A "covered entity" that is a health plan includes any individual or
group plan, private or governmental, that provides or pays for medical care.
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If an employee health plan is self-administered and has fewer than 50
participants, it is excluded from this rule; otherwise, the rule applies to all
health plans. The rule mandates a list of administrative duties that may apply to
a health plan, depending on how much the health plan holds, uses, or shares
individually identifiable health information transmitted or maintained in any
form or medium.
HI PAA permits covered entities to use or disclose protected health information
for treatment, payment, and health-care operations. If a use or disclosure is not
within these purposes, it requires written authorization from the patient.
Each covered entity should have a process to decide to what extent it is covered
by the rule, according to its use of protected health information, and therefore
which of the administrative rules are mandated. The regulation defines all of
these terms in some detail.
Some of the administrative duties under the HI PAA Privacy Rule include:
Establish policies, procedures, budgets, and systems for tracking the use of
protected health information.
Designate a privacy officer.
Establish a complaint mechanism for privacy concerns.
Establish a policy stating that the covered entity will not intimidate or
retaliate against an individual for exercising his or her rights under the law.
Ensure that individuals cannot waive their rights under the rule.
Provide documented training to the workforce by the compliance date, to
new employees upon hire, and to affected employees after significant policy
changes.
Establish a system of sanctions that must be consistently enforced.
Keep all relevant records for six years.
Establish written contracts with business associates (third parties) who have
access to the health plan's protected health information.
There are several situations in which invasion of privacy may be an important
issue. References to or questions about off-the-job conduct frequently fall into
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this category. Additionally, human resource information systems (HRI S)
contain a significant amount of detail about individual employees. Access to
and use of such data should be carefully monitored.
Another situation that may create an invasion-of-privacy issue relates to referral
to or use of an employee assistance program (EAP). In Leggett v. First National
Bank of Oregon (1987), the court found in favor of the employee, holding that
the employer had invaded her privacy by intentionally intruding in her private
affairs when a representative of the company met with a psychologist (to whom
the employee had been referred by the EAP) and questioned the psychologist
about the employee's condition.
Disclosure of confidential medical information to individuals other than those
with a need to know may raise problems under the Americans with Disabilities
Act (ADA) as well as HI PAA. Under HI PAA, regulations related to the privacy
of medical care and treatment have been enacted, and these regulations apply to
all employees who have health insurance.
Medical records relating to requested accommodations under the ADA and/or
leave under the FMLA (Family and Medical Leave Act) are not covered by
HI PAA. However, the ADA requires the confidentiality of medical records
(independent of HI PAA) and seriously restricts the disclosure of such records.
Moreover, the disclosure of an employee's medical records may give rise to
liability for "intrusion upon seclusion," one of the four categories of invasion of
privacy under common law in many states.
HIPAA Security Rule
The HI PAA Security Rule applies to the physical, technical, and administrative
safeguards that are put in place to protect the integrity, availability, and
confidentiality of electronic protected health information (ePHI ). HI PAA
security differs from privacy and confidentiality:
Privacy refers to the right of an individual to control his or her personal
information.
Confidentiality relates to protecting personal information once it has been
received by another entity by safeguarding the information from
unauthorized disclosure.
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The Security Rule encompasses both external and internal security threats and
vulnerabilities.
External threats are from "outsiders" and include breach of network
firewalls, e-mail attacks, computer viruses, compromise of passwords,
posing as organization "insiders," and modem number prefix scanning.
Outsiders may steal and misuse individual health information. Outsider
attacks can also affect the integrity of information by corrupting data that is
being transmitted.
Organizations must also protect against internal threats such as careless staff
who are unaware of security issues and curious or malicious insiders who
deliberately take advantage of system vulnerabilities to access and misuse
personal health information.
The HI PAA Security Rule requires that an organization:
Assess potential risks and vulnerabilities.
Protect against threats to information security or integrity and against
unauthorized use or disclosure.
I mplement and maintain security measures that are appropriate to its needs,
capabilities, and circumstances.
Ensure compliance with these safeguards by all staff.
HI PAA-mandated security safeguards focus on protecting information through:
Administrative safeguardsdocumented, formal practices to manage the
selection and execution of security measures.
Physical safeguardsprotection of computer systems and related buildings
and equipment from hazards and intrusion.
Technical security servicesprocesses that protect and monitor
information access.
Technical security mechanismsprocesses that prevent unauthorized
access to data transmitted over a network.
HI PAA security mandates that the integrity, confidentiality, and availability
of individually identifiable health information must be protected through
comprehensive security measures. No single policy, practice, or tool can
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suffice. Cultural and organizational issues must be addressed as well as
technological and physical concerns. Further, the Security Rule notes that
security is not a one-time project but rather an ongoing, dynamic process that
will create new challenges as covered entities' organizations and
technologies change.
The HI PAA Security Rule sets a minimum threshold for security.
Organizations may choose to implement safeguards that exceed the HI PAA
standards.
New requirements of ARRA
The American Recovery and Reinvestment Act (discussed earlier in relation to
COBRA) imposes new requirements regarding HI PAA. Among these
requirements are the following:
Duty to notify each individual in the event of a security breach of protected
health information
Extension of HI PAA Privacy and Security Rules to include business
associates such as third-party administrators, personal health record vendors,
and health information exchanges
Stricter enforcement and civil penalties for violations of HI PAA Privacy and
Security Rules
Additional access and accounting requirements
ARRA provides funding to improve the nation's health-care information
technology systems. This funding is aimed at helping reduce errors,
streamlining administrative processes, and providing incentives to promote the
use of electronic health records, telemedicine, and clinical data repositories.
For more information on compliance with the HI PAA Privacy and Security
Rules, see the regulations at the Department of Health and Human Services
Web site, www.hhs.gov, and consult a benefits advisor or legal counsel.
Older Worker's Benefit Protection Act (OWBPA), 1990
The Older Worker's Benefit Protection Act (OWBPA) of 1990 prohibits
discrimination in employee benefits and includes specific requirements for
waivers of claims.
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As a result of this act:
Compensation and terms, conditions, and privileges of employment were
defined to encompass all employee benefits, including benefits provided
under a bona fi de employee benefit plan.
Older workers may not waive rights under the Age Discrimination in
Empl oyment Act unless they are given 21 days (in the case of an
individual termination) or 45 days (in cases of group termination or
voluntary retirement programs) to consider the agreement and consult an
attorney.
' Employees must be given seven days to revoke the agreement after signing
' it (individual and group terminations).
Eligible employees must be provided with certain workplace demographic
information as part of a group termination release.
The release must specifically reference age discrimination claims arising
under the ADEA.
The release cannot cover claims arising after its execution.
Unemployment Compensation Amendments (UCA), 1992
The Unempl oyment Compensation Amendments (UCA) of 1992 imposed a
mandatory 20% federal income tax withholding requirement on qualified -
retirement plan proceeds that a recipient does not roll over into another
qualified retirement plan or individual retirement account if the distribution
was an eligible rollover distribution. The withholding does not apply to
trustee-to-trustee transfers, nor does it apply to amounts that are not eligible to
be rolled over. -
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Family and Medical Leave Act (FMLA), 1993
Coverage
The Family and Medical Leave Act of 1993 covers employers with 50 or
more employees (full- or part-time) for 20 or more workweeks in the
current or preceding calendar year. It applies not only to private
;
employers
but also to nonprofit organizations and government entities, including
Congress.
To be eligible for an I'VII.A leave, an employee must have worked at least 12
months (total) for the employer, have worked 1,250 hours in the 12-month
period preceding the commencement of the leave, and work at a site that 50
or more employees work within 75 miles of.
The FMLA allows employees to take up to 12 workweeks of unpaid, job-
protected leave during a designated 12-month period in the following cases:
For incapacity due to pregnancy, prenatal medical care, or childbirth
To care for the employee's child after birth or placement for adoption or
foster care
To care for the employee's spouse, son or daughter, or parent who has a
serious health condition
For a serious health condition that makes the employee unable to perform
his or her j ob
The FMLA requires employers to define the 12-month period consistently for
all employees, using one of the following methods:
The calendar year
Any fixed 12-month "leave year" (e.g., a fiscal year, a year required by
state law, or a year starting on an employee's anniversary date)
The 12-month period measured forward from the date an employee's first
FMLA leave begins
A "rolling" 12-month period measured backward from the date an
employee uses any FMLA leave
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One exception to the 12 workweeks of unpaid leave provided by FMLA occurs
when a husband and wife both work for the same employer and take leave for
the birth of a child, for placement for adoption or foster care, or to care for a
parent with a serious health condition. If both parents work for the same
employer and are married, the parents are collectively allowed a total of 12
weeks of FMLA leave.
Where the husband and wife both use a portion of the total 12-week FMLA
leave entitlement (for the birth of a child, for placement for adoption or foster
care, or to care for a parent), the husband and wife are also entitled to the
difference between the amount each has taken individually and 12 weeks for
FMLA leave for other purposes. For example, if each spouse took six weeks of
leave to care for a healthy newborn child, each could use an additional six
weeks due to his or her own serious health condition or to care for a child with a
serious health condition.
On the other hand, if parents of a newborn are not married and work for the
same organization, each parent can take 12 weeks of unpaid FMLA leave upon
the birth of the child.
The law also covers in loco parentis ("in place of parent") relationships and
applies to 1) employees who stand in place of a parent with day-to-day
responsibilities to care for and financially support a child and 2) employees who
have day-to-day responsibilities to care for or financially support a person who
stood in loco parentis for them when they were children.
In J une 2010, the U.S. Department of Labor issued Administrator's
I nterpretation No. 2010-3 to provide employees and employers with guidance
on how the FMLA applies when there is no legal or biological parent-child
relationship. The interpretation confirms that a lack of a legal or biological
relationship with the child, the presence of a biological parent in the home, or
the existence of a biological mother and father will not necessarily defeat a
finding that an employee stands in loco parentis with the child.
The DOL further noted in the I nterpretation that there are no specific factors
that are dispositive (i.e., leading to the disposition or settling of a matter) on the
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issue of whether the in loco parentis relationship is present and that the DOL
does not interpret the FMLA to require that an employee demonstrate both day-
to-day care and financial support in order to stand in loco parentis to a child.
The 1993 F.VILA regulations defined a serious health condition as one
requiring inpatient hospital, hospice, or residential care or continuing
treatment by a health-care provider (with multiple definitions). However, the
U.S. Department of Labor issued a new set of regulations, effective J anuary
16, 2009, that clarify one of the definitions of aserious health condition,
which involves employee incapacity for more than three consecutive"
calendar days plus two visits to a health-care provider or one visit to a health-
care provider plus a regimen of continuing treatment. The first health-care
provider visit must occur within seven days of the first day of incapacity.
Where applicable, the two visits must occur within 30 days of the beginning
of the period of incapacity, absent extenuating circumstances. In addition, for "
chronic serious health conditions, the employee must visit a health-care
provider at least twice per year.
The prior FMLA regulations generally required employees to give 30 days'
notice in the event of foreseeable leave or, if this was not practical, as much
notice as possible before taking FMLA leave. The 2009 DOL regulations
state that employees must give notice of unforeseeable FMLA leave
i vj, - -accordingto. their employer's usual and customary call-in procedures, except
r , ;
l
i n the case of unusual circumstances. For example, this means that
employees'must report an absence before the start of their ,'shift if the
'
;
employer has a policy requiring them to do so. ~ ' '
1
The 2009 updated regulations also deal with intermittent leave,^medical
certification, and fitness for duty. >
Intermittent leave
The new regulations clarify that employees who take intermittent FMLA
1
leave for planned medical treatment have an obligation to make a
' "reasonable effort" to schedule such leave so as not to unduly disrupt the
employer's operations.
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| fsm Medical certification
The 2009 regulations permit, under certain circumstances, an employer to
contact an employee's health-care provider. Permissible contacts include
those made by a health-care provider on behalf of an employer, a human
resources professional, a leave administrator, or a management official of
the employer. The employee's direct supervisor is precluded from making
such contact.
If an employer determines that a medical certification is incomplete or
insufficient, the employer is required to designate, in writing, what
information is missing. The employee has seven days to cure the
deficiency. Employers may request a new medical certification each leave
year for conditions that last longer than a year.
Fitness for duty
An employer who seeks to obtain a fitness-for-duty assessment from the
employee's health-care provider upon the employee's return to work must
. notify the employee of this requirement. The employer must also provide
the employee with a list of the employee's essential functions no later
than when the employer provides the designation notice to the employee.
.In addition, under the 2009 regulation, when an employee is on an
intermittent or reduced schedule leave for his own serious health
condition, the employee may be required,.if reasonable safety concerns
' . exist, to provide a fitness-for-duty certification periodically.
In .general, subject to certain limitations, an employer has the right to require (or
permit) an employee to take paid-time-off benefits (e.g., sick or vacation days)
concurrently with what would otherwise be an unpaid FMLA leave. Similarly,
subject to certain limitations, an employer may require that the period of time
during which an employee receives workers' compensation of disability
insurance benefits runs concurrently, not consecutively, with FMLA leave.
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Example: If an employer does notrequire the employee to run FMLA
leave concurrent with sick leave, an employee could potentially take two
weeks of paid sick leave plus 12 weeks of unpaid FMLA leave, for a
total of 14 weeks. However, if the employer doesrequire employees to
run their sick leave concurrent with FMLA leave (as most employers
do), then the employee is entitled to 12 weeks of leave: two weeks paid
and ten weeks unpaid.
If during an employee's FMLA leave the organization shuts down for a week
for vacation or business slowdown and employees are not expected to report to
work, then the week would not count against FMLA leave. However, where an
employee is on FMLA leave for an entire workweek containing a holiday, such
as Thanksgiving, the workweek still counts as a full week of FMLA leave,
whether the holiday is paid or not.
FMLA expansion
On J anuary 28, 2008, President George W. Bush signed into law the first
expansion of the Family and Medical Leave Act. The National Defense
Authorization Act for Fiscal Year 2008 provides additional FMLA leave for
employees with family members who are covered members of the military.
Specifically, Section 585 of the act added two new FMLA-qualifying events:
qualifying exigency leave and military caregiver leave.
Many, but not all, of the provisions of the FMLA apply to these two new
categories of FMLA leave, including employer coverage, employee
eligibility requirements, health insurance continuation, and reinstatement
rights. Employees can utilize the leave all at once or on an incremental basis.
The National Defense Authorization Act for Fiscal Year 2010 (2010 NDAA)
further expanded the military family leave rights added to the FMLA in
2008.
Qualified exigency leave. This benefit provides up to 12 workweeks of FMLA
leave due to a spouse, son, daughter, or parent being on covered active duty or
having been notified of an impending call or order to covered active duty in the
armed forces. For members of a regular component of the armed forces,
"covered active duty" means duty during deployment with the armed forces to a
foreign country. For members of reserve components of the armed forces,
including members of the U.S. National Guard, "covered active duty" means
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duty during deployment of the member with the armed forces to a foreign
country under a call or order to active duty in a contingency operation as further
defined in the law.
The 2009 DOL regulations address what constitutes a "qualifying exigency
leave" under the FMLA's military leave provisions. Employees can take
qualifying exigency leave in circumstances that fall under one of the following
categories:
Short-notice deployment
Military events and related activities
Child-care and school activities
Financial and legal arrangements
Counseling; rest and recuperation
Post-deployment activities
Additional activities agreed to by the employer and the employee
The 2009 regulations have not been revised yet to reflect changes to the FMLA
as a result of the 2010 NDAA.
Military caregiver leave. This benefit provides up to 26 workweeks of
unpaid FMLA leave during a single 12-month period for an eligible
employee who is the spouse, son, daughter, parent, or next of kin to a
covered service member with a serious injury or illness. Under the 2010
NDAA amendments, "covered service members" was expanded to include
certain veterans. The definition of "serious injury or illness" was also
expanded. (A "serious injury or illness" is one that may render the member
medically unfit to perform the duties of the member's office, grade, rank, or
rating.) For current members and veterans of the armed forces, this
encompasses not only a serious injury or illness incurred in the line of duty
while on active service but also a serious injury or illness that existed before
the beginning of the member's active duty and that was aggravated by
service in the line of duty while on active service in the armed forces. For a
veteran, the injury or illness may manifest itself before or after the member
becomes a veteran.
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Health benefit continuation
Employers must continue the employee's health benefits while the,employee
is on approved FMLA leave on the same terms and conditions as if the
employee were not on FMLA leave. For example, employees on FMLA are
required to pay their portion of the cost of benefits (e.g., premiums).
If the employee does not return to work following the expiration of the
FMLA leave, COBRA is triggered. An employer may seek reimbursement ,
of health insurance premiums paid on behalf of the employee (and family
members, if applicable) while on leave, under certain limited
circumstances.
Reinstatement rights
FMLA requires that upon an employee's return from approved FMLA leave,
the employer restore the employee to the same position that the employee
occupied prior to FMLA leave or to an equivalent position with equivalent
benefits, pay, and other terms and conditions of employment. Employers
must also comply with other laws that might apply to the employee's absence
and potential reinstatement, such as the Americans with Disabilities Act or
other state nondiscrimination laws.
Reinstatement to the same or equivalent position under the FMLA is not
required in some situations. For example, reinstatement is not required for a
key employee (i.e., a salaried FMLA-eligible employee who is among the
highest paid 10% of all the employees employed by the employer within 75
miles of the employee's work site) if the employer provides written notice to
the employee at the time the employee gives notice of the need for FMLA
leave (or when FMLA leave commences, if earlier) that he or she (1)
qualifies as a key employee and (2) meets other specific notice requirements
but that (3) reinstatement would result in a "substantial and grievous
economic injury to operations." The employer must be able to demonstrate
that reinstatement would result in such an injury to operations.
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Also, reinstatement may not be required if an employee gives unequivocal
notice of intent not to return to work or the employee elects not to return to
work after receiving the employer's notice. However, an employer may be
obliged to reinstate an employee or provide accommodations as governed by
the Americans with Disabilities Act (ADA) as amended (see 825.702), state
leave laws, or workers' compensation laws.
Note: An employee has no greater right to reinstatement or to other benefits
and conditions of employment than if the employee had been continuously
employed during the FMLA leave period.
Modified-duty programs
Modified-duty programs are best suited to employees who will recover
from their injuries sufficiently to perform the essential functions of the
employee's position prior to the injury. Generally, the employee can decline
participation in a modified-duty program (although it may have an impact on
the employee's right to receive workers' compensation benefits).
Cost containment
Employers can integrate leave benefits, workers' compensation leave, and
FMLA leave to reduce the costs of complying with the FMLA.
Communicating clear policies and procedures to employees can reduce
misunderstandings and deter misuse.
The 2009 DOL regulations also contain specific employer notice
requirements. Employers are required to provide employees with a general
notice about the FMLA, an eligibility notice, a rights and responsibilities
notice, and a designation notice.
FMLA imposes substantial and complex legal obligations upon employers.
Employers therefore should seek guidance from the appropriate outside
experts to ensure that they are FMLA-compliant.
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Uniformed Services Employment and Reemployment Rights Act
(USERRA), 1994
The Uniformed Services Employment and Reemployment Rights Act
(USERRA) of 1994 was enacted to protect the employment, reemployment, and
retention rights of persons who voluntarily or involuntarily serve or have served
in the uniformed services. The Veterans Benefits I mprovement Act, signed by
President Bush on December 10, 2004, amended portions of USERRA.
On December 19, 2005, the U.S. Department of Labor published final
regulations interpreting USERRA. These regulations took effect on J anuary 18,
2006. The regulations confirm that USERRA applies to virtually all employers,
both public and private, regard less of size, and prohibits discrimination in
employment, job retention, advancement, or any benefit of employment on the
basis of membership, application for membership, application for service,
performance of service, or obligation for service in the uniformed services. The
final regulations include provisions that:
Confirm that j ob applicants are covered by USERRA if an organization
rejects a candidate or withdraws an offer of employment due to pending
military leave.
Require employees or an appropriate representative of the military to
provide oral or written notice of the need for leave (according to Department
of Defense regulations cited in the USERRA regulations, 30 days when
feasible).
Allow an employee to take military leave for up to five years (extended in
some circumstances, such as an order to remain on active duty because of a
war or national emergency that is unrelated to training).
Clarify the types of military service covered by USERRA.
Give employees on military leave the same non-seniority-based benefits and
rights generally provided (by contract, agreement, policy, practice, or plan)
to other employees with similar seniority, status, and pay on other types of
leaves.
Give employees on military leave the same seniority-based benefits they
would have received if they had not taken military leave.
Require that military leave not create a break in service for retirement plan
purposes, including participation, vesting, and accrual of benefits.
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Establish specific time frames for employees on military leave to apply for
reemployment.
Define employers' reemployment obligations, including timing of
reemployment, reemployment position, and discharge restrictions.
Provide additional protection for disabled veterans.
Employees giving notice of the need for military leave are not required to state
their intention to return to work following military leave at the time they take
leave. Moreover, USSERA regulations specify that an employee may not
prospectively waive his or her right to reemployment.
Employers must provide employees with notice of their rights and obligations
under USERRA whether or not the employer has employees serving in the
military. To assist in meeting the requirement, the Department of Labor has
developed a model poster that may be accessed at www.dol.gov/vets/programs/
userra/poster.htm. The poster should be displayed where the employer
customarily posts employee notices.
Under USERRA, employers are not required to compensate an employee on
temporary military leave from employment, although some employers make
a payment equal to the difference between the empl oyee's military pay and
base salary. Under the FLSA, however, exempt employees must be paid their
. , - - full salary for any workweek in which they are on military leave and do any
, -, work for their employer, less any compensation received from the military.
?
1
"After the first 30 days of military leave, USERRA does not require
, - employers to continue group health-care coverage at the employer's expense;
it does require the, employer to make such coverage available to employees
, and any covered dependents at the employee's expense for up to 24 months -
i*
1
-
or the duration of the military service period, whichever is less.
USSERA permits employers to establish COBRA-like rules in some
circumstances that terminate health coverage for failing to elect continuation
coverage and/or for untimely payment of continuation premi ums, as long as
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such rules also permit (in limited circumstances) retroactive reinstatement of
coverage without any additional administrative reinstatement cost.
USERRA also applies to cafeteria plans. Employees who have continued
pay while on leave can pay their health plan premiums on a pretax basis,
and they can also elect to continue their health-care flexible spending
account.
Under USERRA, if the military service is less than 31 days, an employee
may not be forced to pay more than his/her normal employee share of the
health insurance premium. If the military service is 31 days or more, the
employer must continue to make the group health insurance coverage
available at the employee's expense (plus 2% for administrative costs), for up
to 24 months.
COBRA may give individuals on military leave and their dependents the
right to enroll in other group health plan coverage if it is available, e.g., if a
spouse's employer sponsors a group health plan. However, under USERRA,
dependents do not have any independent right to elect health plan
continuation, and dependents or retirees who perform military service do not
have any rights to continue their health plan coverage.
The final USERRA regulations issued by the Department of Labor are
lengthy and cover many aspects of military leave. For more information on
USERRA, refer to the DOL Web site, www.dol.gov. Note that many state
laws may provide protection for employees beyond what USERRA provides.
Employees are entitled to the maximum protection afforded under federal
and/or state law.
Mental Health Parity Act (MHPA), 1996
The Mental Health Parity Act (MHPA) of 1996 addresses parity between
mental health benefits and medical benefits. It requires health insurance issuers
and group health plans (including self-funded plans with more than 50
employees) to adopt the same annual and lifetime dollar limits for mental health
benefits as for medical benefits.
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Plans that do not impose a lifetime or annual dollar limit on medical benefits
may not impose limits on mental health benefits. However, plans that do impose
limits on substantially all medical/surgical benefits must either include mental
health benefits under the medical aggregate limit or apply a separate limit to
mental health benefits that is no less than the limit applied to medical benefits: -
Several other key provisions include the following:
The law does not apply to substance abuse benefits.
The law does not apply to companies with fewer than 51 employees.
Group health plans are not required to offer mental health benefits.
Different copayments and deductibles for mental health are allowed.
Limits on the number of days or visits or requirements related to medical
necessity are allowed.
An exemption is permitted when a group health plan's costs increase 1% or
more due to the application of the law's requirements. (The increased cost
exemption must be based on actual claims data, not on an increase in insurance
premiums.)
MHPA changes
On October 3, 2008, President Bush signed the Mental Health Parity and Addiction
Equity Act (MHPAEA). Key changes made by the MHPAEA, which are generally
effective for plan years beginning after October 3, 2009, include the following:
If a group health plan includes medical/surgical benefits and mental health
benefits, the financial requirements (e.g., deductibles and copayments) and
treatment limitations (e.g., number of visits or days of coverage) that apply to
mental health benefits must be no more restrictive than the predominant
financial requirements or treatment limitations that apply to substantially all
medical/surgical benefits.
If a group health plan includes medical/surgical benefits and substance use
disorder benefits, the financial requirements and treatment limitations that
apply to substance use disorder benefits must be no more restrictive than the
predominant financial requirements or treatment limitations that apply to
substantially all medical/surgical benefits.
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Mental health benefits and substance use disorder benefits may not be subject
to any separate cost-sharing requirements or treatment limitations that apply
only to such benefits.
If a group health plan includes medical/surgical benefits and mental health
benefits and the plan provides for out-of-network medical/surgical benefits, it
must provide for out-of-network mental health benefits.
If a group health plan includes medical/surgical benefits and substance use
disorder benefits and the plan provides for out-of-network medical/surgical
benefits, it must provide for out-of-network substance use disorder benefits.
Standards for medical necessity determinations and reasons for any denial of
benefits relating to mental health benefits and substance use disorder benefits
must be made available upon request to plan participants.
The parity requirements provided for by the existing law (regarding annual and
lifetime dollar limits) will continue and will be extended to substance use
disorder benefits.
Genetic Information Nondiscrimination Act (GINA) 2008
The Genetic Information Nondiscrimination Act (GINA) prohibits
discrimination against individuals on the basis of their genetic information in
both employment and health care. GI NA changes the laws covering health
plans to protect individuals from having their genetic information used to
impact their eligibility, enrollment, or premium rates for a group health plan.
GI NA includes the following health plan coverage protections, exceptions for
genetic testing, and confidentiality requirements.
Health-care coverage protections. GI NA prohibits an insured or self-
funded health-care plan from denying eligibility to enroll in health-care
coverage or from adjusting premium contribution rates under a plan based
on an individual or family member's genetic information. Health-care plans
are also prevented from requiring a plan participant to undergo a genetic
test to be eligible for health plan coverage.
Exceptions for genetic testing for health-care treatment. GI NA allows a
health-care professional to request that a patient undergo a genetic test or
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advise a patient on the provisions of genetic tests or services through a
wellness program.
Confidentiality of genetic health-care information. GI NA requires that
the disclosure of protected genetic health-care information be governed by
HI PAA. The law also provides participants with injunctive and equitable
relief for violations of GI NA confidentiality. For violations of GI NA
privacy provisions, there are civil monetary penalties of $100 to $265,000
per day and ten years in prison for egregious violations.
GI NA does allow for genetic monitoring of the biological effects of toxic
substances in the workplace. This is discussed in Module 6: Risk Management.
Module 2: Workforce Planning and Employment, discusses nondiscrimination
provisions of GI NA pertaining to employment.
Pension Protection Act (2006)
The Pension Protection Act (PPA) changes the laws that affect defined benefit
plans, defined contribution plans, individual retirement accounts, and other
issues related to retirement planning. Key provisions include the following:
The PPA makes permanent most of the provisions in the Economic Growth
and Tax Relief Reconciliation Act (which is covered later in this section)
that were due to sunset in 2010. These include contribution, deferral, and
catch-up limits for I RA, 401(k), 403(b), SI MPLE I RA, SI MPLE 401(k),
defined contribution, and defined benefit plans. I RA contributions are
$5,000 in 2010 and are adjusted for inflation each year. Catch-up
contributions for individuals age 50 or older are $1,000 for I RAs, $2,500
for SI MPLE I RAs, and $5,500 for 401(k) plans. I RA catch-up contribution
limits, however, will not be adjusted for inflation. SI MPLE I RA and 401 (k)
catch-up contributions will be adjusted in $500 increments based on
inflation. The PPA permanently allows for Roth 401(k) and Roth 403(b)
plans and the Retirement Savings Tax Credit.
The PPA requires most defined benefit pension plans to become fully funded
over a seven-year period starting in 2008. To achieve full pension funding,
the new law allows employers to deduct the cost of making additional
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contributions to fund the pension, provides strict funding guidelines, and
imposes a 10% excise tax on organizations that fail to correct their funding
deficiencies.
Employers are now allowed the option to automatically enroll their
employees into a 401 (k) retirement plan with default contribution levels.
Employees will need to opt out of the 401 (k) plan if they don't want to
contribute to it.
On October 24, 2007, the Department of Labor published a final rule
establishing safe-harbor qualified default investment alternatives (QDI As).
