Employee Benefits: ADEQUACY OF FINANCING

Social Security and Medicare are based on a system of funding that the Social Security Administration refers to as partial advance funding. Under this system, taxes are more than sufficient to pay current benefits and also provide some accumulation of assets for the payment of future benefits. Partial advance funding falls somewhere between pay-as-you-go financing, which was once the way Social Security and Medicare were financed, and full advance funding, as used by private insurance and retirement plans. Under pay-as-you-go financing, taxes are set at a level to produce just enough income to pay current benefits; under full advance funding, taxes are set at a level to fund all promised benefits from current service for those making current contributions.

All payroll taxes and other sources of funds for Social Security and Medicare are deposited into four trust funds: an old-age and survivors fund, a disability fund, and two Medicare funds. Benefits and administrative expenses are paid out of the appropriate trust fund from contributions to that fund and any interest earnings on accumulated assets. The trust funds have limited reserves to serve as emergency funds in periods when benefits exceed contributions, as in times of high unemployment. However, current reserves are relatively small and could pay benefits for only a limited time if contributions to a fund ceased. In addition, the reserves consist primarily of IOUs from the Treasury because the contributions have been "borrowed" to finance the government's deficit.

In the early 1980s, considerable concern arose over the potential inability of payroll taxes to pay promised benefits in the future. Through a series of changes, the most significant being the 1983 amendments to the Social Security Act, these problems appeared to have been solved for the Social Security program—at least in the short run. The changes approached the problem from two directions. On one hand, payroll tax rates were increased; on the other hand, some benefits were eliminated and future increases in other benefits were scaled back. However, the solutions of 1983 have not worked. Although the old-age and survivors fund will continue to grow for the time being and will be quite large by the time the current baby boomers retire, benefits will then begin to exceed income, and the fund will shrink as the percentage of retirees grows rapidly. Without further adjustments, the trust funds will have inadequate resources to pay claims in the foreseeable future. Current projections indicate that the Social Security trust funds will run out of money in 2037.

Because of an increasing number of persons aged 65 or older and medical costs that continue to grow at an alarming rate, there is also concern about the Medicare portion of the program. Estimates are that its trust funds will be depleted by about 2023. The seriousness of this problem was made clear by the fact that one of the earliest actions of the second Clinton administration was the passage of legislation to help maintain the solvency of the Medicare trust funds for a few additional years, primarily through encouraging additional enrollment in managed care plans and trimming projected payments to HMOs, hospitals, and doctors.

In the broadest sense, the solution lies in doing one or both of the following: increasing revenue into the trust funds or decreasing benefit costs. Possibilities for increasing revenue include the following:

- Increasing the Social Security and/or Medicare tax rate

- Increasing the wage base on which Social Security taxes are paid

- Using more general tax revenue to fund the programs

- Subjecting a greater portion of income benefits to taxation and depositing the increased tax revenue into the trust funds

- Investing all or a portion of trust fund assets in higher-yielding investments than Treasury securities

- Suggestions that have been made for decreasing benefit costs include the following:

- Raising the normal retirement age beyond the planned increase to age 67

- Raising the early retirement age beyond 62

- Lowering the benefit formula so that future retirees will get somewhat reduced benefits

- Lowering cost-of-living increases

- Imposing a means test for benefits

- Shifting more of the inflation risk to workers through the use of separate accounts for all or part of each worker's contributions, thus giving the worker some control over his or her account

- Increasing the Medicare eligibility age beyond 65

- Increasing Medicare deductibles and copayments

- Increasing the Medicare Part B premium for everyone or possibly only for higher-income retirees

- Lowering or slowing the growth of payments to Medicare providers

- Encouraging or requiring Medicare beneficiaries to enroll in managed-care plans

Any single change will clearly offend one important group of voters or another. As a result, any ultimate solution will probably involve a combination of several of these changes so that everyone will bear a little of the pain.

