CEBS GBA Exam 1 Questions and Answers

Broad view of Employee Benefits (Mod 1.1) - Answer- Considers Employee Benefits to be virtually any form of compensation other than direct wages paid to Employees (Ex: WC, Unemployment, State DI, SS, Vacation, Holidays, 401K/Retirement, Employer share of Medical, Severance Pay, Child Care, etc..) Narrow view of Employee Benefits (Mod 1.1) - Answer- Any type of plan sponsored or initiated by Employees and Employers and engaged in providing benefits that result from the employment relationship and that are not underwritten or paid directly by the government; (Ex: Benefits excluded include those legally mandated - WC, SS). Impact of Labor Unions on Employee Benefits (Mod 1.2) - Answer- Through Collective Bargaining, Employee Benefit Plans have been impacted. In 1948 ruling states that the duty to bargain in good faith over wages also included insurance and fringes (pension). In WW Cross & Co, NLRB ruled wages included health and accident plan. What is the Taft-Hartley Act? (Mod 1.2) - Answer- The Labor Management Relations Act of 1947 is a United States federal law that restricts the activities and power of labor unions. This set forth good-faith collective bargaining over wages, hours, terms of employment and benefits. 3 Examples of Tax Advantages of Employee Benefit Plans (Mod 1.2) - Answer- 1: Employer Contributions are Tax Deductible 2: Employer Contributions are not considered income to Employees 3: Certain Retirement Benefits Accumulate Tax-Free until distributed. Examples of Questions that should be addressed when creating benefit objectives (Mod 1.3) - Answer- Ex: What benefits should be provided? Who should be covered? Should Employees have options? How should plan be financed? How should plan be administered? How should plan be communicated to Employees? What is the Functional Approach to Employee Benefit Planning? (Mod 1.4) - Answer- Application of a systematic method of analysis to an Employer's Total Employee Benefits Program. It analyzes the organization's EBP as a whole in terms of its ability to meet various employee's needs and to manage loss exposures within the overall compensation goals and parameters. Why is the Functional Approach appropriate when planning, designing and administering Employee Benefits? (Mod 1.4) - Answer- 1: EE Benefits Significant Element of EE Comp and are a Tax-Effective Way to Compensate 2: EE Benefit Represent Large Labor Cost, so ER's should effectively plan/cost-control 3: In the past, EE Benefits were adopted on piece-meal basis; helps to now fill gaps/overlap 4: Systematic Approach to planning helps to keep the EBP current, competitive and in compliance with updated requirements (ACA) 5: Benefits to be integrated properly together Compare Compensation/Service Oriented Benefit Philosophy with the Needs-Oriented (Mod 1.4) - Answer- Compensation/Service: EBP comprised of primarily compensation, service or both. Level of benefits tied to salary or pay levels/years of service Needs Orientated: Focuses on Needs of EE's and their dependents Identify Steps in Applying Functional Approach (Mod 1.4) - Answer- 1: Classify EE/Dep Needs & Objectives (in logical/functional categories) 2: Classify Categories of EE's to be protected 3: Analyze present benefits in terms of functional categories of needs/objectives, persons to benefit, and regulatory requirements 4: Determine any gaps or overlap in benefits from all sources in terms of functional categories of needs & the persons to be protected 5: Consider recommendations for changes 6: Estimate costs/savings from each recommendation 7: Evaluate alternative methods of financing for those recommended benefits (and existing ben) 8: Consider other cost-saving techniques 9: Decide upon appropriate benefits and methods of financing as a result of analysis 10: Implement Changes 11: Communication Changes to Employees 12: Periodically re-evaluate EBP Define Needs/Exposures covered under EBP (Mod 1.4) - Answer- 1: Medical Expenses (EE/Dep) 2: Losses due to Disability (Short/Long Term) 3: Death (EE/Dep/Retirees) 4: Retirement Needs 5: Capital Accumulation Needs/Goals 6: Needs for Unemployment/Layoff/Termination 7: Needs for Financial/Retirement Counseling 8: Losses from property/liability exposures 9: Needs for Dependent Care Assistance 10: Needs for Educational Assistance (EE/Dep) 11: Needs for Custodial-Care Expenses (LTC) 12: Other Needs/Goals (Stock Purchase Plan) Explain