This ruling makes it easier for employers to automatically enroll workers in
the organization's 401(k) and other defined contribution plans. The
regulation resulted from the Pension Protection Act and provides relief to
fiduciaries who invest the assets of participants who do not provide direction,
such as automatically enrolled workers. The regulations sanction three
default investment options:
=> Lifestyle fundsasset allocations that shift gradually over time based on
an investor's age
? Balanced fundsfunds that have a fixed blend of stocks and bonds
Professionally managed accountsa diversified portfolio of funds
managed by an outside advisor
The rule provides limited protection from employee lawsuits based on the
performance of default funds. Fiduciaries must still prudently select and
monitor the investments they choose even if they fall within the QDI A safe
harbor.
The PPA allows hardship withdrawals with respect to any person listed as a
beneficiary under the 401 (k) plan if the plan so allows.
The PPA allows non-spouse beneficiaries to transfer assets inherited from a
qualified retirement plan into a traditional I RA. The beneficiary will avoid
tax on the transfer and will be taxed only when the assets are withdrawn
from the I RA. Beginning in 2010, and for taxpayers whose adjusted gross
income is $100,000 or less, the PPA also allows a direct rollover from a
401 (k) plan to a Roth I RA, with the rollover treated as a Roth conversion.
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Patient Protection and Affordable Care Act of 2010
The Patient Protection and Affordable Care Act (PPACA), enacted on March
23, 2010, and amended one week later by the Health Care and Education
Reconciliation Act, seeks comprehensive reform of the U.S. health-care system.
The key provision requires employers with more than 50 full-time employees to
provide health coverage that meets minimum benefit specifications or pay a
$2,000 per employee penalty. Plan requirements include no exclusions for
preexisting conditions, first-dollar coverage for preventive care services, and
coverage of employees' adult children until age 26.
PPACA also:
Eliminates lifetime maximum benefit limits and restricts annual limits.
Creates a small employer health-care tax credit.
Establishes state-run health-care exchanges to purchase individual and small
business coverage beginning in 2014.
Places an excise tax on "high value" health plans effective in 2018.
Plans in place as of March 23, 2010, are "grandfathered" and can avoid some
(but by no means all) of PPACA's mandates so long as they do not substantially
increase plan participants' out-of-pocket expenses.
PPACA was enacted with broad mandates that will require regulators to provide
more comprehensive and detailed rules and guidance. HR professionals should
monitor the issuance of regulatory rules and guidance documents in this area.
Note: This content is current as of the publication date of this module. It is,
however, subject to change. Visit the SHRM Learning System Resource Center
for information on any changes to the PPACA.
Revenue Act, 1978
The 1978 Revenue Act added two new sections to the Tax Code important to
employee benefits: Sections 125 and401(k). Section 125 allows employers to
offer employees favorable tax treatment on health and welfare benefits. Section
401 (k) allows employees to make tax-favored pay deferrals toward retirement
savings through payroll deductions.
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See Section 4-7 in this module for more information on Section 401 (k) plans
and Section 4-8 for more information on Section 125 plans.
Tax Reform Act, 1986
While simplifying many sections of the Tax Code, the Tax Reform Act of 1986
made significant changes in employee benefit programs, most particularly in
qualified retirement plans. The law put into place new limits on salary deferral
contributions and compensation and, for family-owned businesses, restrictions
on retirement savings capabilities.
Omnibus Budget Reconciliation Act (OBRA), 1993
The 1993 Omnibus Budget Reconciliation Act (OBRA) significantly reduced
the compensation limits in qualified retirement programs, triggering increased
activity in nonqualified retirement programs as well as (to a lesser extent) some
plan terminations.
Small Business J ob Protection Act (SBJ PA), 1996
The Small Business Job Protection Act (SBJPA) of 1996 has a number of
provisions that change the rules concerning 401 (k) and IRA accounts and
contain tax incentives for businesses along with changes in reporting
requirements.
The SBJ PA allows some tax-exempt organizations to institute 401 (k) plans. It
enables small companies to offer SI MPLE (Savings I ncentive Match Plans for
Employees) retirement plans using I RA or 401 (k) models, simplifies the
definition of "highly compensated employee," and restricts the application of
minimum participation rules to defined benefit plans only. The SBJ PA also
provides for certain 401 (k) safe-harbor plans.
Taxpayer Relief Act (TRA), 1997
The 1997 Taxpayer Relief Act (TRA) created tax-advantaged savings
mechanisms, including Roth I RAs and Education I RAs, for individual
taxpayers. It also coordinated many of the rules relating to SI MPLE I RA and
401 (k) plans with the rules generally governing qualified retirement plans.
I ndividual tax credits for higher education expenses were created under the
Hope Scholarship Credit and the Lifetime Learning Credit.
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Economic Growth and Tax Relief Reconciliation Act (EGTRRA), 2001
The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of
2001 in part:
Adjusts minimum vesting schedules for employer matching contributions to
defined contribution plans made after 2001 to three-year cliff vesting and
six-year graded vesting (20% vesting after two years of service, with 20%
per year thereafter).
I ncreases the permissible compensation limit per Code Section 401 (a)( 17),
indexing it each year. For 2010, the limit is $245,000.
I ncreases the limit on annual pensions per Code Section 415(b)( I )(A),
indexing it each year. In 2010, the limit is $195,000.
Permits catch-up contributions for employees age 50 and older. Once a 50+
employee has deferred the maximum allowed under elective deferral and
annual addition limits, catch-up contributions can be allowed. Each such
employee's catch-up limit is $5,500 for 2010; COLA increases will be made
in $500 increments. Catch-ups are pretax and are not tested for discrimination
if made generally available; they will not count against the current or later
years' annual addition limits, deduction limits, and deferral limits.
Modifies distribution and rollover rules.
Allows collectively bargained plans to qualify for a delayed effective date.
Many of the provisions of EGTRRA were initially set to expire after 2010,
especially those increasing employee elective deferrals, the provision for Roth
401(k)s and Roth 403(b)s, and the catch-up contribution allowance. As noted
earlier, the Pension Protection Act of 2006 made all of these provisions
permanent within the Tax Code so that they will not expire in 2011.
Securities and Exchange Act, 1934
To reform the securities industry, the 1934 Securities and Exchange Act
created the Securities and Exchange Commission. This act and its subsequent
amendments are relevant because of their effects on company stock option and
employee stock purchase plans. Applicable provisions require:
Registration of all securities sold on stock exchanges.
Disclosure and trading restrictions whenever "insiders" exercise their stock
options. This group generally includes all senior officers, directors, and
stockholders who own 10%o or more of a corporation's stock.
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Sarbanes-Oxley Act (SOX), 2002
The Sarbanes-Oxl ey Act (SOX) of 2002 was enacted in response to Enron and
other corporate accounting scandals. The act has serious implications for human
resource professionals.
Impact on defined contribution plans
Blackout period. SOX created ERI SA Section 101(i). which requires
administrators of 401 (k) and other defined contribution plans to provide notice
to affected participants and beneficiaries at least 30 days in advance of
covered blackout periods. The act added a civil penalty for a plan
administrator's failure or refusal to provide timely notice of a blackout period.
The blackout period is any period of more than three consecutive business
days during which participants or beneficiaries cannot direct or diversify
assets credited to their accounts or obtain loans or distributions.
Blackout periods typically occur when there is a new plan provider or a change
in investment options. During the blackout period, the outgoing record keeper
completes final processing of participant activity and performs a final
reconciliation of accounts. The new record keeper receives the data, loads it on
the system, and checks it for accuracy. Blackout periods may last between two
and six weeks.
The act also prohibits directors or executive officers of public companies from
engaging in trading that involves company stock held outside of the plan during
the blackout period if the blackout period prevents at least 50% of the plan
participants from engaging in transactions involving company stock held in their
plan accounts. This insider trading prohibition applies to any stock acquired in
connection with the insider's services or employment.
Blackout notice. The 30-day blackout notice must be in writing and must be
stated in a way that the average plan participant can understand. Electronic
notification is permitted if the notice is "reasonably accessible" to participants.
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The notice must include:
Reasons for the blackout period.
I dentification of the investments and participant rights that are affected.
Expected beginning date and length of the blackout period.
: Statement that individuals should evaluate the appropriateness of their
current investment decisions in light of their inability to direct or
diversify their accounts.
Penalties. A plan administrator who fails to provide a required blackout notice
may be fined up to $ 100 per day per affected participant or beneficiary. If the
blackout period involves employer securities, the plan administrator is also
required to provide notice to the issuer of the employer securities.
These blackout restriction provisions became effective on J anuary 23, 2003,
according to rules issued by the Department of Labor's Employee Benefits
Security Administration (EBSA), formerly known as the Pension and Welfare
Benefits Administration (PWBA).
Whistleblower provisions
The act also prohibits publicly traded companies (as well as their officers,
employees, contractors, subcontractors, or agents) from taking any adverse
employment action against employees because of protected whistleblowing
activities. The act protects employees who report conduct that they "reasonably
believe" violates federal securities laws, the rules of the Securities and Exchange
Commission, or any federal law relating to fraud against shareholders.
Employees are protected under the act when they: , '
Raise the allegations of fraud to either a federal agency or a member of the
company who has authority to "investigate, discover, or terminate
misconduct."
, File, testify in, participate in, or assist in a proceeding related to securities
fraud.
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The company cannot di scharge, demote, suspend, threaten, harass, or
di scri mi nate agai nst empl oyees engaged in protected acti vi ti es. However, the
company may take adverse acti on agai nst an empl oyee for l egi ti mate,
nondi scri mi natory reasons.
Cri mi nal penal ti es. In addi ti on to civil liability, the act al so provi des for
cri mi nal penal ti es, i ncl udi ng i mpri sonment, for i ndi vi dual s who retal i ate agai nst
whi stl ebl owers. Any i ndi vi dual who vi ol ates thi s provi si on may be subj ect to
fi nes and i mpri sonment of up to ten years.
Fi gure 38 summari zes the key i ssues for l egi sl ati on rel ated to benefi ts. Thi s
chart is i ntended to be a qui ck reference tool and, as such, does not provi de
enough i nformati on to be used as a defi ni ti ve reference. Ref er to thi s modul e as
wel l as your state and local l aws for compl ete i nformati on regardi ng legal
compl i ance.
Retirement and Health and Welfare Legislation
Employee Retirement Income
Security Act (ERISA)
Established uniform minimum standards for employer-
sponsored retirement and health and welfare benefit
programs
Retirement Equity Act (REA) Provided certain legal protections for spousal beneficiaries of
qualified retirement plans
Consolidated Omnibus Budget
Reconciliation Act (COBRA)
Provides individuals and dependents who may lose medical
coverage with the opportunity to pay to continue coverage
Health Insurance Portability
and Accountability Act (HIPAA)
Made changes to improve health-care coverage portability
and accessibility and provide medical record privacy and
security
Older Worker's Benefit
Protection Act (OWBPA)
Amended ADEA to include all employee benefits; also
provided terminated employees with time to consider group
termination or retirement programs and consult an attorney
Unemployment Compensation
Amendments (UCA)
Imposed a mandatory 20% federal income tax withholding
requirement on most qualified retirement plan proceeds that
a recipient does not roll over into another qualified retirement
plan or individual retirement account
Family and Medical Leave Act
(FMLA)
Provides employees with up to 12 weeks of unpaid leave to
care for family members or because of a serious health
condition of the employee
Figure 38. KeyLegislationAffecting Benefits (continued next page)
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Legislation
Retirement and Health and Welfare Legislation, continued
Uniformed Services
Employment and
Reemployment Rights Act
(USERRA)
Protects employment, reemployment, and retention rights for
persons who voluntarily or involuntarily serve or have served
in the uniformed services
Mental Health Parity Act
(MHPA)
Addresses parity between mental health benefits and medical
benefits
Genetic Information
Nondiscrimination Act (GINA)
Prohibits discrimination against individuals on the basis of
their genetic information in both employment and health care
Pension Protection Act Changes the laws that affect defined benefit plans, defined
contribution plans, individual retirement accounts, and other
issues related to retirement planning
Patient Protection and
Affordable Care Act
Benefits Tax Treatment Legisla
Revenue Act
Mandates that employers with more than 50 employees
provide health-care coverage or pay a $2,000 per employee
penalty and establishes a broad array of minimum benefit
requirements for new plans
tion
Added Sections 125 and 401 (k) to the Tax Code
Tax Reform Act Made significant changes in employee benefit programs,
especially retirement plans
Omnibus Budget Reconciliation
Act (OBRA)
Reduced compensation limits in qualified retirement programs
Small Business J ob Protection
Act (SBJ PA)
Changed rules regarding the ability of tax-exempt
organizations to institute retirement plans modeled after
401 (k) and IRA accounts and to the definition of highly
compensated employees
Taxpayer Relief Act (TRA) Created tax-advantaged savings mechanisms
Economic Growth and Tax
Relief Reconciliation Act
(EGTRRA)
Other Key Legislation
Securities and Exchange Act
Adjusts minimum vesting schedules, increases retirement
plan compensation and contribution limits, permits catch-up
contributions by participants age 50 or older in certain
retirement plans, and modifies distribution and rollover rules
Regulated "insider trading"
Sarbanes-Oxley Act (SOX) Requires administrators of defined contribution plans to
provide notice of covered blackout periods; provides
whistleblower protection for employees
Figure 38. KeyLegislationAffecting Benefits (concluded)
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Tax and Accounting Organizations Affecting Compensation
and Benefit Programs
A major external factor in a total rewards system is the government. Local,
state, and federal legislation dictates the minimum wage, outlaws discriminatory
compensation practices, and specifies government employee benefit programs.
Furthermore, through their taxing powers, governments increase the cost of
labor. I ncreases in Social Security and Medicare can be especially costly, since
employers must match the amount. The Financial Accounting Standards Board
and the I RS also impact an organization's compensation and benefit programs.
Financial Accounting Standards Board (FASB)
The Financial Accounting Standards Board (FASB) was established in 1973
due primarily to public discontent and fear of government regulation. The
formation of the FASB marked the separation of the standards-setting process
from the accounting profession.
The FASB is a private body that decides how financial executives should
y Qj r report their firms' financial information to their shareholders. It derives its
authority from the Securities and Exchange Commission (SEC), and the SEC
enforces the accounting standards.
The conceptual framework of the FASB was crystallized during the 1980s, and a
considerable number of standards (primarily addressing industry-specific topics or
amending existing standards) were issued. Several critical issues, e.g., deferred taxes
and pensions, were also addressed. By the early 1990s, 106 issues had been selected
and official pronouncements had been formulated and released. These statements are
considered to be the most important rules governing financial reporting.
A number of FASB statements affect compensation and benefits. For example, rules
in FAS 106 require employers to recognize the cost of retiree health and other post-
retirement benefits over the course of an employee's career (accrual accounting)
rather than as they are paid. In FAS 87, the board states that accrual accounting goes
beyond cash transactions to provide information about assets, liabilities, and earnings.
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Recent ruling
In a final statement on a stock options rule, the Financial Accounting Standards
Board ruled that companies must treat employee stock options as an expense on
financial statements beginning in 2005. The new rule will provide investors
with more complete and neutral financial information. Companies that issue
stock options must make a good-faith effort to estimate the value of this benefit
and deduct it from income statements. Public companies (other than those filing
as small business issuers) were required to apply the rule as of the beginning of
the next fiscal year that began after J une 15, 2005. Public companies that file as
small business issuers and private companies were required to apply the rule at
the beginning of the next fiscal year beginning after December 15, 2005.
Internal Revenue Service (IRS)
Once Congress has passed tax legislation, the Internal Revenue Service (IRS)
implements the letter and intent of these laws. IRS policies and regulations can
be very effective in determining the types and features of compensation plans
that organizations offer to their employees and the manner in which the
organizations fund and operate these plans.
I RS rulings are responses by the I RS to taxpayer requests for an interpretation
of the law in light of the taxpayer's particular situation. There are two types:
Revenue rulings are published as general guidelines to all taxpayers or
organizations.
Private-letter rulings are addressed only to the specific taxpayer or
organization that requested the ruling.
Figure 39 summarizes the tax and accounting organizations that have a legal
impact upon an organization's compensation and benefits system.
Organization Description
Financial Accounting
Standards Board (FASB)
Private body that decides how financial executives should
report their firms' financial information to their shareholders
Internal Revenue Service
(IRS)
Makes rulings (revenue and private-letter) that interpret
legislation
Figure 39. Organizations Affecting Compensationand Benefits
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Progress Check
Di recti ons: Choose the best answer to each question.
1. As part of conducting a benefit plan needs assessment, the HR professional has looked at
the organization's business strategy and compensation philosophy. What is the NEXT step
that should be taken?
( ) a. Look at market conditions to see what benefits competitors offer.
( ) b. Determine which benefits should be included in the plan.
( ) c. Conduct a utilization review to determine how benefits are used.
( ) d. Determine employee needs with regard to benefits.
2. Which of the following is a possible outgrowth of a benefit plan needs assessment?
( ) a. Paying exempt employees overtime
( ) b. Adding medical coverage for chiropractic care
( ) c. I ncreasing salaries for exempt employees
( ) d. Setting new strategic objectives for the company
3. Which of the following acts protects employees covered by private retirement
programs?
( ) a. Tax Reform Act
( ) b. Employee Retirement I ncome Security Act
( ) c. Tax Equity and Fiscal Responsibility Act
( ) d. Age Discrimination in Employment Act
4. Which of the following coverage situations exemplifies a HI PAA change to COBRA?
( ) a. Reduction in tax penalties against employers who fail to provide the
certificates of coverage when an employee leaves the organization
( ) b. COBRA's 11-month disability extension for continuation of coverage
( ) c. Exclusion of a newborn of a covered employee if the child is born after a
COBRA event
( ) d. Extension of the allowable gap in coverage from 60 days to 90 days to waive
preexisting condition exclusions
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5. Which of the following situations is NOT allowed under the Older Worker's Benefit
Protection Act?
( ) a. Older workers agree to waive their rights under ADEA after being given three
days to consider an agreement.
( ) b. An organization lays off an entire division, the majority of whom are older
workers with specialized skills.
( ) c. An older worker signs a group termination plan, consults an attorney the next day,
and revokes the agreement that day.
( ) d. An organization promotes a newly hired engineer over an older engineer with
more seniority and current skills.
6. The Financial Accounting Standards Board (FASB) was established as a
( ) a. private body to disseminate information on how to file federal tax and accounting
information.
( ) b. public body to disseminate information on how to file federal tax and accounting
information.
( ) c. private body to determine how financial executives should report their firms'
financial information to their investors.
( ) d. public body to determine how financial executives should report their firms'
financial information to their shareholders.
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Progress Check Answers
1. d (p. 4-124)
2. b(p. 4-126)
3. b (p. 4-128)
4. b(p. 4-139)
5.
a
(p. 4-144)
6. c(p. 4-168)
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Government-Mandated Benefits
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16
1&
HR responsibilities related to this section include:
Ensure that compensation arid benefits programs are
compliant with applicable federal, state, and local laws
and regulations.
This section is designed to increase your knowledge of:
Federal, state, and local compensation, benefits, and tax
laws.
urce: HRCertification Institute
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Benefits Required by Statute
Certain benefits are required by statute and cannot be altered or dropped by the
organization, even if a needs assessment indicates that they are not needed by
the organization or its employees.
Currently, federal or state laws and programs mandate or regulate the following:
Social Security/Medicare
Unemployment insurance
Workers' compensation
COBRA (for employers with 20 or more employees that offer health
insurance)
Family and Medical Leave Act (FMLA) (for employers with 50 or more
ernployees in a 75-mile radius)
For a complete discussion of COBRA and FMLA, see Section 4-5 of this module.
Social Security/Medicare
As a Depression-era recovery program, Social Security was the first major federal
government-required employee benefit program. Originally the objective was to
provide retirement income to older workers, thus freeing up jobs for younger workers
and lowering the level of unemployment. Today the Social Security program provides
a basic foundation of security for American workers and their families. For tax
purposes, the system is split into two programs, Social Security and Medicare.
Social Security
Social Security provides retirement, disability, death, and survivor's benefits.
It is a work-related program, not public assistance, and covers most U.S.
... - employees with the exception of the clergy and some workers in the public
sector. To qualify, individuals must work long enough and must earn enough
to accrue a specified number of "quarters" of coverage, generally 40 quarters,
which takes at least ten years.
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As noted earlier, Social Security tax is calculated as a set percentage of salary up
to a yearly maximum. It must be deducted from employees' regular pay
(including some benefits) until the taxable wage base is reached.
There is no age limit for Social Security, and employees who continue to work
while they are receiving Social Security payments must also pay into it. The
employer matches the employees' contributions; independent contractors or
self-employed individuals pay both the employer and employee share of the tax.
Benefits
Basic Social Security benefits include the following.
Reti rement i ncome. The amount of monthly retirement benefits depends on an
individual's average earnings on jobs covered by Social Security. Benefits are
indexed to inflation, so retirees receive an automatic cost-of-living adjustment
each year appropriate to inflation and price increases. Workers and their spouses
can begin receiving benefits at age 62 at a reduced rate. By waiting until their
retirement age, workers receive their full monthly benefits. For each month a
worker delays retirement past their full retirement age, the benefits are increased.
The full retirement age is increasing from age 65 to 67 on a phased-in basis, as
shown in Figure 40.
Birth Year Age for Full Benefits
1937 or earlier 65 years
1938
1939
1940
1941
1942
65 years, 2 months
65 years, 4 months
65 years, 6 months
65 years, 8 months
65 years, 10 months
66 years 1943-1954
1955
1956
1957
1958
1959
66 years, 2 months
66 years, 4 months
66 years, 6 months
66 years, 8 months
66 years, 10 months
67 years 1960 or later
Figure 40. Changes inRetirement Age
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Disability benefits. Monthly disability benefits are paid to workers (and eligible
dependents) under full retirement age if they have a clinically determinable
physical or psychiatric impairment that prevents them from working for at least
five months and is expected to continue for at least 12 months or result in death.
Disability benefits start after the five-month waiting period.
Death benefits. The surviving spouse of a deceased worker is entitled to a
lump-sum death payment of $255.
Survivor's benefits. Social Security pays monthly survivor's benefits to eligible
dependents:
Surviving spouse at age 60 or older (50 if disabled)
Surviving spouse at any age if caring for a child under age 16 or a disabled child
Unmarried children under age 18
Disabled children at any age if they became disabled before age 22 and remain so
Dependent parents, age 62 or older
Earnings test
The retirement earnings test applies only to people below the Social Security normal
retirement age (NRA), which ranges from age 65 to 67, as shown in Figure 40. The
test limits the amount that individuals below NRA and collecting benefits can earn
from work without having part or all of their Social Security benefits withheld.
Pension and investment income doesn't count toward the limits. Those who are older
than the full retirement age can earn any amount without losing benefits.
One of two different exempt amounts applies, depending on the year an individual
reaches NRA.
For people attaining NRA after 2010, the annual exempt amount in 2010 is
$14,160. They must give up $1 for every $2 earned above the limit.
For people attaining NRA in 2010, the annual exempt amount is $37,680. This
higher exempt amount applies only to earnings made in months prior to the
month of NRA attainment. They must give up $1 for every $3 earned above the
limit.
These exempt amounts generally increase annually with increases in the national
average wage index. Earnings in or after the month a person reaches NRA do not
count toward the earnings test.
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Social Security program issues
The Social Security program is facing a number of important issues surrounding
funding and liquidity. Some of the key issues include the following:
Income redistribution. Baby boomers and young people are paying more
into the system than they will receive from the system.
Longevity. More people are living longer.
Ratio of workers to retirees. As a growing senior population becomes
eligible for benefits, fewer younger workers will be available to pay for each
retiree.
As a result of these concerns, employees are turning to other options for
retirement planning and security issues.
Medicare
Medicare is the second program covered under Social Security. Medicare
covers hospital insurance (Medicare Part A) and optional supplemental
medical insurance '(Medicare Part B) for people who reach age 65.
The Medicare component of Social Security is not dependent on one's income or
ability to pay. Like Social Security, Medicare is a matching program, with the
employee and the employer paying an equal percentage of salary in Medicare
taxes. Unlike Social Security tax, Medicare tax does not have a yearly maximum
and is taken from all earnings. Some benefits, such as bonuses, are taxed for
Medicare; others, such as long-term care insurance, are not.
A
m v All individuals are eligible for Medicare benefits'at age 65, whether they ate -
v
^ - -retired or not. However, if an employer provides health insurance benefits, by
. law .the employer's plan must be the primary health-care plan for active
employees who are age 65 or older. In the case of retired workers, Medicare is
the primary carrier and the employer's insurance is secondary. If a company
has fewer than 20 employees, Medicare can be primary for active employees
age 65 or older.
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Hospital insurance (Medicare Part A)
Medicare Part A is mandatory, and it pays for most inpatient hospital care, skilled
nursing facility (SNF) care, and home health and hospice services. For inpatient
hospital and SNF care, for each benefit period (beginning on the day a patient
begins to receive services and ending when the patient hasn't received services for
60 days in a row), Medicare pays all covered costs except certain deductibles and
coinsurance payments, which must be paid by the patient. For inpatient hospital
care (except psychiatric care), for each benefit period, for 2010 the patient pays:
A total deductible of $1,100 and no coinsurance for each hospital stay of one to
60 days.
$275 per day for days 61 to 90.
$550 per each "lifetime reserve day" after day 90 (up to 60 days over the
patient's lifetime).
All costs for each day beyond the lifetime reserve days (150 days).
The 60 lifetime reserve days of inpatient hospital coverage following a 90-day stay
in the hospital can be used only once. Once they are used, Medicare will not renew
them.
For post-hospital extended care in a skilled nursing facility, for each benefit period
for 2010 there is no coinsurance for the first 20 days and $137.50 per day for days
21 to 100.
Medical insurance (Medicare Part BJ
Medicare Part B is optional. To enroll in Part B, participants pay a monthly
premium (which is determined by a person's yearly income) and, for 2010, a
$155 annual deductible and 20% in coinsurance for most medical and other
services. This means that Medicare usually pays 80%) of the reasonable charges
for covered services, including the following:
Services of physicians
Outpatient hospital services
Certain services of dental surgeons, optometrists, chiropractors, podiatrists,
and chiropodists
Additional medical services, including diagnostic x-rays, splints and casts,
rental or purchase of medical equipment, and other specified services
Home health services
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Different terms apply to mental health services and some physical therapy and
other rehabilitation services.
Medicare Advantage Plans (Medicare Part C)
Another option is Medicare Advantage Plans, sometimes called Part C, which
allows individuals to participate in several optional health-care delivery systems
that must include Medicare Parts A and B (such as HMOs and PPOs, which are
discussed in Section 4-8 in this module). These plans may offer extra coverage
beyond Parts A and B and usually include Medicare prescription drug coverage.
However, they may restrict the hospitals and doctors that may be used and may
charge varying premiums.
Prescription benefits (Medicare Part DJ
The Medicare Prescription Drug, I mprovement, and Modernization Act
(commonly referred to as the Medicare Modernization Act, or MMA) was
signed into law in December of 2003. The law added to the Medicare program
an optional outpatient prescription drug benefit known as Part D, which went
into effect on J anuary 1, 2006. All beneficiaries eligible for Medicare Part A
and enrolled in Part B are entitled to the Part D drug benefit.
The Medicare prescription drug coverage is offered by private companies. But
all Medicare plans must offer a minimum standard level of prescription drug
coverage and typically include the following:
A monthly premium, which varies by plan chosen and is in addition to the
premium that currently applies to the Part B benefit
A copayment or coinsurance for drugs
A yearly deductible ($310 in 2010)
A coverage gap, or amount above which the patient has to pay all out-of-
pocket expenses up to the out-of-pocket limit. For 2010, the coverage gap
begins at $2,830 and ends at $4,550.
A "catastrophic" level of coverage that requires the plan to pay all costs
after the patient reaches $4,550 in 2010 in out-of-pocket spending.
Benefits will vary, depending on the drug plan chosen. Some plans offer more
coverage and additional drugs for a higher monthly premium.
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All plans cover both brand name and generic drugs. Deductibles, benefit limits,
and the out-of-pocket limit are indexed to increase in future years with the
growth in per capita Part D spending.
EEOC ruling on Medicare
A ruling by the U.S. Equal Employment Opportunity Commission (EEOC),
effective December 26, 2007, allows employers to reduce health benefits for
Medicare-eligible employees in order to avoid paying premiums that are higher
than those paid for employees not covered by Medicare. The EEOC states that
the rule was necessary in light of a 2000 federal appeals court decision
regarding health benefits for retirees (Erie County Retirees Association v.
County of Erie, upheld by the U.S. Supreme Court in 2008). The decision
declared that if an employer provides retiree health benefits, the health
insurance benefits received by Medicare-eligible retirees be the sameor cost
the sameas the health insurance benefits received by younger retirees.
