Legally Required Benefits 10 Learning Objectives G When you finish studying this chapter, you should be A able to: 10-1. Discuss the origins of legally required benefits. T 10-2. Summarize the four main categories of legally required benefits. E 10-3. Describe fee-for-service plans, traditional managed care approaches, and more S recent consumer-driven approaches to providing health care coverage. , legally required benefits. 10-4. Summarize two additional key laws pertaining to 10-5. Discuss the main benefits and costs of legally required benefits. D E A CHAPTER WARM-UP! N If your professor has assigned this, go to the Assignments section of mymanagementlab.com D already know. After reading the to complete the Chapter Warm-Up! and see what you chapter, you’ll have a chance to take the Chapter Quiz! R and see what you’ve learned. A Today, legally required benefits represent a significant cost to companies. In 2014, companies spent 1 an annual average of $5,200 per employee to provide legally 1 required benefits. For the same period, these benefits accounted for 7.9 percent of the employers’ total payroll costs. That percentage 1 will rise substantially because the Patient Protection and Affordable Care Act of 2010 now requires 2 health insurance as a component of employers to offer health insurance to their employees. Adding legally required benefits propels the annual average cost to approximately $10,100 (based on recent 3 data when health insurance was offered on a discretionary basis). This figure amounts to more than T in compensation budgets, the costs 15.6 percent of total compensation cost. Given limited increases of legally required benefits slowly cut into an employer’s discretion S in setting pay level and pay mix. Perhaps if these trends continue, some employers could be placed at a competitive disadvantage. ISBN 1-323-59381-0 ORIGINS OF LEGALLY REQUIRED BENEFITS Legally required benefits historically provided a form of social insurance. Prompted largely by the rapid growth of industrialization in the United States in the early nineteenth century and the Great Depression of the 1930s, initial social insurance programs were designed to minimize the possibility that individuals who became unemployed or severely injured while working would become destitute. In addition, social insurance programs aimed to stabilize the well-being of dependent family members of injured or unemployed individuals. Furthermore, early social Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson. Copyright © 2017 by Pearson Education, Inc. 10-1 Discuss the origins of legally required benefits. 227 228   >N K insurance programs were designed to enable retirees to maintain subsistence income levels. These intents of legally required benefits remain intact today. Workers’ compensation insurance came into existence during the early decades of the twentieth century, when industrial accidents were very common and workers suffered from occupational illnesses at alarming rates.2 The first constitutionally acceptable workers’ compensation law was enacted in 1911. By 1920, all but six states had instituted workers’ compensation laws.3 State workers’ compensation laws are based on the principle of liability without fault4 (i.e., an employer is absolutely liable for providing benefits to employees that result from occupational disabilities or injuries, regardless of fault). Another key principle of workers’ compensation laws is that employers should assume costs of occupational injuries and accidents. These expenses presumably represent costs of production that employers are able to recoup through setting higher prices. Income discontinuity caused by the Great Depression led to the Social Security Act as a means to protect families from financial devastation in the event of unemployment. The Great G many businesses failed and masses of people became Depression of the 1930s was a time when chronically unemployed. During thisAperiod, employers shifted their focus from maximizing profits to simply staying in business. Overall, ensuring the financial solvency of employees durT and following work-related injuries promoted the welling periods of temporary unemployment being of the economy and contributedEto some companies’ ability to remain in business. These subsistence payments specifically contributed to the viability of the economy by providing S temporarily unemployed or injured individuals with the means to contribute to economic activity by making purchases that resulted,in demand for products and services. The Social Security Act of 1935 also addresses retirement income and the health and welfare of employees and their families. Many employees could not meet their financial obligations (e.g., housing expenses and D food) on a daily basis, and most employees could not retire because they were unable to save enough money to support themselves E in retirement. Furthermore, employees’ poor financial situations left them unable to afford medical A treatment for themselves and their families. Until recently, employers offered health insurance on a discretionary basis. President N American should have health insurance. The Patient Barack Obama maintained that every D Protection and Affordable Care Act (PPACA), enacted on March 23, 2010, is a comprehensive law that requires employers to offer health insurance to employees (the employer mandate). As R an aside, if individuals do not have insurance through employment, they are required to purchase A their own insurance (the individual mandate). In either case, monetary penalties are assessed for failure to meet the law’s insurance mandates. Since the act’s passage, the employer requirements have been implemented in phases. The full implementation of all provisions will be complete by 1 2018. The federal government documents the features and implementations of the PPACA on a 1 dedicated Web site (www.healthcare.gov). 10-2 Summarize the four main categories of legally required benefits. 2 3 CATEGORIES OF LEGALLY REQUIRED BENEFITS T There are four categories of legally required benefits: Social Security programs (unemployment insurance, old age, survivor, disabilitySinsurance, and Medicare under the Social Security Act of 1935), workers’ compensation (various state compulsory disability laws), unpaid family and medical leave (Family and Medical Leave Act of 1993), and health insurance (Patient Protection and Affordable Care Act of 2010). All provide protection programs to employees and their dependents. Social Security Programs The Social Security Act established the following programs: Each of those programs will be reviewed in turn. Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson. Copyright © 2017 by Pearson Education, Inc. ISBN 1-323-59381-0 š Unemployment insurance š Old Age, Survivor, and Disability Insurance (OASDI) š Medicare  ` > >>N {=F K UNEMPLOYMENT INSURANCE The Social Security Act founded a national federal–state unemployment insurance program for individuals who become unemployed through no fault of their own. Each state administers its own program and develops guidelines within parameters set by the federal government. States pay into a central unemployment tax fund administered by the federal government. The federal government invests these payments, and it disburses funds to states as needed. The unemployment insurance program applies to virtually all employees in the United States, with the exception of most agricultural and domestic workers (e.g., housekeepers). Individuals must meet several criteria to qualify for unemployment benefits. Unemployment itself does not necessarily qualify a person, although these criteria vary somewhat by state. Those applying for unemployment insurance benefits must have been employed for a minimum period of time. This base period tends to be the first four of the last five completed calendar quarters immediately prior to becoming unemployed. In addition, all states require sufficient G by each state. Other criteria are previous earnings during the base period, which is determined listed in Table 10-1. A Individuals who meet the eligibility criteria receive weekly benefits. Because the federal government places no limits on a maximum allowable T amount, the benefits amount varies widely from state to state. Most states calculate the weeklyEbenefits as a specified fraction of an employee’s average wages during the highest calendar quarter S of the base period. Unemployed individuals usually collect unemployment insurance benefits for several weeks. The average du, average duration refers to the mean ration of benefits has ranged between 12 and 18 weeks. The number of weeks for which unemployment insurance claimants collect benefits under regular state programs. Provisions are in place to provide extended benefits during periods of high unD employment, which was the case during and following the 2007–2009 recession. E and state taxes levied on employUnemployment insurance benefits are financed by federal ers under the Federal Unemployment Tax Act (FUTA). State A and local governments as well as not-for-profit companies (e.g., American Cancer Association) are generally exempt from FUTA, N Employer contributions amount although some states have elected to participate in this program. to 6.2 percent of the first $7,000 earned by each employeeD(i.e., the taxable wage base). FUTA specifies $7,000 as the minimum allowable taxable wageRbase. Relatively few states’ taxable wage base is as low as the FUTA-specified minimum. In 2015, states’ taxable wage bases ranged Ado require employee contributions. from $7,000 in Louisiana to $40,900 in Hawaii. Some states OLD AGE, SURVIVOR, AND DISABILITY INSURANCE OASDI contains a number of benefits that 1 were amended to the Social Security Act following its enactment in 1935. Besides providing retirement income, the amendments include survivors’ insurance (1939), and both disability 1 insurance and Medicare (1965). The phrase old age in the title refers to retirement benefits. Virtually all U.S. workers are eligible for protections under2the OASDI and Medicare programs. 