MEDICARE+CHOICE

In 1985, Congress amended the Medicare program to allow a beneficiary to elect coverage under a health maintenance organization (HMO) as an alternative to the traditional Medicare program. At first, the number of persons electing this option was relatively small. Many of the elderly had not had HMO coverage during their working years and viewed such coverage with some skepticism. In addition, many HMOs continued to focus on expanding their traditional market of younger, healthier lives rather than entering a new and demographically different market. In addition, there were complex federal rules that had to be satisfied to enter the Medicare market.

The situation slowly changed as more HMOs got into the Medicare market and the public became more familiar with HMO coverage. In addition, as medical costs continued to rise, the election of an HMO option made more sense from a cost standpoint. As a result, HMO coverage for Medicare beneficiaries grew rapidly in the mid to late 1990s, and approximately one out of six beneficiaries now has such coverage.

Under the 1985 rules, an HMO is basically given 95 percent of what Medicare would expect to pay to provide benefits if a beneficiary electing HMO coverage had stayed in the traditional Medicare program. In turn, the HMO is expected to provide at least the same benefits as those that are available under Medicare. While an HMO can provide additional benefits and charge an extra premium, many HMOs have provided additional benefits such as prescription drugs without charging an additional premium. Such zero-premium plans have been very popular among Medicare beneficiaries. While they must continue to pay the Part B Medicare premium, these beneficiaries have been able to receive coverage that is broader than traditional Medicare and thus have no reason to purchase a supplemental medigap policy.

In 1999, Part C of Medicare (called Medicare+Choice) went into effect. It expands the choices available to most Medicare beneficiaries by allowing them to elect health care benefits through one of several alternatives to the traditional Parts A and B as long as the providers of these alternatives enter into contracts with the Health Care Financing Administration. However, beneficiaries must still pay the Part B premium.

The new Medicare+Choice plans include the following:

- HMOs as previously allowed

- Preferred-provider organizations (PPOs)

- Provider-sponsor organizations (PSOs), similar to HMOs but established by doctors and hospitals that have formed their own health plans

- Private fee-for-service plans

- Private contracts with physicians

- Medical savings accounts

These plans must provide all benefits available under Parts A and B. They may include additional benefits as part of the basic plan or for an additional fee.

Through 2001, beneficiaries may enroll in a Medicare+Choice plan or switch options (including reenrollment in parts A and B) at any time. In 2002, changes will be allowed only once during the first six months of the year. Beginning in 2003, an annual change will be allowed only during the first three months of the year.

Unfortunately, the initial reaction to Medicare+Choice has been less than overwhelming. As of early 2000, few new providers of alternative coverage have entered the marketplace. One reason for this is that the Medicare+Choice rules are extremely complex, and it is questionable if many of the potential providers can enter the market in a viable way. In addition, several HMOs that previously offered coverage have left the market for a variety of reasons; other HMOs no longer offer zero-premium plans or have increased premiums and/or reduced benefits. These changes stem from two factors. First, HMO costs have increased significantly in recent years, partially because of major increases in the cost of prescription drugs, which are a major source of medical expenses for the elderly. Second, the rate of growth of Medicare payments to HMOs has been reduced so that many HMOs are receiving increases that fail to match their increases in expenses.

MEDICARE: PART B BENEFITS

Benefits
Part B of Medicare provides benefits for most medical expenses not covered under Part A. These include the following:

- Physicians' and surgeons' fees. These fees may result from house calls, office visits, or services provided in a hospital or other institution. Under certain circumstances, benefits are also provided for the services of chiropractors, podiatrists, and optometrists.

- Diagnostic tests in a hospital or in a physician's office.

- Physical therapy in a physician's office, or as an outpatient of a hospital, skilled-nursing facility, or other approved clinic, rehabilitative agency, or public-health agency.

- Drugs and biologicals that cannot be self-administered.

- Radiation therapy.

- Medical supplies such as surgical dressings, splints, and casts.

- Rental of medical equipment such as oxygen tents, hospital beds, and wheelchairs.

- Prosthetic devices such as artificial heart valves or lenses after a cataract operation.

- Ambulance service if a patient's condition does not permit the use of other methods of transportation.

- Mammograms and Pap smears.