Unemployment Insurance
Unempl oyment insurance, set up as part of the Social Security Act of 1935,
was another Depression-era mandatory employee benefit. It was designed to
provide employees with some income when the business cycle took a
downturn and they lost their j obs through no fault of their own. It was also
intended to provide laid-off employees with some income, thereby mitigating
the depth and seriousness of any recessionary period. It is administered by
individual states, and unemployment insurance laws vary state by state.
Primarily, employers fund unemployment insurance. (Only a few states have
additional partial funding by employees.) The amount a person receives as
unemployment insurance benefits is a function of salary up to a monthly
maxi mum amount.
Financing
To fund unemployment insurance, employers pay a federal tax of 6.2% on the
first $7,000 earned by each worker. The money is held in a federal trust, with
each state having its own account. If all state unemployment insurance is
current, employers usually receive a 5.4% credit, and the remaining .8%) goes to
the federal government.
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In addition, most states have state unemployment taxes. All states allow for an
experience rating; this involves charging lower percentages to employers who
have terminated fewer workers. As a result, tax rates may vary from as low as
1% to as high as 10%.
Eligibility
To qualify for unemployment insurance benefits in most states, an
unemployed worker must:
Be available and be actively seeking work.
Not refuse suitable employment.
Not have left the j ob voluntarily.
Not be unemployed because of a labor dispute (except in Rhode Island or
New York).
Not have been terminated for misconduct.
Have worked a minimum number of weeks.
Coverage
With the exception of a few agricultural and domestic workers, all workers
(97% of the workforce) are covered by unemployment insurance. However,
these workers must still meet eligibility requirements to receive benefits.
Duration
Most states impose a time limit, which is extended in periods of high
unemployment. Generally, payments continue for 26 weeks unless Congress has
granted an extension with the approval of the president.
Managing costs
Organizations can manage their unemployment insurance costs by:
Planning workforce deployment to avoid having one department hiring
while another is laying off workers with similar skills.
Attracting well-qualified employees and utilizing hiring tools such as
behavioral interviews and preemployment screening to avoid "bad hires."
Administering policies and procedures consistently.
Monitoring employee resignations to screen for constructive discharge.
Documenting and fighting inappropriate claims aggressively.
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Workers' Compensation
Workers' compensation is a state insurance program paid for by the employer.
It is designed to protect workers in case of a work-related injury or disease that
arose out of, and while in the course of, employment. In general, statutory
workers' compensation systems strike a compromise between the interests of
employee and employer when an employee is injured or becomes ill as a result
of his or her employment.
There are several categories of workers' compensation benefits:
Permanent and temporary total disability
Permanent and temporaiy partial disability (e.g., loss of an arm)
Survivor's benefits in cases of fatal injuries ,
<' Medical expenses
Rehabilitation
Under workers' compensation plans, employers assume all costs of work-
related injuries, regardless of who is to blame for the accident (no-fault
insurance). The overall effect has been to reduce the number of court cases,
improve safety on the job, and provide prompt treatment and rehabilitation
when injuries occur.
Prior to the enactment of workers' compensation laws, injured workers had to file
suit against employers. Such legal actions had significant drawbacks for workers
and sometimes delayed appropriate medical care. At the same time, a successful
employee suit could impose very large and unpredictable costs on an employer.
Thus workers' compensation provides for prompt payment of medical,
rehabilitation, and lost-time costs to injured or ill workers. At the same time, the
system places maximum benefits on injuries or illnesses and encourages
employers to reduce employment-based illnesses and injuries.
Workers' compensation is regulated by the states, not the federal government.
Thus, regulations vary from state to state. The individual states prescribe the rules
governing coverage, eligibility, types of benefits, and the financing of benefits.
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Funding
Some states allow employers/industries to opt out of the state's workers'
compensation plan to set up their own plans. These self-funded plans are
referred to as nonsubscriber plans.
If not self-funded, employers pay a premium (fee) to an insurance company or
state fund that assumes the risk. Coverage is generally funded by a payroll tax
that is paid only by the employer. Like unemployment insurance, workers'
compensation coverage is experience-rated. Industries and organizations that
have a high incidence of workers' compensation claims pay more into the fund.
Work-related disability
A work-related disability for the purpose of workers', compensation is
defined as a physical condition that is either caused, aggravated, precipitated,
or accelerated by work activity or the work environment. It can be the result of
an accident or illness. Workers' compensation does not cover all worker health
problems, only those that are identified as a work-related disability, injury, or
illness.
Benefits
Benefits under workers' compensation generally include medical care, disability
income, rehabilitation, and death benefits.
Compensation
The amount of workers' compensation is tied to fixed schedules of minimum
and maximum payments. Disability income is often based on the employee's
earnings at the time of the injury and the nature of the impairment.
Managing costs
Employers can manage their workers' compensation costs by:
Employing occupational or medical specialists.
Instituting preventive injury programs.
Training employees.
Requiring managers in all departments to define light-duty/return-to-work jobs.
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Progress Check
Directions: Choose the best answer to each question.
1. A 41-year-old man died, leaving a wife and five children under the age of 12. Which of the
following federally mandated benefits can the man's wife expect to receive?
( ) a. Medicare health-care coverage for herself and all dependent children under the
age of 18
( ) b. COBRA health continuation coverage for herself and all dependent children for
up to 18 months
( ) c. Social Security death benefits of $255 and monthly income for herself and all
dependent children under the age of 18
( ) d. Unemployment insurance coverage for up to 26 weeks
2. A company that announces that it will close a plant in six months must provide which of the
following mandated benefits?
( ) a. Unemployment benefits to an employee actively seeking work
( ) b. COBRA health-care continuation coverage for up to 36 months
( ) c. A severance compensation and benefits package
( ) d. Supplemental unemployment benefits for up to 26 weeks
3. According to the law, workers' compensation benefits must be provided
( ) a. regardless of fault in an accident.
( ) b. only in cases where employees followed the organization's safety and health
rules.
( ) c. only to workers in the construction and other "heavy" work industries.
( ) d. for off-the-job injuries.
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Progress Check Answers
1. c (p. 4-176)
2. a (p. 4-181)
3. a (p. 4-182)
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4. 7
j Deferred Compensation Plans
HR responsibilities related to this section include:
Develop/select, implement/administer, and evaluate
benefit programs that support the organization's strategic
goals, objectives, and values.
This section is designed to increase your knowledge of:
Benefits programs.
Noncash compensation methods.
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Deferred Compensation
Virtually all employers must offer the mandated benefits discussed in
Section 4-6. (Certain government employers do not participate in Social
Security. Employee size requirements also impact the provision of COBRA
and FMLA.) Nonstatutory benefits are those that are offered by the
individual employer to best meet the needs of the organization and its
employees. These benefits are not required by law. The results of a benefit
plan needs assessment should be the determining factor when deciding
which nonstatutory benefits the organization offers its employees.
Deferred compensation provides income to employees at some future time
as compensation for work performed now. This section looks at both
qualified deferred compensation plans (plans that provide tax benefits and
are offered to all employees in the organization) and nonqualified deferred
compensation plans (plans that may provide some tax benefits but are
offered to only select employees). The section also covers qualified
domestic relations orders.
There are several other types of nonstatutory benefits an employer may offer.
Health-care benefits are covered in Section 4-8 of this module, and a variety of
other nonstatutory benefits are discussed in Section 4-9.
Qualified Deferred Compensation Plans
Qualified deferred compensation plans make sense for a number of reasons:
They help in recruiting new employees and retaining talent until retirement.
They permit employees who reach retirement age to terminate employment
with retirement income, creating openings for others.
They are an established, competitive benefit that employees often expect as
a condition of employment.
They provide tax deferrals for all plan participants.
The enactment of ERI SA and subsequent federal tax legislation provides
favorable tax treatment to retirement and other benefit plans provided they
comply with comprehensive government restrictions and controls. For example,
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plans must comply with the provisions of Title I of ERI SA, which pertains to
fiduciary responsibility, reporting, and disclosure. Retirement benefit plans may
also qualify under applicable provisions of the I nternal Revenue Code for
favorable tax treatment.
The applicable qualification rules are exceedingly complex and beyond the
scope of this module. Generally speaking, however, such plans must:
Be in writing and be communicated to all employees.
Be established for the exclusive benefit of employees and/or their
beneficiaries.
Satisfy certain rules concerning eligibility, vesting, and funding. (See the
discussion of ERI SA in Section 4-5 in this module.)
Not discriminate in favor of officers, shareholders, or highly compensated
employees (HCEs) in contributions or benefits. Highly compensated
employee status is determined by an array of issues such as business
ownership (the employee owns more than 5% of the firm) and/or salary.
(This figure is indexed to increase as necessary with inflation and is
$110,000 for 2010.) Organizations can apply a 20% restriction (employee
is among the highest-paid 20% in the company) to HCE status if they
choose. Titles may not necessarily be indicative of HCE status.
Qualified plans offer tax-favored benefits to both employers and employees:
For-profit employers receive an immediate tax deduction for contributions.
Earnings accumulate tax-deferred until withdrawn, enabling the employees'
accounts to grow faster than if they were currently taxed.
Employees pay taxes on the funds (composed of employer and/or employee
contributions, plus investment earnings) at ordinary income tax rates only
when the benefits are received (for example, at retirement).
Qualified Retirement Plans
Qualified retirement plans come in two varietiesdefined benefit plans and
defined contribution plansand each variety has different plan types. Note as a
general rule that the various dollar limits that apply to qualified plan
contributions or benefits are indexed for inflation and may increase over time.
Therefore, always consult with a reputable advisor to determine what dollar
limitations are in effect for any given year.
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Defined benefit plans
In a traditional defined benefit plan, the employer agrees to provide the
employee with a retirement benefit amount based on a formula. The employer
must fund the plan to the level required by the formula. (Some defined benefit
plans provide for employee contributions in addition to the employer's
contribution.) The employer bears the risk that sufficient funds will be
available in the plan when required for retirement distributions.
The Pension Benefit Guaranty Corporation (PBGC) insures these plans.
Companies pay an annual per-participant insurance premium; underfunded
plans pay an additional variable rate premium.
There are three common formulas used in determining the promised benefit for
defined benefit plans.
Flat-dollar formula. Under a flat-dollar formula, the plan pays a set
dollar amount for each year of service under the plan. This type of
formula is usually seen in plans covering hourly-paid employees under a
collective bargaining agreement. For example, the plan might pay $80 per
month for each year of service, which equates to a $1,600 monthly
retirement benefit for someone who retires after 20 years of service with
the employer.
Career-average formula. There are two types of career-average
formulas.
In the first type, participants earn a percentage of the pay for each year
they are plan participants. Such plans usually require regular minimum
benefit updates to help ensure that low-earning years (typically early in a
career) do not disadvantage the target income replacement ratio.
In the second type, the participant's yearly earnings are totaled and then
averaged over the years in the plan. At retirement, the benefit equals a
percentage of the career-average pay multiplied by the employee's years
of service.
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Final-pay formula. A final-pay formula plan bases benefits on the
average earnings during a specified number of years immediately prior to
retirement, for example, the three highest-paid consecutive years,
presumably the time when an employee's earnings are the highest. This
plan provides the greatest inflation protection (so long as the participant's
highest earning years are among his or her last years with the employer)
and, not incidentally, the greatest cost to the employer.
A fourth type of defined benefit plan, the cash balance plan, expresses the
promised benefit in terms of a hypothetical account balance. Cash balance
plans have become popular alternatives to traditional defined benefit plans
because the benefit can more easily be communicated to participants and the
accrued benefit is portable. In a cash balance plan, an employee's
hypothetical account is credited each year with two credits:
A pay credit, such as a percentage of compensation
An interest credit, which is a fixed or variable rate linked to an index such
as Treasury bills
Notwithstanding the annual credits to the hypothetical accounts, increases
and decreases in the plan's trust do not directly affect the benefit amount
promised to employees. As with all defined benefit plans, the employer
assumes the investment risks on plan assets. When the employee is entitled to
receive benefits from the plan, benefits are defined in terms of an account
balance.
Upon retirement, the employee may elect to:
Receive a lifetime annuity paying a set amount per year for life.
Receive a lump sum (with the consent of his or her spouse).
For example, an employee with an account balance of $200,000 may elect to
take an annuity paying $20,000/year for life or receive a lump sum of
$200,000. The lump sum can be rolled into an I RA or another plan that
accepts rollovers.
Figure 41 summarizes the types of defined benefit plans.
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Defined Benefit Plans Description
Flat-dollar formula Employer pays a set dollar amount for each year of
service under the plan.
Career-average formula Based on a percentage of pay for each year the
employee is in the plan or a percentage of career-
average pay times years of service.
Final-pay formula Based on the average earnings during a specified
number of years (usually at the end of
employment).
Cash balance plan Defines the promised benefit in terms of a
hypothetical account balance and features benefit
portability.
Figure 41. Defined Benefit Plans
Defined contribution plans
In adefined contribution plan, employees and/or employers pay a specific
amount into the plan for each participant. Employer contributions often are
based upon a percentage of salary or a percentage of profits.
Such payments accumulate, along with investment earnings, in separate
participant accounts. Once the employer's obligation has been met (the
contribution made), the employer's customary ongoing risks are fiduciary and
administrative in nature.
The amount of a participant's retirement benefit is determined by the amounts
contributed and how well the account performs over the years and is not
guaranteed. Because of the time value of money, defined contribution plans tend
to favor employees who commence participation relatively early in their careers.
Defined contribution plans are becoming increasingly popular as employers
attempt to lower the cost of retirement benefits. Most employers provide a
relatively short eligibility period (usually one year or less) and enact vesting
provisions on employer contributions to encourage longer-term employment.
They may also offer loan and hardship distribution options for the employee.
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A variety of plans are available.
Profit-sharing plans. As mentioned earlier, profit-sharing plans allow
employers to make contributions from current and accumulated profits. The
employer annual deduction limit for profit-sharing plans is 25% of eligible
payroll. Annual per-participant contribution limitations are flexible and
discretionary and can run as high as 100% of a participant's annual
compensation, up to $49,000 per participant for 2010 and adjusted for COLA
each year. (However, the 25% deduction limit might make such a contribution
nondeductible and subject to an excise tax.) Contributions may be made on a
discretionary basis. In years when the company has no profits, company
contributions are not required, but the company may still make contributions if
it desires.
Money purchase plans. Under a money purchase plan, the employer's
contribution is a fixed percentage of an eligible employee's compensation (up to
100% or $49,000 for 2010, whichever is less). The percentage is written into the
plan, and the contribution is mandatory, even if the business has no profits.
Since the passage of the Economic Growth and Tax Relief Reconciliation Act,
most money purchase plans have either been terminated, merged, or converted
into profit-sharing plans because the deductibility limits for profit-sharing plans
and money purchase plans are now the same.
Employee stock-ownership plans (ESOPs). Employee stock-ownership plans
(ESOPs) provide shares of company stock to employees' accounts to fund the
employer contribution and are a variety of qualified retirement plan. ESOPs
sometimes are referred to as stock bonus plans. (See discussion of organization-
wide incentive plans in Section 4-4 of this module.)
401(k) plans. As the name suggests, Section 401 (k) of the I nternal Revenue
Code governs the design and operation of 401 (k) plans. Both for-profit and
some tax-exempt organization employers can offer 401 (k) plans. (Governments,
which are a different type of entity under the Tax Code, may not offer 401 (k)
plans unless grandfathered in for pre-1986 plans.)
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The yearly amount an employee can put into a 401 (k) is set by the Internal
Revenue Code and adjusted annually for inflation. The 2010 limit is $] 6,500.
The annual contribution limitation for HCEs may be further limited,
depending upon the level of contributions being made by employees who are
not HCEs.
Employees who are 50 years old or older can contribute more each year, to
"catch up." In 2010, this amount is $5,500; the amount will be adjusted for
inflation in $500 increments.
401 (k) plans can be designed in two ways:
In a salary reduction arrangement, employees may defer a portion of their
compensation to a qualified profit-sharing or stock-bonus plan. Employees'
contributions represent a pretax reduction in their earnings, and these
contributions may or may not be matched in whole or in part by the
employer.
In a profit-sharing arrangement, the employer may make a profit-sharing
allocation to a tax-deferred trust account irrespective of whether the
employee defers a portion of his or her income into the account.
f k Although an employee is always 100% vested in his or lief own contributions,
employer matching contributions customarily vest over time. EGTRRA
modified the minimum vesting schedules that may be applied to employer
;.' matching contributions, requiring either that such matching contributions
- " . - become 100% vested not later than when the employee completes three years
of service with the employer or, alternatively, that they vest in no less than
20% annual increments, beginning when the employee completes two years of
service and becoming 100% vested once the employee completes six years of
service.
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403(b) plans. Section 403(b) of the Internal Revenue Code allows the
creation of 403(b) plans, which are retirement savings plans in which
employees of certain tax-exempt organizationsqualified employers as
determined by Section 501(c)(3) of the Internal Revenue Codecan
participate. A qualified employer is an organization that is "organized and
operated exclusively for religious, charitable, scientific, public-safety
testing, literary, or educational purposes." These types of institutions include
K-12 public schools, colleges, universities, hospitals, libraries, philanthropic
organizations, and churches.
In general, the amount of pretax dollars that employees of such organizations
may contribute is $16,500 (for 2010). Contributions can be invested in:
Tax-sheltered annuities (TSAs) issued by life insurance companies.
Tax-sheltered custodial accounts (TSCAs) that invest in mutual funds.
Roth 401(k) and 403(b) plans. Beginning in 2006, employers sponsoring
401 (k) or 403(b) plans have a new option to offer to their employees:
designated Roth contributions. These contributions can be accepted by
new or existing 401 (k) or 403(b) plans.
Roth 401 (k) or 403(b) contributions are permitted under a Code section
added by EGTRRA. If a plan adopts this feature, employees can designate
some or all of their elective contributions as designated Roth contributions,
which differ from traditional 401 (k) and 403(b) contributions in that they
are included in gross income rather than being pretax elective
contributions.
In many respects, Roth after-tax contributions are similar to traditional
pretax elective contributions to existing 401 (k) and 403(b) plans:
They are subject to the same annual dollar limit as pretax contributions.
While a participant may designate some of their elective deferral to a
regular pretax 401 (k) or 403(b) and some to a Roth 401(k) or 403(b), the
total of all deferrals cannot exceed the $16,500 limit (for 2010) plus the
$5,500 catch-up contribution if age 50 or older.
They must be fully vested.
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They generally may be distributed only on the occurrence of certain
events, including the attainment of age 59/4, hardship, death, disability,
severance, or termination of the plan.
They are subject to the minimum required distribution rules.
An employer can make matching contributions on designated Roth
contributions. However, only an employee's designated Roth contributions can
be allocated to designated Roth accounts. The matching contributions made by
the employer on account of designated Roth contributions must be allocated to
a pretax account, just as matching contributions on traditional pretax elective
contributions are.
Elections to designated Roth contributions are irrevocable. Once they are
designated as Roth contributions, they cannot later be changed to pretax
elective contributions.
Figure 42 summarizes the types of defined contribution plans.
Defined Contribution Plans Description
Profit-sharing plan Plan that distributes a portion of an
organization's profits to its employees (profits
are not required for contributions).
Money purchase plan Plan in which employers make mandatory
payments (a fixed percentage of an eligible
employee's compensation) to a retirement plan.
Employee stock-ownership
plan (ESOP)
Stock shares are provided to the employee's
account.
401 (k) plan Plan that allows employees to make tax-favored
pay deferrals toward retirement savings through
a payroll deduction plan.
403(b) plan Plan that allows employees of certain tax-
exempt organizations to contribute pretax
dollars toward retirement savings.
Roth 401(k)/403(b) plan Plan that allows after-tax contributions to
existing 401 (k) or 403(b) plans.
Figure 42. Defined ContributionPlans
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Figure 43 compares defined benefit plans and defined contribution plans.
Defined Benefit Plans Defined Contribution Plans
Explicit benefit is communicated Unknown benefit level is difficult to
somewhat easily. communicate.
Concept of real value of plan not Employees assume more plan
easily communicated. investment risks.
Company absorbs risks associated Employer contribution costs are
with changes in inflation and known up front.
interest rates that affect cost.
Account balance easier to
Total employer costs are unknown. communicate.
Administration more complex and
costly.
Figure 43. Comparisonof Retirement Plan Alternatives
Phased Retirement
On May 22, 2007, final rules issued by the Internal Revenue Service on
flexible retirement arrangements became effective. These rules permit
employees approaching normal retirement age to reduce the number of
hours worked or work in a different capacity.
The final rules clarify that a defined benefit pension plan is permitted to pay
retirement benefits to a participant who has reached normal retirement age,
even if the participant has not severed employment with the employer. The
rules also provide guidance on how low a plan may set its normal
retirement age based on the typical retirement age for the industry in which
the covered workforce is employed.
In addition, the 59/4 age requirement for phased retirement participants in a
defined benefit or money purchase plan has been deleted. The final rule
states that a plan satisfies the "safe harbor" if the normal retirement age is
age 62. The rule also provides guidance where a pl an's normal retirement
age is between ages 55 and 62 and age 50 for qualified public safety
employees.
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Other Tax-Deferred Retirement Plans
In addition to defined benefit and defined contribution plans, the Tax Code
allows individuals, the self-employed, and employees of small companies and
tax-exempt organizations to set aside money for retirement in other types of
tax-deferred accounts.
Individual retirement accounts (IRAs)
A wage earner can contribute an amount up to a yearly maximum to a tax-
deferred individual retirement account (IRA). Depending on the person's
taxable income and whether the individual is also covered by a retirement plan
at work, the contribution may or may not be tax-deductible.
Roth IRAs
Unlike most traditional I RAs, there is no initial tax deduction for a Roth I RA
contribution. Where a traditional IRA typically defers tax payment on income
and capital gains and has minimum distribution requirements, a Roth IRA
with limited exceptionsprovides tax-free income growth. Since taxes are paid
up front with a Roth IRA, earnings accumulate tax-free, and no federal income
tax is levied when qualifying distributions are taken from the plan.
Simplified Employee Pensions (SEPs)
The self-employed and small organizations that do not want the administrative
complexity associated with a 401 (k) or 403(b) plan can make annual pretax
contributions for all employees to a Simplified Employee Pension (SEP)
account. SEP accounts are actually I RAs and therefore impose little if any
administrative burden on the employer, which makes them a viable option for
small employers and the self-employed.
Savings Incentive Match Plan for Employees (SIMPLE)
The Small Business J ob Protection Act of 1996 created the Savings Incentive
Match Plan for Employees (SIMPLE), which can be either a 401 (k) plan or
an I RA. A SI MPLE has very specific contribution and employer matching
requirements.
457 plans
Section 457 of the IRS Code allows employees of states, political subdivisions
or agencies of states, and certain tax-exempt organizations to defer receipt of
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wages in 457 plans. In turn, the organization pledges to reimburse these
amounts plus earnings to the employee at a future date for services currently
rendered. It is a way for employees to defer taxes to a time when they expect to
be in a lower tax bracket.
Figure 44 summarizes these types of tax-deferred retirement plans.
Plan Description
Individual retirement account
(IRA)
Tax-deferred account to which wage
earners can contribute an amount up to a
yearly maximum
Roth IRA Account providing tax-free income growth;
contributions are made with after-tax
dollars
Simplified Employee Pension
(SEP)
Tax-deferred account to which the self-
employed and employees of very small
businesses can contribute
Savings Incentive Match Plan
for Employees (SIMPLE)
Retirement plan by which employees can
contribute each year to a 401 (k) plan or
IRA
457 plan Plan that allows employees of states,
political subdivisions or agencies of states,
and certain tax-exempt organizations to
defer receipt of wages
Figure 44. Other Tax-Deferred Retirement Plans
Tax-Deferred Education Accounts
The Tax Code also allows individuals, the self-employed, and employees of
small companies to set aside money for education in tax-deferred accounts.
529 plans
A 529 plan provides families with a federal tax-free way to save money for
college. Authorized by Congress in 1996, 529 plans are legally known as
qualified tuition programs (QTPs). "529 plan" became the popular name
because Section 529 of the I RS Code specifies the pl an's tax advantages. 529
plans are sponsored by states, state agencies, or educational institutions.
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There are two types of 529 plans:
College savings plans. These plans allow the saver (also known as the
account holder) to establish an account for a future student (the
beneficiary). Plans typically offer a variety of investment options (e.g.,
stock mutual funds, bond mutual funds). The deferred savings may be
used for expenses at any college.
Prepaid tuition plans. These plans allow savers to lock in future tuition
at participating in-state public colleges and universities at current prices.
In some cases, room and board may be prepaid. State governments often
guarantee investments in prepaid tuition plans that they sponsor.
Every state and the District of Columbia has at least one of these two options;
many states offer both.
Coverdell Education Savings Accounts (ESAs)
Coverdell Education Savings Accounts (ESAs), previously known as
Education I RAs, were originally established by the Taxpayer Relief Act and
then subsequently expanded by the Economic Growth and Tax Relief
Reconciliation Act.
Coverdell ESAs are trusts set up solely for the purpose of paying qualified
education expenses for the designated beneficiary of the account. They are
exempt from federal taxation. Qualified higher education expenses include
expenses for tuition, fees, books, supplies, and equipment required for
enrollment or attendance. If the designated beneficiary is enrolled at least
half time at an eligible educational institution, certain room and board
expenses qualify. Qualified expenses also include public, private, and
religious elementary and secondary school expenses.
Multiple Coverdell accounts can be established for one beneficiary.
However, total contributions made to all Coverdell ESAs for any beneficiary
in one tax year cannot be greater than $2,000. Contributions are not
deductible.
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In general, the designated beneficiary of a Coverdell ESA can receive tax-free
distributions to pay qualified education expenses. The distributions are tax-free
to the extent that the amount of the distributions does not exceed the
beneficiary's qualified education expenses. If a distribution exceeds those
expenses, a portion of the distribution is taxable.
Figure 45 summarizes these tax-deferred education plans.
Tax-Deferred
Education Plans
Description
529 plan Qualified tuition plan that provides families a federal tax-
free way to save money for college
Coverdell ESA Trust created exclusively for the purpose of paying the
qualified education expenses of the designated beneficiary
Figure 45. Tax-Deferred EducationCompensation Plans
Nonqualified Deferred Compensation Plans
One way for organizations to provide additional benefits to executives is to
offer nonqualified deferred compensation plans. These plans do not qualify
- for favorable treatment under ERI SA. .
Since nonqualified plans either allow participants to defer receipt of income
(and having to pay taxes on that income) or provide a supplemental
retirement benefit beyond the limits placed on qualified plans, the
empl oyee's benefit is unsecured and not protected by ERI SA or the PBGC.
Generally, nonqualified plans cannot be made available organization-wide
and employer contributions are not deductible. Organization-wide plans,
which are deductible under ERI SA, must be administered as qualified plans,
be operated under ERI SA rules, and not be skewed toward highly
compensated employees.
A top hat plan is an example of a nonqualified deferred compensation plan.
It is designed to provide retirement benefits for a select group of management
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TOTAL REWARDS Section 4 11
or highly paid employees. Employer-sponsors of top hat plans must submit to
the IRS a one-time abbreviated filing disclosing the existence of the
arrangement. A deferred compensation arrangement designed to permit a
select group of management or highly compensated employees to defer
receipt .of income for a short period of time (i.e., a few years) rather than until
retirement would not be considered a top hat plan under ERI SA and thus
would not be subject to the one-time filing requirement.
Other types of plans include excess deferral plans and rabbi trusts.
Excess deferral plans
Excess deferral plans typically provide ah additional nonqualified benefit
1
, to those executive employees whose contributions to the qualified plan are
limited due to Code Section 415 limitations on qualified plan benefits.
Because there are no nondiscrimination requirements applicable to excess
deferral plans, the organization can pick and choose which employees to
benefit by such plans.
Adding a nonqualified excess deferral plan prevents executives from being
disadvantaged in terms of the organization's income-replacement ratios. For
example, an executive earning $300,000 might receive a contribution to the
nonqualified excess deferral plan equal to what his or her contribution to the
qualified plan would have been without regard to the cap, less the contribution
actually made to the qualified plan.
Figure 46 shows the contribution, assuming a 6% contribution to the qualified
retirement plan and a compensation limit of $245,000 allowed in 2010.
Contribution to
Excess Deferral Plan
$18,000-$14,700 =$3,300
Figure 46. Contributions to anExcess Deferral Plan
Allowed Qualified Plan Contribution
Contribution (Without Regard to Cap)
$245,000 x 6% =$14,700 $300,000 x 6% =$18,000
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Rabbi trusts
Nonqualified plans vary greatly but typically promise the executive a future
payment of cash. In all cases, the promise is unsecured and thus any funds set
aside for payment to the executive must remain subject, at all times prior to
payment, to the claims of the employer's creditors.