3 T they have earned through eligible survivors’ and disability programs, based on how much credit payroll contributions. They earn credit based on quarters S of coverage, which each equal three OLD AGE BENEFITS Individuals may receive various benefit levels upon retirement, or under ISBN 1-323-59381-0 TABLE 10-1 Eligibility Criteria for Unemployment Insurance Benefits To be eligible for unemployment insurance benefits, an individual must: š Not have left a job voluntarily š Be able and available for work š Be actively seeking work š Not have refused an offer of suitable employment š Not be unemployed because of a labor dispute (exception in a few states) š Not have had employment terminated because of gross violations of conduct within the workplace Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson. Copyright © 2017 by Pearson Education, Inc. 229 230   >N K consecutive months during the calendar year. In 2015, a worker earned credit for one quarter of coverage for each quarter in which she made at least $1,220 of Social Security taxable income. This figure is based on the average total wages of all workers as determined by the Social Security Administration (SSA). Workers may earn up to four quarters of coverage credit each year. Individuals become fully insured when they earn credit for 40 quarters of coverage, or 10 years of employment, and remain fully insured during their lifetime. An individual who has become fully insured must meet additional requirements before receiving benefits under the particular programs. Under the retirement program, fully insured individuals may choose to receive benefits as early as age 62, although their benefit amounts will be permanently reduced if elected prior to full retirement age. Congress instituted changes in the minimum age for receiving full benefits. It increased the full retirement age from age 65 for people born in 1938 or later because of higher life expectancies. The age for collecting full Social Security retirement benefits is gradually increasing to age 67 in 2022. The average monthly benefit for all retired workersGwas $1,328 in 2015.5 A status and the survivors’ relationshipTto the deceased. Dependent, unmarried children of the deceased and a spouse of the deceased E who is caring for a child or children may receive survivors’ benefits if the deceased worker was fully insured. A widow or widower at least age 60 S or a parent at least age 62 who was dependent on the deceased employee is entitled to survivors’ benefits if the deceased worker was ,fully insured. In 2015, the average monthly benefit was SURVIVOR BENEFITS The SSA calculates survivors’ benefits based on the insureds’ employment $1,253.6 DISABILITY BENEFITS The SSA pays benefits to seriously disabled workers and family members. D In particular, Social Security pays only for total disability. Disability under Social Security is E based on a person’s inability to perform work done before becoming disabled and the inability A medical condition. The disability must also last, or be to adjust to other work because of the expected to last, for at least 1 year or to N result in death. Disability benefits are available to disabled workers who are unable to work as a result of a D serious medical or mental impairment that lasts at least 12 months. Seriously disabled workers R as long as they meet two criteria. First, the worker must are eligible to receive disability benefits have accumulated at least 40 credits. Second, the worker must have earned at least 20 credits of A the last 40 calendar quarters in the last 10 years ending with the year of disablement. Younger workers need fewer quarters of coverage because they have fewer years to accumulate them. For example, workers ages 21–31 1 may qualify with half as many credits between age 21 and becoming disabled. Becoming disabled at age 29 requires credit for 4 years of employment 1 (equivalent to 16 credits based on earning 4 credits per year) since the 8-year period beginning at age 21. The average monthly disability2benefit in 2015 was $1,146.7 3 Tconvalescent care, and major doctor bills. The Medicare insurance coverage for hospitalization, program includes five separate features: S MEDICARE The Medicare program serves nearly all U.S. citizens age 65 or older by providing Most individuals who are eligible to receive protection under Medicare may choose to receive coverage in one of two ways. A person may receive coverage under the original Medicare Plan or Medicare Advantage Plans as illustrated in Figure 10-1. Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson. Copyright © 2017 by Pearson Education, Inc. ISBN 1-323-59381-0 š Medicare Part A —Hospital insurance š Medicare Part B —Medical insurance š Medigap —Voluntary supplemental insurance to pay for services not covered in Parts A and B š Medicare Part C: Medicare Advantage —Choices in health care providers, such as through HMOs and PPOs š Medicare Part D: Medicare Prescription Drug Benefit —Prescription drug coverage  ` Original Medicare Plan Part A (Hospital) Part B (Medical) Medicare provides this coverage. Part B is optional. You have your choice of doctors. Your costs may be higher than in Medicare Advantage plans. + Part D (Prescription Drug Coverage) You can choose this coverage. Private companies approved by Medicare run these plans. Plans cover different drugs. Medically necessary drugs must be covered. + Medigap (Medicare Supplement Insurance) Policy OR > >>N {=F K Medicare Advantage Plans like HMOs and PPOs Called “Part C,” this option combines your Part A (Hospital) and Part B (Medical) Private insurance companies approved by Medicare provide this coverage. Generally, you must see doctors in the plan. Your cost may be lower than in the Original Medicare Plan, and you may get extra benefits. + Part D (Prescription Drug Coverage) G Most APart C plans cover prescription drugs. If they don’t you may be able to choose this coverage. Plans cover T drugs. Medically necessary drugs must be different covered. E S , You can choose to buy this private coverage (or an employer/union may offer similar coverage) to fill in gaps in Part A and Part B coverage. Costs vary by policy and company. D E A FIGURE 10-1 Options for Receiving Medicare Benefits Source: Based on U.S. Department of Health and Human Services. (2011). NMedicare & You. Available: www.medicare. gov, accessed February 14, 2011. D R The original Medicare Plan is a fee-for-service plan that A is managed by the federal government. We will discuss the features of fee-for-service plans later in this chapter. Participants in fee-forservice plans possess the choice to receive care from virtually any licensed health care provider or facility. On the other hand, Medicare Advantage Plans offer 1 a variety of insurance options, including health maintenance organizations, preferred provider organizations, Medicare special needs 1 plans, and Medicare medical savings account plans (MSA). Medicare Advantage Plans are run 2 the Medicare program. Restrictions by private companies subject to strict regulations specified in pertain to pricing of the different plans. 3 T insurance covers both inpatient MEDICARE PART A COVERAGE This compulsory hospitalization ISBN 1-323-59381-0 and outpatient hospital care and services. Social Security S beneficiaries, retirees, voluntary enrollees, and disabled individuals are all entitled. Both employers and employees finance Medicare Part A benefits through payroll taxes of 1.45 percent on all earnings, to be noted shortly. Examples of Part A coverage include: š Inpatient hospital care in a semiprivate room, meals, general nursing, and other hospital supplies and services. š Skilled nursing facility care, including semiprivate room, meals, skilled nursing and rehabilitative services, and supplies for up to 100 days per year. Examples of skilled nursing care include physical therapy after a stroke or serious accident. Individuals who meet the eligibility criteria do not pay a premium for Part A coverage; however, those who do not meet the eligibility criteria paid a monthly premium up to $407 in 2015. Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson. Copyright © 2017 by Pearson Education, Inc. 231 232   >N K MEDICARE PART B COVERAGE This voluntary supplementary medical insurance covers 80 percent of medical services and supplies after the enrolled individual pays an annual deductible for services furnished under this plan. Part B helps pay for physicians’ services and for some medical services and supplies not covered under Part A. Medicare Part B pays for medical care such as doctors’ services, outpatient care, clinical laboratory services (e.g., blood tests and urinalysis) and some preventive health services (e.g., cardiovascular screenings and bone mass measurement). Part B also provides ambulance services to a hospital or skilled nursing facility when transportation in any other vehicle would endanger a person’s health. Part A coverage automatically qualifies an individual to enroll in Part B coverage for a monthly premium. The premium amounts will be revised annually. In 2015, monthly Part B premiums ranged from $104.90 to $335.70, based on income level. MEDIGAP INSURANCE Medigap insurance supplements Part A and Part B coverage and is available to Medicare recipients in most G states from private insurance companies for an extra fee. Most Medigap plans help cover the costs of coinsurance, copayments, and deductibles. A Federal and state laws limit the sale of these plans to up to 10 different standardized choices that T For example, some policies cover costs not covered by vary in terms of the level of protection. the original Medicare plan. E Some insurers offer Medicare Select plans. Medicare Select plans are Medigap policies S for limiting the choice of health care providers. Three that offer lower premiums in exchange states (Massachusetts, Minnesota, and, Wisconsin) do not subscribe to this system for offering Medigap insurance. Separate rules apply in these states. D MEDICARE PART C COVERAGE—MEDICARE ADVANTAGE The Balanced Budget Act of 1997 established Medicare+Choice—renamed E to Medicare Advantage in 2004 as a third Medicare program—as an alternative to the original program (Parts A and B). The Medicare Advantage A C, provides beneficiaries the opportunity to receive program, informally referred to as Part N including private fee-for-service plans, managed care health care from a variety of options, plans, or medical savings accounts.DFee-for-service plans provide protection against health care expenses in the form of cash benefits paid to the insured or directly to the health care R provider after receiving health care services. These plans pay benefits on a reimbursement basis. Medicare Parts A and B are based onAfee-for-service arrangements. As we will discuss later in this chapter, managed care plans often pay a higher level of benefits if health care is received from approved providers. 1 1 of 2003 (also known as the Medicare Modernization Improvement, and Modernization Act Act of 2003 for short) instituted a prescription drug benefit for Medicare program participants. 