- Diabetes glucose monitoring and education.

- Colorectal cancer screening.

- Bone mass measurement.

- Prostate cancer screening.

- Pneumococcal vaccine and its administration.

Home health care services as described for Part A when a person does not have Part A coverage or Part A benefits are not applicable.

There were proposals by President Clinton and others to add prescription drug coverage to Medicare that would be partially financed by the large budget surpluses of recent years. In addition, there would be a relatively large increase in the Part B premium. Although the coverage would be subject to maximum annual limits and substantial copayments, the cost of this coverage would be significant because of the high use of expensive prescription drugs by the elderly.

Exclusions
Although the preceding list may appear to be comprehensive, there are numerous medical products and services not covered by Part B, some of which represent significant expenses for the elderly. They include the following:

Most drugs and biologicals that can be self-administered, except drugs for osteoporosis, oral cancer treatment, and immune-suppressive therapy under specified circumstances

- Routine physical, eye, and hearing examinations, except those previously mentioned

- Routine foot care

- Immunizations, except pneumococcal vaccinations or immunization required because of an injury or immediate risk of infection

- Cosmetic surgery, unless it is needed because of an accidental injury or to improve the function of a malformed part of the body

- Dental care, unless it involves jaw or facial bone surgery or the setting of fractures

- Custodial care

- Eyeglasses, hearing aids, or orthopedic shoes

In addition, benefits are not provided to persons eligible for workers' compensation or to those treated in government hospitals. Benefits are provided only for services received in the United States, except for physicians' services and ambulance services rendered for a hospitalization that is covered in Mexico or Canada under Part A. Part B is also a secondary payer of benefits under the same circumstances described for Part A.

Amount of Benefits
With some exceptions, Part B pays 80 percent of the approved charges for covered medical expenses after the satisfaction of a $100 annual deductible. Annual maximums apply to outpatient psychiatric benefits ($450) and physical therapy in a therapist's office or at the patient's home ($400). A few charges are paid in full without any cost sharing. These include (1) home health services, (2) pneumococcal vaccine and its administration, (3) certain surgical procedures that are performed on an outpatient basis in lieu of hospitalization, (4) diagnostic preadmission tests performed on an outpatient basis within 7 days prior to hospitalization, (5) mammograms, and (6) Pap smears.

The approved charge for doctor's services covered by Medicare is based on a fee schedule issued by the Health Care Financing Administration. A patient is reimbursed for only 80 percent of the approved charges above the deductible—regardless of the doctor's actual charge. Most doctors and other suppliers of medical services accept an assignment of Medicare benefits and therefore are prohibited from charging a patient in excess of the fee schedule. They can, however, bill the patient for any portion of the approved charges that were not paid by Medicare because of the annual deductible and/or coinsurance. They can also bill for any services that are not covered by Medicare.

Doctors who do not accept assignment of Medicare benefits cannot charge a Medicare patient more than 115 percent of the approved fee for nonparticipating doctors. Because the approved fee for nonparticipating doctors is set at 95 percent of the fee paid for participating doctors, a doctor who does not accept assignment of Medicare benefits can charge a fee that is only 9.25 percent greater than if assignment had been accepted (115 percent × 95 percent = 109.25 percent). As a result, some doctors either do not see Medicare participants or limit the number of such patients that they treat.

The previous limitation on charges does not apply to providers of medical services other than doctors. Although a provider who does not accept assignment can charge any fee, Medicare pays only 80 percent of what the fee schedule shows has been approved. For example, assume the approved charge for medical equipment is $100 and the actual charge is $190. Medicare reimburses $80 (.80 × $100), and the balance is borne by the Medicare recipient.

MEDICARE: PART A BENEFITS

Part A of Medicare provides benefits for expenses incurred in hospitals, skilled-nursing facilities and hospices. Some home health care benefits are also covered. For benefits to be paid, the facility or agency providing benefits must participate in the Medicare program. Virtually all hospitals are participants, as are most other facilities or agencies that meet the requirements of Medicare.

