20.5 Review and Practice
- What are the main ways in which group insurance differs from individual insurance?
- Why is group insurance proportionately less expense than individual insurance?
Rosa Sanchez, single, age twenty-five, received two job offers after college graduation. Both were with organizations that she respected, and the nature of the work at each place sounded very interesting to her. One job was with a larger, well-established firm and offered $22,000 per year in salary plus noncontributory benefits worth $7,000 per year. The other job was with a small business and offered a salary of $30,000 per year without employer voluntary benefits (the employer is required to pay for social insurance programs). Rosa’s mother suggested that she make the choice between the two jobs based on which offered better total compensation.
- What factors should Rosa consider in determining the better package? Which package do you think maximizes her total compensation?
- Which employer is economically better off (all else being equal), the one offering salary plus benefits or the one offering salary only? Explain your answer.
Henry Zantow, the comptroller for Kado Industries, was discussing the supposed advantages of a true cafeteria plan versus a traditional plan with Lloyd Olsen. Lloyd agreed with Henry that a cafeteria plan certainly seemed the better of the two plans. Both Henry and Lloyd looked at each other and in the same breath said, “I wonder why anyone would choose a traditional plan?”
- What is your answer to this question?
- If the corporation decides to use a cafeteria plan, why might it want a minimum level of core benefits?
- What does it mean to self-insure and have the stop-loss programs for workers’ compensation and for group health insurance?
Jan Czyrmer, the employee benefits manager at Ludlow Enterprises, wants to restructure the leave policy for the company. He is concerned that employees abuse the sick leave policy, taking sick leave time for personal reasons not related to illness. He wants to abolish particular types of leave (such as sick leave, vacation leave, personal leave) and give employees a certain number of general leave days per year to use as they choose.
- What advantages might Jan cite to convince upper management that consolidating leave time may be helpful for Ludlow Enterprises?
- If upper management rejects Jan’s idea of a major restructuring of leave time, what can he do to prevent abuse of the current sick leave policy? What steps can be taken to reduce moral hazard within the traditional leave system?
Knowledge Networking, Inc., provides a growing business of high-tech and electronics equipment and software. It is a specialty retail and online business that has tripled its revenues in the past seven years. The company started fifteen years ago and includes fifty outlets on both the East and West coasts. In 2005, the company went public and now, despite the major financial crisis, it is doing very well with innovation and creative offerings. The company has 5,600 full-time employees and 1,000 part-time employees. Knowledge Networking, Inc., provides all the social insurance programs and offers its employees a cafeteria plan with many choices. Employees have generous choices of health, life insurance, and disability coverages; dental and vision care; premium conversion plan; and flexible spending accounts as part of the cafeteria plan. Each employee receives $5,500 a year from the employer to pay for the benefits.
- Describe in detail your understanding of the structure of the cafeteria plan of Knowledge Networking, Inc. (design this cafeteria plan). What are the advantages and disadvantages of this cafeteria plan?
- Knowledge Networking, Inc., follows the federal laws: FMLA, ADA, Civil Rights Act, and Age Discrimination in Employment Act. If you were the employee benefits manager, how would you explain the impact of each of these acts on the employee benefits of the employees?
- How would the group insurance rates be computed (what factors play into the computation) for such a company?
- Why might Knowledge Networking, Inc., prefer to self-insure their workers’ compensation and health insurance rather than buy insurance?
Yolanda Freeman is evaluating whether federal nondiscrimination laws have helped or hurt employees.
- Which federal laws particularly affect employee benefits? Which workers are particularly affected by each law?
- Who pays the cost of requiring that benefits be paid on a nondiscriminatory basis? Do additional benefit costs have any effect on employee wage levels?
- If federal laws did not require coverage for certain employees and their dependents, who would pay for benefits for these individuals? Do you think that social welfare is maximized by mandating coverage for certain workers and their dependents through these nondiscrimination laws?