2 Commonly referred to as Part D, the 3 drug benefit was first offered in 2006. Medicare covers a percentage of prescription drug costs after a calendar year deductible of $320 in 2015, up to $2,960. After that, expenditures up to T $4,750 are not covered by Medicare. This coverage gap is known as the “donut hole” because Medicare contributes to the payment of approved prescription S MEDICARE PRESCRIPTION DRUG BENEFIT The passage of the Medicare Prescription Drug, medications for amounts outside the $2,960–$4,750 range less the annual deductible. While in the “donut hole,” the insured pays more for prescription medications. The amount for which the insured is responsible while in the donut hole range is decreasing each year until it reaches no more than 25 percent of the medication cost. This reduction is one of the many mandates set forth in the PPACA. requires equal employer and employee contributions under the Federal Insurance Contributions Act (FICA).8 FICA requires that employers pay a tax based on their payroll; employees contribute a tax based on earnings, which is withheld from each paycheck. The Self-Employment Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson. Copyright © 2017 by Pearson Education, Inc. ISBN 1-323-59381-0 FINANCING OASDI AND MEDICARE PROGRAMS Funding for OASDI and Medicare programs  ` > >>N {=F K Contributions Act (SECA)9 requires that self-employed individuals contribute to the OASDI and Medicare programs, but at a higher tax rate. In either case, the tax rate is subject to an increase each year in order to fund OASDI programs sufficiently. OASDI PROGRAMS The largest share of the FICA tax funds OASDI programs. In 2015, of the total 7.65 percent FICA tax, 6.20 percent was set aside. Self-employed individuals contributed 15.30 percent, of which 12.40 percent was set aside for the OASDI program. OASDI taxes are subject to a taxable wage base. Taxable wage bases limit the amount of annual wages or payroll cost per employee subject to taxation. The taxable wage base may also increase over time to account for increases in the cost of living. In 2015, the taxable wage base was $118,500 for the OASDI portion of the FICA tax. Annual wages, payroll costs per employee, and self-employed earnings above the taxable wage base are not taxed. MEDICARE PROGRAMS The Medicare tax, or hospital insurance tax (HI) a portion of FICA, supports the Medicare Part A program. Employers, employees, G and self-employed individuals contribute 1.45 percent. Self-employed individuals contribute double the amount, or 2.9 percent. A The Medicare tax is not subject to a taxable wage base. All payroll amounts and wages are taxed. T people believe that the Social According to the Social Security Administration, many Security taxes they pay are held in interest-bearing accounts Eset aside by the federal government to meet their own future retirement income needs. To the contrary, the Social Security system S represents a pay-as-you-go retirement system. In other words, Social Security taxes paid by , today’s workers and their employers are used to pay the benefits for today’s retirees and other beneficiaries. There is ongoing debate within the U.S. Congress regarding how to shore up these programs for future generations. D Workers’ Compensation E Workers’ compensation insurance programs, run by states individually, are designed to cover A expenses incurred in employees’ work-related accidents. Maritime workers within U.S. borders N and federal civilian employees are covered by their own workers’ compensation programs. The maritime workers’ compensation program is mandated by D the Longshore and Harborworkers’ Compensation Act, and federal civilian employees receive workers’ compensation protection R under the Federal Employees’ Compensation Act. Thus, workers’ compensation laws cover virtually all employees in the United States, except for A domestic workers, some agricultural workers, and small businesses with fewer than a dozen regular employees.10 WORKERS’ COMPENSATION OBJECTIVES AND OBLIGATIONS 1TO THE PUBLIC Six basic objectives underlie workers’ compensation laws:11 1 ISBN 1-323-59381-0 š Provide sure, prompt, and reasonable income and medical benefits to work-accident 2 victims or income benefits to their dependents, regardless of fault. 3 and workloads arising out of perš Provide a single remedy and reduce court delays, costs, sonal injury litigation. T š Relieve public and private charities of financial drains. S š Eliminate payment of fees to lawyers and witnesses as well as time-consuming trials and appeals. š Encourage maximum employer interest in safety and rehabilitation through appropriate experience-rating mechanisms. š Promote frank study of causes of accidents (rather than concealment of fault), reducing preventable accidents and human suffering. Employers must fund workers’ compensation programs according to state guidelines. Participation in workers’ compensation programs is compulsory in all states with the exception of Texas, where employers are not required to provide workers’ compensation insurance (with limited exceptions such as businesses that hold construction contracts with the government). Self-insurance, another funding option allowed in the majority of states, requires companies to Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson. Copyright © 2017 by Pearson Education, Inc. 233 234   >N K deposit a surety bond, enabling them to pay their own workers’ claims directly.12 Many companies select self-insurance because it gives employers more discretion in administering their own risks. Nevertheless, self-insured companies must pay their workers the same benefits as those paid by state funds or private insurance carriers. The following Watch It! video describes the California Healthcare Foundation’s approach to ensuring workplace safety. Efforts to promote workforce safety, by making it everyone’s responsibility, may lead to fewer workers’ compensation claims. In addition, an employer’s use of wellness programs, many of which we discussed in Chapter 9, can play an instrumental role in promoting workplace safety. WATCH IT! If your professor has assigned this, go to the Assignments section of mymanagementlab.com     "   %2&% %% '&%&$ %2/# G A HOW WORKERS’ COMPENSATION COMPARES TO SOCIAL SECURITY BENEFITS Workers’ comT pensation differs from Social Security disability insurance and Medicare in important ways. Workers’ compensation pays for medical care forEwork-related injuries beginning immediately after the injury occurs; it pays temporary disability benefits S after a waiting period of 3–7 days; it pays permanent partial and permanent total disability benefits to workers who have lasting consequences of disabilities caused on the job; in most states, it pays, rehabilitation and training benefits for those unable to return to pre-injury careers; and it pays benefits to survivors of workers who die of work-related causes. Social Security, in contrast, pays benefits to workers with long-term disabilities from any cause, but D only when the disabilities preclude work. Social Security also pays for rehabilitation services and E workers. Social Security begins after a 5-month waiting for survivor benefits to families of deceased period and Medicare begins 29 months after A the onset of medically verified inability to work. N RECENT TRENDS IN WORKERS’ COMPENSATION In recent years, workers’ compensation claims have risen dramatically in terms of both numbers of claims and claims amounts. The increased D prevalence of repetitive strain injuries resulting from the use of keyboards has contributed to R compensation cost nearly 18 percent of all legally this trend. In September 2014, workers’ 13 required benefits. The proportionAin industries that generally pose substantial worker hazards spent a greater proportion of their legally required benefits dollars to provide workers’ compensation insurance. For example, this proportion was approximately 34 percent in the 1 construction industry. 1 2 permissible methods of funding. Employers generally subscribe to workers’ compensation insurance through private carriers or,3in some instances, through state funds. A third funding option, self-insurance, requires companies to deposit a surety bond, enabling them to pay their own workers’ claims directly.14 ManyTemployers select self-insurance when available because it gives them greater discretion in administering their own risks. Nevertheless, self-insured S FINANCING WORKERS’ COMPENSATION PROGRAMS Workers’ compensation laws specify the companies must pay their workers the same benefits paid by state funds or private insurance carriers. In most states, the insurance commissioner sets the maximum allowable workers’ compensation insurance premium rates for private insurance carriers. Family and Medical Leave Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson. Copyright © 2017 by Pearson Education, Inc. ISBN 1-323-59381-0 The Family and Medical Leave Act of 1993 (FMLA) aims to provide employees with job protection in cases of family or medical emergency. The basic thrust of the act is guaranteed leave, and a key element of that guarantee is the right of the employee to return either to the position he or she left when the leave began or to an equivalent position with the same benefits, pay, and other terms and conditions of employment. The passage of the FMLA reflects a growing recognition  ` > >>N {=F K that many employees’ parents are becoming elderly, rendering them susceptible to a serious illness or medical condition. These elderly parents are likely to require frequent (if not constant) attention for an extended period while ill, which places a burden on their adult children. The passage of the FMLA also recognizes the increasing prevalence of two-income families and the changing roles of men regarding child care. Both partners are now more likely to work full time and share family responsibilities, including child rearing. Much like elderly parents, children can also become seriously ill, requiring parents’ attention. The FMLA also enables fathers to take paternity leave to care for their newborn babies. Until the passage of the FMLA, men did not have protection comparable to what women receive under the Pregnancy Discrimination Act. Title I of the FMLA states: An eligible employee is entitled to 12 unpaid work weeks of leave during any 12-month period for three reasons: because of the birth or placement for adoption or foster care of a child; because of the serious health condition of a spouse, G child, or parent; or because of the employee’s own serious health condition. Leave may be taken for birth or placement of A a child only within 12 months of that birth or placement. T female employees: “A father, as . . . family leave provisions apply equally to male and well as a mother, can take family leave because of the birth E or serious health condition of his child; a son as well as a daughter is eligible for leave to care for a parent.” ISBN 1-323-59381-0 S The minimum criteria for eligibility under this act include the following: Eligible workers , must be employed by a private employer or by a civilian unit of the federal government. Eligible workers must also have been employed for at least 12 months by a given employer. Finally, eligible workers have provided at least 1,250 hours of service D during the 12 months prior to making a request for a leave. Employees who do not meet these criteria E are excluded, as are those who work for an employer with fewer than 50 employees within a 75-mile radius of the employee’s A home. The FMLA does not explicitly define “hours of service.” As a result, many disgruntled employees have filed lawsuits against employers’ definitions of hours of service. N Employers may require employees to use paid personal, sick, or vacation leave first as part D of the 12-week period. If an employee’s paid leave falls short of the 12-week mandated period, then the employer must provide further leave—unpaid—toRtotal 12 weeks. While on leave, employees retain all previously earned seniority or employment A benefits, though employees do not have the right to add such benefits while on leave. Furthermore, while on leave, employees are entitled to receive health insurance benefits. Finally, employees may be entitled to receive health 1 health condition or some other benefits if they do not return from leave because of a serious factor beyond their control. 