Part A of Medicare along with Part B provides a high level of benefits for medical expenses. However, as is described in the next few pages, deductibles and copayments may be higher than in prior group or individual coverage. In addition, certain benefits that were previously provided may be excluded or limited. For this reason, persons without supplemental retiree coverage from prior employment may wish to consider the purchase of a medigap policy in the individual marketplace.

Hospital Benefits
Part A pays for inpatient hospital services for up to 90 days in each benefit period (also referred to as a spell of illness). A benefit period begins the first time a Medicare recipient is hospitalized and ends only after the recipient has been out of a hospital or skilled-nursing facility for 60 consecutive days. A subsequent hospitalization then begins a new benefit period.

In each benefit period, covered hospital expenses are paid in full for 60 days, subject to an initial deductible of $792 in 2001. This deductible is adjusted annually to reflect increasing hospital costs. Benefits for an additional 30 days of hospitalization are also provided in each benefit period, but the patient must pay a daily copayment ($198 in 2001) equal to 25 percent of the initial deductible amount. In addition, each recipient also has a lifetime reserve of 60 additional days that may be used if the regular 90 days of benefits have been exhausted, but once a reserve day is used, it cannot be restored for use in future benefit periods. When using reserve days, patients must pay a daily copayment ($396 in 2001) equal to 50 percent of the initial deductible amount.

There is no limit on the number of benefit periods a person may have during his or her lifetime. However, there is a lifetime limit of 190 days of benefits for treatment in psychiatric hospitals.

Covered inpatient expenses include the following:

-Room and board in semiprivate accommodations. Private rooms are covered only if required for medical reasons.

- Nursing services (except private-duty nurses).

- Use of regular hospital equipment, such as oxygen tents or wheelchairs.

- Drugs and biologicals ordinarily furnished by the hospital.

- Diagnostic or therapeutic items or services.

- Operating room costs.

- Blood transfusions after the first three pints of blood. Patients must pay for the first three pints of blood unless they get donors to replace the blood.

- There is no coverage under Part A of Medicare for the services of physicians or surgeons.

Skilled-Nursing Facility Benefits
In many cases, a patient may no longer require continuous hospital care but may not be well enough to go home. Consequently, Part A provides benefits for care in a skilled-nursing facility if a physician certifies that skilled-nursing care or rehabilitative services are needed for a condition that was treated in a hospital within the past 30 days. In addition, the prior hospitalization must have lasted at least three days. Benefits are paid in full for 20 days in each benefit period and for an additional 80 days with a daily copayment ($98 in 2001) that is equal to 12.5 percent of the initial hospital deductible. Covered expenses are the same as those described for hospital benefits.

A skilled-nursing facility may be a separate facility for providing such care or a separate section of a hospital or nursing home. The facility must have at least one full-time registered nurse, and nursing services must be provided at all times. Every patient must be under the supervision of a physician, and a physician must always be available for emergency care.

One very important point should be made about skilled-nursing facility benefits: Custodial care is not provided under any part of the Medicare program unless skilled-nursing or rehabilitative services are also needed.

Home Health Care Benefits
If a patient can be treated at home for a medical condition, Medicare pays the full cost for an unlimited number of home visits by a home health agency. Such agencies specialize in providing nursing and other therapeutic services. To receive these benefits, a person must be confined at home and be treated under a home health plan set up by a physician. No prior hospitalization is required. The care needed must include skilled-nursing services, physical therapy, or speech therapy. In addition to these services, Medicare also pays for the cost of part-time home health aides, medical social services, occupational therapy, and medical supplies and equipment provided by the home health agency. There is no charge for these services other than a required 20 percent copayment for the cost of such durable medical equipment as iron lungs, oxygen tanks, and hospital beds. Medicare does not cover home services furnished primarily to assist people in activities of daily living such as housecleaning, preparing meals, shopping, dressing, or bathing.

If a person has only Part A of Medicare, all home health care services are covered under Part A. If a person has both Parts A and B, the first 100 visits that commence within 14 days of a hospital stay of at least three days are covered under Part A. All other home health visits are covered under Part B.