As a result, some organizations opt to set up a grantor or rabbi trust as a means
of offering limited protections on the promise to pay income in the future. These
arrangements obtained their name because they were first recognized when the
I RS issued a favorable private-letter ruling on one such arrangement between a
rabbi and his congregation.
Note, however, that although this arrangement segregates the deferred funds by
putting them in a trust so that the organization cannot divert the assets pledged
to the employee, it does not protect the funds against organization bankruptcy,
receivership, or attachment by creditors.
Typically, rabbi trusts were established by organizations as a separate trust
entity and were usually funded by insurance. However, after 409A changes,
these arrangements will now be changing. Section 409A is a new section of the
Internal Revenue Code that prescribes very strict rules for amounts deferred
under nonqualified deferred compensation plans. Harsh penalties may apply to
participants if a plan fails to comply with the new rules.
Figure 47 lists some of the advantages and disadvantages of nonqualified
deferred compensation.
Advantages Disadvantages
Less expensive to set up than Cannot be organization-wide.
qualified plans.
Money set aside is not protected
Are not subject to maximum dollar from creditors in the case of
amounts. bankruptcy.
Allow organizations to provide Tax ramifications for employers
additional benefits to executives. are not as favorable as for
qualified plans.
Figure 47. Advantages and Disadvantages of
Nonqualified Deferred Compensation Plans
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Qualified Domestic Relations Orders (QDROs)
HR professionals must be aware of qualified domestic relations orders
(QDROs) that may affect distributions from retirement plans. A QDRO creates
or recognizes the right of an alternate payee to receive all or a portion of the
benefits under a retirement plan. This is usually the result of divorce
proceedings and an empl oyee's former spouse petitioning for a portion of the
employee's retirement benefit.
When a plan receives a domestic relations order seeking to divide retirement
benefits, it must first determine whether the order is a qualified domestic
relations, order. The order must relate to child support, alimony, or marital
property rights and must be made under state domestic relations law. To be
qualified, the' order,should clearly specify the participant's name and last
known mailing address and the name and last known address of each alternate
' payee. I t must also state the name'of the plan, the amount or percentage (or the
method of determining the amount or percentage) of the benefit to be paid to
the alternate payee, and the number of payments or time period to which the
order applies. - .
The order cannot provide a type or form of benefit not otherwise provided under
the plan and cannot require the plan to provide an actuarially increased benefit.
I n certain situations, a QDRO may provide that payment is to be made to an
alternate payee before the participant is entitled to receive their benefit. For
example, if the participant is still employed, a QDRO could require payment to
an alternate payee to begin on or before the payee's earliest retirement age,
whether or not the plan woul d allow the employee to receive benefits at that
time.
The Department of Labor has issued new regulations, effective April 6, 2007,
that clarify certain issues relating to domestic relations orders under ERI SA.
The new regulations allow a valid QDRO to be issued even after the participant
has died. Also included is the provision that if a subsequent domestic relations
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order is submitted on behalf of a participant's second former spouse, it may be
treated as a QDRO even when it assigns to the participant's second former
spouse a portion of the participant's benefits not already assigned to his or her
first former spouse.
A major U.S. Supreme Court case reiterated the need for retirement plan
administratorsand perhaps even more importantly, divorce attorneysto pay
attention to divorce decrees and QDROs. In Kennedy v. Plan Administrators for
Dupont Savings (No. 07-636, J anuary 29, 2009), the Supreme Court faced a
situation where a participant was divorced. As part of the divorce decree,
Kennedy's divorcing spouse agreed to disclaim any benefits from Kennedy's
retirement plan account. However, Kennedy never changed his beneficiary
designation on the pl an's forms. When Kennedy died, the ex-spouse claimed the
retirement benefits as did a representative of Kennedy's estate (his daughter).
The Supreme Court determined that the pl an's documents were controlling, not
the divorce decree. J ustice Souter, writing for the majority, summarized the
findings as follows:
The question here is whether the terms of the limitation on assignment or
alienation invalidated the act of a divorced spouse, the designated
beneficiary under her ex-husband's ERISA pension plan, who purported to
waive her entitlement by a federal common law waiver embodied in a
divorce decree that was not a QDRO. We hold that such a waiver is not
rendered invalid by the text of the antialienation provision, but that the plan
administrator properly disregarded the waiver owing to its conflict with the
designation made by the former husband in accordance with plan
documents.
Thus, the Supreme Court awarded the benefits to the ex-spouse. The Court's
decision in this case has broad implications for employees nationwide and for
divorcing pension plan participants in particular. Plan administrators should also
take note: When a divorce occurs, you may want to ask the plan participant if he
or she would like to change beneficiaries.
Be sure to check your state laws regarding QDROs.
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Progress Check
Directions: Choose the best answer to each question.
1. Which of the following defined benefit plans is portable for the employee?
( ) a. Flat-dollar formula
( ) b. Cash balance plan
( ) c. Final-pay formula
( ) d. Career-average formula
2. A retirement plan that allows employees of a for-profit company to reduce their regular pay
and contribute a portion of it toward retirement on a tax-deferred basis is most likely based
on which of the following Internal Revenue Code sections?
( ) a. 125
( ) b. 401 (k)
( ) c. 403(b)
( ) d. 457
3. An employee opts to save money in a tax-deferred account to be used to pay for a child's
college education at future tuition rates. This type of plan is most likely a
( ) a. money purchase plan.
( ) b. 401 (k) plan.
( ) c. 403(b) plan.
( ) d. 529 plan.
4. Which of the following accounts is most likely to provide retirement income for a self-
employed individual?
( ) a. 403(b) plan
( ) b. ESOP
( ) c. SEP
( ) d. Rabbi trust
5. An individual who wants to save money for a child's private high school tuition would
mostly likely make contributions to which of the following accounts?
( ) a. Coverdell ESA
( ) b. 529 plan
( ) c. Roth IRA
( ) d. SI MPLE
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Progress Check Answers
1. b (p. 4-191)
2. b (p. 4-193)
3. d (p. 4-199)
4. c (p. 4-198)
5. a (p. 4-200)
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A-
V
HR responsibilities related to this section include:
Develop/select, implement/administer, and evaluate
benefit programs that support the organization's strategic
goals, objectives, and values.
This section is designed to increase your knowledge of:
Benefits programs.
)urce: HRCertification Institute
TOTAL REWARDS Section 4 11
Health-Care Benefits
Health insurance has become so important to the average American worker that
the term is nearly synonymous with benefits. It has, however, been an optional
protection program not mandated by law. With the March 2010 enactment of the
Patient Protection and Affordable Care Act (PPACA), employers with more than
50 full-time employees will be required to provide health coverage that meets
minimum benefit specifications or pay a $2,000 per employee penalty. The bill's
passage suggests that the United States is moving closer to ensuring that all
Americans have health-care coverage, either through employer-provided group
plans or through policies purchased by individuals on a state-run exchange.
For more information on this topic and a list of additional resources, please visit
the SHRM Learning System Resource Center at learnhrm.com.
Types of Health-Care Plans
Most employers offer one of several types of medical plans.
Indemnity (Fee-for-Service) Plans
An indemnity health-care plan (or fee-for-service health-care plan) is a full-
choice plan, and covered employees can go to any qualified physician or hospital
and submit claims to the insurance company. The fee is generated when the
employee uses health services. Therefore, there is an incentive for the physician
or hospital to provide more services. With the advent of managed care, these
plans are offered less frequently, mainly due to cost and benefit design issues.
Managed Care Plans
Managed care is a general term for a medical plan that seeks to ensure that the
treatments a person receives are medically necessary and provided in a cost-
effective manner.
Managed care options include health maintenance organizations (HMOs),
which are prepaid capitated health-care plans structured to emphasize
preventive care and cost containment. The physician is paid on a per capita (per
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head) basis rather than for the actual treatment provided. Members voluntarily
enroll by paying a set monthly or annual fee. They must use HMO physicians
and facilities in order to take advantage of low copayments or fees, and there is
no need to submit any claims. There are two primary types of HMOs:
Group model HMOs contract with individual practice associations (I PAs)
groups of physicians in private practice who provide some services.
Staff model HMOs directly employ staff physicians and other health-care
professionals.
In addition to HMOs, there are other types of managed care plans. Figure 48
describes some of the prevalent ones.
Description
Formed by an insurance company, an employer, or a group of employers
who negotiate discounted fees with networks of health-care providers. In
return, the employers guarantee a certain volume of patients. Those
enrolled in a PPO can elect to receive treatment outside the network but
have to pay higher copayments or deductibles.
Point-of-service
(POS) organizations
Combination of a PPO and an HMO; provide direct access to specialists.
Exclusive provider
organizations (EPOs)
Plans in which participants must use providers in the network of
coverage or no payment will be made.
Physician hospital
organizations (PHOs)
Consist of hospital and physician practices that merge into vertically
integrated structures.
Figure 48. Other Types of Managed Care Plans
All of these plans typically offer employees basic medical coverage, including
hospitalization, surgical services, physician visits, and some forms of extended
care (home health care after hospitalization and hospice care).
Prescription Drug Plans
Prescription drug plans typically require either a per-prescription minimum
copayment (e.g., $20 to $60) or a percentage with a ceiling amount (e.g., 25%
coinsurance; not less than $10 nor more than $75). I f the cost is less than the
copayment, the amount is the cost of the drug. Some plans require employees
to fill prescriptions at specified pharmacies at a prearranged reduced cost.
Other Managed
Care Plans
Preferred provider
organizations (PPOs)
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Plans may also require the use of generic-brand drugs when available, at lower
or no cost to the employee, or use a formulary list that states which prescription
drugs are covered. Plans that include provisions for mail-order purchases of
"maintenance" drugs are gaining popularity.
Although most major medical plans cover prescription drugs, some employers
prefer to provide a separate drug plan.
Dental Plans
While dental plans vary, there are general categories of coverage offered by
most plans.
Figure 49 lists the types of coverage typically included in dental plans.
Type of Service Example
Typical
Reimbursement
Preventive Teeth cleaning 100%
Restorative Fillings 80%
Major restorative Bridges 50%
Orthodontia Braces 50% *
For dependents under age 19
Figure 49. Typical Dental PlanCoverage
Since many dental services can be postponed, such plans typically have a *
high adverse selection rate. To be underwritten, a dental plan typically
requires close to 100% participation and a schedule of caps on the benefits.
Some plans are of a managed care variety, offering coverage only when
network providers are used. Other plans are indemnity programs offering
coverage in the form of reimbursement based upon reasonable and customary
charges no matter which provider furnishes the dental care services.
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Vision Care Plans
The American Optometric Association estimates that 60 million Americans
suffer from computer eyestraina serious problem that is costing nearly $ 1.2
billion each year to diagnose and treat. When employers calculate the cost of
lowered productivity related to eye care problems, many conclude that offering
vision care is a sound business decision.
Vision plans generally limit the frequency and dollar amounts available to
employees. The majority of plans limit new lenses, frames, and contact lenses to
once every year or two. In addition to these restrictions, most plans make
allowances for a standard set of lenses, frames, or contact lenses. Employees
pay more for scratch-resistant coatings or special lenses to ease computer
eyestrain. Some plans may also provide discounts on laser vision correction
surgery.
Alternative Health Care
A growing number of Americans integrate alternative medical therapies (e.g.,
massage, acupuncture, hypnosis, herbal medicine) with traditional medical
treatment. As a result, the request for nontraditional health-care insurance coverage
has grown. For example, chiropractic care, once considered nontraditional, is now
covered by some health-care plans.
Types of Health-Care Funding
Once an employer has designed a health benefit program, there are a number of
ways to fund it, including the following.
Fully Insured Plan
In afully insured health-care plan, the employer pays a third-party insurance
carrier premiums that cover medical charges, administrative costs, sales
commissions, taxes, and profits. Typically, the insurer adjusts the premiums,
on an annual basis, to coincide with the group's claims experience. All risk is
borne by the third-party provider. Based upon claims, the insurer either profits
or loses on its risk. State insurance laws govern the terms and conditions of
group medical insurance programs and vary on a state-by-state basis.
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A minimum premium plan is a variation on a fully insured plan. Technically
still fully insured, such a plan begins to shift some risk to the employer. That is,
if there are fewer claims than initially projected, the employer begins to share in
the savings. Conversely, if claims are greater than projected, the employer
potentially pays more.
Self-Funded Plan
If a company has aself-funded health-care plan, the employer takes on the
role of the insurance company and assumes some or all of the risk. Unlike
insured arrangements, self-funded arrangements are subject to annual
nondiscrimination testing requirements to ensure that the plan is not
discriminating in favor of highly compensated employees in eligibility or
benefits.
Options employers have for administering a self-funded plan include the
following:
Administrative-services-only (ASO) plan
With an administrative-services-only (ASO) health-care plan, risk is
assumed by the employer. In essence, the employer hires only the claims
department of the insurance company.
Third-party administrator (TPA) plan
Third-party administrator (TPA) health-care plans are much like an ASO
arrangement, but they utilize an independent (not usually insurer-related)
claims department.
I nasmuch as there is no insurance involved in fully self-funded plans, state
(WW^L insurance laws cannot dictate the content and coverage of such plans because of
the ERI SA preemption rules described in Section 4-5 of this module.
With a partially self-funded plan, the employer purchases one or two types of
stop-loss coverage, either specific and/or aggregate stop-loss (also known as
excess-loss coverage). Specific stop-loss coverage protects the plan from risk of
a major illness for one participant (or sometimes one family unit) covered by the
plan. Aggregate stop-loss coverage protects the plan from the risk of large total
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claims from all participants during the plan year. The partially self-funded plan
then would typically utilize the administrative services of either an ASO or TPA
as outlined above.
Health Insurance Purchasing Cooperatives (HSPCs)
Health insurance purchasing cooperatives (HIPCs) act as purchasing
agents for large groups of employers in a region. They shop for the highest-
quality health plans at the lowest prices. In addition, they may negotiate
directly with health-care providers. The goal of such health alliances is to
;
provide small businesses with the needed economic clout to negotiate more-
advantageous rates than they can get acting independently.
Key Medical I nsurance Terms
Understanding health insurance can be very complicated. Figure 50 provides a
glossary of key terms affecting coverage and services.
Medical Insurance Terms
Balance billing Practice where an uncontracted medical provider bills a
patient for all charges not paid for by the patient's
insurance plan, even if those charges are above the
plan's usual and customary rate or are considered
medically unnecessary
Coordination of
benefits
Eliminates the duplication of payments when an
employee, spouse, or dependents have health coverage
under two or more plans
Copayment Specified percentage (typically 20% to 30%) of covered
medical expenses that employee pays or fixed dollar
amount that the covered person pays each time he or she
visits a physician or purchases prescription drugs
Deductible Initial amount of covered medical expenses an individual
must pay before receiving paid benefits under a health-
care plan; usually expressed in terms of an individual
and/or family deductible or a per-service fee
Figure 50. Glossaryof Basic Medical Insurance Terms (continued next page)
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Medical Insurance Terms
Gatekeeper Individual, usually a primary-care physician, who is given
control of patient access to specialists and services in a
managed care organization
Lifetime maximum
benefit
Maximum dollar amount of covered medical expenses that
a health-care plan will pay on behalf of any covered person
during that person's lifetime
Medicare carve-
out
Health plan where benefits are reduced for employees
eligible for Medicare; Medicare becomes the primary
provider
Medicare
supplement
Health plan that covers specific expenses not covered by
Medicare
Nonduplication of
benefits
Requires a secondary carrier to reimburse only up to the
level of reimbursement the primary carrier would have paid
Out-of-pocket
maximum
Stated amount out of pocket the insured can pay for
medical costs in a 12-month period before copayments
end
Preexisting
conditions
Medical conditions that existed before a health-care policy
is taken out
Premium sharing Situation in which the employee pays a portion of the
required monthly premium for health-care coverage
Reasonable and
customary
Reimbursement standard used by insurance companies to
determine how much providers should be paid for their
services
Utilization review Audit of health-care use and charges to identify which
benefits are used and to make certain that care is
necessary and costs are in line
Figure50. Glossary of Basic Medical Insurance Terms (concluded)
The fol l owi ng exampl e shows the way i n whi ch these terms are used i n
determi ni ng the cost of heal th care for the empl oyer and the empl oyee.
Example: An employee's health coverage has a $300 deductible per
calendar year with an out-of-pocket maximum of $1,000. The employer
pays 80% of all covered reasonable and customary expenses, and the
employee pays the remaining 20%. The employee has reasonable and
customary expenses of $10,000 for the year. In this case, the employee
pays the deductible plus 20% of the remaining amount or $1,000,
whichever is less, and the employer pays the difference.
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Therefore:
Employee costs =($10,000 - $300) x .20 =$1,940 or $1,000 ($1,000)
. Employer costs =$10,000 - $1,000 = $9,000
If $500 of the billed $10,000 was considered above what is reasonable
and customary, the employee would pay the additional $500, or $1,500,
and the employer would pay $8,500 (unless the provider agreed not to
"balance-bill" the patient for the additional $500).
Controlling Health-Care Costs
Clearly, a key concern of organizations is keeping health-care costs down. While it
is not a simple task, there are some things that HR benefit managers can do.
Change the Delivery System
A major focus has been on structurally changing the delivery of health care
through managed care systems such as health maintenance organizations,
preferred provider organizations, or health insurance purchasing cooperatives as
well as negotiating expenses with third-party providers.
Let Employees Choose
Another approach to reducing costs is to let employees pick the programs that best
serve their overall needs. This way, the employer is not paying for unwanted health-
care services. At a minimum, the employer might give employees the option of
joining an HMO as an alternative to its indemnity health plan. The employer might
also offer flexible benefits to slow the increase in health-care costs.
Redesign the Policies
Another strategy has been to redesign policies so employees will assume a
larger percentage of the costs. Strategies include the following:
I ncreasing deductibles and out-of-pocket requirements (The impact of
increased costs being shifted to employees can be mitigated by allowing
employees to pay these costs through pretax health-care spending accounts
that comply with Section 125 of the Internal Revenue Code, discussed in
greater detail later in this section.)
Requiring coinsurance and premium payments
Requiring generic substitutions or mail-order prescription drugs
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Promote Prevention and Wellness
Many employers consciously encourage their employees to stay healthy through
a variety of programs:
No-smoking policies
I ncentives for quitting smoking
On-site physical fitness facilities
Healthier food in cafeterias and vending machines
Focusing on early detection of potentially serious health problems
Health risk assessments
Encouraging healthy/safe behaviors such as offering gym membership
reimbursement and assistance with purchasing bicycles for commuting
to/from work.
Refer to Section 6-4 of Module 6: Risk Management for more information on
wellness programs.
Conduct Careful Reviews
The trend is toward tighter control of expenditures through requirements such as:
Gatekeeper systems
Preadmission testing
Preauthorization for elective and nonemergency surgery or hospitalization
Analysis to identify preventable claims
Undertake a Utilization Review
A utilization review involves a thorough audit of the health-care charges to
make certain that the care is necessary and the costs are in line with expected
levels. Such a review might include the following steps:
PrecertificationA second opinion is obtained before certain medical treatments
are covered.
Concurrent reviewNurses or doctors hired by the review firm determine the
appropriateness of the treatment at the same time that medical procedures begin.
Case managementI n the case of catastrophic illnesses, independent medical
professionals monitor the treatment of patients to ensure that the treatments are
necessary and cost-effective.
Post-treatment bill reviewAn independent firm reviews the invoices of health-
care providers to ensure that all charges are reasonable.
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Most agree that it is necessary for organizations to keep health-care costs
affordable for the organization's financial health. However, in their zeal to control
costs, it is incumbent upon the organization to be certain that health-care changes
are not made at the expense of a group, an individual, or family members.
Consumer-Directed Health Care
Rising health-care costs is a topic of concern for both employers and employees.
The objective of consumer-directed health care is to help employers better
control costs while allowing employees to make more decisions about their
health care.
Health reimbursement accounts and health saving accounts are two examples of
consumer-directed health-care programs. They allow employers to lower their
costs and provide employees with set-aside money or credits to pay for out-of-
pocket medical and related expenses. Options may also have favorable tax
advantages for both parties.
Health Reimbursement Accounts
A health reimbursement account (HRA) is an employer-funded plan that
reimburses employees only for eligible and substantiated health-care expenses.
HRAs are also referred to as health reimbursement arrangements and are a form
of personal care accounts.
The following information on HRAs comes from an article by Gary B. Kushner,
SPHR, CBP, President, Kushner and Company. The full text of the article, "I RS
and Treasury Department Release Guidance on Health Reimbursement
Accounts," may be viewed at www.kushnerco.com/articles/hra.pdf.
How HRAs work
The following example illustrates how a typical HRA works:
An employer purchases a high-deductible medical plan, with a $2,000
individual deductible. Further, the plan pays the next $4,000 of eligible
expenses at either 80% for in-network care or 50% for out-of-network care.
The employer provides each employee with a $1,000 employer-paid
contribution to an HRA.
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The employee's first $ 1,000 of eligible medical expenses is initially
submitted to the insured health plan, and the $1,000 is applied toward the
annual deductible.
Next, the employee submits the claim to the HRA and is reimbursed up to
$1,000 (less any amounts previously paid out). The employee has now
exhausted this year's HRA contribution. The employee needs to pay the
next $1,000 of eligible claims to satisfy the remaining $1,000 deductible.
When this is done, the employee can collect benefits under the medical plan.
On the employee's next $4,000 of eligible medical expenses, the plan makes
payments at either the 80% (in-network) or 50% (out-of-network) level.
Any eligible medical expenses exceeding $6,000 ($ 1,000 HRA plus $ 1,000
employee deductible plus $4,000 subject to coinsurance) are paid by the
health plan at 100%.
HRA advantages and disadvantages
There are advantages and disadvantages to HRAs, as illustrated in Figure 51.
Advantages
Employees are motivated to stay within
account limits and avoid having to pay
high deductibles.
The employee can "roll over" the
remaining unpaid funds into the next
year.
At the employer's discretion,
employees can spend money on
services not covered by traditional
insurance plans.
Since an HRA is treated as a benefit
and not compensation, it reduces an
employee's overall tax rate.
Employers see HRAs as an alternative
to the increasing costs of traditional
health plans.
The employer need not fund the
account but rather can make notional
entries as a liability on its books.
Disadvantages
Employees who have chronic health
issues may face a high deductible and
more annual costs than employees
without chronic health issues.
Employees can't take leftover funds to
a new employer if they terminate
employment. (However, at the
employer's discretion, the funds can be
used toward COBRA payments if the
employee leaves his or her present
employer or can be used to pay for
retiree health-care premiums.)
Productivity could suffer if employees
postpone health care to build up their
accounts. Problems left untreated may
become more expensive to treat later.
Figure 51. Advantages and Disadvantages of HealthReimbursement Accounts
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HRA rules
The employer must follow the guidance given in IRS Notice 2002-45, which
includes the following:
The HRA must be in the form of a written plan document.
Only employer funding is allowed; employee salary-reduction (pretax)
contributions are not allowed.
The HRA can reimburse an employee only for eligible and substantiated
medical expenses as defined under 213 of the Internal Revenue Code.
The HRA may not reimburse any medical expenses incurred before the
HRA is established or before the participant is eligible and begins
participation in the HRA.
Only current and former employees (including retired employees) and their
spouses and dependents (including spouses and dependents of deceased
employees) are eligible to participate in an HRA. Self-employed individuals are
not eligible to participate in an HRA.
The employer may not take actions that would threaten the eligibility of the
plan. For example, an employer must not give employees the choice, at year
end, of taking cash or using remaining HRA funds for any other purposesuch
as a contribution to a 401 (k) plan. Also, if an employee is given an indirect
arrangement where a "bonus" is paid to employees at year end for unused HRA
amounts, the plan will be disqualified and all payments will be subject to
taxation. Similarly, if at termination an employee has accumulated HRA funds
and only those employees receive a "severance" payment, then all amounts
under the HRA are taxable to all participants.
The HRA is subject to all of the rules of COBRA continuation coverage.
Other benefit laws may also apply to an HRA, including HI PAA's rules on
certificates of creditable coverage as well as its underwriting rules relating to
preexisting conditions. ERI SA requirements may also apply.
An HRA that is self-funded must meet all of the nondiscrimination
requirements under 105(h) and must not favor highly compensated employees.
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Health Savings Accounts
Health savings accounts were created by a provision in the Medicare legislation
passed in November 2003. A health savings account (HSA) is a tax-sheltered
savings account similar to an IRA, but it is created primarily for the purpose of
paying for medical expenses. The HSA trustee or custodian is typically a bank or
an insurance company. To be eligible, an individual must be covered by a
qualifying high-deductible health plan (HDHP) and not be covered by any other
non-HDHP plan. According to 2010 figures, an HDHP has:
A deductible of at least $ 1,200 employee-only, $2,400 family.
Out-of-pocket limits of no more than $5,950 employee-only, $11,900 family.
HSA contributions are set by law at a maximum for 2010 of $3,050 annually for
individual coverage and $6,150 for family coverage. HSAs carry an additional
"catch-up" provision allowing individuals age 55 to 65 to make an additional
$1,000 contribution in 2009 and later years.
Contributions to the HSA can be made by the employer, the employee, or both.
Contributions are deductible if made by the employer and are excludable from
income and wages (for employment tax purposes) if made by the employee (if
done through a Section 125 plan, which is described next in this section). Earnings
grow tax-free, and distributions for qualified medical expenses (defined under
Section 213(d) of the Internal Revenue Code) are tax-free. Unused HSA funds can
be carried over from year to year, are portable, and can be used into retirement.
How HSAs work
A typical HDHP/HSA works as follows:
Money currently spent on a traditional health plan is used to purchase a low-
cost high-deductible policy.
All or a portion of the savings is deposited as an employer contribution into a
tax-deductible HSA.
Employees may contribute additional dollars through salary reduction.
The HSA should be used to help pay unreimbursed medical expenses until
the deductible is met (or can be used for any purpose with significant tax
consequences).
The high-deductible insurance policy takes care of covered medical expenses
that exceed the deductible.
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Figure 52 summarizes key characteristics of HRA and HSA health-care options.
Option Description
Health
reimbursement
accounts
(HRAs)
Employer-funded medical plan that reimburses employees only for eligible
and substantiated health-care expenses. Each employee receives an
employer-paid contribution that is treated as a benefit and not
compensation. High deductibles motivate employees to stay within account
limits. Employees can roll over any unpaid funds into the next year. Funds
are not portable.
Health savings
accounts
(HSAs)
A tax-sheltered savings account for the purpose of paying for medical
expenses. An individual must be covered by a qualifying high-deductible
health plan. Contribution limits are set by law. Contributions can be made
by the employer, the employee, or both. Funds can be carried over from
year to year, are portable, and can be used into retirement.
Figure 52. HRA and HSA Consumer-Directed Health-Care Options
Flexible Benefit Plans Under Section 125
Section 125 benefit plans are written plans maintained by the employer for the
benefit of the employees. They allow both employers and employees to save
taxes on the money they pay toward their group-sponsored health, dental, and
group-term life insurance plan premiums as well as on dependent care or out-of-
pocket medical expenses.
- ^
4
s
-II
.Because they allow employees options, Section 125 plans are often grouped
under'the term "cafeteria plans." Section 125 plans are available in three
forms, all of which offer employees a choice in the way they select and pay for
employee benefits offered by their employers:. -
" JPremium-only plans (POPs)
Flexible spending accounts (FSAs) ^ ^
Full cafeteria plans
Premium-Only Plans (POPs)
Premium-only plans (POPs) are the simplest Section 125 plans and the easiest
to maintain. They create no new benefits. The employer provides a means for
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TOTAL REWARDS Section 4 11
employees to receive favorable tax treatment for the employee's cost of benefits
already offered.
Having a POP allows employees' premium contributions for certain qualified
benefits such as health care (whether for self or dependents), dental care, life
insurance, or disability coverage to be automatically deducted from their
salaries before taxes are taken out. Paying for benefits with pretax dollars rather
than after-tax dollars reduces the employees' taxable income by the amount
contributed, so employees pay less in taxes and have more take-home pay. With
employee pretax income lowered, employers and employees also pay less in
Social Security (FI CA) payroll taxes.
Flexible Spending Accounts (FSAs)
The flexible spending account (FSA) is usually offered with a POP and helps
employees use pretax dollars to pay for out-of-pocket (not covered by
insurance) expenses such as eyeglasses and contact lenses, medical insurance
deductibles and copayments, prescriptions, orthodontia, chiropractic services,
dental treatments, x-rays, and laboratory services. I nsurance premiums,
including COBRA, are not payable from an FSA account.