1 The first major revisions to the FMLA were instituted in January 2009. The changes created 2 leave opportunities for military families and required employees to adhere to stricter guidelines for taking leave. Relatives of seriously injured members of 3 the military may take up to 26 weeks off from work to care for their injured military family members. In addition, relatives of members T of the National Guard or reserves who are called to activity duty may receive up to 12 weeks of S member’s troop), arrange child leave to attend military programs (official send-off of the family care, or make financial arrangements. Nonmilitary workers who claim to have chronic health conditions (e.g., ongoing back pain) must see their doctor at least twice per year for documentation. Additional revisions to the FMLA may be on the horizon. For example, President Barack Obama may ask Congress to extend coverage by including companies that employ at least 25 workers. As noted, the current law applies to companies that employ at least 50 workers. A more recent revision effective March 27, 2015, incorporates a broader definition of spouse. Eligible employees in legal same-sex marriages will be able to take FMLA leave to care for their spouse or family member, regardless of where they live. This will ensure that the FMLA will give spouses in same-sex marriages the same ability as all spouses to fully exercise their FMLA rights. Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson. Copyright © 2017 by Pearson Education, Inc. 235 236   >N K One final comment about family and medical leave warrants mention. As discussed, the FMLA provides unpaid leave. On September 23, 2002, the California governor signed legislation that allows employees to take partially paid family leave beginning after July 1, 2004. This paid family leave program allows workers to take up to 6 weeks off to care for a newborn, a newly adopted child, or an ill family member. Under this law, employees are eligible to receive 55 percent of their wages during their absence. Health Insurance Health insurance covers the costs of a variety of services that promote sound physical and mental health, including physical examinations, diagnostic testing, surgery, hospitalization, psychotherapy, dental treatments, and corrective prescription lenses for vision deficiencies. The Patient Protection and Affordable Care Act of 2010 (PPACA) is a comprehensive law that mandates health insurance coverage and sets minimum standards for insurance. G (We will discuss health insurance design alternatives in the next section of this chapter.) Individuals who can afford to purchase A health insurance must do so either by participating in an employer-sponsored plan or purchasing health insurance coverage independently. Starting T in 2016, companies with at least 50 employees are required to offer affordable health insurE are known as the individual mandate and employer ance under the law. These requirements mandate, respectively. S Employers and individuals are subject to monetary penalties for failure to provide or carry insurance coverage. Individuals who,do not receive coverage through employment or are unemployed pay a penalty; oftentimes, some refer to this as a tax rather than as a penalty. Without this mandate, many individuals would D likely put off purchasing health insurance until they need it, that is, at the onset of a serious medical condition, when premium rates are highest (as E when healthy). This practice would also cause insurcompared to purchasing health insurance ance premiums to rise for those who A maintain coverage, including the cost of health insurance premiums to employers: Insurance companies may spread rate increases to protect profits. N Many provisions of the law will have a broad impact on employment-sponsored health insurD status. PPACA distinguishes between health plans that ance plans that do not have grandfathered existed prior to the March 23, 2010, enactment date and those that come into existence afterward. R Individual and group health plans already in existence prior to enactment are referred to as grandA fathered plans. New health plans (or preexisting plans that have been substantially modified after March 23, 2010) are referred to as non-grandfathered plans. Grandfathered plans could lose this status if at least one of the following modifications were made: 1 š Elimination of all or substantially1all benefits to diagnose or treat a particular condition. š Increase in a percentage cost-sharing requirement (e.g., raising an individual’s coinsurance 2 requirement from 20 percent to 25 percent). 3 š Increase in a deductible or out-of-pocket maximum by an amount that exceeds medical inflation plus 15 percentage points. T š Increase in a copayment by an amount that exceeds medical inflation plus 15 percentage S inflation). points (or, if greater, $5 plus medical š Decrease in an employer’s contribution rate towards the cost of coverage by more than 5 percentage points. š Imposition of annual limits on the dollar value of all benefits below specified amounts.15 š Ambulatory patient services š Emergency services š Hospitalization Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson. Copyright © 2017 by Pearson Education, Inc. ISBN 1-323-59381-0 Reducing or eliminating coverage for one or more “essential benefits” will cause a grandfathered plan to lose this status. Essential health benefits must include items and services within at least the following 10 categories:  ` š š š š š š š > >>N {=F K 237 Maternity and newborn care Mental health and substance use disorder services, including behavioral health treatment Prescription drugs Rehabilitative services and devices Laboratory services Preventive and wellness services and chronic disease management Pediatric services, including oral and vision care Companies that fail to offer health insurance are also subject to a penalty. If a company owes the penalty because it didn’t cover workers, it must pay approximately $2,000 per full-time employee (excluding first 30 employees). The fee is assessed on a monthly basis per employee. In other words, the per-employee penalty is divided by 12 months and paid for each month the insurance requirement is not met. Starting in 2016, the penalty amount in health insurance has increased. The formula is complex and is subject to change based on possible legislative rule G changes and experience. The PPACA instituted requirements that health plans A remove annual dollar limits on most health benefits as well as eliminated preexisting conditionTclauses altogether. Starting in 2018, the Cadillac tax will apply to high-cost employer-sponsored health plans. Plans that cost more E than $10,200 annually for individual coverage and $27,500 for family coverage are subject S that exceeds those limits. For to the Cadillac tax. The tax equals 40 percent of the amount example, if an individual plan costs $14,000, the employer , would pay 40 percent of $3,800 ($14,000 minus $10,200), or $1,520 for each covered individual. The tax was intended to be a disincentive for employers to provide overly rich health benefits, and the cost of the health plan is one way to assess the level of benefits. It is expected thatDthese limits will increase from time to time. E A N HEALTH INSURANCE PROGRAM DESIGN D ALTERNATIVES R one or more insurance companies Employers usually enter into a contractual relationship with to provide health-related services for their employees and,A if specified, employees’ dependents. An insurance policy refers to a contractual relationship between the insurance company and the beneficiary. The insurance policy specifies the amount of money the insurance company will pay, for such particular services as physical examinations.1Employers pay insurance companies a negotiated amount, or premium, to establish and maintain 1 insurance policies. In this chapter, the term insured refers to employees covered by the insurance policy. Companies can choose from the following ways to2provide health insurance coverage. These include fee-for-service plans, as well as alternative managed care plans, and plans associ3 ated with the consumer-driven approach. ISBN 1-323-59381-0 Fee-For-Service Plans T S Fee-for-service plans provide protection against health care expenses in the form of a cash benefit paid to the insured or directly to the health care provider after the employee has received health care services. These plans pay benefits on a reimbursement basis. Three types of eligible health expenses are hospital expenses, surgical expenses, and physician charges. Under feefor-service plans, the insured may generally select any licensed physician, surgeon, or medical facility for treatment, and the insurer reimburses the insured after medical services are rendered. There are two types of fee-for-service plans. The first type, indemnity plans, is based on a contract between the employer and an insurance company. The contract specifies the expenses and rate that are covered. The second type, self-funded plans, operates in the same fashion as indemnity plans. Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson. Copyright © 2017 by Pearson Education, Inc. 10-3 Describe feefor-service plans, traditional managed care approaches, and more recent consumerdriven approaches to providing health care coverage. 238   >N K The main difference between insurance plans offered by insurance companies and selffunded insurance plans centers on how benefits are financed. When companies elect indemnity plans, they establish a contract with an independent insurance company. Insurance companies pay benefits from their financial reserves, which are based on the premiums companies and employees pay to receive insurance. Companies may instead choose to self-fund employee insurance. Such companies pay benefits directly from their own assets with either current cash flow or funds set aside in advance for potential future claims. The decision to self-fund is based on financial consideration. Self-funding makes sense when a company’s financial burden of covering employee medical expenses is less than the cost to subscribe to an insurance company for coverage. By not paying premiums in advance to an independent carrier, a company retains these funds for current cash flow. Fee-for-service plans provide three types of medical benefits under a specified policy: hospital expense benefits, surgical expense benefits, and physician expense benefits. Companies sometimes select major G medical plans to provide comprehensive medical coverage instead of limiting coverage to the A three specific kinds just noted, or to supplement these specific benefits. T of stipulations designed to control costs and to limit Fee-for-service plans contain a variety a covered individual’s financial liability. E Common fee-for-service stipulations include deductibles, coinsurance, out-of-pocket maximums, preexisting condition clauses, and maximum S benefits limits. , DEDUCTIBLE A common feature of fee-for-service plans is the deductible. Over a designated period, employees must pay for services (i.e., meet a deductible) before insurance benefits D become active. The deductible amount can vary widely based on the plan specifics, ranging E to a few thousand dollars. Deductible amounts may anywhere between a few hundred dollars also depend on annual earnings, expressed A either as a fixed amount for a range of earnings or as a percentage of income. N COINSURANCE Insurance plans feature D coinsurance, which becomes relevant after the insured pays the annual deductible. Coinsurance R refers to the percentage of covered expenses paid by the insured. Most indemnity plans stipulate 20 percent coinsurance. This means that the plan A whereas the insured is responsible for the difference, in will pay 80 percent of covered expenses, this case, 20 percent. Coinsurance amounts vary according to the type of expense. Insurance plans most com1 monly apply no coinsurance for diagnostic testing and 20 percent for other medical services. 