Hospice Benefits
Hospice benefits are available under Part A of Medicare for beneficiaries who are certified as being terminally ill persons with a life expectancy of six months or less. While a hospice is thought of as a facility for treating the terminally ill, Medicare benefits are available primarily for services provided by a Medicare-approved hospice to patients in their own homes. However, inpatient care can be provided if needed by the patient. In addition to including the types of benefits described for home health care, hospice benefits also include drugs, bereavement counseling, and inpatient respite care when family members need a break from caring for the ill person.

To qualify for hospice benefits, a Medicare recipient must elect such coverage in lieu of other Medicare benefits, except for the services of the attending physician or services and benefits that do not pertain to the terminal condition. There are modest copayments for some services.

The benefit period consists of two 90-day periods followed by an unlimited number of 60-day periods. These periods can be used consecutively or at intervals. A beneficiary may cancel the hospice coverage at any time (for example, to pursue chemotherapy treatments) and return to regular Medicare coverage. Any remaining days of the current hospice benefit period are lost forever, but the beneficiary can elect hospice benefits again. However, the beneficiary must be recertified as terminally ill at the beginning of each new benefit period.

Exclusions
There are some circumstances under which Part A of Medicare does not pay benefits. In addition, there are times when Medicare acts as the secondary payer of benefits. Exclusions under Part A include the following:

Services outside the United States and its territories or possessions. There are a few exceptions to this rule for qualified Mexican and Canadian hospitals. Benefits are paid if an emergency occurs in the United States and the closest hospital is in one of these countries. In addition, persons living closer to a hospital in one of these countries than to a hospital in the United States may use the foreign hospital even if an emergency does not exist. Finally, there is coverage for Canadian hospitals if a person needs hospitalization while traveling the most direct route between Alaska and another state in the United States. However, this latter provision does not apply to persons vacationing in Canada.

- Elective luxury services, such as private rooms or televisions.

- Hospitalization for services not necessary for the treatment of an illness or injury, such as custodial care or elective cosmetic surgery.

- Services performed in a federal facility, such as a veterans' hospital.

- Services covered under workers' compensation.

Under the following circumstances, Medicare is the secondary payer of benefits:

- When primary coverage under an employer-provided medical expense plan is elected by (1) an employee or spouse aged 65 or older or (2) a disabled beneficiary.

- When medical care can be paid under any liability policy, including policies providing automobile no-fault benefits.

- In the first 30 months for end-stage renal disease when an employer-provided medical expense plan provides coverage. By law, employer plans cannot specifically exclude this coverage during this 30-month period.

- Medicare pays only if complete coverage is not available from these sources and then only to the extent that benefits are less than would otherwise be payable under Medicare.

MEDICARE: ELIGIBILITY

Part A, the hospital portion of Medicare, is available to any person aged 65 or older as long as the person is entitled to monthly retirement benefits under Social Security or the railroad retirement program. Civilian employees of the federal government aged 65 or older are also eligible. It is not necessary for these workers to actually be receiving retirement benefits, but they must be fully insured for purposes of retirement benefits. The following persons are also eligible for Part A of Medicare at no monthly cost:

Persons aged 65 or older who are dependents of fully insured workers aged 62 or older.

Survivors aged 65 or older who are eligible for Social Security survivors benefits.

Disabled persons at any age who have been eligible to receive Social Security benefits for two years because of their disability. This includes workers under age 65, disabled widows and widowers aged 50 or over, and children 18 or older who were disabled prior to age 22.

Workers who are either fully or currently insured and their spouses and dependent children with end-stage renal (kidney) disease who require renal dialysis or kidney transplants. Coverage begins either the first day of the third month after dialysis begins or earlier for admission to a hospital for kidney-transplant surgery.

Most persons aged 65 or over who do not meet the previously discussed eligibility requirements may voluntarily enroll in Medicare. However, they must pay a monthly Part A premium and also enroll in Part B. The monthly Part A premium may be as high as $300 in 2001, depending on the quarters of coverage a person earned under Social Security. The premium is adjusted annually to reflect the full cost of the benefits provided.