Revenue Ruling 2003-102, issued by the IRS, specifies that nonprescription
over-the-counter medicines or drugs purchased for medical care of an employee
or the employee's dependents can be reimbursed with pretax dollars through a
health-care flexible spending account. This is permitted even though the
employee cannot deduct those costs on his or her income tax return. In the
ruling, the I RS states that such expenses are reimbursable with pretax dollars
only if they involve expenditures for medical care. "Medical care" is defined by
the I RS as amounts paid for the "diagnosis, cure, mitigation, treatment, or
prevention of disease or for the purpose of affecting any structure or function of
the body." As examples of properly reimbursable items that are available
without a physician's prescription, the I RS mentions antacids, allergy
medicines, pain relievers, and cold medicines. In contrast, the I RS states that
expenses for items that are merely beneficial to an individual's general good
health, such as dietary supplements, toothpaste, toiletries, or cosmetics, are not
expenses for medical care and therefore are not reimbursable with pretax
dollars.
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Another type of FSA account allows employees to use pretax dollars for
dependent care, which is defined as:
Care for a child through age 12.
Care for a disabled spouse or dependent unable to care for himself or
herself.
Some household-related services such as a visiting nurse.
Like aPOP, an FSA increases employee take-home pay while decreasing
employer payroll taxes. The amount of pay employees deposit into their FSA
account is determined by each employee. That amount is automatically
deducted from the employee's paycheck every pay period and is deposited into
their FSA account.
The employees pay their out-of-pocket expenses up front and submit a claim
and documentation, and a reimbursement is made from their own account.
The flexibility of an FSA makes it a good option for small to middle-size
companies as well as large employers.
FSAs include risk for the employee and the employer:
For many years, FSAs were subject to the "use-it-or-lose-it" rule, which
required unused contributions remaining at the end of the plan year and
', not submitted for reimbursement within the "run-off' period
immediately following the plan year to be forfeited. However, the IRS
modified the rule'so "that anFSA may, at the employer's option, be
amended to include a grace period at the end of each plan year. This
period must apply to all plan participants in the FSA'and may hot
exceed the two and one-half months immediately following the plan
year. Health-care or dependent-care expenses incurred during the grace
period may be reimbursed from any contributions remaining in the FSA
at the end of the previous plan year. Any contributions remaining at the
end of the grace period or at the end of any additional "run-off' period
are forfeited.
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Employers must pay for FSA health-care claims when they are
incurred. For example, an employee decides to set aside $100 per
month in her FSA health-care account. In February, she submits a claim
for $1,200 for dental work performed in J anuary. If her employment is
terminated on March 1, she is still entitled to the full $1,200
reimbursement even though she paid only $200 ($100 per month for
J anuary and February), since the qualified expenses were incurred prior
to the termination of employment; This rule does not apply to
dependent-care reimbursement accounts.
Full Cafeteria Plans
With full cafeteria plans, employees choose from a menu of eligible
qualified benefits prior to the start of the plan year or coverage period. In
these types of Section 125 plans, employees are typically given a number of
benefit credits that they may spend on a variety of qualified benefit items,
choosing not just between different benefits but also choosing items within a
given benefit.
For example, an employee might choose to allocate more benefit credits to
buy greater disability coverage while spending less in health care by
purchasing a less-rich health option.
In some plans,, employees may opt out of certain benefits suph as health care,
but usually only i f they have proof of other coverage within the family unit.
Additionally, employees'in full flexible benefit plans can either cash out
unused benefit credits or buy additional benefits through pretax salary
reductions. The administrative and maintenance costs to the employers for
full cafeteria plans are the greatest among the Section 125 options.
Figure 53 summarizes the advantages and disadvantages of full cafeteria benefit
plans.
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Advantages of
Full Cafeteria Plans
Tailored to each employee's needs
Flexiblebenefits can change as
employees' lives change
Efficient use of benefits (not paying
for unused benefits)
Employer's sensitivity to all program
costs and employee cost-sharing
Employees' awareness of benefits
and what they cost
Favorable tax treatment
Employer's cost of benefits lowered
over the long run by reducing the rate
of increase and/or the organization's
subsidies
Disadvantages of
Full Cafeteria Plans
Benefits chosen that do not meet the
employee's needs (from the
employer's point of view)
Adverse selectionbenefits may be
selected only by employees who fully
utilize those benefits, consequently
not spreading risks across the whole
group and thus negatively affecting
costs
Subject to nondiscrimination
requirements in Section 125 of the
Internal Revenue Code
Figure 53. Full Cafeteria Plans
Figure 54 compares key characteristics of all three types of Section 125 flexible
benefit plans.
Option Description
Premium-only
plans (POPs)
Allows employees to make premium contributions for certain qualified
benefits (e.g., health care, dental care, life insurance, disability coverage)
with pretax dollars. Increases employee take-home pay while decreasing
employer payroll taxes because Social Security (FICA) payroll taxes are
lowered. The employee's cost of benefits determines the amount of pay
employees can deposit into their POP.
Flexible
spending
accounts
(FSAs)
Allows employees to use pretax dollars to pay for out-of-pocket (not covered
by insurance) expenses and dependent-care expenses. Increases
employee take-home pay while decreasing employer payroll taxes because
Social Security (FICA) payroll taxes are lowered. Each employee
determines the amount of pay deposited into their FSA account. Unpaid
funds cannot be rolled over into the next year beyond the plan grace period.
Full cafeteria
plans
Allows employees to choose from a menu of eligible qualified benefits and
typically pay for them with pre-allocated benefit credits. Some plans permit
employees to cash out unused benefit credits or buy additional benefits
through pretax salary reductions.
Figure 54. Section125Flexible Benefit Plans
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TOTAL REWARDS Section 4 8
Progress Check
Directions: Choose the best answer to each question.
1. Under a company's health plan, employees are not required to submit claims if they go to
participating doctors and hospitals since these providers are direct employees of the health-
care provider. This type of health-care plan is most likely a(n)
( ) a. PPO.
( ) b. commercial insurance plan.
( ) c. IPA model HMO.
( ) d. staff model HMO.
2. In which of the following does the employer take on the role of the insurance company and
assume some or all of the risk?
( ) a. Self-funded plan
( ) b. HMO
( ) c. PPO
( ) d. I ndemnity plan
3. Which of the following strategies will NOT reduce employer health-care costs?
( ) a. Promoting a wellness program
( ) b. Eliminating time lapses on preexisting conditions
( ) c. Establishing a gatekeeper system
( ) d. Conducting utilization reviews
4. Which of the following health plans allows an employee to roll over unused account balances
from year to year?
( ) a. Premium-only plans
( ) b. Flexible spending accounts
( ) c. Full cafeteria plans
( ) d. Health reimbursement accounts
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TOTAL REWARDS Section 4-11
Progress Check Answers
1. d (p. 4-211)
2. a (p. 4-214)
3. b (p. 4-217)
4. d (p. 4-220)
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4. 9
Other Nonstatutory Benefits
m
b
' 1
4
HR responsibilities related to this section include:
Develop/select, implement/administer, and evaluate
benefit programs that support the organization's strategic
goals, objectives, and values.
This section is designed to increase your knowledge of:
Benefits programs:
TOTAL REWARDS Section 4 11
Other Nonstatutory Benefits
The reasons people are attracted to and stay with organizations are as diverse
as the workforce itself. There are a number of benefits that help organizations
attract and retain employees. Module 5: Employee and Labor Relations
discusses the more intangible benefits employers can provide, such as the
work environment and having flexible time available. This section provides
an overview of other, more tangible benefits not yet discussed that many
organizations provide:
Disability benefits
Life insurance
Long-term care insurance
Severance package
Supplemental unemployment benefits (SUB)
Paid leave
Paid-time-off (PTO) bank
Care of dependents
Transportation assistance
Tuition reimbursement
Prepaid legal insurance
Disability Benefits
In addition to replacing income when they retire and are no longer working,
employees may need some type of income-replacement plan in case they
become disabled, die prematurely (leaving their family without adequate
resources), or are temporarily out of work due to illness or injury.
Phases of Coverage
Work-related illnesses or injuries are covered under workers' compensation.
Nonwork-related disabilities are covered by the employer's disability plan,
which typically has three phases.
Three
o
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TOTAL REWARDS Section 4-11
Employer-provided sick leave
Most sick-leave policies pay 100% of pay for a specified number of days.
Usually, employees may accrue sick leave up to a maximum cap. When they
have used the maximum amount, the sick leave ends and short-term disability
coverage begins.
Short-term disability (STD) coverage
Short-term disability (STD) coverage may replace only a portion of lost
income and may require a waiting period.
Organizations may self-fund their short-term disability coverage. To contain
their costs/risk, those organizations that do self-fund need to consider the
percentage of salary that employees receive and the duration of the time STD
continues. There may also be a service-related component, giving more STD
coverage for more years of service.
Typically, STD allows employees to receive 50% to 10% of their base
compensation for up to six months.
Long-term disability (LTD) coverage
Long-term disability (LTD) coverage usually begins after the short-term
coverage expires. Due to the risks associated with long-term coverage, a
commercial insurance company almost always underwrites such coverage.
:
If the-disabled employee is eligible for Social Security disability payments,
- LTD is usually integrated with Social Security disability to'avoid duplication
of coverage. Typically,-the employee'is-on LTD" for f i ve months before Social
Security payments begin, at which-time the LTD benefit is reduced by the
amount of the Social Security benefit. Social Security becomes the primary
provider.
Once employees go on LTD, they are no longer employed by the organization
and are off the payroll, even though they may be collecting LTD benefits. ' -
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TOTAL REWARDS Section 4 11
Typically, during the first two years of LTD, employees must be unable to
perform their own occupation. After the first two years of LTD coverage,
benefits are continued if the person is unable to engage in any work or
occupation which he or she has the education, training, or experience to perform
(unless the LTD policy specifies that employees must be able to return to their
own occupations).
LTD generally provides employees with payments equaling 60% to 65% of the
employee's monthly earnings.
Benefits cease if the person returns to work or dies prior to retirement age.
There are no income-level restrictions on LTD. The general practice is that
LTD payments are not considered taxable income for the employee when the
employee pays for the LTD coverage with his/her after-tax dollars.
Compared to short-term disability, LTD could be a relatively expensive benefit
to offer employees, since it could begin at an early age and last until normal
retirement age. Normal retirement age is defined by the age at which Social
Security begins.
Key Issues Regarding Disability Coverage
Some key facts to remember about disability protection include the following.
It may be required.
Temporary disability insurance is required by law in California, Hawaii,
New J ersey, New York, Rhode I sland, and Puerto Rico and in the railroad
industry.
Tax situations must be considered.
If employees purchase disability coverage with pretax dollars through a
flexible benefit plan or if premiums are paid entirely by the employer, the
disability benefits will be taxed. If employees pay with after-tax dollars,
benefits are not taxed.
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TOTAL REWARDS Section 4 10
Physician's verification
A physician's verification may be required for disability leave. (Although
most employers take the employee's word for absences of less than a week,
given the enactment of the Family and Medical Leave Act, some employers
may require proof.)
Rehabilitation
Some employers offer light or alternative work duties to bring disabled
employees back to work. However, this is a controversial subject that may
require legal advice. Under the Americans with Disabilities Act, the
employer must make reasonable accommodations to enable disabled
workers to perform their jobs. The Family and Medical Leave Act
specifically allows an employee to turn down "light-duty" work. See Section
4-5 of this modul e and Section 6-3 in Module 6: Risk Management.
Life I nsurance
Another major concern of most employees is caring for their families if they were
to die. Many employers provide death benefits through group-term life insurance.
Group-term life insurance provides a lump-sum payment to beneficiaries. The
insurance may be for a flat amount (such as $25,000) or a multiple of salary (such
as two times base annual earnings). The amount may vary by the length of service
or the position of the insured.
Excess Group-Term Life Insurance
Frequently, the value of group-term life insurance is kept at $50, 000 or less ^ ..
because such policies are not taxable to employees when the plan is
considered hSndi'scriminatory. When this type of policy is greater than
I ' $50,000, the amount over $50,000 is referred to as excess group-term life
reinsurance and is taxed as imputed income, Imputed income is the IRS - - "
estimated amount of the premium for coverage oyer $50,000, based on the f
age of the employee and the amount of coverage over $50,000. The
employee does not actually receive the benefit in real dollars but pays taxes
on it. Imputed income is added to other income and appears on the
employee's Form W-2.
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TOTAL REWARDS Section 4 10
To calculate the tax on the excess, the value of the group-term life insurance
must be known. IRS Table 1, Section 79, sets the value of this insurance based
on the employee's age as of December 31 of the tax year and the monthly cost
of insurance per $ 1,000.
Let's look at an example.
Example: A 47-year-old employee receives a $100,000 group-term life
insurance policy as a benefit. The excess coverage would be $50,000
($100,000 - $50,000). Table 1 sets the cost of insurance for someone
age 47 at $0.15 per $1,000. Therefore, the cost of the excess group-term
life insurance would be $7.50 per month ((50,000/1,000) x 0.15), or $90
for 12 months, reported as imputed income on the employee's W-2 form
at the end of the year.
Dependent Group Life Insurance
Some employers also insure the employee's spouse or dependent children
through dependent group life insurance. Most organizations allow employees
to pay for such coverage via payroll deduction at favorable group rates.
Long-Term Care Insurance
- Under the Health Insurance Portability and Accountability Act, if long-
term care (LTC) insurance is offered as an employee benefit, it must
provide coverage to people who are chronically ill for at least 90 days and
both employers and employees are taxed the same as for health insurance.
That is, premium payments are not counted as employee income, and
employers can deduct their part of the insurance premiums from their
_ annuaHncome tax.
;
*.
1
'
l
LTC insurance covers" the costs of long-term care in a variety of settings,
including care provided at home, in an assisted living facility, in a nursing
home, or in an inpatient hospice care environment.
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Long-term care policies may not be offered through cafeteria or flexible
spending accounts.
Severance Package
Employees who are terminated for some reason other than cause are often given
a severance package, which may include:
Salary continuation for a specified period of time (for example, one week
for each year of completed service).
Outplacement services such as assessment, testing, j ob search and interview
skills training, and resume preparation.
Retraining to become qualified for new jobs in other industries.
Continuation of benefits for a specified period of time.
" Severance arrangements, depending upon their terms and conditions, may
constitute ERI SA-governed welfare benefit plans and thus would subject the
employer to ERI SA mandates. ' ,
Employers are well advised to consider developing a formal severance
plan that complies with ERI SA for a number of reasons, including the
following: ' , '
No jury trial _ - -
More favorable standard of review
- - - >-'';> Potential preemption of state laws that may include personal liability and
t
_ , tf puni ti ve and other damages . ;
* . Administrative exhaustion requirement ,
f
, 1
Supplemental Unemployment Benefits (SUB)
Some employers provide supplemental unemployment benefits (SUB) in
addition to the required government unemployment benefits. SUB clauses are
most often found in unionized environments where cyclical employment
patterns are common.
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Under the Internal Revenue Code, such plans may be exempt from federal
income taxes for employers (but not for employees).
Paid Leave
Paid leave provides needed relief from the physical and mental demands of
work. The program structure may reward long-term employees for their
seniority and service. Plus, paid leave contributes to a worker's ability to be
productive and to sustain the stress of the job.
Typically, employers offer their full-time employees paid leave for holidays,
vacations, community service, leave of absence, and bereavement.
Holiday Pay
The number of holidays for which employers provide paid leave is usually
between six and 12 per year. Most employers include the core national holidays
(New Y ear's Day, Memorial Day, I ndependence Day, Labor Day, Thanksgiving
Day, Christmas Day, and sometimes Martin Luther King's birthday and/or
President's Day).
Vacation Pay
Most vacation policies are based on employee length of service and pay 100%
of base earnings.
In some organizations, vacation time can be accrued and carried over to the next
year (or beyond). There are legal considerations for vacation carry-over. Earned
but unused vacation pay may represent an accrued liability for employers. If
required by organization policy or state law, the organization must pay out, in
cash, accrued but unused vacation to employees upon termination. Due to the
potential large costs unused vacation time may represent, employers utilize caps
on carry-over days.
Generally, employees must schedule their vacation time in advance and secure
supervisory approval. In some flexible benefit plans, employees may buy or sell
a limited number of vacation days.
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Pay for Legally Protected Activities
Most states do not require pay for time spent in community service. Those
that regulate this area generally specify only reemployment; Yet, many
employers pay the difference between 100% of salary and the amount the
employee receives as payment for engaging in certain community services
such as jury duty, witness duty (except when testifying against the employer),
serving on an election board, or serving in the military reserve or National
Guard.
While federal law protects citizens' right to vote, it is the individual state law
that arbitrates between that right and the rights of employers to discipline
workers or withhold pay for time not worked. Laws governing time off to
vote can be found in 30 states, with many of these rules trying to strike a
balance between the interests of employee and employer. In 20 states,
employees must be paid for time spent voting; employers are prohibited
from penalizing an employee or making deductions from wages for at least
part of the time the employee is authorized to be absent for voting. Five
states spell out that workers are paid for their time off only if they actually
vote. Seventeen states require employees to give advance notice of their
intention to take time off. Employers are allowed to specify the hours to be
taken for voting in 20 states.
Leave of Absence
Some industries or professions (for example, teaching) allow long-term
employees to take a leave of absence, which is a period of time to complete a
course of study, do research, or engage in other learned pursuits. While some
organizations may pay employees during a leave of absence, many consider the
leave unpaid.
Bereavement Leave
Most organizations allow time off with pay to attend the funeral of a close
relative. Some organizations extend this benefit to funerals of friends as well.
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Personal Days
Most organizations allow a few days of time off with pay each year for
employees to attend to personal needs outside of vacation, illness, and the other
leaves described in this section.
Paid-Time-Off (PTO) Bank
Some employers combine all paid-time-off programs such as vacation, sick
leave, holidays, and personal days into one large bank of time, usually called
a pai d-ti me-off (PTO) bank. The rationale is to treat employees as adults
and no longer require an accounting of the reason for various absences with
pay from the workplace.
Some employers with PTO programs see reduced absenteeism, greater
productivity, and stronger employee loyalty. Others experience increased
absenteeism, unscheduled absences, and abuses when combined with the
intermittent leave provisions of the Family and Medical Leave Act.
Care of Dependents
Dual-career families are now the norm. In addition, many families in the
"sandwich generation" have both children and parents or grandparents to care
for. These families look to their employers for benefit assistance. Many
organizations allow employees to use some of their accumulated sick leave to
care for sick children, parents, or grandparents. Under certain circumstances,
time off without pay may be available under the Family and Medical Leave
Act.
See the discussion of the FMLA in Section 4-5 of this module.
Child-Care Services
Employers can offer a variety of services to help working parents deal with the
daily needs of preschool- or school-aged children:
Supportive leave policies
Resource and referral services as part of an employee assistance plan to
identify community services and child-care providers
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TOTAL REWARDS Section 4 10
Direct financial assistance within a flexible benefit program (see earlier
discussion on dependent-care FSA reimbursement accounts)
Flexible work schedules such as flextime, j ob sharing, and part-time work
On-premises child-care centers (offered by only a few employers)
Elder Care
Changing demographics indicate that programs helping employees care for
aging parents or grandparents will become more important as life
expectancies increase. Some organizations already offer programs in this
area:
Supportive leave policies
Employer-sponsored group long-term care insurance
Counseling
Resource and referral services
Flexible work schedules such as flextime, j ob sharing, and part-time
work
Transportation Assistance
Company Car
Of all employee levels, executives and direct salespeople are most likely to be
provided with a company car. The employer pays for the insurance and,
typically, offers the employee unrestricted personal use of the car. Employees
must reimburse the company for any personal miles or be taxed on the value of
the personal use of the company car.
I mputed income requirements must be considered for personal use.
Some companies have moved away from providing an actual car and provide a
car allowance instead.
Commuting Costs
Some organizations reimburse employees for commuting expenses, including:
Employer-provided parking at or near the place of employment.
Mass transit costs (tokens, transit passes, etc.).
Van-pooling or car-pooling expenses.
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TOTAL REWARDS Section 4 11
Some employer-sponsored plans may be tax-exempt; such as commuter-
reduction programs. Other programs such as subsidized parking may be
imputed income to the employee. Under recent changes in tax laws, employees
may be offered the opportunity to pay their parking or public transportation
commuting expenses on a pretax basis.
Tuition Reimbursement
Many employers reimburse educational expenses to encourage employees to
expand their skills and knowledge. Generally, as long as the course does not
pertain to sports, games, or hobbies, reimbursements for tuition and certain
related expenses are not taxable to the employee. There is an annual dollar limit
on the amount of reimbursement eligible for income exclusion. Employers may
require a passing grade or higher for reimbursement.
Prepaid Legal I nsurance
Most prepaid legal insurance plans provide routine services (for example,
consulting on real estate matters, divorces, or wills). Felony crimes are
generally excluded, primarily because of the expense and potential for negative
publicity, as are employment-related suits.
This is a high-cost benefit because of the high hourly fees for legal services and
the potential that employee utilization rates could increase.
Tax Treatment of Benefits
The tax treatment of benefits is a complicated science best left to tax specialists.
The intent of this module is to provide the HR professional with a basic
understanding of the tax ramifications of many benefits, including the
advantages of using pretax dollars to obtain benefits.
Figure 55 summarizes the federal income tax treatment of most categories of
direct and indirect compensation.
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TOTAL REWARDS Section 4-9
Taxable Compensation
Direct compensation
Base pay
Back-pay awards
Differential pay (including overtime)
Incentive pay (bonuses, commissions, cash
awards)
Severance pay
Tips
Paid time off
Indirect compensation
Employer-paid or reimbursements:
Employee-paid disability benefits (if purchased
in pretax dollars)
Disability benefits (if employer pays the
premiums)
Life insurance (if employee pays premium with
pretax dollars)
Premium cost of group-term life insurance to
the extent the coverage exceeds $50,000
Educational expense reimbursements in
excess of annual statutory limits
Gifts, prizes, and awards over certain dollar
amounts
Other imputed income, such as
unsubstantiated employee business expenses
Commuter expenses in excess of $230/month
Parking in excess of $230/month
Personal use of company vehicle
Sick pay
Nontaxable Compensation
Direct compensation
Wages paid after death in a new
calendar year
Indirect compensation
Employer-paid or reimbursements:
Business expenses (if accounted for
in timely manner)
Child care (up to $5,000) under a
Section 129 plan
Company vehicle (business use only)
De minimis fringes ($25 or less)
Life insurance (if employee pays
premium with after-tax dollars)
Group life insurance plans providing
$50,000 or less of coverage
Educational expense reimbursements
up to annual statutory limits
Employee discounts on employer
goods/services
Medical/dental/health plans
(employer contributions)
Direct moving expenses (up to the
deductible amount)
No-additional-cost services
Employee-paid disability benefits (if
purchased in after-tax dollars)
Figure 55. Taxable and Nontaxable Compensation
2011 SHRM

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TOTAL REWARDS Section 4 10
Progress Check
Di recti ons: Choose the best answer to each question.
1. Which of the following benefits would typically pay the salary of an employee who is out of
work for 225 days while recovering from an illness?
( ) a. Employer-provided sick leave
( ) b. Short-term disability coverage
( ) c. Long-term disability coverage
( ) d. Paid leave of absence
2. Which of the following employer-paid benefits would an employee receive tax-free?
( ) a. Ten days of sick leave at 100% of original salary
( ) b. $ 1,500 for taking a computer class at the community college
( ) c. $500 award for a labor-saving suggestion
( ) d. Two weeks of paid vacation
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TOTAL REWARDS Section 4-11
Progress Check Answers
1. c (p. 4-233)
2. b (p. 4-243)
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Total Rewards
4. 10
Compensation and Benefit
Programs for International
Employees
BBififj|
HR responsibilities related to this section include:
Develop, implement/administer, and evaluate expatriate
and foreign national compensation and benefits
programs. SPHR ONLY
This section is designed to increase your knowledge of:
International compensation laws and practices (for
example, expatriate compensation, entitlements, choice
of law codes). SPHR ONLY
TOTAL REWARDS Section 4 10
The following content oncompensation and benefits programs for international
employees has beenidentified bythe HR CertificationInstitute inthe bodyof knowledge
as pertaining to SPHR certification only. Questions related to this content will appear on
the SPHR examonly.
International Assignee Compensation and Benefits Issues
As reviewed in previous sections, compensation and benefit plans are a critical link
between ail organization's strategies and its success. The same applies to
multinational enterprises (MNEs), organizations with operations in multiple
countries. However, an added complexity is the design and administration of
specialized salary, benefit, and financial allowances required to meet the unique
circumstances associated with international assignments.
Expatriates is the term traditionally used to describe persons who move to one
country and are employed by an organization based in another country. Inpatriates
has generally described employees brought in from another country to work in the
headquarters country for a specified period, and repatriates has referred to
employees who have returned home from an international assignment. In some
organizations, these terms prevail. However, in today's global environment, there
are many types of international workers (beyond the traditional expatriate and
inpatriate). International assignee (IA) is now the umbrella term used to describe
anyone on a global posting.
Trends indicate that organizations are generally reducing the number of long-term
expatriate assignments while increasing the number of:
Employees hired locally (local hires or local nationals).
Cross-border assignments and the use of short-term and permanent assignments.
Localizations (employees sent to work in another country, usually with some
allowances to get there, but hired as local employees).
Other cross-border types of assignments.
There is not necessarily a right or wrong approach to determining terms and
conditions of employment in different countries. The underlying principle is that
just as an employer must provide competitive terms and conditions of employment
in the domestic labor market, they must do so in the labor markets of other
countries. This may result in employees of one country having salary and/or benefit
2011 SHRM 4-248
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TOTAL REWARDS Section 4 10
programs that are qui te di fferent f rom those of another country. Thus, the test of
organi zati onal empl oyee equi ty is not empl oyee to empl oyee but rather country to
country.
Al though i nternati onal assi gnments can be very career-enri chi ng, there are al most
al ways addi ti onal costs that an assi gnee wi l l experi ence and that the organi zati on will
be expected to hel p underwri te, i ncl udi ng certai n tax i mpl i cati ons. When devel opi ng
the gl obal compensati on and benefi ts structure, HR must deal wi th many factors that
are not present in a domesti c envi ronment. Fi gure 56 provi des an overvi ew of the
maj or issues and chal l enges and notes the general i mpl i cati ons for gl obal HR.
Factor Description Global HR Implications
Standardization
versus
localization
Typically, strategies are standardized in
keeping with the organization's overall
compensation and benefits philosophy.
Specific practices tend to be localized to fit
the context of country, regional, or local
conditions.
Have a long-term program to support
the organizational compensation
philosophy, but consider local
restrictions, tax regimes, and culture.
Culture Cultural differences necessitate
understanding that the value of
compensation and benefits programs is in
"the eye of the beholder."
A benefit highly valued in one country may
be relatively meaningless in another.
Differences are often rooted in deep-
seated beliefs, attitudes, and values.
Avoid headquarters (HQ) biases or
replication of HQ country policies and
procedures (e.g., paying sales
commissions in risk-averse cultures
or reward/recognition programs that
reward individual contributions in
cultures that place greater emphasis
on team/group contributions or prefer
private recognition).
Involve local contacts to understand
usual and customary compensation
and benefits practices.
Competitive
labor market
At a broad level, the compensation and
benefits required to attract and maintain
talent are determined by the competitive
demand for that talent.
However, the nature of the competition for
talent may vary across countries and
regions, depending on factors such as:
Type of talent sought.
Geographic scope of the talent market.
Industries in which the talent may be
found.
Mix of remuneration components.
Lead, lag, or match the rates of pay in
the relative marketplace based on the
skills needed, the.demand for
required talent, and the best way to
compensate those types of workers.
Offer appropriate combinations of pay
and benefits that will appeal to current
or potential employees.
Employ people with similar skills
when industry-specific expertise is in
short supply or competition is high;
retrain or coach the hires on the job.
Figure 56. Issues/Challenges inGlobal Compensationand Benefits (continued next page)
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Factor Description Global HR Implications
Collective bargaining,
employee representation,
and government mandates
Employees in most parts of the world
are protected from actions that impact
their wages and employment
conditions.
Unions play a very strong role in many
countries and sometimes include
provisions for management as well as
employees.
Works councils (not to be confused
with unions) also offer worker
protections.
Meet requirements of third-
party representation.
Understand the implications
for minimum wages,
severance packages, and
pensions.
Recognize related government
regulations and mandates and
industry-wide collective
agreements.
Economic factors Many differences exist from country to
country, in terms of the:
Influence of politics and power.
Distribution of wealth across a
country's citizenry.
Unpredictability of events (i.e.,
sometimes rapid changes in rates
of inflation, currency).
Recognize that unofficial
sources of power in a
community or region and
official governmental
personnel may have a large
impact on what is considered
acceptable.
Contribute to the local area to
support educational facilities,
internal training, child care, or
other local services.
Make allowances for local
inflation/deflation or currency
fluctuations.
Conduct a risk analysis of
economic factors and their
consequences.
Create contingency plans to
mitigate the risks associated
with potential changes in
economic factors.