1 for mental health services. Coinsurance rates for these Many insurance plans provide benefits services tend to be the highest, often as 2 much as 50 percent. 3 rates, the expense amounts for which T individuals are responsible can be staggering. These amounts are often beyond the financial Smeans of most individuals. Thus, most plans specify the OUT-OF-POCKET MAXIMUM Health care costs are on the rise. Despite generous coinsurance Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson. Copyright © 2017 by Pearson Education, Inc. ISBN 1-323-59381-0 maximum amount the insured must pay per calendar year or plan year, known as the out-ofpocket maximum provision. The purpose of the out-of-pocket maximum provision is to protect individuals from catastrophic medical expenses or expenses associated with recurring episodes of the same illness. Out-of-pocket maximums are usually stated as a fixed dollar amount and apply to expenses beyond the deductible amount. Individuals often have lower annual out-of-pocket maximums than family coverage. For example, the out-of-pocket maximum might be limited to $1,000 for individual coverage and $2,500 for family coverage. As an illustration, an insurance plan specifies a $200 deductible. An individual is responsible for the first $200 of expenses plus additional expenses up to $800 per year (i.e., the out-of-pocket maximum) for a total of $1,000.  ` > >>N {=F K PREEXISTING CONDITION CLAUSES A preexisting condition is a condition for which medical advice, diagnosis, care, or treatment was received or recommended during a designated period preceding the beginning of coverage. Prior to the Patient Protection and Affordable Care Act, insurance plans oftentimes excluded preexisting conditions from coverage. Insurance companies chose to impose preexisting conditions to limit their liabilities for serious medical conditions that predate an individual’s coverage. The Patient Protection and Affordable Care Act has eliminated preexisting condition clauses altogether. MAXIMUM BENEFIT LIMITS Insurance companies specify maximum benefit limits, expressed as a dollar amount over the course of 1 year or over an insured’s lifetime. In many cases, insurance policies specified both annual maximums and lifetime maximums. Until the passage of the PPACA, employers could purchase health insurance plans with lower maximum benefit limits at correspondingly lower costs. The Patient Protection and Affordable Care Act prohibits G limits on most benefits. A Managed Care Approach T The managed care approach emphasizes cost control by limiting an employee’s choice of docE tors and hospitals. Three common managed care plans are health maintenance organizations S (HMOs), preferred provider organizations (PPOs), and point-of-service (POS) plans. , HEALTH MAINTENANCE ORGANIZATIONS HMOs are sometimes described as providing prepaid medical services because fixed periodic enrollment fees cover HMO members for all medically necessary services only if the services are D delivered or approved by the HMO. HMOs generally provide inpatient and outpatient care as E well as services from physicians, surgeons, and other health care professionals. Most medical A services are either fully covered or, in the case of some HMOs, participants are required to make nominal copayments. Copayments represent nominal payments an individualNmakes as a condition of receiving services. HMOs express copayments as fixed amountsDfor different services (e.g., office visits, prescription drugs, and emergency room treatment). It should be noted that the R ranges of figures that follow are simply approximations. Common copayment amounts vary A between $15 and $50 for each doctor’s office visit and between $10 and $70 per prescription drug. We address the reason for the wide variation in prescription drug copayment amounts later in this chapter. HMO plans share several features in common with 1 fee-for-service plans, including outof-pocket maximums. HMOs differ from fee-for-service 1 plans in three important ways. First, HMOs offer prepaid services, whereas fee-for-service plans 2 operate on a reimbursement basis. Second, HMOs include the use of primary care physicians as a cost-control measure. Third, co3 insurance rates are generally lower in HMO plans than in fee-for-service plans. T S HMOs assign PRIMARY CARE PHYSICIANS HMOs designate some of their physicians, usually general or ISBN 1-323-59381-0 family practitioners, as primary care physicians. each member to a primary care physician or require each member to choose one. Primary care physicians determine when patients need the care of specialists. HMOs use primary care physicians to control costs by significantly reducing the number of unnecessary visits to specialists. As primary care physicians, doctors perform several duties. The most important duty is perhaps to diagnose the nature and seriousness of an illness promptly and accurately, after which the primary care physician refers the patient to the appropriate specialist. COPAYMENTS The most common HMO copayments apply to physician office visits, hospital admissions, prescription drugs, and emergency room services. Office visits are nominal amounts, ranging from $15 to $50 per visit. Hospital admissions and emergency room services are higher, Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson. Copyright © 2017 by Pearson Education, Inc. 239 240   >N K ranging between $50 and $500 for each occurrence. Mental health services and substance abuse treatment require copayments as well. Inpatient services require copayments that are similar in amount to those for hospital admissions for medical treatment; however, copayments for outpatient services (e.g., psychotherapy, consultation with a psychiatrist, or treatment at a substance abuse facility) are generally expressed as a fixed percentage of the fee for each visit or treatment. HMOs usually charge a copayment ranging between 15 and 25 percent. PREFERRED PROVIDER ORGANIZATIONS Under a preferred provider organization (PPO), a select group of health care providers agrees to furnish health care services to a given population at a higher level of reimbursement than under fee-for-service plans. Physicians qualify as preferred providers by meeting quality standards, agreeing to follow cost-containment procedures implemented by the PPO, and accepting the PPO’s reimbursement structure. In return, the employer, insurance company, or third-party administrator helps guarantee the provider the physician’s minimum G patient loads by furnishing employees with financial incentives to use the preferred providers. PPO plans include features thatA resemble fee-for-service plans or HMO plans. Features most similar to fee-for-service plans T are out-of-pocket maximums and coinsurance, and those most similar to HMOs include the use of nominal copayments. PPOs contain deductible and E coinsurance provisions that differ somewhat from other plans. S , PPO plans most closely resemble practices commonly used in fee-for-service plans. Unlike fee- DEDUCTIBLES PPOs include deductible features. The structure and amount of deductibles under for-service plans, PPOs often apply different deductible amounts for services rendered within and outside the approved network. Higher deductibles are set for services rendered by nonD network providers to discourage participants from using services outside the network. E A for-service plans. PPOs calculate coinsurance as a percentage of fees for covered services. PPOs also use two sets of coinsurance payments: N The first set applies to services rendered within the network of care providers and the second appliesDto services rendered outside the network. Coinsurance rates for network services are substantially lower than they are for non-network services. Coinsurance R 10 and 20 percent. Non-network coinsurance rates run rates for network services range between A between 60 and 90 percent. COINSURANCE Coinsurance is a feature of PPO plans—its structure is most similar to fee- POINT-OF-SERVICE PLANS A point-of-service plan (POS) combines features of fee-for-service systems and HMOs. Employees pay1 a nominal copayment for each visit to a designated network of physicians. In this regard, POS plans are similar to HMOs. Unlike HMOs, however, 1 employees possess the option to receive care from health care providers outside the designated network of physicians, but they pay2somewhat more for this choice. This choice feature is common to fee-for-service plans. 3 T Specialized Insurance Benefits PRESCRIPTION DRUG PLANS Prescription drug plans cover the costs of drugs. These plans apply exclusively to drugs that state or federal laws require to be dispensed by licensed pharmacists. Prescription drugs dispensed to individuals during hospitalization or treatment Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson. Copyright © 2017 by Pearson Education, Inc. ISBN 1-323-59381-0 S plans to provide specific kinds of benefits. Benefits Employers often use separate insurance professionals sometimes refer to these plans as carve-out plans. Carve-out plans are set up to cover dental care, vision care, prescription drugs, mental health and substance abuse, and maternity care. Specialty HMOs or PPOs usually manage carve-out plans based on the expectation that single-specialty practices may control costs more effectively than multispecialty medical practices. We will focus on prescription drug plans and mental health and substance abuse plans because of the rampant inflation in prescription drug costs and the increased recognition that mental health disorders may hinder worker productivity.  ` > >>N {=F K in a long-term care facility are not covered by prescription drug plans. Insurers specify which prescription drugs are covered, how much they will pay, and the basis for paying for drugs. Three kinds of prescription drug programs are currently available to companies who choose to provide these benefits to employees. The first, medical reimbursement plans reimburses employees for some or all of the cost of prescription drugs. These programs are usually associated with self-funded or independent indemnity plans. The second kind of plan, often referred to as a prescription card program, operates similarly to managed care programs because it offers prepaid benefits with nominal copayments. The name arose from the common practice of pharmacies requiring the presentation of an identification card. Prescription card programs limit benefits to prescriptions filled at participating pharmacies, similar to managed care arrangements for medical treatment. The third type of plan, a mail order prescription drug program, dispenses expensive medications used to treat chronic health conditions such as human immunodeficiency virus (HIV) or such neurological disorders as Parkinson’s disease. HealthG insurers specify whether participants must receive prescription drugs through mail order programs A or locally approved pharmacies. Cost is the driving factor for this decision. Mail order programs offer a cost advantage because T they purchase medications at discounted prices in large volumes. E some form of mental illness (e.g., clinical depression) atSleast once during their lifetimes.16 Nearly 20 percent develop a substance abuse problem. As , a result, insurance plans provide MENTAL HEALTH AND SUBSTANCE ABUSE Approximately 20 percent of Americans experience mental health