MIDTERM MODULE COMPENSATION

ADMINISTRATION
LESSON 3: DISCRETIONARY BENEFITS
Discretionary Benefits: An Overview
Discretionary benefits are extra perks that employers provide to their employees, which go
beyond what the law requires. These benefits help support employees in various ways and can
include things like retirement plans, paid time off, and health insurance. They became popular in
the 1940s and 1950s as employers looked for ways to attract and retain talent.
Components of Discretionary Benefits
Here are some key components of discretionary benefits, particularly focusing on income
protection programs:
A. Income Protection Programs
These programs are designed to provide financial support if you can't work due to illness or
disability. They help ensure that you have a steady income during tough times. Here are some
specific types of income protection:
1. Short-term Disability Insurance
o What It Is: This insurance replaces a part of your income for a limited time (usually
weeks to a few months) if you can't work due to a temporary illness or injury.
o Examples of Covered Situations:
 Illness or Injury: If you get sick or hurt and can't do your job for a while.
 Recovery from Surgery: If you need time off to recover from surgery or a
medical procedure.
 Pregnancy/Maternity: If you face complications during pregnancy or need
time off for maternity leave.
2. Long-term Disability Insurance
o What It Is: This insurance provides income replacement if you can't work for a long
period (often years) due to a serious illness or injury.
o Example: If a construction worker has a severe injury from a workplace accident
and can't work for an extended time, they may qualify for long-term disability
benefits.
3. Life Insurance
o What It Is: Life insurance is a contract between you and an insurance company.
You pay a premium, and in return, the insurer promises to pay a certain amount of
money to your beneficiaries upon your death or after a specified time.
o Purpose: This provides financial security for your loved ones, ensuring they have
support even after you're gone.