Any person eligible for Part A of Medicare is also eligible for Part B. A monthly premium must be paid for Part B. This premium, $50.00 in 2001, is adjusted annually and represents only about 25 percent of the cost of the benefits provided. The remaining cost of the program is financed from the general revenues of the federal government.

Persons receiving Social Security or railroad retirement benefits are automatically enrolled in Medicare if they are eligible. If they do not want Part B, they must reject it in writing. Other persons eligible for Medicare must apply for benefits. As a general rule, anyone who rejects Part B or who does not enroll when initially eligible may later apply for benefits during a general enrollment period that occurs between January 1 and March 31 of each year. However, the monthly premium is increased by 10 percent for each 12-month period during which the person was eligible but failed to enroll.

Medicare secondary rules make employer-provided medical expense coverage primary to Medicare for certain classes of individuals who are over 65, who are disabled, or who are suffering end-stage renal disease. These persons (and any other Medicare-eligible persons still covered as active employees under their employer's plans) may not wish to elect Medicare because it largely constitutes duplicate coverage. When their employer-provided coverage ends, these persons have a seven-month special enrollment period to elect Part B coverage, and the late enrollment penalty is waived.

Medicare is also secondary to benefits received by persons (1) entitled to veterans' or black-lung benefits, (2) covered by workers' compensation laws, or (3) whose medical expenses are paid under no-fault or liability insurance.

SOCIAL SECURITY: OBTAINING BENEFIT INFORMATION

In 1995, the Social Security Administration began sending an annual Earnings and Benefit Estimate Statement to each worker aged 60 and older. This statement, renamed the Social Security Statement, is now provided annually to all persons aged 25 or older who have employment covered under Social Security and are not currently entitled to monthly benefits. The statement enables an employee to verify his or her contributions to the Social Security and Medicare programs. It also contains an estimate of benefits that are available upon retirement, disability, or death.

The statement will help employees understand their total benefit package as well as enable any errors in earnings records to be corrected while information is readily available. As a general rule, requests for corrections must be made within 3 years, 3 months, and 15 days following the year in which wages were paid or self-employment income was earned. However, clerical or fraudulent errors can be corrected after that time.

SOCIAL SECURITY: TYPES OF BENEFITS

As its name implies, the Social Security program provides three principal types of benefits:

- Retirement (old-age) benefits

- Survivors' benefits

- Disability benefits

Retirement Benefits
A worker who is fully insured under Social Security is eligible to receive monthly retirement benefits as early as age 62. However, the election to receive benefits prior to the normal retirement age of 65 years results in a permanently reduced benefit.

In addition to the retired worker, the following dependents of persons receiving retirement benefits are also eligible for monthly benefits:

A spouse aged 62 or older. However, benefits are permanently reduced if this benefit is elected prior to the spouse's reaching age 65. This benefit is also available to a divorced spouse under certain circumstances if the marriage lasted at least 10 years.

A spouse of any age if the spouse is caring for at least one child of the retired worker who is (1) under age 16 or (2) disabled and entitled to a child's benefit as described below. This benefit is commonly referred to as a mother's or father's benefit.

Dependent, unmarried children under age 18. This child's benefit will continue until age 19 as long as a child is a full-time student in elementary or secondary school. In addition, disabled children of any age are eligible for benefits as long as they were disabled before reaching age 22.

It is important to note that retirement benefits as well as all other benefits under Social Security and Medicare are not automatically paid on eligibility but must be applied for.

Beginning in 2003, the normal retirement age for nonreduced benefits for workers and spouses will gradually increase until it reaches age 67 in 2027.