and substance abuse benefits designed to cover treatment of mental illness and chemical dependence on alcohol and legal and illegal drugs. Delivery methods include fee-forD programs (EAPs) represent a service plans and managed care options. Employee assistance portal to taking advantage of employer-sponsored mental E health and substance abuse treatment options. EAPs help employees cope with personal problems that may impair their personal lives A violence, the emotional impact of or job performance, including alcohol or drug abuse, domestic AIDS and other diseases, clinical depression, and eating disorders. EAPs also assist employers N in helping troubled employees identify and solve problemsD that may be interfering with their job or personal life. Rof a variety of treatments, including Mental health and substance abuse plans cover the costs prescription psychiatric drugs (e.g., antidepressant medication), A psychological testing, inpatient hospital care, and outpatient care (e.g., individual or group therapy). Mental health benefits amounts vary by the type of disorder. Psychiatrists and psychologists rely on the Diagnostic and 1 mental disorders based on sympStatistical Manual of Mental Disorders (DSM-5) to diagnose toms, and both fee-for-service and managed care plans rely1on the DSM-5 to authorize payment of benefits. ISBN 1-323-59381-0 2 3 Consumer-Driven Health Care T Managed care plans became popular alternatives to fee-for-service plans mainly to help employers and insurance companies more effectively manage theScosts of health care. As discussed, managed care plans by design imposed substantial restrictions on an employee’s ability to make choices about from whom they could receive medical treatment, the gatekeeper role of primary care physicians, and the level of benefits they could receive based on designated in- and out-ofnetwork providers. Despite the cost control objectives of managed care, health care costs have continued to rise dramatically over the years while restricting employee choice. Consumer-driven health care refers to the objective of helping companies maintain control over costs while also enabling employees to make smarter choices about health care. This approach may enable employers to lower the cost of insurance premiums by selecting fee-for-service plans or managed care plans with higher employee deductibles. The most popular consumer-driven approaches couple health plan flexible spending accounts and health reimbursement accounts. These accounts provide Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson. Copyright © 2017 by Pearson Education, Inc. 241 242   >N K Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson. Copyright © 2017 by Pearson Education, Inc. ISBN 1-323-59381-0 employees with resources to pay for medical and related expenses not covered by higher deductible insurance plans at substantially lower costs to employers. Flexible spending accounts (FSAs) permit employees to pay for specified health care costs that are not covered by an employer’s insurance plan. Prior to each plan year, employees elect the amount of pay they wish to allocate to this kind of plan. Employers then use this money to reimburse employees for medical expenses incurred during the plan year that qualify for repayment. A significant advantage to employees is the ability to make contributions to their FSAs on a pretax basis; however, a noteworthy drawback is the “use it or lose it” provision of FSAs. FSAs require employees to estimate the amount of money they think they will need for eligible medical expenses. Of course, it is difficult to predict many medical needs and to estimate the costs of anticipated medical needs. Employees lose contributions to their FSAs when they overestimate the cost of medical needs because employers neither allow employees G to carry balances nor do employers reimburse employees for balances remaining at the end of the year. A On the other hand, employers may establish health reimbursement accounts (HRAs). The T with three important differences. First, employers make purposes of HRAs and FSAs are similar the contributions to each employee’s HRA, E whereas employees fund FSAs with pretax contributions deducted from their pay. Employees S do not contribute to HRAs. HRA arrangements are particularly appealing to employees with relatively low salaries or hourly wage rates because , HRAs permit employees to carry over unused account they do not contribute to them. Second, balances from year to year, whereas employees forfeit unused FSA account balances present at the end of the year. Third, employers may offer employees HRAs as well as FSAs, and the use D of these accounts is not limited to participation in high-deductible health care plans, which is the E case for HSAs. The idea of consumer-driven health A care has most recently received substantially greater attention than before because of the Bush administration (President George W. Bush) and the Republican-led Congress, who favor N greater employee involvement in their medical care and D to help maintain competitiveness in the global market. reducing the cost burden for companies The Medicare Prescription Drug, Improvement and Modernization Act of 200317 added R Section 223 to the IRC, effective January 1, 2004, to permit eligible individuals to establish health savings accounts (HSAs) toAhelp employees pay for medical expenses. In 2015, an employer, an employee, or both may contribute as much as $3,350 annually for unmarried employees without dependent children or as much as $6,550 for married or unmarried em1 ployees with dependent children. Employers may require employees to contribute toward these limits. Employee contributions would1be withheld from an employee’s pay on a pretax basis. Employers offer HSAs along with a high 2 deductible insurance policy, established for employees. High-deductible health insurance plans require substantial deductibles and low out-of-pocket 3 maximums. For individual coverage, the minimum annual deductible was $1,300 with a maximum out-of-pocket limit at or below T $6,450 in 2015. For family coverage, the deductible was $2,600 with maximum out-of-pocket S limits at or below $12,900. HSAs offer four main advantages to employees relative to FSAs and HRAs. First, HSAs are portable, which means that the employee owns the account balance after the employment relationship ends. Second, HSAs are subject to inflation-adjusted funding limits. Third, employees may receive medical services from doctors, hospitals, and other health care providers of their choice, and they may choose the type of medical services they purchase, including such items as long-term care, eye care, and prescription drug coverage. FSAs and HRAs substantially limit employee choice. Fourth, HSA assets must be held in trust and cannot be subject to forfeiture. That is, any unspent balances in the HSA can be rolled over annually and accumulate tax-free until the participant’s death. FSAs and HRAs have no legal vesting requirement, which means employees do not possess the right to claim unused balances when they terminate employment.  ` > >>N {=F K 243 ADDITIONAL HEALTH CARE LEGISLATION Besides PPACA, a variety of laws influence employer-sponsored health care offerings. We review two of the key laws in chronological order: the Consolidated Omnibus Budget Reconciliation Act of 1985 and the Health Insurance Portability and Accountability Act of 1996. Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) was enacted to provide employees with the opportunity to continue receiving their employer-sponsored medical care insurance temporarily under their employer’s plan if their coverage otherwise would cease because of termination, layoff, or other change in employment status. COBRA applies to a wide variety of employers, with exemptions available only for companies that normally employ fewer than 20 workers, church plans, and plans maintained by the U.S. government. COBRA is an amendment to the Employee Retirement Income Security Act G of 1974. Under COBRA, individuals may continue their coverage, as well as coverage for their A spouses and dependents, for up to 18 months. Coverage may extend for up to 36 months for Tcoverage because of an employee’s spouses and dependents facing a loss of employer-provided death, a divorce or legal separation, or certain other qualifying E events, which include employee termination, retirement, and layoff. Table 10-2 displays the maximum continuation period for S particular qualifying events. Companies are permitted to charge COBRA beneficiaries , a premium for continuation coverage of up to 102 percent of the cost of the coverage to the plan. The 2 percent markup reflects a charge for administering COBRA. Employers that violate the COBRA requirements are subDthe violation continues. In addition, ject to an excise tax per affected employee for each day that plan administrators who fail to provide required COBRA E notices to employees may be personally liable for a civil penalty for each day the notice is not provided. A N Act of 1996 (HIPAA) Health Insurance Portability and Accountability The Health Insurance Portability and Accountability Act D of 1996 (HIPAA) contains three main provisions. The first provision is intended to guarantee that employees and their depenR dents that leave their employer’s group health plan will have ready access to coverage under a A or claims experience. The second subsequent employer’s health plan, regardless of their health provision sets limits on the length of time that health plans and health insurance issuers may ISBN 1-323-59381-0 1 TABLE 10-2 COBRA Continuation Requirements 1 2 {'%2/&) &" 3 Employee T a. Termination of employment for any reason, including termination of disability benefits and layoff (except for S gross misconduct) b. Loss of eligibility due to reduction in work hours c. Determination by the Social Security Administration (SSA) of disability that existed at time of qualifying event Dependent a. Loss of dependent child status b. Employee’s death, divorce, or legal separation Spouse (entitled to Medicare) %' &&'%&  18 monthsa 18 months 18 months 36 months 36 months 36 months a This 18-month period may be extended for all qualified beneficiaries if certain conditions are met in cases where a qualified beneficiary is determined to be disabled for purposes of COBRA. Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson. Copyright © 2017 by Pearson Education, Inc. 10-4 Summarize two additional key laws pertaining to legally required benefits. 244   >N K impose preexisting health conditions and identify conditions to which no preexisting condition may apply. As noted previously, since the passage of the Patient Protection and Affordable Care Act, preexisting condition clauses were eliminated. The third provision protects the transfer, disclosure, and use of health care information. THE BENEFITS AND COSTS OF LEGALLY REQUIRED BENEFITS 10-5 Discuss the main benefits and costs of legally required benefits. Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson. Copyright © 2017 by Pearson Education, Inc. ISBN 1-323-59381-0 Employee benefits are unlike most bases for monetary compensation (e.g., merit, pay-forknowledge, and incentives). Under these programs, the amount of compensation employees receive varies with their level of contributions to the company. Instead, benefits tend to emphasize social adequacy. Under the principle of social adequacy, benefits are designed to provide G subsistence income to all beneficiaries regardless of their performance in the workplace.18 Thus, A benefits do not directly meet the imperatives of comalthough humanitarian, legally required petitive strategy. Legally required benefits, however, may contribute indirectly to competitive T advantage by enabling individuals to remain participants in the economy. E Nevertheless, legally required benefits may be a hindrance to companies in the short term S employer expenditures (e.g., contributions mandated because these offerings require substantial by the Social Security Act and various , state workers’ compensation laws). Without these mandated expenditures on compensation, companies could choose to invest these funds in direct compensation programs designed to boost productivity and product or service quality. How can HR managers and otherDbusiness professionals minimize the cost burden associated with legally required benefits? Let’s E consider this issue for both workers’ compensation and unemployment insurance benefits. In the case of workers’ compensation, employers can A is to reduce the likelihood of workers’ compensation respond in two ways. The first response claims. The implementation of workplace N safety programs is one strategy for reducing workers’ compensation claims. Effective safety programs include teaching safe work procedures D and safety awareness to employees and supervisors. Another strategy for reducing workers’ R programs that include inspections of the workplace compensation claims is health promotion to identify health risks (e.g., high levels A of exposure to toxic substances) and then to eliminate those risks. The second employer response is to integrate workers’ compensation benefits into the rest 1 rampant cost increases associated with workers’ comof the benefits program. Because of the pensation, several state legislatures have 1 considered integrating employer-sponsored medical insurance and workers’ compensation programs. This “24-hour” coverage would specifically 2 compensation into traditional employer-provided health roll the medical component of workers’ insurance. Some companies have already 3 experimented with 24-hour coverage. For instance, Polaroid Corporation found cost advantages associated with integrating medical insurance and T workers’ compensation: reduced administrative expense through integration of the coverages, better access to all employee medical S records, and a decrease in litigation.19 Use of 24-hour coverage is not widespread for a number of reasons.20 Many insurance companies view this approach as complicated. In addition, some companies are concerned that this coverage would cost them in unanticipated ways. Employers also can contain their costs for unemployment insurance. As discussed earlier, the amount of tax employers contribute to providing unemployment insurance depends partly on their experience rating. Thus, employers can contain costs by systematically monitoring the reasons they terminate workers’ employment and avoiding terminations that lead to unemployment insurance claims whenever possible. For example, it is not uncommon for companies to employ workers on a full-time basis when they experience increased demand for their products or services. Adding full-time workers is reasonable when companies expect that the higher demand  ` > >>N {=F K 245 will last for an extended period (e.g., more than 2 years); however, when demand is lower in the short term, companies usually reduce their workforce through layoffs. Unless the laid-off employees immediately find employment, they will file claims with their local employment security office for unemployment insurance. Their claims contribute to the companies’ unemployment experience rating and, thus, their cost expenditures. COMPENSATION IN ACTION  Make recommendations on wellness programs and To both employees and employers, legally required benefits other benefits that support and enhance legally required can, at first glance, appear to be a burden. These costs mean benefits (which could also decrease overall cost for the that less capital will be devoted to investments or available company; e.g., health care). Assess the cost up front for expenditures in other areas. However, by thoroughly un-G and provide justification for the cost by comparing it to derstanding the principles behind the establishment of theseA potential future costs. laws, they will be viewed as less of a burden and more of a benefit. As HR and line managers, you will have the responsi-T Line managers take the lead bility of educating employees about the broader array of ben-E  Ensure that all employees are properly trained on equipefits options, as well as protecting the company from liabilities ment and that the work environment is safe. This will S associated with a failure to comply with certain legally serve as a preventative measure against certain benefits mandated benefits. , that have a cost to employee and employer (e.g., workers’ compensation). Action checklist for line managers and HR—  Seek education on certain legally required benefits protecting the company and educating employeesD that are likely to be encountered (e.g., FMLA). Become comfortable with talking about these issues; dealing HR takes the lead E sensitively with these issues when they are brought up  Benchmark other companies to see how flexible benefit A by employees may mitigate the risk of employees filing a plans are chosen and administered. This flexibility will grievance on how their legally granted right was comproempower employees and will likely lead to positive work-N (akin to “bedside manners” with hospitals). related outcomes (e.g., reduced absenteeism and low D  mised Work with HR to create a communication plan that turnover). clearly demonstrates the benefits of the plan, describes  Involve employees in the discussion as the benefits plan isR how to take full advantage of its benefits, and increases adjusted to better align the cost of the benefits plan and A awareness and appreciation. its attractiveness to employees. Proper training of employees to ensure safety Deal with employee discussions on benefits effectively and with sensitivity Benchmark other companies to assess benefits offerings 1 1 2 3 T Roll out communication plan that is focused on raising S Involve employees in discussions as benefits evolve Recommend benefits awareness and appreciation ISBN 1-323-59381-0 END OF CHAPTER REVIEW MyManagementLab Go to mymanagementlab.com to complete the problems marked with this icon . Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson. Copyright © 2017 by Pearson Education, Inc. 246   >N K Summary Learning Objective 1: Legally required benefits provide a form of social insurance. Various benefits arose out of particular undesirable social, work, and economic conditions as well as President Barack Obama’s call for all Americans to possess health insurance protection. Learning Objective 2: There are four main categories of legally required benefits: Social Security programs (retirement, survivor and disability insurance, and Medicare under the Social Security Act of 1935), workers’ compensation (various state compulsory disability laws), unpaid family and medical leave (Family and Medical Leave Act of 1993), and health insurance (Patient Protection and Affordable Care Act). Key Terms Learning Objective 3: Alternative health insurance design options include fee-for-service plans, various managed care plans, and consumer-driven health care. Learning Objective 4: Additional legislation influences legally required benefit practices, including the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) and the Health Insurance Portability and Accountability Act of 1994. Learning Objective 5: Legally required benefits are costly to employers; however, they do provide advanG Legally required benefits such as health insurance tages. can A promote a productive workforce. From a societal perspective, these benefits provide a form of social T insurance and contribute to work–life balance. E S , D base period 229 Federal Unemployment Tax Act (FUTA) 229 quarters of coverage 229 fully insured 230 Medicare Part A 231 Medicare Part B 232 Medigap 232 Medicare Select plans 232 Medicare Advantage 232 Federal Insurance Contributions Act (FICA) 232 Self-Employment Contributions Act (SECA) 232 taxable wage base 233 Medicare tax 233 hospital insurance tax (HI) 233 Longshore and Harborworkers’ Compensation Act 233 Federal Employees’ Compensation Act 233 Family and Medical Leave Act of 1993 (FMLA) 234 health insurance 236 medical reimbursement plans 241 prescription card program 241 mail order prescription drug program 241 consumer-driven health care 241 flexible spending accounts (FSAs) 242 health reimbursement accounts (HRAs) 242 Medicare Prescription Drug, Improvement and Modernization Act of 2003 242 health savings accounts (HSAs) 242 high-deductible health insurance plans 242 Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) 243 Health Insurance Portability and Accountability Act of 1996 (HIPAA) 243 Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson. Copyright © 2017 by Pearson Education, Inc. ISBN 1-323-59381-0 Patient Protection and Affordable E Care Act of 2010 (PPACA) 236 grandfathered plans A 236 non-grandfathered plans N 236 Cadillac tax 237 D insurance policy 237 R premium 237 fee-for-service plans A237 indemnity plans 238 self-funded plans 238 self-funding 238 1 deductible 238 1 coinsurance 238 2 238 out-of-pocket maximum preexisting condition 3 239 maximum benefit limits 239 T managed care plans 239 S 239 prepaid medical services copayments 239 primary care physicians 239 preferred provider organization (PPO) 240 point-of-service plan (POS) 240 carve-out plans 240 prescription drug plans 240  ` > >>N {=F K 247 MyManagementLab CHAPTER QUIZ! If your professor has assigned this, go to the Assignments section of mymanagementlab.com    % {'‘1 %& " ~% /'} %&#G Discussion Questions 10-1. Except for the Patient Protection and Affordable Care Act, the remaining legally required benefits were conceived more than a decade ago. What G changes in the business environment and society might affect the relevance or perhaps the viabil- A ity of any of these benefits? Discuss your ideas. T 10-2. Describe the principles of fee-for-service plans E and managed care plans. What are the similarities S and differences? 10-3. Discuss some of the choices an employer may , make to help control health care costs. 10-4. In what ways may legally required benefits have contributed to an employee entitlement D mentality regarding discretionary benefit offerings? Explain your rationale. 