Types of Life Insurance

A. Term Life Insurance: provides coverage for a specific period (the "term"),
typically 10, 20, or 30 years.
 How it works: You pay a premium for that term, and if you die during that time,
your beneficiaries receive a death benefit.
 Key Features:
Affordable: Term life is generally the most affordable type of life insurance.
No Cash Value: It doesn't build cash value like permanent policies.
Temporary Coverage: Coverage ends at the end of the term unless renewed or
converted.
Best for: Those who need a specific amount of coverage for a limited time, such
as covering a mortgage or debts.
B. Whole Life Insurance:
 What it is: Whole life insurance provides lifetime coverage, as long as
premiums are paid.
 How it works: You pay a fixed premium for your entire life, and the policy
includes a cash value component that grows over time.
  Key Features:
 Lifetime Coverage: Guaranteed coverage for your entire life.
 Cash Value: Builds a cash value that can be borrowed against or withdrawn.
 Higher Premiums: Premiums are typically higher than term life.
 Best for: Those who want lifetime coverage and a financial tool with a guaranteed
cash value.
C. Universal Life Insurance:
 What it is: Universal life insurance is a type of permanent life insurance with more
flexibility than whole life.
 How it works: You pay premiums that can be adjusted within limits, and the policy
includes a cash value component that can grow based on investment performance.
 Key Features:
 Flexibility: Premiums and death benefits can be adjusted within limits.
 Cash Value: Builds a cash value that can be borrowed against or withdrawn.
 Investment Component: Cash value can grow based on investment performance,
but it's not guaranteed.
 Best for: Those who want permanent coverage with more flexibility and potentially
higher growth potential for their cash value.
4. Retirement program is a plan, often offered by employers or individuals, designed to
help people save and invest money to provide income and financial security after they
stop working.
Here's a more detailed explanation:
Key Aspects of Retirement Programs:
 Purpose:
The primary goal is to ensure individuals have sufficient funds to maintain their lifestyle
and meet their financial needs during retirement.
 Types:
Retirement programs can take various forms, including:
 Pension plans: These are employer-sponsored plans where the employer makes
regular contributions to a pool of money that funds payments to employees after
retirement.
 Defined contribution plans: These plans, like 401(k)s, allow employees to contribute
to a retirement account, often with employer matching, and the investment returns
determine the amount available at retirement.
 Individual retirement accounts (IRAs): These are personal retirement accounts
where individuals can contribute and grow their savings tax-advantaged.
 Benefits:
Retirement programs offer several advantages:
 Financial security: They provide a stream of income or a lump sum payment to
cover living expenses after retirement.
 Tax advantages: Many retirement plans offer tax-deferred or tax-free growth,
allowing investments to grow faster.
 Employer contributions: Some employers contribute to retirement plans, reducing
the cost for employees.
 Examples:
Common examples include 401(k)s, 403(b)s, traditional and Roth IRAs, and pension
plans.
LESSON 4
Origins of Employee-Sponsored Retirement Benefits
Employee-sponsored retirement benefits have their roots in the early 20th century, evolving from
traditional pension plans to more complex systems we see today. The origins can be traced back
to the introduction of Social Security in the 1930s in the United States, which provided a safety
net for retirees. As companies began to recognize the need to attract and retain talent, they
started offering retirement plans as part of their employee benefits packages.
The Employee Retirement Income Security Act (ERISA) of 1974 played a crucial role in shaping
these benefits, establishing standards to ensure that employees' retirement assets were
protected. By creating regulations around funding and managing pension plans, ERISA set the
groundwork for the modern defined benefit and defined contribution plans, such as 401(k)s.
Example: A company might offer a 401(k) plan, allowing employees to contribute a portion of
their salary before taxes are taken out, often with an employer match to incentivize participation.
b. Types of Defined Contribution Plans
Defined contribution plans are retirement savings plans where the amount contributed is
defined, but the final benefit received at retirement depends on investment performance. The
most common types include:
1. 401(k) Plans: Employees can save and invest a portion of their paycheck before taxes
are deducted. Employers often match contributions up to a specified limit.
2. 403(b) Plans: Similar to 401(k)s but designed for employees of public schools and certain
tax-exempt organizations.
3. 457 Plans: Offered by state and local government employers, allowing employees to
defer compensation until retirement.
4. Profit-Sharing Plans: Employers make contributions based on the company's profits,
allowing employees to benefit when the company performs well.
Example: An employee participating in a 401(k) may choose to contribute 5% of their salary,
and the employer matches 50% of that contribution, effectively increasing the employee's
retirement savings.
c. Fee-for-Service Plans
Fee-for-service (FFS) plans are types of health insurance that provide the policyholder with
flexibility in choosing healthcare providers. Under these plans, patients can see any doctor or
specialist without a referral, and they pay a predetermined fee for each service received.
Key features:
 Patients receive services and then submit claims to their insurance company.
 The insurer pays a portion of the costs, while the patient is responsible for any remaining
balance (copayments or coinsurance).
Example: A patient with an FFS plan visits a specialist for a consultation, pays an initial fee for
the service, and later submits the claim to their insurance for reimbursement.
d. Managed Care Plans Specialized Insurance Benefits
Managed care plans are designed to manage cost, utilization, and quality of healthcare. They
typically provide a range of healthcare services through a network of providers. These plans can
include:
1. Health Maintenance Organizations (HMOs): Require members to choose a primary
care physician (PCP) and get referrals for specialists.
2. Preferred Provider Organizations (PPOs): Give members the flexibility to see any
healthcare provider, but provide cost savings for using network providers.
3. Exclusive Provider Organizations (EPOs): Similar to PPOs but do not cover any out-of-
network care unless in an emergency.
 4. Point of Service (POS) Plans: Combine features of HMOs and PPOs, allowing members
to choose between in-network or out-of-network services at the point of care.
Example: An HMO may offer preventative services like annual check-ups without a copayment,
encouraging members to maintain their health and reduce future healthcare costs.
By understanding the origins and types of employee-sponsored retirement benefits and health
insurance programs, individuals can make more informed decisions about their employment
benefits and retirement planning. Each plan offers different advantages and limitations,
reflecting the diverse needs of employees and employers alike.

Certainly! Here's a simple breakdown of the differences between HMOs, PPOs, and EPOs:

1. Health Maintenance Organizations (HMOs)

 Network: You must choose a primary care doctor (PCP) from a specific network.

 Referrals: If you need to see a specialist, you typically need a referral from your PCP.

 Cost: Generally lower monthly premiums and out-of-pocket costs, but you have less flexibility in choosing
doctors.

 Example: If you're sick and want to see a specialist, you first go to your PCP, who then sends you to the right
specialist within the HMO network.

2. Preferred Provider Organizations (PPOs)

 Network: You have a larger network of doctors and hospitals to choose from.

 Referrals: You can see specialists without needing a referral, which gives you more immediate access to care.

 Cost: Usually higher monthly premiums and out-of-pocket costs, but you save money by seeing doctors within
the network.

 Example: If you want to see a specialist, you can go directly to them without going through your primary care
doctor first, but you'll pay less if they're in the PPO network.

3. Exclusive Provider Organizations (EPOs)

 Network: You must use doctors and hospitals that are part of the EPO network.

 Referrals: No referrals are needed to see specialists, similar to PPOs.

 Cost: Generally lower premiums than PPOs, but you don’t have any coverage if you go outside the network,
except in emergencies.

 Example: If you need to see a specialist, you can go to any specialist in the EPO network without a referral, but if
you go outside the network, you’ll usually have to pay the full cost.

Summary

 HMO: Must use a network, need referrals, lower costs.

 PPO: More flexibility, no referrals needed, higher costs.

 EPO: Must use a network, no referrals needed, moderate costs, but no out-of-network coverage.

This should give you a clearer idea of how these health insurance plans differ!