COMMERCE 2BC3 Chapter Notes - Chapter 10: Co-Insurance, Flexible Spending Account, Managed Care
4 Jul 2018
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Chapter 10 – Employee Benefits
- Employee Benefits: Part of an organization’s total compensation package and include both
mandatory government-sponsored benefits and voluntary benefits such as life and disability
insurance, extended health coverage, additional vacation pay, and a range of other
Reasons for Benefits Growth
- Several factors have contributed to less emphasis on cash and more on benefits in
compensation
oTo understand these factors, it is useful to examine the growth in benefits overtime and
the reasons for that growth
- First, significant growth occurred following WW2 when wage and price controls instituted
during the war, combined with labour market shortages, forced employers to think of new ways
to attract and retain employees
- The tax treatment of benefits programs is often more favorable for employees than the tax
treatment of wages and salaries, meaning that a dollar spent on benefits has the potential to
generate more value for the employees than the same dollar spent on wages and salaries
- The marginal tax is the % of additional earnings that goes to taxes
- Employers realize tax advantages from certain types of benefits
- The tax advantage of benefits also takes another form:
oDeferring compensation until retirement allows the employee to receive cash but at a
time when the employee’s tax rate is sometimes lower because of a lower income level
- Third factor that has influenced benefits growth is the cost advantage that groups typically
realize over individuals
oOrg that represent large groups of employees can buy insurance at a lower rate because
of economies of scale, which spread fixed costs over more employees to reduce the
costs per person
- Fourth factor was the growth of organized labour in Canada from 30s through the 50s
oUnions were successfully able to pusure their members interests in benefits, particularly
when tax advantages provided an incentive for employers to shift money from cash to
benefits
Benefits Programs
- Most benefits fall into one of the following categories
oMandatory government sponsored benefits
The CPP/QPP is an example
A mandatory government-sponsored pension plan funded by employers
and employees that provides a basic level of income security for
working Canadians when they retire or become disabled; administered
separately in Quebec
Employment Insurance
Is a federal plan administered
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Its main objective are:
oTo offset lost income during involuntary unemployment due to
job loss, illness, or compassionate leave to care for gravely ill family
members
oTo provide maternity and parental benefits off the job due to
pregnancy childbirth and adoption
oTo help unemployed workers find new jobs
oTo provide an incentive for employees to stabilize employment
oTo preserve investments in worker skills by providing income
during short-term layoffs
oUnemployed workers are eligble for benefits if they:
Have a prior attachment to the workforce,
Are available and willing to work each day
Are actively looking for work
Were not discharged for cause (such as wilful
misconduct), did not quit voluntarily, and are not out of
work because of a labour dispute
Workers’ compensation
A mandatory government-sponsored insurance plan funded by
employers that provides wage-loss benefits, health care, survivor benefits,
and rehabilitative services to eligible employees with work-related injuries
or diseases
Cover job related injuries and deaths
Fall into 4 major categories:
oWage loss benefits
oHealth care
oSurvivor benefits
oRehabilitative services
oVoluntary Employer Sponsored Benefits
Private group insurance
Extended medical insurance
Basic types include hospital expenses not covered by provincial
hospital/medical plans such as semi private and private room coverage
Other benefits that employers may offer include dental care, vision
care, and prescription drug benefits
Disability insurance
2 basic types:
oShort term disability plans – provide income security to
employees for short term absence from work due to nonwork
related illness or injury
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oLong term disability plans – is a form of income protection for
longer term absences from work due to non work related chronic
illness or disability and where applicable provides benefits until the
max time specified in the long term disability plan
oRetirement
If a private retirement plan: is provided, it must be a registered pension plan
according to the Income Tax Act and will be subject to pension standards legislation
across Canada
Main types of registered pension plans offered include: defined benefit, money
purchase or defined contribution and hybrid mixed plans, which are a combo of
both defined benefit and defined contribution plans
Defined benefit pension plan is an employer sponsored and registered
plan that guarantees a specified retirement benefit level to employees
typically based on a combo of years of service and age aswell as the
employee’s earning level
oOften the amount guaranteed is 70% of whatever years of
previous earnings are utilized in the calculation
oThese plans insulate employees from investment risk, which is
borne by the company if the company has to pay out a
guaranteed level of benefits upon retirement, it is in the company’s
best interest to fund the plan well and incest plan funds to the best
advantage however, in the event of financial probs that force
company to terminate or reduce employee pension benefits, plan
members be at risk
Defined – Contribution Pension Plan do not promise a specific benefit
level for employees upon retirement.
oRather an individual account is set up for each employee to
which the employer provides a guaranteed size of contribution
oThe employee often contributes aswell and the funds are
invested. However since there is no further obligation for the
employer, funds are often managed more conservatively
oWhen it is time to retire, the total funds invested are withdrawn
and used to purchase a retirement fund for the employee
oAdvantage for employers: investment risk is shifted to
employees and presents fewer administrative challenges because
there Is no need to calculate payments based on age and service
oWide variety of defined contribution plans:
one of the simplest is a money purchase plan, under
which an employer specifies a level of annual contribution.
The term money purchase stesm from the fact that
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