10-5. Conduct some research on the future of the Social Security programs (see the Web site www.ssa.gov). Based on your research, prepare a statement, not to exceed 250 words, that describes your view of the Social Security programs (e.g., whether they are necessary, their viability, or whether there should be changes in how the programs are funded). How has this research influenced your views? ISBN 1-323-59381-0 E A CASE N   % %&)" '& % && D An additional Supplemental Case can be found on MyManagementLab. R Susan Berry just returned from a national conference on compensation and benefits where she attended a A session on health savings accounts (HSAs). Susan is the human resources director at Frontline PR, and the company has been struggling with the cost of health care insurance. After speaking with several experts at the conference, Susan now thinks an HSA might be a viable option for the company. Frontline PR is a public relations firm located in the Northeast1that employs close to 150 people in four different offices. Public relations professionals make up most of1the staff, but the company also employs a complete administrative and operations staff. All of Frontline’s employees work full-time schedules and 2 currently offers a standard fee-forare eligible to participate in its health care insurance plan. Frontline services health care insurance option. The plan has a modest deductible of $300 per year and a 20 percent 3 coinsurance requirement. In addition, the company offers a flexible spending account (FSA) that allows T employees to set aside pretax earnings to pay for the deductible, coinsurance, and other medical expenses. Susan is considering offering an HSA along with a high-deductible health insurance plan instead of S the current insurance plan and FSA. At the conference, Susan learned that making such a change could result in significant cost savings for a company. The high-deductible health insurance plan would cost a lot less for the company than the standard fee-for-services plan that Frontline currently offers. While Susan suggests that Frontline make contributions to each employee’s HSA, the overall costs for the health care benefit would still be less than its current option. Beyond cost savings on premiums, many believe that consumer-driven health care tends to reduce overall health care costs. Some of the experts Susan spoke to at the conference stated that when employees have a greater say in their health care decisions, they make wiser decisions and do not spend as much on health care. Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson. Copyright © 2017 by Pearson Education, Inc. 248   >N K Susan has discussed the HSA option with Frontline’s director of finance, Allison Jones. From the financial perspective, Allison agrees that the option would be a good step to start controlling health care costs. However, as an employee who would use the benefit, Allison isn’t so sure that an HSA with a highdeductible health insurance plan is the right option for the company. Based on Susan’s initial explanation, Allison didn’t really understand how the HSA worked. Further, she was concerned that she would have to spend more out of pocket on her own health care. Susan is convinced that the HSA option would offer a significant cost savings to Frontline. However, after her discussion with Allison, Susan is still unsure if it is the right path to recommend for her company. Questions: 10-6. What are some advantages of implementing the HSA option? 10-7. What are some potential disadvantages of the HSA option? 10-8. What do you recommend? Why? G Crunch the Numbers! A Calculating Taxes underTthe Patient Protection %&G22%0 %  E & %&% '&  '0"1 S " %& 0 2'& & mymanagementlab.com. The PPACA imposes taxes on employers, who choose not to provide health insurance benefits or who choose to offer highly expensive health insurance plans. Let’s assume that a company has 500 workers. Calculate the costs of the following scenarios. D Questions: E 10-9. The company chooses not to provide health insurance. How much will the penalty be based on the formula presented in this chapter?A 10-10. The company prices health insurance N for its workforce, and determines that the annual cost is $2,500,000. Based on your answer to question 10-9, how much money would it save by not D offering health insurance? 10-11. The company is considering the purchase of a high-priced health insurance option. The cost is R equal to $16,000 per employee for individual coverage and $30,000 per employee for family covA to individual coverage. Based on the guidelines presented erage. Half of the employees subscribe in this chapter, calculate the Cadillac tax. 1 MyManagementLab 1 2 Go to mymanagementlab.com for Auto-graded writing questions as well as the following Assisted-graded writing questions: 3 10-12. How does a state determine T if an individual is eligible for unemployment insurance benefits? S 10-13. Define health insurance concepts such as insurance policy and premium, and explain the different types of health insurance programs. What are the main differences among these programs? 10-14. MyManagementLab Only—comprehensive writing assignment for this chapter. 1. U.S. Department of Labor. (March 11, 2015). Employer costs for employee compensation, December 2014 (USDL: 15-0386). Available: www.bls.gov, accessed March 15, 2015. 2. Dulles, F. R., & Dubofsky, M. (1993). Labor in America: A History. Arlington Heights, IL: Harlan Davidson. Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson. Copyright © 2017 by Pearson Education, Inc. ISBN 1-323-59381-0 Endnotes  ` > >>N {=F K 3. Rejda, G. E. (1994). Social Insurance and Economic Security. Upper Saddle River, NJ: Prentice Hall. 4. U.S. Chamber of Commerce. (2013). 2013 Analysis of Workers’ Compensation Laws. Washington, DC: Author. 5. U.S. Social Security Administration. (2015). Fact Sheet: Social Security Changes. Available: www.ssa.gov, accessed March 14, 2015. 6. Ibid. 7. Ibid. 8. 26 U.S.C. §§3101–3125. 9. 26 U.S.C. §§1401–1403. 10. Ibid. 11. Nackley, J. V. (1987). Primer on Workers’ Compensation. Washington, DC: Bureau of National Affairs. 12. Ibid. 13. U.S. Department of Labor. (March 11, 2015). Employer costs for employee compensation, December 2014 (USDL: 15-0386). Available: www.bls.gov, accessed March G 15, 2015. 14. Nackley, Primer on Workers’ Compensation. ACare Act Implementation: Part II. 15. U.S. Department of Labor (2015). FAQs about the Affordable Available: http://www.dol.gov, accessed July 1, 2015. T 16. U.S. Surgeon General. (2011). Epidemiology of Mental Illness. Available: http://www.surgeongeneral E .gov/library/mentalhealth/chapter2/sec2_1.html, accessed February 22, 2011. 17. Public L. No. 108–173. S 18. Martocchio, J. J. (2014). Employee Benefits: A Primer for Human Resource Professionals (5th ed.). , Burr Ridge, IL: Irwin/McGraw-Hill. 19. Tompkins, N. C. (1992). Around-the-clock medical coverage. HR Magazine (June), pp. 66–72. 20. Baker, L. C., & Krueger, A. B. (1993). Twenty-Four-Hour Coverage and Workers’ Compensation D Insurance. Working paper, Princeton University Industrial Relations Section. E A N D R A ISBN 1-323-59381-0 1 1 2 3 T S Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson. Copyright © 2017 by Pearson Education, Inc. 249 G A T E S , D E A N D R A 1 1 2 3 T S ISBN 1-323-59381-0 Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson. Copyright © 2017 by Pearson Education, Inc. CONTEMPORARY STRATEGIC COMPENSATION CHALLENGES V Where We Are Now: G PART IV, EMPLOYEE BENEFITS, explained the most A widely used employee benefits T practices and approaches to planning the employee benefits program. We have studied the context for compensation, concepts for awarding E pay increases, tools for structuring S core compensation (base pay and pay increases), and employee benefits, rounding out the , principles and practices for building strategic total compensation systems. Now we turn to contemporary strategic compensation challenges. Our focus will be on two important D E practices for compensating these two employee groups differ from what we applied to the A vast majority of employee groups. N D In PART V, WE WILL COVER R A Chapter 11 COMPENSATING EXECUTIVES strategic employee groups: executives and the flexible workforce. Many principles and Chapter 12 COMPENSATING THE FLEXIBLE WORKFORCE 1 ISBN 1-323-59381-0 1 2 ® 3 MyManagementLab T the online Building Strategic You can access the CompAnalysis Software to complete Compensation Systems Project by logging into www.mymanagementlab.com. S 251 Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson. Copyright © 2017 by Pearson Education, Inc. 11 Compensating Executives Learning Objectives G When you finish studying this chapter, A you should be able to: 11-1. Explain the difference between T executive pay and pay for nonexecutives. 11-2. Define executive status. E 11-3. List the components of executive compensation packages. S 11-4. Discuss the principles and processes of setting executive compensation. , 11-5. Summarize the executive compensation disclosure rules and the reasons why they have been established. 11-6. Briefly explain the executiveD compensation controversy as it relates to whether U.S. executives are paid tooEmuch. A N CHAPTER WARM-UP! D If your professor has assigned this, go to the Assignments section of mymanagementlab.com R and see what you already know. After reading the to complete the Chapter Warm-Up! chapter, you’ll have a chance toA take the Chapter Quiz! and see what you’ve learned. Executive compensation practices in U.S. companies have received substantial attention in the 1 compensation packages are tied to company perforpress. Questions about whether executives’ mance is among the major issues. As1we will see, executive pay practices have raised concerns that many executives receive lucrative compensation and benefits even when company perfor2 Many critics have questioned whether such practices mance falls below shareholder expectations. may interfere with some executives’ motivation to achieve excellent performance. Other concerns 3 have been voiced by labor unions, which focus on social injustice given the substantial gap in pay T between executive and nonexecutive employees, particularly when executive-level management S reductions-in-force of nonexecutive employees. chooses to limit labor through extensive CONTRASTING EXECUTIVE PAY WITH PAY FOR NONEXECUTIVE EMPLOYEES From an economic standpoint, the chief executive officer (CEO) is the seller of his or her services, and the compensation committee is the buyer of these services. Under classic economic theory, a reasonable price is obtained through negotiations that are at arm’s length between an informed seller and an informed buyer. An awkward situation can result when the CEO hires a professional compensation director or compensation consultant. In this case, the compensation 252 Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson. Copyright © 2017 by Pearson Education, Inc. ISBN 1-323-59381-0 11-1 Explain the difference between executive pay and pay for nonexecutives.    >  0 %&>"   G A T E S , „  (    „  .   !  (    !  .       (            .   (       D E A N D R A 1 1 2 3 T S %& „  „  $    „     „    !  $    !     !        $             ,                FIGURE 11-1 Examples of Key Employees U.S. Treasury Regulations define the term officer used in this definition of key employees:3 Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson. Copyright © 2017 by Pearson Education, Inc. ISBN 1-323-59381-0 Generally, the term officer means an administrative executive who is in regular and continued service. The term officer implies continuity of service and excludes those employed for a special and single transaction. An employee who merely has the title of an officer but not the authority of an officer is not considered an officer for purposes of the key employee test. Similarly, an employee who does not have the title of an officer but has the authority of an officer is an officer for purposes of the key employee test.    
Purchase answer to see full attachment