Employee Benefit Plan Financing
This article will focus on employee benefit plan financing. This article will describe employee benefits plans, their history, primary regulations (including the Employee Retirement Income Security Act), and financing. This article will provide an analysis of the different types of benefit plan financing, including pooling, captive insurance, self-funding, and voluntary employee beneficiary association, as well as a brief discussion of the advantages and disadvantages of each financing choice. The issues associated with retirement and pension plan financing will be addressed.
Keywords Captive Insurance; Employee Benefit Plan; Employee Retirement Income Security Act (ERISA); Pooling; Self-Funding; Voluntary Employee Beneficiary Associations
The most common employee benefit plans available to full-time, and in some instances part time, workers in the United States include retirement plans, health plans, leave plans, severance benefits, and life-insurance benefits. These benefit plans are generally financed with different financial tools and approaches. The plans are generally funded by employer contributions, employee contributions, or some combination of funding arrangements agreed upon through negotiation and bargaining. Variables that effect plan financing include government regulations, organizational resources, plan sponsor and plan member relationship and negotiations, plan enrollment, and plan coverage.
Employee Benefit Plan Process
The overall employee benefits process or system includes stages of design, finance, and administration. Benefit design and administration, which are responsive to the stakeholder needs, organizational resources, and government requirements, rely on sufficient financing to support member needs and claims. The range of employee benefit financing options is large. Employers may be fully insured, self-funded, or adopt a hybrid risk-sharing approach. Variables that affect an employer's choice of benefit plan financing schemes include the average age of the employees, level of benefits, cash flow, multiple plan options, and multiple locations. Employee benefit plans may be classified as a ‘defined contribution plan’, in which benefits are delivered into individual accounts for each member; a ‘funded defined benefit plan’, in which contributions from the employer are invested in a fund towards increasing the benefits; or an ‘unfunded defined benefit plan’, in which no funds are set aside by the employer.
Financing of Employee Benefit Plans
Employers finance employee benefit plans through four main tactics or approaches: Pooling, self-funding, captive insurance, and voluntary employee beneficiary associations (VEBA). The federal government regulates and oversees how employee benefit plans are financed to protect the interests of the labor force and their families. Organizations without sufficient funds to pay out retirement benefits and pensions, health-care claims, or leave benefits potentially harm individual employees and the economic health of the nation in general. The federal government regulates and encourages certain sorts of employee benefit plan financing through tax exemptions and deductions and discourages the use of other employee benefit plan financing options through restrictions, regulations, and penalties. The Employee Retirement Income Security Act of 1974, the federal legislation that governs the administration and design of employer pension, health and welfare plans, is one of the main regulatory forces shaping the type of financing used to fund employee benefits plans (Halterman, 2000).
This article will describe and analyze employee benefit plan financing in the public and private sectors of the United States. The following section, an overview of the history of employee benefit plans in the United States, will serve as a foundation for later discussions on the main types of employee benefit plan financing. The issues associated with employee retirement and savings plan financing will be addressed.
History of Employee Benefit Plans in the United States
At the end of the Industrial Revolution in America, American workers were left without much of their traditional familial safety net and economic self-sufficiency and instead had a new financial dependence on their employers and the government. Employee benefits became common in the United States during the early twentieth century. During this time, the social safety net switched from private sector (family, charity, community) to public sector (social policies such as welfare). The government became a source of labor regulations, such as mandated employee benefits and safe working conditions, and social welfare provisions, such as public education, welfare payments, pensions, and social security for disadvantaged groups such as poor families, elderly, disabled and students (Amenta & Bonastia, 2001). Significant labor policy of the twentieth-century includes the Organic Act of the Department of Labor, National Labor Relations (Wagner) Act, the Labor-Management Relations Act (also referred to as the Taft-Hartley Act), and the Employee Retirement Income Security Act. These laws established the parameters used today for finance, coverage, and administration of employee benefit plans.
U.S. Department of Labor
In 1913, the Organic Act of the Department of Labor (Public Law 426-62) established the U.S. Department of Labor (DOL) to administer and oversee a wide variety of laws and regulations concerning employment benefits. Public Law 426-62 states that "the purpose of the Department of Labor shall be to foster, promote, and develop the welfare of the wage earners of the United States, to improve their working conditions, and to advance their opportunities for profitable employment" (29 USC Sec. 551, 2010). In 1935, the National Labor Relations (Wagner) Act established the regulations governing labor relations of enterprises engaged in interstate commerce. The National Labor Relations Act established the National Labor Relations Board (NLRB) to protect the right of the labor force to organize in a way that will allow for collective bargaining either through chosen representatives or to avoid such activities entirely. The National Labor Relations Board includes five presidentially-appointed members and 33 regional directors. This board decides appropriate bargaining units, hosts elections for union representatives, and pursues accusations of unfair labor practices by employers. Unfair labor practices include interference, coercion, or restraint in the labor force’s right to organize; interference with the creation of labor unions; encouraging or discouraging union membership; and refusal to bargain collectively with a chosen employee representative.
Labor-Management Relations Act
In 1947, the Labor-Management Relations Act (also referred to as the Taft-Hartley Act) (Public Law 29-141) was passed to ensure that the rights of individual employees are not infringed upon in their association with labor organizations whose activities have an affect on commerce; define and guide labor and management practices which affect commerce and are adverse to the common good, and to protect the rights of the public in labor disputes that affect commerce. The Labor-Management Relations Act significantly affected how employee benefit plans are designed and implemented today. The Labor-Management Relations Act made fringe benefits part of collective bargaining and allowed tax-free employer contributions to employee benefit trust funds. In 1974, the Employee Retirement Income Security Act (ERISA) was passed “to protect the interests of participants and their beneficiaries in employee benefit plans. ERISA requires that sponsors of private employee benefit plans provide participants and beneficiaries with adequate information regarding their plans; individuals who manage plans must meet certain standards of conduct derived from the common law of trusts; and that benefit plan administrators meet standards for reporting to the government and disclosure to participants” (“About PWBA,” 2004, ¶5). ERISA includes civil enforcement provisions to protect plan funds and plan members.
The Employee Retirement Income Security Act is administered, overseen, and enforced by the Employee Benefits Security Administration (EBSA). Prior to 2003, the Employee Benefits Security Administration was known as the Pension and Welfare Benefits Administration (PWBA). The Employee Benefits Security Administration, a part of the Department of Labor, protects pensions, health plans, and other employee benefits for over 150 million American people. The Employee Benefits Security Administration operates to meet the following goals and provide the following services: help workers obtain the information necessary to take advantage of their benefit rights; help officials understand the different requirements of relevant statutes so they can meet their legal responsibilities; work to develop policies designed to promote the growth...
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