Concept of Replacement Ratio in terms of creating Retirement/Disability Plans (Mod 1.5) - Answer- A Replacement Ratio is a person's gross income after retirement, divided by his or her gross income before retirement. Should include SS, capital accumulation benefits as well as retirement plans. Define Protection-Oriented Benefits (Mod 1.5) - Answer- Consist of Medical Expense Benefits, Life/STD/LTD Insurance - protect against serious loss exposures that could spell immediate financial disaster. As such, they have a relatively short probationary period due to the need of immediate coverage. Define Accumulation-Orientated Benefits (Mod 1.5) - Answer- Consist of Pension Plans, Profit-Sharing, Savings, 401K, etc...which reward an Employee for long service with an Employer. Involve a longer probationary period since viewed as a reward - not a disadvantage for long-term employees. Impact of making a plan Contributory on Employee Participation (Mod 1.5) - Answer- Impacts group as a whole - not everyone will elect due to cost. If participation is mandatory in a contributory plan, may create employee relations problem. Describe arguments of flexibility in designing employee benefit plans as it relates to functional approach (Mod 1.5) - Answer- Argument 1: More flexibility EE has, more likely he or she will select a benefit that best meets needs/goals - thus, flexibility in plan design/options facilitates functional approach. Argument 2: Works against functional approach because some EE's may not recognize all their needs and leave some uncovered. Define concept of risk (Mod 2.1) - Answer- Uncertainty with respect to possible losses. Inability to determine with certainty the actual number and value of claims. Define relationship between peril and hazard (Mod 2.1) - Answer- Peril: Cause of a loss (fires, floods, theft, death) Hazard: Condition that increases probability that a peril will occur or tends to increase severity of loss when a peril occurs. Define physical hazard, moral hazard, morale hazard (Mod 2.1) - Answer- Physical: Physical Condition (Defective Wiring, No Fire Extinguisher), increases chance of loss Moral: Dishonesty increases chance of loss (Arson)...b/c of Moral, premiums are higher to all. Attempt to control by careful UW and provisions such as deductibles, waiting periods, exclusions Morale: Carelessness or Indifference by insureds since they have insurance (protected from loss). How does pure risk differ from speculative risk (Mod 2.2) - Answer- Pure Risk: Situations where two alternatives are possible - risk will happen (no loss) or it will happen and a financial loss takes place. Many EB Coverages fall into this classification. Nothing positive can result from Pure Risk, but many are insured (Fire, Auto, Illness, Disability) Speculative Risk: Involve a possibility (that is not present in pure risk) of a gain. Three potential outcomes: Loss, No Loss, Gain (Ex: Purchase Stock, Gambling) Most Important Type of Pure Risk (Mod 2.2) - Answer- Personal Risk (Death, Illness, DI, Unemployment) Summarize Methods for Handling Risk (Mod 2.2) - Answer- 1: Avoidance - does not take on risk/gets rid of 2: Control - attempts to prevent or reduce the probability/severity of a loss taking place 3: Retention - risk is assumed and paid for by the person suffering the loss 4: Transfer - one shifts the financial burden of risk to another party 5: Insurance - form of transfer which the financial burden is transferred to insurance company How is insurance a mechanism for EBP's? (Mod 2.3) - Answer- Insured (EE/ER) pays money (premium) into a fund (insurance company). Upon occurrence of loss, reimbursement is provided to person suffering loss. Thus, risk has been reduced/eliminated and all who paid into the fund share the resulting loss. Compare insurance mechanism to gambling (Mod 2.3) - Answer- Insurance is a mechanism to handling existing risk - gambling creates risk where one did not previously exist. Risk caused by gambling is 100% speculative, while insurance deals with pure risk. Gambling involves a gain for one party while insurance is a mutual sharing of any losses. The loser in the gambling transaction remains in a negative situation while the insured is financially restored in whole or part to prior condition. Define Indemnification (Mod 2.3) - Answer- Principle of making the insured whole again after reimbursement for covered loss takes place - similar financial situation than prior to