Taxation Tax regulations differ widely from
country to country.
Some countries have no income tax,
while others have income tax in excess
of 50%.
Some benefits that are taxable in one
country are not taxable in the
geographically adjacent country and
vice versa.
Involve experts in local
compensation and benefits
laws and practices.
Understand the taxation of
cash and noncash
compensation, benefits, and
perquisiteswhat is taxed, at
what rates, and at what levels.
Recognize that a benefit may
be unacceptable to
employees, depending on how
it is taxed.
Figure 56. Issues/Challenges inGlobal Compensationand Benefits (continued next page)
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TOTAL REWARDS Section 4 10
Factor Description
Laws and Laws and regulations impact the remuneration
regulations of employees in many areas, such as:
Work hours and compulsory time off (paid
and unpaid).
Minimum wage.
Overtime.
Compulsory bonuses.
Employment-at-will.
Acquired rights.
There are tremendous country-to-country
variances as well as some regional and local
differences.
Global HR Implications
Understand the differences and
similarities in each market.
Recognize benefits that are
government-provided,
mandated by the government,
or chosen by the employee.
Involve experts in local
compensation and benefits
laws and regulations.
Source: SHRMGlobal LearningSystem: Global Compensation and Benefits. Alexandria, Virginia: Society for Human
Resource Management, 2009.
Figure 56. Issues/Challenges inGlobal Compensationand Benefits (concluded)
As highlighted in Figure 57 later in this section, there are many approaches to
defining how these issues will be addressed through total compensation. With
the exception of the negotiation approach, the approaches presume the
existence of a policy for international assignees. Such a policy not only helps
ensure equity between international assignees but can also be more readily
benchmarked against the policies and practices of other organizations. A well-
defined policy also avoids sometimes-dangerous precedents associated with
individual-by-individual negotiations.
Failure of a defined approach to international assignees can result in:
Unwillingness of an individual to accept an international assignment.
Premature return of an international assignee.
Voluntary termination of an international assignee.
Family problems related to the international assignment.
General employee dissatisfaction with the assignment and/or ineffective
performance.
Existence of internal equity complaints.
Compensation
The design and maintenance of an international compensati on plan is more
difficult and complex than that of a domestic plan. It may seem logical for an
2011 SHRM 4-251
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TOTAL REWARDS Section 4 11
employer to maintain organization-wide pay scales. But it can then become very
difficult to get employees to accept positions in high-cost locations. At the same
time, paying employees different salaries with variable cost-of-living adjustments
can create new and different problems.
Consider just a couple of problematic scenarios that can arise for an international
human resource (I HR) manager or an HR professional:
A highly remunerated employee transferred internationally to a different
location ends up working side by side with another employee who makes
considerably less for performing the same function.
An international employee transferred for an assignment at the United States
headquarters receives a substantial salary increase to reach the United States
pay level. But when the individual returns home, the salary must be cut to the
pre-United States assignment level.
I n international assignments, employees performing essentially the same jobs
in the same or different countries receive different pay as a result of factors
. such as the economy of the country, the cost of living, general pay levels,
traditions and values for jobs, difficulty of the assignment location, currency
fluctuation, and tax consequences.
Traditionally, the practice of international human resources was almost totally
focused on expatriate assignments that lasted three to five years. As noted earlier in
this section, global HR now has a much broader and more expansive role in
international assignment management.
In an effort to meet the objectives of both MNEs and international assignees,
various approaches are used in determining compensation packages. These
compensation approaches are complex and sophisticated to formulate and
manage. A full discussion of the myriad types is beyond the scope of this
section. The intent here is to examine some of the key concepts related to long-
term assignmentsthose usually lasting longer than one year and involving
relocating the employee and his or her family to the host country. Typical
approaches are listed and described in Figure 57.
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Approach Description Advantages Disadvantages
Negotiation/ad hoc Typically used when first few
assignees are sent from
headquarters to other
countries; continues to
evolve to meet the needs of
each successive assignee.
Occurs on an ad hoc basis,
as need arises.
Each potential assignee is
approached with the explicit
or implicit question, "What
will it take to get you to move
to another country?"
Immediacy and convenience
when insufficient planning
has occurred.
There is an increasing lack of
consistency of policy.
Experienced and
knowledgeable assignees can
take advantage of less
knowledgeable HQ personnel
and vice versa.
Precedents unknowingly
established can have costly
long-term consequences.
The compensation package
may reflect the negotiator's
skills as much as fairness and
equity.
Pure localization Most straightforward method
of assignee compensation.
Pays assignee exactly what
local nationals in equivalent
positions in host country are
paid.
Simple to communicate,
easy to administer.
Decreased perceptions of
inequity in host country.
Strong motivation for
employees from low-
salary countries to move
to high-salary countries.
Inappropriate for assignees
moving from high- to low-
salary countries.
Rewards some assignees with
higher-than-necessary
compensation to motivate the
assignees to accept the
assignment.
Usually involves some
allowances for employees from
high-salary countries (e.g., for
housing and transportation),
particularly during transition.
Figure 57. Common International Compensation Approaches (continued next page)
2011 SHRM 4-253
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Approach Description Advantages Disadvantages
Higher-of-home-or-
host-country
Variation of localization
strategy.
Assignee who moves from
high-salary country to low-
salary country receives
compensation package that
is most beneficial to
him/her. Assignee from
low-salary country will be
elevated to compensation
offered by host country.
Assignee from high-salary
country will continue to
receive relatively high
home-country
compensation.
Simple to communicate.
All of the advantages of pure
localization for assignees from low-
salary countries.
Eliminates the disincentive to move
from high-salary countries to low-
salary countries.
May lead to perceptions of
inequity among assignees
working in the same host
country.
Will probably still require
allowances and
adjustments for differences
in expenditures, particularly
for employees from high-
salary countries.
Home-country-
based balance
sheet
Employer pays differential
between home-country
costs and assignment
costs.
International assignees
maintain their home-
country standard of living or
purchasing power as they
move from one country to
another.
Preserves the purchasing power of
assignees at a fixed level.
Eliminates disincentive to repatriate
due to loss of accumulated
purchasing power.
Accounts for differential impact of
move among separate expenditure
categories.
Allows increases and decreases in
expenditure categories to balance
each other.
May lead to perceptions of
inequity among assignees
of different nationalities
working in the same host
country.
Challenging to administer
because there can be
many home-country
comparisons to collect data
on.
Can be challenging to
explain, especially if
adjustments are required
during an assignment.
Figure 57. Common International Compensation Approaches (continued next page)
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i u i h l nci i Hnuo oecuon 4-1 u
Approach Description Advantages Disadvantages
Headquarters-
based balance
sheet
Similar to home-country-based
balance sheet but calculates
compensation package only for
typical headquarters-based
employees.
Same level of salary and
allowances given to assignees
from the headquarters country
are given to assignees from
other home countries.
Maintains purchasing power of
assignees from headquarters
country.
Simple to communicate, easy to
administer.
Promotes perceptions of equity
among assignees of different
nationalities working in same
host country.
Often translates to high costs for the
organization, especially with
assignees from low-salary countries.
Can create difficulty in repatriating
assignees to low-salary countries.
May be unfair to assignees from
countries in which expenditure
patterns are significantly different than
headquarters (especially income
taxes).
Lump-sum
Employer pays employee lump
sum (instead of allowances
and differentials).
Assignees may spend lump
sum as they see fit.
Simple to communicate, easy to
administer.
Provides maximum flexibility for
an assignee.
Strong incentive for assignee to
move to host country provided
by large cash award at start of
assignment.
Offers tax advantages to
assignees if paid at home when
they are from low-tax countries.
Disincentive to repatriate unless all or
part of payment is made at the time of
repatriation.
Decreases organizational control of
assignee expenditures; can be
costlier than other approaches.
May lead to the loss of certain tax
advantages, particularly with respect
to host-country housing.
Cafeteria Employer offers assignee
several options, subject to
overall limit.
List varies by country,
depending on which options
can be delivered more tax-
effectively than cash payments.
Simple to communicate, easy to
administer.
Provides some degree of
flexibility for an assignee.
Provides more organizational
control of expenditures.
A standardized set of options may be
inappropriate for some assignees or
some countries.
Assignees may feel constrained by
options offered.
Potential for perceived inequities can
arise from options selected.
Source: Adapted from SHRM Global Learning System: Global Compensation andBenefits. Alexandria, Virginia: Society for Human Resource Management, 2009.
Figure 57. Common International Compensation Approaches (concluded)
2011 SHRM 4-255
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TOTAL REWARDS Section 4 10
Benefits
I n the case of i nternati onal assi gnments, a benefi ts manager faces a tremendous
chal l enge in understandi ng what is normal l y provi ded to empl oyees, what
government taxes cover, and even what empl oyees expect. Ul ti matel y, many MNEs
secure the servi ces of i nternati onal HR and accounti ng fi rms in the benefi ts area.
The structure and admi ni strati on of an MNE's benefi ts program is general l y
di ctated by ri gorous regul ati ons wi thi n each country. Each assi gnment country must
be treated on an i ndi vi dual basi s because of the potenti al for vari ati ons in benefi ts.
For exampl e, the government in many countri es covers benefi ts that are often
empl oyer-sponsored in the Uni ted States, such as heal th care.
Fi gure 58 descri bes such common country vari ati ons outsi de of the Uni ted States.
Description Examples
Benefits that are
government-
provided
These benefits are administered and
provided directly by the government,
usually paid for through taxes.
Usually, they are health-care and
retirement benefits, but they may
include other benefits, such as life
insurance, disability insurance, or
unemployment insurance.
Benefits that are
government-
mandated
These benefits are provided by
employers because the law requires
them to do so.
Country law often requires
employers to provide specific types
of leave, a certain amount of
vacation each year, and time off for
legal holidays.
Benefits that are
voluntary
(discretionary)
Benefits provided voluntarily by the
employer may not be totally
discretionary, because competitive
practice or employee relations may
exert pressure on the employer.
An organization may augment
health-care benefits where
government-supplied health care is
not satisfactory.
Benefits that are
market practice
These benefits are offered and
adjusted compared to the external
market.
Examples include providing a car or
car/transportation allowance, child-
care vouchers, and meal vouchers.
Tax treatment of
benefits
Benefits may be taxed differently in
different countries.
Examples are varied taxes for cash
and noncash compensation,
benefits, and perquisites.
Source: SHRMGlobal LearningSystem: Global Compensationand Benefits. Alexandria, Virginia: Society for Human
Resource Management, 2009.
Figure 58. CommonBenefit Variations Across Countries
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TOTAL REWARDS Section 4 10
Some of the major nonsalary benefits international employees receive include
the following:
Social security
Paid time off
Retirement
Severance
Health and welfare insurance (health care, disability, and life insurance)
Social Security
Social security benefits vary greatly worldwide. The social security systems in
place reflect the culture and political history of each country.
Social security systems in some countries are generous, while other countries
barely have coverage. The extensive social security benefits in many
industrialized countries have created economic strain jeopardizing coverage.
U.S. international social security agreements
Since the late 1970s, the United States has established a network of bilateral
social security agreements that coordinate the U.S. Social Security program
with the comparable programs of other countries.
[ SI International social security agreements, often called totalization
^ , agreements, have two main purposes: , ' . ,
" , They eliminate dual social security taxation, the situation that occurs
when a worker from one countty w
T
orks in-another country and is
- required to pay social security, taxes, to both countries on the same
1
j , > earnings. ,
t They help fill gaps in benefit protection for workers who have divided
their careers between the United States and another country and would be
ineligible for coverage in either nation.
Typically, the social security agreements are based on two rules. The territorial
rule states that, in general, an employee will be subject to the taxes of the
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TOTAL REWARDS Section 4 11
country in which the work is to be performed. The detached worker rule states
that home-country social security taxes will apply in order to minimize
disruption.
The aim of all U.S. totalization agreements is to eliminate dual social security
coverage and taxation while maintaining the coverage of as many workers as
possible under the system of the country where they are likely to have the
greatest attachment, both while working and during retirement. Each agreement
seeks to achieve this goal through a set of objective rules.
The existence of a bilateral social security agreement will not exempt an
employee from a country's social security program. I nstead, the country that
will continue to insure the worker must issue a certificate of coverage to the
country from which an "exemption is sought. Once filed with the appropriate
government entities-, the certificate of coverage is used for subsequent filing in
compliance with the relevant social insurance agencies.
Some totalization agreements do effectively eliminate dual social security
participation and specify which country's coverage applies under specific
employment situations. But in other countries, a United States citizen may
not be able to opt out of local social security participation. In these situations,
the MNE typically pays the additional costs.
Paying dual social security contributions is especially costly for employers that
offer tax equalization arrangements for their international employees. An
organization that sends an employee to work in another country often
guarantees that the assignment will not result in a reduction of the employee's
after-tax income. Tax equalization in international compensation means that the
assignee's host-country salary is reduced by the hypothetical tax (e.g., state and
federal) that the assignee would have experienced in his or her home country.
The employer pays and reports in the host country only the net salary after the
reduction for the home-country employee's tax. Thus, the host-country taxes are
based on a lower compensation level than would have been experienced if the
hypothetical taxes were not subtracted.
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TOTAL REWARDS Section 4-11
Tax equalization ensures that the assignee pays no less and no more taxes than
he or she would have paid in the home country, hence the term "tax
equalization." Advantages of tax equalization are not artificially inflating
salaries in high tax countries and allowing substantial employee tax gains in a
low tax country. Tax equalization also minimizes tax and compensation issues
at repatriation. Employers with tax equalization programs typically agree to pay
both the employer and employee share of host-country social security taxes on
behalf of their transferred employees.
HR professionals must research a country's practices before developing an
international benefits program. Additional information on totalization
agreements can be found on the Social Security Administration Web site, at
www.ssa.gov/international. Additional information about global social security
may be found at the following Web sites:
NATLEX, a global database maintained and kept current by the
International Labor Organization (I LO), at www.ilo.org/dyn/natlex/
natlex_browse.home
Official Web sites of various governments
Paid Time Off
Vacation/holiday leave
Allotments for vacation time or other paid-time-off benefits are often legislated
or dictated by collective bargaining. Even if not legally mandated, time-off
programs are usually strongly based in culture and tradition. In some Western
European countries, for instance, the majority of businesses virtually shut down
in August, when most people take their vacations.
Public holidays
Each country has paid public holidays, usually nationally, during which
organizations may be required to shut down. In some instances, additional time
is granted by employers, but this is more market practice. Certain holidays may
be observed on a local basis or only by certain industries.
Similar to vacations, holidays are an area where MNEs and HR need to be
aware of country requirements and employee expectations.
2011 SHRM

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TOTAL REWARDS Section 4 11
Materriity/paternity/parental leave
Some portion of maternity leave is paid in many countries. Unpaid time off or
the right of the individual to work part-time may also be available to supplement
maternity leave. In addition to maternity leave, some countries offer paid or
unpaid paternity and parental leave.
Sick leave
Sick leave policies can vary in terms of the number of days allowed, the amount
of wages paid, the entity that pays the wages, and the waiting period before
being eligible for payment. Depending upon the country, sick leave policies
may set by law, by collective bargaining, or by the employer.
Retirement
Retirement programs are sometimes mandated by the government, but they are
often paid for with employee and employer contributions. Supplemental
government support is sometimes provided. Defined benefit and defined
contribution plans may be used to provide retirement benefits. Stock options,
equity participation plans, and employee ownership have been tried by United
States MNEs outside of the United States, with varying degrees of success.
Cultural expectations and differing local and country laws and taxes create
complexities for all of the various options.
Severance
Voluntary and nonvoluntary terminations both can be complex and difficult to
manage. Local law typically dictates conditions under which an employee may
be terminated and the amount of payment the employee may receive. MNEs and
HR need to be aware of the local and country requirements.
Health and Welfare Insurance
There are significant national differences in the type of medical, disability, and
life insurance coverage for workers. The role of private and organizational
coverage varies depending on the national coverage provided.
Health care
In the United States, health care is basically a private system paid for by
individuals and employers. In many countries, health care is paid for through
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TOTAL REWARDS Section 4-11
some sort of social insurance, funded by employers, employees, general
taxation, or combinations of these. It is very rare for employees not to be at least
partially covered by some form of government-supported health care, often
through a tax-supported system of government-controlled medicine.
Disability
The concept of disability is interpreted differently in different countries.
Generally a differentiation is made between short-term and long-term disability,
but the characteristics of each categoiy will differ in terms of definition, funding
source, and the duration and amount of benefit.
Life insurance
Life insurance payable upon an employee's death is generally covered by social
security. In some countries, the government mandates that employers must
provide life insurance, although most employers provide this as a voluntary
benefit. In many countries, an employee can purchase supplemental coverage
through an employer-sponsored group plan.
This concludes the SPHR-level content oncompensationand benefits programs for
international employees.
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TOTAL REWARDS Section 4 10
Progress Check
Di recti ons: Choose the best answer to each question.
1. When paying international assignees, it is best to use:
( ) a. company-wide scales.
( ) b. variable cost-of-living scales.
( ) c. a variety of approaches.
( ) d. home-country-based balance sheet approach.
2. Compensation discrepancies between international assignees are most likely to occur with
which compensation approach?
( ) a. Negotiation approach
( ) b. Headquarters-based balance sheet approach
( ) c. Home-country-based balance sheet approach
( ) d. Pure localization approach
3. An employee born in another country and educated in the U.S. is returning to his native
country to work for a U.S. organization. What is the best compensation approach for this
organization and employee?
( ) a. Lump-sum approach
( ) b. Cafeteria approach
( ) c. Higher-of-home-or-host-country approach
( ) d. Pure localization approach
4. Which of the following statements about benefits for international assignees is true?
( ) a. Pension and health benefits are provided by the government in most other
countries; therefore, most MNEs do not provide them.
( ) b. Each assignment differs; therefore, assignee benefit plans will differ.
( ) c. A United States citizen can opt out of a country's benefit coverage; therefore,
benefits for assignees should be based on the MNE's basic benefit plan.
( ) d. Equitable benefit plans for assignees are not difficult to design if the HR
professional establishes parity with the assignee and peers back home.
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TOTAL REWARDS Section 4-11
Progress Check Answers
1. c (p. 4-248)
2. a (p. 4-253)
3. d (p. 4-253)
4. b (p. 4-256)
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4-263
Evaluating the Total Rewards
System and Communicating It
to Employees
HR responsibilities related to this section include:
Develop, implement, and evaluate compensation
policies/programs and pay structures based upon internal
equity and external market conditions that support the
organization's strategic goals, objectives, and values.
Develop/select, implement/administer, and evaluate
benefit programs that support, the.organization's strategic
goals, objectives, and values.
Communicate and train the workforce in the
compensation and benefits programs and policies (for
example, self-service technologies).
This section is designed to increase your knowledge of:
Technology to support HR activities: .
TOTAL REWARDS Section 4 10
gies and rrograms
The ul ti mate questi on for every HR professi onal is: How do you know if the
organi zati on's total rewards system is effecti ve? The answer to thi s questi on lies in
the goal s of the system. Secti on 4-2 in thi s modul e stated that the obj ecti ves of any
organi zati on's total rewards system are to be cost-effecti ve and affordabl e as wel l
as compl i ant wi th local, state, and federal l aws and regul ati ons. But beyond that,
the basi c obj ecti ve of the total rewards system is to of f er empl oyees a system that
is compati bl e wi th the organi zati on's mi ssi on and strategy and the corporate
cul ture, appropri ate for the workforce, external l y and i nternal l y equi tabl e, and
effecti ve in recrui ti ng and retai ni ng empl oyees.
Fi gure 59 summari zes some of the key questi ons that HR managers must
answer to determi ne i f thei r organi zati on's pay and benefi t system is effecti ve.
Total Rewards Systems
Is the system in compliance?
How easy is it for the organization to meet the
nondiscrimination requirements of ERISA and
comply with other federal regulations?
Does the system have adverse impact on
protected groups?
Does the system support the organization's
EEO and affirmative action goals?
Is the system compatible with the
organization's mission and strategy?
Does it meet the organization's goals, mission,
and objectives?
How well does the system enable the
organization to attract and retain employees?
Does it motivate employees to superior
performance?
Does the system fit the culture? Is it
appropriate for the workforce?
If the organization is entitlement-oriented, does
the system provide total rewards focused on
employee security?
If the organization is contribution-oriented, do
the total rewards programs recognize
individual effort and achievement?
Does the system offer total rewards programs
that meet employees' lifestyle needs?
Is the system internally equitable?
How appropriate is the compensation mix:
fixed vs. variable? cash vs. benefits?
retirement vs. health/welfare benefits?
How well do employees understand the
system?
Do employees perceive the system to be
fair and adequate?
Looking at performance appraisal data,
how well does the system encourage and
reward superior performance?
What is the organization's turnover rate?
the system externally competitive?
How does the total rewards package
compare with those of competitors in
terms of scope and costs?
Is the organization leading, lagging, or
matching others in the marketplace?
Is the system enabling the organization to
attract and retain qualified employees?
How wisely is the organization investing in
its employees? Is each dollar spent
generating a return on investment in terms
of productivity and profitability?
Figure 59. Evaluating the Total Rewards System
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TOTAL REWARDS Section 4-11
Ongoing monitoring of the system will pay off in a more cost-effective system, in
more satisfied employees, and in fewer legal complications. Not incidentally,
such payoffs mean fewer compensation headaches for the HR function.
Communicating with Employees
One of the key purposes of a total rewards system is to attract, reward, and retain
employees. Even the most lucrative total rewards package will fail in this task
unless employees understand and value it. The keystone to a successful total
rewards program is employee communication. Communication takes two forms
required and voluntary.
Required Communication
Most of the federally mandated reporting and communicating requirements fall
under ERI SA, but there are other required communications as well.
ERISA requirements
Under ERI SA, each employee is entitled to receive the following
automatically:
Summary plan description (SPD) containing information on what the plan
provides and how it operates. The SPD is due within 120 days after
establishment of the plan or 90 days after eligibility and must be updated
no less frequently than once every five years. "
Summary annual report (SAR) that contains financial information about'
the plan (due seven months after end of plan year). '
Summary of material modificatiotis (SMM), due within 210 days after end
of plan year whenever any of the pl an's features havebeen significantly
V. j j"'^''
1
''* , ji-''
1
"**- * - -
changed. ^ < \ _
In addition, the annual report (Form 5500) that is filed with the Department of
Labor seven months after the end of the plan year must be available for
inspection or a copy provided to participants upon written request. The DOL
and the IRS use these reports to oversee retirement, welfare, and benefit plans.
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4-267
TOTAL REWARDS Section 4 11
Other required communications
Other required communications include the following:
Notification of continuation of benefits under COBRA
Explanation of ESOPs and other stock benefits under Securities and
Exchange regulations
Posting of all required federal, state, and local employment laws
Voluntary Communication
Simply meeting the mandated requirements probably will not satisfy employees'
need to understand their total rewards program. The organization needs an
approach that outlines policies and procedures as well as an expectation that
managers and HR will communicate directly with employees as needed and
whenever possible.
Communication plans
The more complex the system and the more choices available, the greater the
need for a communication plan.
Such plans include:
Describing (in writing) and distributing the organization's compensation
philosophy, policies, practices, and procedures, including:
Personalized benefit statements.
Regular reminders of policies.
Plan brochures.
Employee handbooks and benefit manuals.
Posters and bulletin board announcements.
Paycheck stuffers.
Announcing new employee orientation programs.
Specifying the percentage of any salary increase attributable to merit and the
percentage that is based on other factors (e.g., equity adjustments or
promotions).
Administering performance appraisals and merit pay systems.
Answering employees' compensation questions through in-house
newsletters, memos, or other contacts.
Providing open enrollment periods that afford opportunities to review plan
provisions.
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Sharing employer cost information on benefits programs.
Providing an intranet portal for real-time access to information on the
compensation and benefit plans.
Hosting benefit fairs so all employees can inquire about benefits and review
what is available.
Describing complaint procedures.
Direct communication
Having a written communication plan is the first step toward effectively
communicating the total rewards plan to employees. However, direct, person-to-
person communication is still preferable in many instances.
Either HR or the employee's manager must take the time to meet with
individual employees in a comfortable, confidential setting to communicate
compensation and benefit issues such as:
J ob grade changes.
Raises.
Individual benefit issues.
New policies or procedures that directly affect that employee.
Policy infractions (incorrect reporting of overtime, etc.).
While such a meeting may be based upon a written document, the affected
employee should feel free to ask questions and leave the meeting having had
any questions answered and understanding the compensation or benefit issue
discussed.
Good employee communication helps increase employees' awareness that their
employer is attempting to create internal equity, ensure competitiveness, and
reward individual performance.
Self-Service Technologies
Organizations are increasingly using technology to deliver HR services to the
workforce. Self-service technologies and employee self-service (ESS)
applications will continue to evolve in sophistication and use. More
organizations will pay employees electronically and post pay statements and
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TOTAL REWARDS Section 4 11
benefit summaries online. Paper statements of direct deposits and benefits may
decrease. The number of employees using identification codes and personal
identification numbers (PI Ns) to access payroll and benefits information online
and to print personal records as needed either from home or from work will
increase.
Such intranet and Web-based employee self-service applications offer several
potential benefits, including:
Reduced administrative work for HR.
Increased accuracy of employee data.
I mproved timeliness in information and employee transactions.
Reduced dollars spent on other traditional HR delivery channels (e.g., paper-
based transactions).
Enhanced reputation as a "green," environmentally conscious employer.
All ESS Internet applications must be protected from hackers, tampering, and
unauthorized access from inside and outside the organization. Access to payroll
data and benefits must be safeguarded not only as sound business practice but
also to maintain compliance with state and local regulations. Employees should
have access only to the data they need to get their jobs done or to perform
personal self-service transactions.
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TOTAL REWARDS Section 4-11
Progress Check
Directions: Choose the best answer to each question.
1. Which of the following reports must be sent to employees automatically?
( ) a. Summary plan description (SPD)
( ) b. Annual report (Form 5500)
( ) c. Compa-ratios
( ) d. Workers' compensation notice
2. Under ERI SA, when is the annual report (Form 5500) on a qualified benefit plan due to be
filed with the DOL?
( ) a. Two months after eligibility of the plan
( ) b. Three months after establishment of the plan
( ) c. Seven months after the end of the plan year
( ) d. One year after plan features have changed
2011 SHRM
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4-271
TOTAL REWARDS Section 4 11
Progress Check Answers
1. a (p. 4-267)
2. c (p. 4-267)
\ You have completed Module 4: Total Rewards of the SHRM Learning
System. Next, check your understanding by completing the Web-based
module-specific tests to help you identify any concepts that need -
additional study. ~
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TOTAL REWARDS
1
ssi
-
v
& <i
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v.
tp 11
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Figures 25 and 26 are reprinted fromPayTrain, Module 5: Record Keeping and Systems,
2009, American Payroll Association, San Antonio, Texas.
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TOTAL REWARDS
Glossary
A, B
Age Discrimination in Employment Act
(ADEA)Act that determined that older
workers may not be discriminated against by
performance-based pay systems.
Balance billingPractice where an
uncontracted medical provider bills a patient
for all charges not paid for by the patient's
insurance plan, even if those charges are
above the plan's usual and customary rate or
are considered medically unnecessary.
Base payBasic compensation an
employee receives, usually as a wage or
salary.
Benchmark jobsJ obs used as reference
points when setting up a j ob classification
system and when designing or modifying a
pay structure.
BroadbandingCombining several salary
grades or j ob classifications with narrow pay
ranges into one band with a wider salary
spread.
c
Call-back payPay that employees receive
when they are called back for an extra shift
in the same workday.
Capitated health-care planType of
health-care plan in which the physician is
paid on a per capita (per head) basis rather
than for actual treatment provided.
Cash balance planForm of defined
benefit plan that defines the promised
benefit in terms of a hypothetical account
balance and features benefit portability.
Cliff vestingRequires participants to
complete a specific number of years of
service with an employer before they get
any vested benefits, after which they are
100% vested.
CommissionPayment made to salespeople,
usually calculated as a percentage of sales.
Comparable worthConcept that states
that jobs requiring comparable skills, effort,
responsibility, and working conditions filled
primarily by women should have the same
j ob classification and salary as similar jobs
filled by men.
Compa-ratioPay level divided by the
midpoint of the pay range.
Compensable factorsReflect the dimensions
along which a j ob is perceived to add value to
the organization; used to determine which jobs
are worth more than others.
Consolidated Omnibus Budget
Reconciliation Act (COBRA)Act that
provides individuals and dependents who
may lose medical coverage with opportunity
to pay to continue coverage.
Consumer-directed health careHealth-
care options intended to help employers
better control costs while allowing
employees to make more decisions about
their health care.
Consumer price index (CPI)I nstrument
that measures change over time for costs of
a group of goods and services.
Coordination of benefitsEliminates the
duplication of payments when an
employee, spouse, or dependents have
health coverage under two or more plans.