claim. Which risk handling technique is mutually exclusive (Mod 2.3) - Answer- Avoidance - when you avoid a risk, you have no losses so there is no need for other techniques State advantages/disadvantages of using insurance to fund an EBP (Mod 2.3) - Answer- Advantages: -Known Premiums (Budgeting) -Outside Administration (Handled by Insurance) -Financial Backing -Cost Management (Design Plans to limit cost) -Economy (Insurance more efficient/lower cost) Disadvantages: -Possible Additional Costs (Admin, Comm, Overhead, Premium Taxes) -Employee Satisfaction (Slow, Claim Denials) Describe characteristics of ideal insurable risk (Mod 2.3) - Answer- 1: Must be large number of similar risks (law of large numbers) 2: Loss should be verifiable and measurable 3: Loss should not be catastrophic in nature 4: Chance of loss subject to calculation (avg frequency/severity) - adequate premium 5: Premium should be economically feasible - insured should afford premium/less than face value or amount of policy coverage 6: Loss should be accidental and unintentional from the insured's standpoint/control (moral) Describe characteristics of group technique that enable life/health to be written as EBP by minimizing adverse selection (Mod 2.5) - Answer- 1: Only certain groups are eligible 2: Steady flow of lives through the group 3: Minimum number of covered lives 4: Minimum portion must participate 5: Eligibility Requirements 6: Maximum Limits Imposed (prevent excess cov) 7: Conservative Guarantee Issue Amounts Describe Indemnity Plans (Mod 3.1) - Answer- The 1st employment based medical plans covered catastrophic losses (inpatient hospital expenses) - later added outpatient, diagnostic and physician services. Early programs and their successors known as Indemnity Plans (or traditional, fee-for services). They pay a percentage of cost of treatment (100% Emergency/Preventative and 80% all other) and don't require permission to access specialty. Describe Managed Care (Mod 3.1) - Answer- Insurance carriers have a role in steering health services/care while prepaying some portion of healthcare services. The managed care model (in the form of Health Maintenance Organizations - HMO's) all but replaced traditional indemnity plans. Define common types of Employer Sponsored Health Plans (Mod 3.1) - Answer- 1: HMO (Health Maintenance Organization) 2: PPO (Preferred Provider Organization) 3: POS (Point of Service Plan) 4: HDHP (High Deductible Health Plan) - linked to Tax-Advantaged Savings Account How does an HMO operate? (Mod 3.1) - Answer- Requires individual to select primary care physician (PCP) from a network of providers. PCP is responsible for managing individual's care and if care is required beyond scope of PCP, they will provide a referral to specialty care. No benefits (except emergency) are available outside the Network. Out of pocket expenses (PCP/Specialty) are routinely a flat dollar amount (copay) - no need to file for reimbursement. How does a PPO operate? (Mod 3.1) - Answer- 52% of Covered Workers Enrolled; Designed in response to HMO criticism, allows limited benefits for care received out of the preferred network and requires no referral to see a specialist. If specialist is in-network, coverage may be similarly structured with copays under HMO. Outside network, cost is significantly higher. How are POS plans part of a hybrid between HMO/PPO plans? (Mod 3.1) - Answer- Offers in-network (preferred) and out of network (nonpreferred) benefits. Individual may need to select PCP to obtain referrals for in-network specialty care. Out of pocket expenses for in-network providers are copays (similar to HMO cost...slightly higher) - no need to file for reimbursement. For out of network, out of pocket expenses are not a flat dollar amount but a percentage (ex: 40% common) of fees. Contrast PPO's vs POS' (Mod 3.1) - Answer- Both overlap significantly. Differences do include primary care provider requirement by POS but not PPO; lower copay amounts for preferred care in POS than in PPO; smaller network in a POS than PPO. Describe HDHP's (Mod 3.1) - Answer- Provides catastrophic insurance. Trades lower premium cost to higher deductible by paying benefits only after insured has incurred significant out of pocket expenses. Developed so individuals have greater financial stake in healthcare decisions - manage expenses, offers possibility of accumulating health care savings in tax-advantaged account (both ER/EE contrib's)