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TOTAL REWARDS Glossary
CopaymentSpecified percentage
(typically 20% to 30%) of covered medical
expenses that employee pays or fixed
dollar amount that covered person pays
each time he or she visits a physician or
purchases prescription drugs.
Copeland "Anti-Kickback" ActAct that
prohibits federal contractors from receiving
kickbacks from employees or subcontractors
for wages earned on federal projects.
Cost-of-living adjustment (COLA)
Periodic compensation payment given to
eligible employees regardless of their
performance or company profitability;
usually linked to inflation.
Coverdell Education Savings Account
(ESA)Trust created exclusively for the
purpose of paying the qualified education
expenses of a designated beneficiary.
D
Davis-Bacon ActAct that established
prevailing wage and benefit requirements
for contractors on federally funded
construction projects.
DeductibleI nitial amount of covered
medical expenses an individual must pay
before receiving paid benefits under a
health-care plan.
Deferred compensationPlan that provides
income to employees at some future time as
compensation for work performed now.
Defined benefit planPlan that promises
employee a retirement benefit amount based
on a formula.
Defined contribution planPlan in which
the employer and sometimes the employee
make an annual payment to the employee's
retirement plan account.
Differential payPay that is based on
when the employee works (e.g., overtime
pay, shift-pay differential) or where the
employee works.
Direct compensationPay that is received
by an employee, including base pay,
differential pay, and incentive pay.
DrawAmount advanced on future
commissions.
Dual-ladder career progressionAllows
employees to advance via either a management
or technical track within an organization.
E
Economic Growth and Tax Relief
Reconciliation Act (EGTRRA)Act that
adjusts minimum vesting schedules,
increases retirement plan compensation and
contribution limits, permits catch-up
contributions by participants age 50 or older
in certain retirement plans, and modifies
distribution and rollover rules.
Emergency-shift payExtra pay that
employees receive when they are called into
work during an emergency (e.g., a power
outage).
Employee Commuting Flexibility Act
Amendment to the Portal-to-Portal Act;
clarifies that commuting time is not paid
working time.
Employee Retirement Income Security
Act (ERISA)Act that established uniform
minimum standards for employer-sponsored
retirement and health and welfare benefit
programs.
Employee stock-ownership plans
(ESOPs)Stock bonus plans by which
employees gain ownership in the
organization for which they work.
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TOTAL REWARDS Glossary
EmployeesWorkers who are covered by
Fair Labor Standards Act regulations as
determined by the IRS.
Equal Pay Act (EPA)Act that prohibits
wage discrimination by requiring equal pay
for equal work.
Equal workWork having equal skills,
equal effort, equal responsibility, and equal
working conditions, all performed at the
same location.
Excess deferral plansNonqualified
deferred compensation plans that provide
benefits to selected management or highly
compensated employees beyond Section 401
or 415 limitations.
Excess group-term life insurance
Amount of employer-provided group-term
life insurance over $50,000.
Exclusive provider organization (EPO)
Plan in which participants must use
providers in the network of coverage or no
payment will be made.
Exempt employeesEmployees who are
excluded from FLSA overtime pay
requirements.
ExpatriatesTraditional term used to
describe persons who live in one country
and are employed by an organization based
in another country.
Experience ratingRating system that
bases insurance rates on claims history.
External equityWhen an organization's
pay rates are at least equal to market rates.
F
Factor comparison methodJ ob
comparison method that ranks each j ob by
each selected compensable factor and then
identifies dollar values to develop a pay rate.
Fair Labor Standards Act (FLSA)Act that
regulates employee status, overtime pay, child
labor, minimum wage, record keeping, and
other administrative concerns.
Family and Medical Leave Act (FMLA)
Act that provides employees with up to 12
weeks of unpaid leave to care for family
members or because of a serious health
condition of the employee.
Fee-for-service health-care planFull-
choice health-care plan that allows covered
employees to go to any qualified physician
or hospital and submit claims to the
insurance company; also known as
indemnity health-care plan.
Financial Accounting Standards Board
(FASB)Private body that decides how
financial executives should report their firms'
financial information to their shareholders.
529 planQualified tuition plan that
provides families a federal tax-free way to
save money for college.
Flat-rate payProvides each incumbent of
a j ob with the same rate of pay, regardless of
performance or seniority; also known as
single-rate pay.
Flexible spending account (FSA)Type of
Section 125 plan that allows employees to
use pretax dollars to pay for out-of-pocket
health and dependent-care expenses.
401(k) plansPlans that allow employees
to make tax-favored pay deferrals toward
retirement savings through a payroll
deduction plan.
403(b) plansPlans that allow employees
of certain tax-exempt organizations to
contribute pretax dollars toward retirement
savings.
457 plansPlans that allow employees of
states, political subdivisions or agencies of
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TOTAL REWARDS Glossary
states, and certain tax-exempt organizations
to defer receipt of wages.
Frequency distributionListing of
grouped data, from lowest to highest.
Frequency tableShows the number of
people or organizations associated with data
organized in a frequency distribution.
Full cafeteria planType of Section 125
plan that allows employees to choose from a
menu of benefits and allocate pretax dollars
to pay for those benefits.
Fully insured health-care planHealth-
care plan in which the employer pays a
third-party insurance carrier premiums that
cover medical charges, administrative costs,
sales commissions, taxes, and profits.
G
Gainsharing plansGroup incentives
where a portion of the gains an organization
realizes from group efforts is shared with the
group.
GatekeeperI ndividual, usually a primary-
care physician, who is given control of
patient access to specialists and services in a
managed care organization.
General pay increasePay increase given
to all employees (or a class of employees
such as office or production workers) based
on local competitive market requirements;
awarded regardless of employee
performance.
Genetic Information Nondiscrimination
ActAct that prohibits discrimination
against individuals on the basis of their
genetic information in both employment and
health care.
Geographic differential payPay based
on where an employee works.
Golden handcuffsSystem of overlapping
short- and long-term incentives to make it
less likely that key employees will leave a
company.
Golden parachutesClauses written into
executive contracts that provide special
payments to key executives who might lose
their position or be otherwise disadvantaged
if another company took control of the
organization through a merger or
acquisition; also known as parachutes.
Graded vestingSystem by which
qualified retirement plan participants
become incrementally vested over a period
of years of service.
Green-circle ratesSituation where an
employee's pay is below the minimum of
the range.
Gross earningsTotal earnings before taxes;
include regular wages plus additional earnings
such as tips, bonuses, and overtime pay.
Group-term life insuranceForm of
insurance carried by employers for their
employees that provides a lump-sum
payment to the employees' beneficiaries.
H
Hazard payPay earned by employees
who work in an environment that is
considered more risky from a safety or
health point of view.
Health Insurance Portability and
Accountability Act (HIPAA)Act that
made changes to improve health-care
coverage portability and accessibility and
provide medical record privacy and security.
Health insurance purchasing cooperative
(HIPC)Purchases health-care plans for
large groups of employers to provide small
businesses the economic advantages large
companies have.
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TOTAL REWARDS Glossary
Health maintenance organizations
(HMOs)Form of health care that provides
services for a fixed period on a prepaid basis.
Health reimbursement account (HRA)
Employer-funded plan that reimburses
employees only for eligible and
substantiated health-care expenses.
Health savings account (HSA)Tax-
sheltered savings account similar to an I RA
but created primarily to pay for medical
expenses.
Highly compensated employee (HCE)
Determined by an array of issues such as
business ownership and/or salary.
Hourly wageForm of base pay that is
dependent on the number of hours
worked.
I
In loco parentis"In place of a parent";
term used in expansion of FMLA coverage
to employees who stand in place of a
parent with day-to-day responsibilities to
care for and financially support a child or
who have a day-to-day responsibility to
care for or financially support a person
who stood "in loco parentis" for them.
Incentive payForm of direct
compensation where employers pay for
performance beyond normal expectations to
motivate employees to perform at higher
levels.
Indemnity health-care planFull-choice
health-care plan that allows covered
employees to go to any qualified physician
or hospital and submit claims to the
insurance company; also known as fee-for-
service health-care plan.
Independent contractorsWorkers who
are not covered by Fair Labor Standards
Act regulations as determined by the IRS.
Indirect compensationCompensation
commonly referred to as benefits.
Individual retirement accounts (IRAs)
Tax-deferred accounts to which wage
earners can contribute an amount up to a
yearly maximum.
InpatriatesTraditional term used to
describe employees brought in from another
country to work in the headquarters countiy
for a specified period.
Internal equityOccurs when people feel
that performance or j ob differences result in
corresponding differences in pay rates.
International assignee (IA)Umbrella
term used to describe anyone on a global
posting.
International social security
agreementsBilateral social security
agreements that coordinate the U.S. Social
Security program with the comparable
programs of other countries; also known as
totalization agreements.
Involuntary deductionsPayroll
deductions such as tax levies and court-
ordered child support that an employee must
pay.
J
Job classificationEvaluation method that
groups jobs into a predetermined number of
grades or classifications, each having a class
description to use for j ob comparisons.
Job evaluationSystematic determination
of the relative worth of jobs within an
organization.
Job rankingEvaluation method that
establishes a hierarchy of j obs from lowest to
highest based on overall importance to the
organization.
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2011 SHRM
TOTAL REWARDS Glossary
L
Lifetime maxi mum benefitMaximum dollar
amount of covered medical expenses that a
health-care plan will pay on behalf of any
covered person during that person's lifetime.
Line-of-sightConcept that states that
employees must be able to influence the
attainment of a goal and see a direct result of
their efforts in order for incentive pay plans to
be effective.
Long-term care insuranceI nsurance
coverage that provides a daily monetary benefit
to people who are chronically ill and who
require living assistance either at home or in a
residential facility.
Long-term disability (LTD) coverage
Replaces a portion of employee's lost income
after short-term disability coverage ends.
Lump-sum increase (LSI)One-time
payment made to an employee; also called
performance bonus.
M
Managed careGeneral term for a
medical plan that seeks to ensure that the
treatments a person receives are medically
necessary and provided in a cost-effective
manner.
Market-based evaluationMethod similar
to j ob evaluation systems that evaluates jobs
based upon their market value.
Maturity curvesCorrelate pay with time
spent in a professional field such as
teaching or research.
MedianMiddle point above and below
which 50% of scores in a set of data lie.
MedicareSocial Security
Administration program that provides
medical care for people after age 65.
Medicare carve-outHealth plan where
benefits are reduced for employees eligible
for Medicare; Medicare becomes the
primary provider.
Medicare supplementHealth plan that
covers specific expenses not covered by
Medicare.
Mental Health Parity Act (MHPA)Act
that addresses parity between mental
health benefits and medical benefits.
Merit paySituation where an individual's
performance is the basis for either the
amount or timing of pay increases; also
called performance-based pay.
Minimum wageMi ni mum hourly
amount, determined by Congress, that
nonexempt employees can be paid.
ModeValue that occurs most frequently
in a set of data.
Modified-duty programsOffered to
employees who are on leave for injuries
under FMLA; j ob tasks are modified to meet
the employee's restrictions.
Money purchase plansPlans in which
employers make mandatory payments (a
fixed percentage of an eligible employee's
compensation) to a retirement plan.
Multinational enterprises (MNEs)
Organizations with operations in multiple
countries.
N
Nonduplication of benefitsI n health
plans, requires a secondary carrier to
reimburse only up to the level of
reimbursement the primary carrier would
have paid.
Nonexempt employeesEmployees covered
under FLSA regulations, including overtime
pay requirements.
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TOTAL REWARDS Glossary
Nonqualified deferred compensation
planI ncome deferral benefit offered to
a select group of management or highly
compensated employees in the
organization.
o
Older Worker's Benefit Protection Act
(OWBPA)Act that amended ADEA to
include all employee benefits; also provided
terminated employees with time to consider
group termination or retirement programs
and consult an attorney.
Omnibus Budget Reconciliation Act
(OBRA)Act that reduced compensation
limits in qualified retirement programs.
On-call payPay that employees receive
when they are on call but not actually
working.
Out-of-pocket maximumStated amount
out of pocket the insured can pay for
medical costs in a 12-month period before
copayments end.
Overtime payRequired for nonexempt
workers under FLSA at 1.5 times the
regular rate of pay for hours over 40 in a
workweek.
P
Paid-time-off (PTO) bankLarge bank of
time comprising all of an employee's paid
time off (i.e., vacation, sick leave, and
holidays) that the employee can use as he or
she sees fit.
Paired-comparison methodJ ob ranking
method in which evaluator compares each
j ob with every other j ob being evaluated.
ParachutesClauses written into executive
contracts that provide special payments to
key executives who might lose their position
or be otherwise disadvantaged if another
company took control of the organization
through a merger or acquisition; also known
as golden parachutes.
Pay compressionOccurs when there is
only a small difference in pay between
employees regardless of their skills,
experience, or seniority; also known as
salary compression.
Pay gradesUsed to group jobs that have
approximately the same relative internal
worth and are paid at the same rate or within
the same pay range.
Pay rangesSet the upper and lower
bounds of possible compensation for
individuals whose jobs fall in a pay grade.
Pay surveysCollect information on
prevailing market rates and include topics
such as incentive plans, overtime pay, base
pay, and vacation and holiday practices.
Pension Benefit Guaranty Corporation
(PBGC)Set up by ERI SA to insure payment
of benefits in the event that a private-sector
defined benefit pension plan terminates with
insufficient funds to pay the benefits.
Pension Protection ActAct that changes
the laws that affect defined benefit plans,
defined contribution plans, individual
retirement accounts, and other issues related
to retirement planning.
Performance-based paySituation where
an individual's performance is the basis for
either the amount or timing of pay increases;
also called merit pay.
Performance bonusOne-time payment
made to an employee; also called a lump-
sum increase (LSI ).
Performance-sharing plansOrganization-
wide incentive plans in which funds are made
available for incentive awards based on
predetermined criteria and standards.
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TOTAL REWARDS Glossary
PerquisitesSpecial privileges for
executives that are usually noncash items.
Person-based payPay systems in which
employee characteristics, rather than the job,
determine pay.
Physician hospital organizations
(PHOs)Consist of hospital and physician
practices that merge into vertically
integrated structures.
Point-factor methodMost commonly
used method of j ob evaluation; it involves
using specific factors to evaluate j ob worth.
Point-of-service (POS) organizations
Combination of a PPO and an HMO;
provide direct access to specialists.
Portal-to-Portal ActAct that defines
what is included as hours worked and is
therefore compensable and a factor in
calculating overtime.
Preexisting conditionsMedical
conditions that existed before a health-care
policy is taken out.
Preferred provider organizations
(PPOs)Formed by an insurance company,
an employer, or a group of employers who
negotiate discounted fees with networks of
health-care providers; in return, the
employers guarantee a certain volume of
patients.
Premium-only plan (POP)Type of
Section 125 plan that allows employees to
pay for certain qualified benefits with pretax
dollars.
Premium payExtra pay for working
holidays or vacation days.
Premium sharingSituation in which
employee pays a portion of the required
monthly premium for health-care coverage.
Private-letter rulingsRulings issued by the
IRS to specific taxpayers or organizations that
request an interpretation of the law.
Productivity-based payPay based on the
quantity of work and outputs that can be
accurately measured.
Profit-sharing plansPlans that distribute
a portion of an organization's profits to its
employees.
Prudent person ruleStates that an
ERI SA plan fiduciary has legal and
financial obligations not to take more risks
when investing employee benefit program
funds than a reasonably knowledgeable,
prudent investor would under similar
circumstances.
Q
Qualified deferred compensation plan
Retirement benefit offered to all employees
in the organization; provides tax advantages
and is protected under Employee Retirement
I ncome Security Act.
Qualified domestic relations orders
(QDROs)Create or recognize the right of
an alternative payee to receive all or a
portion of the benefits under a retirement
plan.
Qualifying eventUnder COBRA, an
event, such as termination for reasons other
than gross misconduct, that allows
employees to continue their group health-
care coverage for a specified period of time.
R
Rabbi trustGrantor trust designed to
segregate nonqualified deferred compensation
benefits from an employer's general accounts.
Reasonable and customary
Reimbursement standard used by insurance
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TOTAL REWARDS Glossary
companies to determine how much providers
should be paid for their services.
Red-circle ratesDescribe situations
where employees' pay is above the range
maximum.
RepatriatesTraditional term referring to
employees who have returned home from an
international assignment.
Reporting payPay provided to employees
who report for work as scheduled but then
find that no work is available.
Retirement Equity Act (REA)Act that
provided certain legal protections for spousal
beneficiaries of qualified retirement plans.
Revenue ActAct that added Sections 125
and 401 (k) to the Tax Code.
Revenue rulingsRulings published by the
I RS as general guidelines to all taxpayers or
organizations.
Roth 401(k)/403(b) plansPlans that
allow after-tax contributions to existing
401 (k) or 403(b) plans.
Roth IRAAccount providing tax-free
income growth; contributions are made with
after-tax dollars.
s
SalaryUniform amount of money paid to a
worker regardless of how many hours are
worked.
Salary compressionOccurs when there is
only a small difference in pay between
employees regardless of their skills, experience,
or seniority; also known as pay compression.
Sarbanes-Oxley Act (SOX)Act that requires
administrators of defined contribution plans to
provide notice of blackout periods; provides
whistleblower protection for employees.
Savings Incentive Match Plan for
Employees (SIMPLE)Retirement plan
by which employees can contribute each
year to a 401(k) plan or I RA.
Section 125 benefit plansWritten benefit
plans maintained by the employer that allow
employees to use pretax dollars to pay for
certain qualified benefits.
Securities and Exchange ActAct that
regulated "insider trading."
Self-funded health-care planHealth-care
plan in which the employer assumes the role
of the insurance company and assumes some
or all of the risk.
SenioritySystem that shows preference to
employees with the longest service.
Serious health conditionAs defined in
DOL regulations, a condition that involves
employee incapacity for more than three
calendar days plus "two visits to a health-
care provider."
Service Contract ActAct that extended
prevailing wage rate and benefit
requirements to employers providing
services under federal government contracts.
Severance packageSet of benefits
provided to employees who are terminated
for some reason other than cause.
Shift payRefers to supplemental pay paid
to employees who work less-desirable hours,
such as second or third shifts.
Short-term disability (STD) coverage
Replaces a portion of lost income for a
specified period of time for employees who
are ill or have nonwork-related injuries.
Sick leaveSpecified period of time during
which employees who are ill or have nonwork-
related injuries receive their full salary.
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TOTAL REWARDS Glossary
Simplified Employee Pension (SEP)
Tax-deferred account to which the self-
employed and employees of very small
businesses can contribute.
Single-rate payProvides each incumbent
of a j ob with the same rate of pay, regardless
of performance or seniority; also known as
flat-rate pay.
Small Business Job Protection Act
(SBJPA)Act that made changes to rules
regarding the ability of tax-exempt
organizations to institute retirement plans
modeled after 401 (k) and I RA accounts and to
the definition of highly compensated
employees.
Social SecuritySocial Security Administration
program that provides retirement, disability,
death, and survivor's benefits.
Stop-loss coverageI nsurance policy that
protects employers with partially self-funded
insurance plans by limiting individual and
group-wide claims.
Sunset clauseI dentified time period and
ending point that should be identified in
incentive pay plans.
Supplemental unemployment benefits
(SUB)Benefits paid to unemployed
workers beyond required government
unemployment benefits.
Supplemental wagesPay beyond base
salary or wages such as bonuses and
commissions.
T
Tax Reform ActAct that made
significant changes in employee benefit
programs, especially retirement plans.
Taxable wagesAll remuneration for
services (including noncash benefits) that is
taxable when paid.
Taxpayer Relief Act (TRA)Act that
created tax-advantaged savings mechanisms.
Time-based differential payPay rates
that are affected by when an employee
works.
Time-based step-rate paySystem in
which pay is based on longevity in the j ob
and pay increases occur on a predetermined
schedule.
Top hat planNonqualified deferred
compensation plan that provides retirement
benefits to select group of management or
highly compensated employees.
Total rewardsAll forms of financial and
nonfinancial returns that employees receive
from their employers.
Totalization agreementsBilateral social
security agreements that coordinate the U.S.
Social Security program with the
comparable programs of other countries;
also known as international social security
agreements.
Travel payTypically paid to nonexempt
workers for the time they spend traveling to
or between work assignments.
u
Unemployment Compensation
Amendments (UCA)I mposed a
mandatory 20% federal income tax
withholding requirement on most qualified
retirement plan proceeds that a recipient
does not roll over into another qualified
retirement plan or individual retirement
account.
Unemployment insuranceMandatory
benefit program set up as part of the Social
Security Act designed to provide employees
with some income when they lose their jobs
through no fault of their own.
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TOTAL REWARDS Glossary
Uniformed Services Employment and
Reemployment Rights Act (USERRA)
Act that protects employment, reemployment,
and retention rights for persons who
voluntarily or involuntarily serve or have
served in the uniformed services.
Unweighted averageRaw average of data
that gives equal weight to all factors with no
regard to individual factors such as the
number of incumbents or companies.
Utilization reviewAudit of health-care
use and charges to identify which benefits
are used and to make certain that care is
necessary and costs are in line.
V
VestingProcess by which a retirement
benefit becomes nonforfeitable.
Voluntary deductionsPayroll deductions
selected by the employee such as charitable
contributions.
w
Walsh-Healey ActAct that extended concept
of prevailing wage to employers who
manufacture or supply goods under government
contracts and required time and a half.
Weighted averageAverage of data that
takes other factors such as the number of
incumbents into account.
Work Opportunity Tax Credit ( WOTC)
Tax credit to encourage employers to hire
people from targeted groups.
Work-related disabilityPhysical
condition (accident or illness) that is caused,
aggravated, precipitated, or accelerated by
work activity or the work environment.
Workers' compensationState insurance
program designed to protect workers in
cases of work-related injuries or diseases.
WorkweekAny fixed, recurring period of
168 consecutive hours (7 days times 24
hours = 168 hours).
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TOTAL REWARDS
, >>
Index
Note: The page numbers used in this index include the module number, for example, page 4-48
refers to page 48 of Module 4.
A
absence, leave of, 4-239
accounti ng organizations affecti ng compensati on
and benefit programs, 4-167-4-168
ad hoc approach to international compensati on,
4-253
ADEA (Age Discrimination in Empl oyment
Act), 4-33, 4-36
adj ustment matrix, pay, 4-93
administrative exemption under Fair Labor
Standards Act, 4-14
administrative-services-only health plan, 4-214
Advantage Plans, Medicare, 4-179
adverse selection, 4-219
"AEI s" ("assistance eligible individuals") under
Consol i dated Omni bus Budget Reconciliation
Act, 4-136
Age Di scri mi nati on in Empl oyment Act, 4-33,
4-36
aged data, 4-64
alternative health care, 4-213
Alvarez, IBP, Inc., v., 4-28
Ameri can Recovery and Rei nvestment Act
and Consol i dated Omni bus Budget
Reconci l i ati on Act, 4- 135^- 137
and Heal th I nsurance Portability and
Accountabi l i ty Act, 4-143
analysis
of data, 4-634-67
gap, 4-125-4-126
annual incentives, 4-110-4-111
ARRA. See Ameri can Recovery and
Rei nvestment Act
ASO (admi ni strati ve-servi ces-onl y) health plan,
4-214
"assistance eligible individuals" under
Consol i dated Omni bus Budget Reconciliation
Act, 4-136
auditing, in controlling costs, 4-118
automati c step-rate pay structure, 4-85
average, 4-65^1-66
awards, cash, 4-104
B
bal ance billing, 4-215
base pay, 4-84-4-90
base salary, for executives, 4-110
behavioral control, in determi ni ng empl oyee
status, 4-10
benchmark j obs, 4-55, 4-61
benefi ts, 4-42,4-124
death (Social Security), 4-176
disability, 4-176, 4- 232^- 235,4- 261
flexible plans, 4- 223^- 227
government-mandated, 4-174-4-183
health-care, 4- 210^- 222, 4- 260^- 261
for international empl oyees, 4-248-4-251, 4-
256^- 261
legislation affecti ng, 4- 127^- 128, 4- 165^-
166
needs assessment, 4-124-4-127
survi vor's (Social Security), 4-176
tax treatment, 4- 242^- 243
unempl oyment, 4-180-4-181, 4- 237^- 238
workers' compensati on, 4-182-4-183
bereavement leave, 4-239
bl ackout period/notice, and Sarbanes-Oxl ey Act,
4-163-4-164
bl ue-col l ar workers, 4-18-4-19
bonus, performance, 4-95
breaks, under Portal-to-Portal Act, 4-29
broadbandi ng, 4-71-4-72
budgeti ng, in controlling costs, 4-117-4-118
c
cafeteri a approach to international
compensati on, 4-255
cafeteri a plans, 4-223^1-227
2011 SHRM
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4-287
TOTAL REWARDS Index
cal l -back pay, 4-96
capi tated heal th-care pl ans, 4- 210- 4- 211
career-average formul a, 4-190, 4-192
cash awards, 4-104
cash bal ance pl an, 4- 191,4- 192
cash profi t-shari ng pl ans, 4-107
catch-up contri buti ons, 4-158, 4-162, 4-194
central tendency, measures of, 4-65^1-67
chi l d l abor provi si ons of Fair L abor Standards
Act, 4- 22^- 24
chi l d-care servi ces, 4-4-240^1-241
cl ai ms, Fai r L abor Standards Act, i nvesti gati on
of, 4-26
cl assi fi cati on, j ob, 4-52,4-54^1-55, 4-60
cl i ff vesti ng, 4- 130,4- 131
COBRA . See Consol i dated Omni bus Budget
Reconci l i ati on Act
COL A s (cost-of-l i vi ng adj ustments), 4-93^1-94
col l ecti ve bargai ni ng, and i nternati onal
compensati on and benefi ts, 4-250
col l ege savi ngs pl ans, 4-200
combi nati on step-rate and perf ormance pay
structure, 4-86
commi ssi ons, 4-104, 4-115-4-116
communi cati on wi th empl oyees, 4-267^4-269
commuti ng costs, 4-241^1-242
company car, 4-241
comparabl e worth, 4-32
compa-rati os, 4-69^1-70
compensabl e factors, 4-55^4-59
compensati on
control l i ng costs, 4- 117- 4- 118
deferred, 4-188^1-205
di rect, 4-42
eval uati on of, 4-266-4-267
i ndi rect. See benefi ts
for i nternati onal empl oyees, 4-2514-255
l egi sl ati on affecti ng, 4-6, 4-354-36
tax treatment, 4-242^1-243
compensatory ti me, 4-22
competency-based pay systems, 4-89
competi ti ve l abor market, and i nternati onal
compensati on and benefi ts, 4-249
compl i ance requi rements, Fai r L abor Standards
Act, 4-8
compressi on, pay, 4-92^1-93
compressi on, sal ary, 4-924-93
computer empl oyees, under Fai r L abor
Standards Act, 4- 16- 4- 17
concl udi ng acti vi ti es, and Portal -to-Portal Act,
4-28
confi denti al i ty, 4-141
Consol i dated Omni bus Budget Reconci l i ati on
Act, 4-133-4-137, 4-139, 4-151, 4-165
consumer pri ce i ndex, 4-94
consumer-di rected heal th care, 4-2194-223
contri buti on-ori ented corporate cul ture, 4-44
coordi nati on of benefi ts, 4-215
copayment, 4-215
Copel and "Anti -K i ckback" Act, 4-7, 4-35
corporate cul ture, 4-44
cost-of-l i vi ng adj ustments, 4-934-94
costs, control l i ng
compensati on, 4- 117- 4- 118
Fami l y and Medi cal L eave Act, 4-152
heal thcare, 4-2174-219
Coverdel l Educati on Savi ngs Accounts, 4- 200-
4-201
CPI (consumer pri ce i ndex), 4-94
creati ve professi onal s, under Fai r L abor
Standards Act, 4-16
cri mi nal penal ti es, Sarbanes-Oxl ey Act, 4-164
cul ture
corporate, 4-44
and i nternati onal compensati on and benefi ts,
4-249
D
data
aged, 4-64
anal ysi s, 4-63^1-67
factored for geography, 4-64
l evel ed, 4-64
Davi s-Bacon Act, 4-6, 4-35
death benefi ts, Soci al Securi ty, 4-176
deducti bl es, in heal th pl ans, 4-215
deducti ons
i mproper, 4- 17- 4- 18
f rom pay, 4-79
Def ense Authori zati on Bi l l , 4-7
deferred compensati on pl ans, 4-188^1-205
nonqual i fi ed, 4-201^1-203
qual i fi ed, 4-1884-201
deferred profi t-shari ng pl ans, 4-107
defi ned benefi t pl ans, 4-131,4-1584-159, 4-
190-4-192, 4-197
4-288
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TOTAL REWARDS Index
defined contribution plans, 4-131, 4-158-4-159,
4-1924-197
dental plans, 4-212
dependent group life insurance, 4-236
dependents, care of, 4-2404-241
differential pay, 4-954-99
differential piece-rate pay system, 4-88
differentials
for foreign pay, 4-99
geographic pay, 4-98^4-99
for labor costs, 4-98
for locations, 4-98^4-99
direct compensation, 4-42
direct sales personnel, pay plans, 4-115-4-116
directors, pay plans for, 4-117
disability benefits, 4-176, 4-183,4-232^4-235,
4-261
discriminatory actions, under Equal Pay Act, 4-32
draw, 4-104
drug plans, 4-1794-180, 4-2114-212
dual-ladder career progression, 4-116
E
earnings test, Social Security, 4-176
economic factors, and international
compensation and benefits, 4-250
Economic Growth and Tax Relief Reconciliation
Act, 4-162,4-166,4-194
Education IRAs, 4-161,4-200^4-201
Education Savings Accounts, 4-200-4-201
EEOC ruling on Medicare, 4-180
EGTRRA. See Economic Growth and Tax
Relief Reconciliation Act
elder care, 4-241
emergency-shift pay, 4-96
Employee Commuting Flexibility Act, 4-29
employee representation, and international
compensation and benefits, 4-250
Employee Retirement Income Security Act, 4-
128^4-132, 4-163, 4-165, 4-237, 4-267
employee stock-ownership plans, 4-1084-109,
4-193,4-196
employees
computer, under Fair Labor Standards Act,
4-16-4-17
exempt, 4-12^4-20,4-27
highly compensated, 4-16,4-189
and independent contractors, 4-84-12
employees (continued)
nonexempt, 4-124-20, 4-27
outside sales, 4-17
employer-provided sick leave, 4-233
enforcement, Fair Labor Standards Act, 4-25
entitlement-oriented corporate culture, 4-44
EPA (Equal Pay Act), 4-314-33, 4-36
EPOs (exclusive provider organizations), 4-211
Equal Employment Opportunity Commission
ruling on Medicare, 4-180
Equal Pay Act, 4-314-33, 4-36
equal work, 4-314-32
equity
external, 4-45^4-46
internal, 4-46^4-47
ERISA. See Employee Retirement Income
Security Act
ESAs (Education Savings Accounts), 4-200^4-201
ESOPs. See employee stock-ownership plans
evaluation
job, 4-524-61
of total rewards system, 4-266^4-267
exceptions, under Equal Pay Act, 4-33
excess deferral plans, 4-202
excess group-term life insurance, 4-2354-236
exclusive provider organizations, 4-211
executive
exemption, under Fair Labor Standards Act,
4-14
pay plans, 4-1104-115
exempt employees, 4-124-20,4-27
expatriates, 4-248
experience rating, 4-181,4-183
external equity, 4-45^4-46
external pay surveys, 4-62^4-63
F
factor comparison method of job evaluation, 4-
52, 4-59, 4-60
Factor Evaluation System, 4-56
Fair Labor Standards Act, 4-7,4-36
blue-collar workers, 4-18-4-19
child labor provisions, 4-22^4-24
compensatory time, 4-22
compliance requirements, 4-8
employees vs. independent contractors, 4-8-
4-12
enforcement, 4-25
2011 SHRM 4-289
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TOTAL REWARDS Index
Fai r L abor Standards Act (cont i nued)
exempt empl oyees vs. nonexempt
empl oyees, 4-12-4-20, 4-27
i mproper deducti ons, 4- 17- 4- 18
i nvesti gati ng cl ai ms, 4-26
mi ni mum wage, 4-13, 4-24^1-25, 4-26^1-27
overti me pay, 4-13, 4- 20^- 22, 4-974-98
penal ti es, 4-26
record keepi ng, 4-25
safe harbor, 4-174-18
veteran status, 4-18-4-19
whi te-col l ar exempti ons, 4- 13- 4- 17
Fami l y and Medi cal L eave Act, 4-145, 4-165
concurrent wi th other l eave, 4- 148- 4- 149
cost contai nment, 4-152
coverage, 4- 145- 4- 149
excepti on when husband and wi f e work for
same empl oyer, 4-146
expansi on, 4- 149- 4- 150
fi tness for duty, 4-148
heal th benefi t conti nuati on, 151
and in loco parentis rel ati onshi ps, 4- 146- 4-
147
i ntermi ttent l eave, 4-147
medi cal certi fi cati on, 4-148
mi l i tary caregi ver l eave, 4-150
modi fi ed-duty programs, 4-152
noti ce, 4-147
qual i fi ed exi gency l eave, 4- 149- 4- 150
rei nstatement ri ghts, 4-151-4-152
seri ous heal th condi ti on, 4-147
FASB (Fi nanci al Accounti ng Standards Board),
4- 167- 4- 168
fee-for-servi ce heal th-care pl ans, 4-210
FES (Factor Eval uati on System), 4-56
fi nal -pay f ormul a, 4-191, 4-192
Fi nanci al Accounti ng Standards Board, 4- 167-
4-168
fi nanci al control , in determi ni ng empl oyee
status, 4- 10- 4- 11
fi nanci al servi ce i ndustry workers, under Fai r
L abor Standards Act, 4- 19- 4- 20
First National Bank of Oregon, Leggett v., 4-141
fi rst responders, under Fai r L abor Standards Act,
4-19
fi tness for duty, under Fami l y and Medi cal
L eave Act, 4-148
529 pl ans, 4- 199- 4- 200, 4-201
fl at-dol l ar formul a, 4- 190,4- 192
fl at-rate pay system, 4-85, 4-90
fl exi bl e benefi t pl ans, 4-223^4-227
fl exi bl e spendi ng accounts, 4- 224- 4- 226, 4-227
FL SA. See Fai r L abor Standards Act
FML A. See Fami l y and Medi cal L eave Act
forei gn pay di fferenti al s, 4-99
Form 5500, 4-132, 4-267
401 (k) pl ans, 4- 158- 4- 159, 4- 160- 4- 161, 4-
193-4-194, 4- 195- 4- 196
403(b) pl ans, 4- 195- 4- 196
457 pl ans, 4- 198- 4- 199
frequency di stri buti ons, 4- 64- 4- 65
frequency tabl es, 4-64^4-65
FSAs (fl exi bl e spendi ng accounts), 4-224^1-
226, 4-227
ful l cafeteri a pl ans, 4-2264-227
ful l y i nsured heal th-care pl ans, 4- 213- 4- 214
fundi ng
heal th-care programs, 4- 213- 4- 215
Soci al Securi ty program, 4-177
G
gai nshari ng pl ans, 4-1054-106
gap anal ysi s, 4- 125- 4- 126
gatekeepers, 4-216
general pay i ncreases, 4-94
General Schedul e system, 4-54
Geneti c I nformati on Nondi scri mi nati on Act, 4-
1574-158, 4-166
geographi c pay di fferenti al s, 4-98^1-99
geography, data factored for, 4-64
GI NA (Geneti c I nformati on Nondi scri mi nati on
Act), 4-1574-158,4-166
gol den handcuffs, 4-101
gol den parachutes, 4-111
government mandates, and i nternati onal
compensati on and benefi ts, 4-250
government-mandated benefi ts, 4- 174- 4- 183
graded vesti ng, 4-130, 4-131
grades, pay, 4-674-68
green-ci rcl e pay rates, 4-914-92
gross earni ngs, 4-78
group i ncenti ve pay pl ans, 4- 105- 4- 106
group perf ormance i ncenti ves, 4-106
group-term l i fe i nsurance, 4-235^1-236
GS (General Schedul e) system, 4-54
Gui de-Chart Profi l e, 4-56
2011 SHRM 4-290
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TOTAL REWARDS Index
H
hardware for payroll systems, 4-81-4-82
Hay Plan, 4-56
hazard pay, 4-96
HCEs (highly compensated employees), 4-16, 4-
189
headquarters-based balance sheet approach to
international compensation, 4-255
health benefit continuation, 4-133^1-137, 4-139,
4-151
Health Information Technology for Economic
and Clinical Health Act, 4-139
Health Insurance Portability and Accountability
Act, 4-137-4-143, 4-165
Privacy Rule, 4-1394-141
Security Rule, 4-1414-143
health insurance purchasing cooperatives, 4-
215
health maintenance organizations, 4-2104-
211
health reimbursement accounts, 4-219-4-221, 4-
223
health savings accounts, 4-222^4-223
health-care benefits, 4-210^1-222, 4-260-4-
261
higher-of-home-or-host-country approach to
international compensation, 4-254
highly compensated employees, 4-16, 4-189
HIPAA. See Health Insurance Portability and
Accountability Act
HITECH (Health Information Technology for
Economic and Clinical Health) Act, 4-139
HIPCs (health insurance purchasing
cooperatives), 4-215
HMOs (health maintenance organizations), 4-
210-4-211
holiday leave, 4-259
holiday pay, 4-238
holidays, public, 4-259
home-country-based balance sheet approach to
international compensation, 4-254
hourly wage, 4-84
HRAs (health reimbursement accounts), 4-219-
4-221,4-223
HSAs (health savings accounts), 4-222^1-
223
human resources employees, under Fair Labor
Standards Act, 4-20
I
IAs (international assignees), 4-248
IBP, Inc., v. Alvarez, 4-28
improper deductions under Fair Labor Standards
Act, 4-17-4-18
Improshare plan, 4-106
imputed income, 4-235^1-236
in loco parentis relationships, 4-146-4-147
incentive pay, 4-99^1-109
annual, 4-110-4-ti l
group plans, 4-105-4-106
individual plans, 4-103-4-104
long-term, 4-1124-115
organization-wide plans, 4-106-4-109
requirements for, 4-994-103
incentive stock options, 4-112
indemnity health-care plans, 4-210
independent contractors, 4-84-12
indirect compensation. See benefits
individual incentive pay plans, 4-103-4-104
individual practice associations, 4-211
individual retirement accounts, 4-1584-159, 4-
198,4-199
inpatriates, 4-248
insurance
adjusters, under Fair Labor Standards Act,
4-19
legal, 4-242
life, 4-235^4-236, 4-261
long-term care, 4-236^1-237
unemployment, 4-180-4-181, 4-237-4-238
intermittent leave, under Family and Medical
Leave Act, 4-147
internal equity, 4-464-47
internal pay surveys, 4-62,4-63
Internal Revenue Service, 4-94-12, 4-168
international assignees, 4-248
international employees
benefits, 4-248-4-251,4-256-4-261
compensation, 4-2514-255
international social security agreements, 4-257-
4-259
invasion of privacy, 4-141
investigating Fair Labor Standards Act
claims, 4-26
involuntary deductions, 4-79
IP As (individual practice associations), 4-211
IRAs. See individual retirement accounts
2011 SHRM
Printed on 30% post-consumer waste recycled paper.
4-291
TOTAL REWARDS Index
I RS (I nternal Revenue Servi ce), 4- 9- 4- 12, 4-168
I SOs (i ncenti ve stock opti ons), 4-112
J , K, L
j ob
cl assi fi cati on, 4-52, 4-54-4-55, 4-60
eval uati on, 4-524-61
ranki ng, 4-52, 4- 53,4- 60
j obs, benchmark, 4-55, 4-61
j ob-to-j ob compari son methods, 4-52, 4-60
j ob-to-predetermi ned-standard compari son
methods, 4-52, 4-60
Kennedy v. Plan Administrators for Dupont
Savings, 4-205
knowl edge-based pay systems, 4-89
l abor cost pay di fferenti al s, 4-98
l aggi ng the market, 4-46
l aws/regul ati ons, and i nternati onal compensati on
and benefi ts, 4-251
l eadi ng the market, 4-46
l earned professi onal s, under Fai r L abor
Standards Act, 4-15
l eave
of absence, 4-239
bereavement, 4-239
concurrent, under Fami l y and Medi cal
L eave Act, 4-148^1-149
hol i day, 4-259
i ntermi ttent, under Fami l y and Medi cal
L eave Act, 4-147
for l egal l y protected acti vi ti es, 4-239
materni ty, 4-260
mi l i tary caregi ver, 4-150
pai d, 4- 148^1- 149,4- 238^1- 240
parental , 4-260
paterni ty, 4-260
personal days, 4-240
qual i fyi ng exi gency, under Fami l y and
Medi cal L eave Act, 4-149^1-150
si ck, 4-232, 4-260
Ledbetter v. Goodyear Tire & Rubber Co., 4-
34^-35
legal i nsurance, 4-242
l egal l y protected acti vi ti es, pay for, 4-239
Leggett v. First National Bank of Oregon, 4-141
l egi sl ati on
affecti ng benefi ts, 4-127-4-128, 4- 165^1- 166
affecti ng compensati on, 4-6, 4-35^1-36
l evel ed data, 4-64
l everaged empl oyee stock-ownershi p pl ans, 4-
108
life i nsurance, 4-235^1-236, 4-261
l i feti me maxi mum benefi t, 4-216
Lilly Ledbetter Fai r Pay Act, 4-344-35, 4-36
l i ne-of-si ght, 4-101
l ocal i zati on vs. standardi zati on, and i nternati onal
compensati on and benefi ts, 4-249
l ocati ons, pay di fferenti al s for, 4-984-99
l ong-term care i nsurance, 4-236^1-237
l ong-term di sabi l i ty coverage, 4-233^1-234
l ong-term i ncenti ves, 4- 112- 4- 115
LSI s (l ump-sum i ncreases), 4-95
L TD (l ong-term di sabi l i ty) coverage, 4-233^1-
234
l ump-sum approach to i nternati onal
compensati on, 4-255
l ump-sum i ncreases, 4-95
M
managed-care heal th pl ans, 4-2104-211
market-based j ob eval uati on, 4-61
market-based pay i ncreases, 4-95
master file, 4-79^1-80
matchi ng the market, 4-45^1-46
materni ty l eave, 4-260
"matters of si gni fi cance" in determi ni ng
exempt/nonexempt status, 4-14
maturi ty curves, 4-116
meal s, under Portal -to-Portal Act, 4-29
mean, 4-65^1-66
measures of central tendency, 4-654-67
medi an, 4-66
medi cal certi fi cati on, under Fami l y and Medi cal
L eave Act, 4-148
Medi care, 4-79, 4-177^1-180, 4-216
Medi care Advantage Pl ans, 4-179
Mental Heal th Pari ty Act, 4-155^1-157, 4-
166
Mental Heal th Pari ty and Addi cti on Equi ty Act,
4-156^1-157
meri t pay, 4-86-4-87, 4-90
MHPA (Mental Heal th Pari ty Act), 4-155^1-
157,4-166
MHPA EA (Mental Heal th Pari ty and Addi cti on
Equi ty Act), 4-156^1-157
mi l i tary caregi ver l eave, 4-150
2011 SHRM 4-292
^^^ Printed on 30% post-consumer waste recycled paper.
TOTAL REWARDS Index
minimum premium health plans, 4-214
minimum wage, 4-13, 4-24-^1-25, 4-26-^1-27
minors, 4-224-24
mission, organizational, 4-434-44
mode, 4-66
modified duty, under Family and Medical Leave
Act, 4-152
money purchase plans, 4-193,4-196
N
National Defense Authorization Act, 4-149-4-
150
needs assessment, for benefits, 4-1244-127
negotiation approach to international
compensation, 4-253
nonduplication of benefits, 4-216
nonexempt employees, 4-12-4-20,4-27
nonleveraged employee stock-ownership plans,
4-108
nonqualified deferred compensation plans, 4-
2014-203
nonqualified stock options, 4-112
nonquantitative job evaluation methods, 4-52, 4-
534-55, 4-60
nonsubscriber workers' compensation plans, 4-183
NQSOs (nonqualified stock options), 4-112
nurses, under Fair Labor Standards Act, 4-20
0
OBRA (Omnibus Budget Reconciliation Act), 4-
161,4-166
Older Worker's Benefit Protection Act, 4-143-
4-144, 4-165
Omnibus Budget Reconciliation Act, 4-161,4-166
on-call pay, 4-96
on-call time, 4-28
organizational mission, 4-434-44
organizational strategy, 4-434-44
organization-wide incentive pay plans, 4-1064-
109
out-of-pocket maximum, 4-216
outside directors, pay plans for, 4-117
outside sales employees, under Fair Labor
Standards Act, 4-17
overtime pay, 4-13,4-204-22, 4-974-98
OWBPA (Older Worker's Benefit Protection
Act), 4-143-4-144, 4-165
P
paid leave, 4-148-4-149,4-238^1-240
paid time off, 4-148-4-149, 4-259-4-260
paid-time-off bank, 4-240
paired-comparison method of job ranking, 4-53
parachutes, 4-111
parental leave, 4-260
Part A, Medicare, 4-178
Part B, Medicare, 4-178-^1-179
partially self-funded health plans, 4-214-4-215
paternity leave, 4-260
Patient Protection and Affordable Care Act, 4-
160,4-166
pay
adjustment matrix, 4-93
adjustments, 4-93-^1-95
base-pay systems, 4-844-90
call-back, 4-96
compression, 4-92^1-93
differential, 4-95^4-99
emergency-shift, 4-96
geographic differentials, 4-984-99
grades, 4-674-68
hazard, 4-96
holiday, 4-238
incentive, 4-99-4-109,4-112-4-115
increases, general, 4-94
for legally protected activities, 4-239
on-call, 4-96
overtime, 4-13,4-20-4-22, 4-97^1-98
piece rate, 4-88,4-104
premium, 4-96
ranges, 4-684-69, 4-117
reporting, 4-97
shift, 4-96
structure, 4-67^1-72
surveys, 4-61^1-63
time-based differential, 4-954-98
travel, 4-29-4-30, 4-97
vacation, 4-238
variations, 4-914-93
paychecks, 4-784-79
payroll, 4-78-4-84
hardware, 4-81^1-82
paychecks, 4-78^4-79
record keeping, 4-794-81
software, 4-83
2011 SHRM 4-293
^ ^ ^ Printed on 30% post-consumer waste recycled paper.
TOTAL REWARDS Index
PBGC (Pension Benefit Guaranty Corporation),
4-129, 4-190
penalties
Fair Labor Standards Act, 4-26
Sarbanes-Oxley Act, 4-164
Pension Benefit Guaranty Corporation, 4-129, 4-
190
Pension Protection Act, 4-158^1-159, 4-166
percentiles, 4-67
performance bonus, 4-95
performance grants, 4-114-4-115
performance-based pay system, 4-864-87, 4-90
performance-sharing plans, 4-107
perquisites, 4-111
personal days, 4-240
person-based pay system, 4-88^1-89,4-90
phantom stock, 4-113
phased retirement, 4-197
PHI (protected health information), 4-139
PHOs (physician hospital organizations), 4-211
physician hospital organizations, 4-211
piece-rate pay plans, 4-88, 4-104
Plan Administrators for Dupont Savings,
Kennedy v., 4-205
point-factor method of job evaluation, 4-52, 4-
55^1-59, 4-60
point-of-service organizations, 4-211
POPs (premium-only plans), 4-2234-224, 4-
227
Portal-to-Portal Act, 4-274-31, 4-36
POS (point-of-service organizations), 4-211
PPA (Pension Protection Act), 4-1584-159, 4-
166
PPACA (Patient Protection and Affordable Care
Act), 4-160, 4-166
PPOs (preferred provider organizations), 4-211
preexisting conditions, 4-216
preferred provider organizations, 4-211
premium pay, 4-96
premium sharing, 4-216
premium-only plans, 4-223^1-224, 4-227
prepaid legal insurance, 4-242
prepaid tuition plans, 4-200
preparatory activities, and Portal-to-Portal Act,
4-28
prescription drug plans, 4-179^1-180, 4-2114-
212
primary duty, in determining FLSA
exempt/nonexempt status, 4-13
privacy, 4-139^1-141
Privacy Rule, Health Insurance Portability and
Accountability Act, 4-139-4-141
private-letter rulings, 4-168
productivity-based pay system, 4-874-88, 4-
90
professional exemption under Fair Labor
Standards Act, 4-14-4-16
professionals
creative, under Fair Labor Standards Act, 4-
16
learned, under Fair Labor Standards Act, 4-
15
pay plans for, 4-116
profit-sharing plans, 4-107, 4-193, 4-196
protected health information, 4-139
prudent person rule, 4-129
PTO (paid-time-off) bank, 4-240
public holidays, 4-259
pure localization approach to international
compensation, 4-253
Q, R
QDIAs (qualified default investment
alternatives), 4-159
QDROs (qualified domestic relations orders), 4-
204^1-205
qualified default investment alternatives, 4-159
qualified deferred compensation plans, 4-1884-
201
qualified domestic relations orders, 4-2044-205
qualifying events, under Consolidated Omnibus
Budget Reconciliation Act, 4-134
qualifying exigency leave, under Family and
Medical Leave Act, 4-149^1-150
quantitative data analysis, 4-64^4-67
quantitative job evaluation methods, 4-52,4-55-
4-60
quartiles, 4-67
rabbi trusts, 4-203
range spreads, 4-68^1-69
ranges, pay, 4-68^4-69, 4-117
ranking, job, 4-52, 4-53, 4-60
raw average, 4-65^1-66
REA (Retirement Equity Act), 4-1324-133, 4-
165
reasonable and customary reimbursement
standard, in health plans, 4-216
4-294
Printed on 30% post-consumer waste recycled paper.
2011 SHRM
TOTAL REWARDS Index
recognition programs, 4-104
record keeping
Fair Labor Standards Act, 4-25
payroll, 4-79-4-81
red-circle pay rates, 4-91
regulations, and international compensation and
benefits, 4-251
reinstatement rights, under Family and Medical
Leave Act, 4-151-4-152
relationship, type of, in determining employee
status, 4-11-4-12
repatriates, 4-248
reporting pay, 4-97
restricted stock grants, 4-113-4-114
restricted stock units, 4-114
retention of payroll records, 4-79-4-81
retirement benefits, Social Security, 4-175
Retirement Equity Act, 4-132-4-133, 4-165
retirement, phased, 4-197
retirement plans
for international employees, 4-260
qualified, 4-189-4-199
Social Security, 4-175
Revenue Act, 4-160-4-161, 4-166
revenue rulings, 4-168
Roth 401(k)/403(b) plans, 4-162,4-195-4-196
Roth IRAs, 4-159,4-161, 4-198, 4-199
RSUs (restricted stock units), 4-114
Rucker Plan, 4-105-4-106
s
safe harbor under Fair Labor Standards Act, 4-
17-4-18
salary, 4-84
compression, 4-92-4-93
plus commission/bonus, 4-116
for sales
1
personnel, 4-115,4-116
sales personnel, pay plans, 4-115-4-116
SAR (summary annual report), 4-132, 4-267
Sarbanes-Oxley Act, 4-163-4-165, 4-166
Savings Incentive Match Plan for Employees, 4-
161,4-198,4-199
SBJ PA (Small Business J ob Protection Act), 4-
161,4-166
Scanlon plan, 4-105
Section 125 plans, 4-223-4-227
Securities and Exchange Act, 4-162, 4-166
security of payroll system, 4-84
Security Rule, Health Insurance Portability and
Accountability Act, 4-141-4-143
self-funded health plans, 4-214-4-215
self-service technologies, 4-269-4-270
seniority, 4-94-4-95
SEPs (Simplified Employee Pensions), 4-198,4-
199
serious health condition, under Family and
Medical Leave Act, 4-147
Service Contract Act, 4-7, 4-36
severance packages, 4-237, 4-260
shift pay, 4-96
short-term disability coverage, 4-233
sick leave, 4-232,4-260
SIMPLE. See Savings Incentive Match Plan for
Employees
Simplified Employee Pensions, 4-198,4-199
single-rate pay system, 4-85, 4-90
skill-based pay systems, 4-89
Small Business J ob Protection Act, 4-161, 4-166
SMM (summary of material modifications), 4-
132,4-267
social security, for international employees, 4-
257-4-259
Social Security (U.S.), 4-79, 4-174-4-177, 4-233
software for payroll systems, 4-83
SOX (Sarbanes-Oxley Act), 4-163-4-165, 4-166
SPD (summary plan description), 4-132, 4-134
4-135,4-267
"specialized intellectual instruction" requirement
in determining exempt/nonexempt status, 4-15
standardization vs. localization, and
international compensation and benefits, 4-
249
standby time, 4-28
state laws, 4-26-4-27
STD (short-term disability) coverage, 4-233
step-rate with variability-based performance
considerations, 4-86
stock option plans, 4-109, 4-112,4-168
stock purchase plans, 4-113
stock-based plans, 4-108-4-109
stop-loss coverage, 4-214-4-215
straight commission plans for sales personnel, 4-
115-4-116
straight piece-rate pay system, 4-88
straight salary plans for sales personnel, 4-115
strategy, organizational, 4-43-4-44
2011 SHRM
Printed on 30% post-consumer waste recycled paper.
4-295
TOTAL REWARDS Index
SUB (supplemental unemployment benefits), 4-
2374-238
summary annual report, 4-132, 4-267
summary of material modifications, 4-132, 4-
267
summary plan description, 4-132, 4-134^1-135,
4-267
sunset clause, 4-101
supplemental unemployment benefits, 4-237^1-
238
supplemental wages, 4-79
surveys, pay, 4-61-4-63
survivor's benefits, Social Security, 4-176
T
tax organizations affecting compensation and
benefit programs, 4-1674-168
tax equalization, 4-258^1-259
Tax Reform Act, 4-161,4-166
tax treatment of compensation and benefits, 4-
242^1-243
taxable wages, 4-78
taxation, and international compensation and
benefits, 4-250
tax-deferred education accounts, 4-199^1-201
taxes
Medicare, 4-79
Social Security, 4-79, 4-175
withholding, 4-78^1-79
Taxpayer Relief Act, 4-161,4-166
technologists/technicians, under Fair Labor
Standards Act, 4-20
third-party administrator health plans, 4-214
time worked, 4-20^1-21
time-based differential pay, 4-95^1-98
time-based step-rate pay structure, 4-85^1-86, 4-
90
top hat plans, 4-201^1-202
total rewards systems, 4-1-4-2
defined, 4-42
evaluating, 4-266^1-267
objectives, 4-42-4-47
totalization agreements, 4-257-4-259
TPA (third-party administrator) health plans, 4-
214
TRA (Taxpayer Relief Act), 4-161, 4-166
training time, under Portal-to-Portal Act, 4-31
transportation assistance, 4-241-4-242
travel pay, 4-29^1-30, 4-97
travel time, under Portal-to-Portal Act, 4-294-30
tuition plans, prepaid, 4-200
tuition reimbursement, 4-242
U, V, w
UCA (Unemployment Compensation
Amendments), 4-144, 4-165
unemployment benefits, 4-180^-181, 4-237^1-
238
Unemployment Compensation Amendments, 4-
144, 4-165
Uniformed Services Employment and
Reemployment Rights Act, 4-153^1-155, 4-166
unweighted average, 4-654-66
USERRA (Uniformed Services Employment
and Reemployment Rights Act), 4-1534-155,
4-166
utilization review, 4-216, 4-2184-219
vacation, 4-259
vacation pay, 4-238
vesting, 4-1304-131, 4-162, 4-194
veteran status, and Fair Labor Standards Act, 4-
18-4-19
vision care plans, 4-213
voluntary deductions, 4-79
wage, minimum, 4-13, 4-24^1-25, 4-264-27
wages
hourly, 4-84
supplemental, 4-79
taxable, 4-78
waiting time, and Portal-to-Portal Act, 4-29
Walsh-Healey Act, 4-7, 4-35
weighted average, 4-65^1-66
weighted mean, 4-65^1-66
wellness programs, 4-218
whistleblower provisions of Sarbanes-Oxley
Act, 4-1644-165
white-collar exemptions, 4-13-4-17
withholding deductions, 4-79
withholding taxes, 4-78-4-79
Work Opportunity Tax Credit, 4-33-4-34, 4-36
workers' compensation, 4-182-4-183
work-related disability under workers'
compensation, 4-183
workweek, 4-21
WOTC (Work Opportunity Tax Credit), 4-33-4-
34, 4-36
2011 SHRM 4-296
^^^ Printed on 30% post-consumer waste recycled paper.
Module 4Checklist
Section Start Completion
4-1: Key Compensation Legislation
4-2: Total Rewards and the Strategic
Focus of the Organization
4-3 Compensation Structure
4-4 Compensation Systems
4-5 Introduction to Benefit Programs
and Key Benefits Legislation
4-6 Government-Mandated Benefits
4-7 Deferred Compensation Plans
4-8 Health-Care Benefits
4-9 Other Nonstatutory Benefits
4-10: Compensation and Benefit
Programs for International
Employees
4-11: Evaluating the Total Rewards
System and Communicating It to
Employees
Score for Module Review Test One*
Score for Module Review Test Two*
* Look for these tests on the Web at www.learnhrm.com.
Society for Human
Resource Management
1 800 Duke Street
Alexandria, VA 22314- 3499
USA
www.shrm.org
2011 SHRM
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