Survivors Benefits
All categories of survivors benefits are payable if a worker is fully insured at the time of death. However, three types of benefits are also payable if a worker is only currently insured. The first is a lump-sum death benefit of $255, payable in the following order of priority:

To a surviving spouse who was living with the deceased worker at the time of death

To a surviving spouse (other than a divorced spouse) who was not living with the deceased worker at the time of death if the surviving spouse is eligible for or entitled to benefits based on the deceased wage earner's record for the month of death

To children who are eligible for or entitled to benefits based on the deceased wage earner's record for the month of death

If none of these categories of survivors exists, the benefit is not paid

There are two categories of persons who are eligible for income benefits as survivors if a deceased worker was either fully or currently insured at the time of death:

Dependent, unmarried children under the same conditions as previously described for retirement benefits

A spouse (including a divorced spouse) caring for a child or children under the same conditions as previously described for retirement benefits

The following categories of persons are also eligible for benefits, but only if the deceased worker was fully insured:

A widow or widower aged 60 or older. However, benefits are reduced if taken prior to age 65. This benefit is also payable to a divorced spouse if the marriage lasted at least 10 years. In addition, the widow's or widower's benefit is payable to a disabled spouse at age 50 as long as the disability commenced no more than 7 years after (1) the worker's death or (2) the end of the year in which entitlement to a mother's or father's benefit ceased.

A parent aged 62 or over who was a dependent of the deceased worker at the time of death.

Disability Benefits
A disabled worker under age 65 is eligible to receive benefits under Social Security as long as he or she is disability insured and meets the definition of disability under the law. The definition of disability is very rigid and requires a mental or physical impairment that prevents the worker from engaging in any substantial gainful employment. The disability must also have lasted (or be expected to last) at least 12 months or be expected to result in death. A more liberal definition of disability applies to blind workers who are aged 55 or older. They are considered disabled if they are unable to perform work that requires skills or abilities comparable to those required by the work they regularly performed before reaching age 55 or becoming blind, if later.

Disability benefits are subject to a waiting period and are payable beginning with the sixth full calendar month of disability. In addition to the benefit paid to a disabled worker, the other categories of benefits available are the same as those described under retirement benefits.

As previously mentioned, certain family members not otherwise eligible for Social Security benefits may be eligible if they are disabled. Disabled children are subject to the same definition of disability as workers. Disabled widows or widowers must be unable to engage in any gainful (rather than substantial gainful) employment.

Eligibility for Dual Benefits
In many cases, a person is eligible for more than one type of Social Security benefit. Probably the most common situation occurs when a person is eligible for both a spouse's benefit and a worker's retirement or disability benefit based on his or her own Social Security record. In this case and in any other case when a person is eligible for dual benefits, only an amount equal to the higher benefit is paid.

Termination of Benefits
Monthly benefits to any Social Security recipient cease on death of the recipient. When a retired or disabled worker dies, the family members' benefits that are based on the worker's retirement or disability benefits also cease, but the family members are then eligible for survivors benefits.

Disability benefits for a worker technically terminate at age 65 but are then replaced by comparable retirement benefits. In addition, any benefits payable because of disability cease if the definition of disability is no longer satisfied. However, the disability benefits will continue during a readjustment period that consists of the month of recovery and two additional months.

As long as children are not disabled, benefits usually terminate at age 18 but may continue until age 19 if the child is a full-time student in elementary or secondary school.

The benefits of a surviving spouse terminate on remarriage unless remarriage takes place at age 60 or later.

SOCIAL SECURITY: ELIGIBILITY

To be eligible for benefits under Social Security, an individual must have credit for a minimum amount of work under the program. This credit is based on quarters of coverage. For 2001, a worker receives credit for one quarter of coverage for each $830 in annual earnings on which Social Security taxes are paid, up to a maximum of four quarters in any one calendar year, even if all wages are earned within one calendar quarter. Consequently, a worker paying Social Security taxes on as little as $3,320 (that is, $830 × 4) during the year will receive credit for the maximum four quarters. As in the case of the wage base, the amount of earnings necessary for a quarter of coverage is adjusted annually for changes in the national level of wages.

Quarters of coverage are the basis for establishing an insured status under Social Security. The three types of insured status are fully insured, currently insured, and disability insured.

Fully Insured
A person is fully insured under Social Security if either of two tests is met. The first test requires credit for 40 quarters of coverage. Once a person acquires such credit, he or she is fully insured for life even if employment covered under Social Security ceases.

Under the second test, a person who has credit for a minimum of six quarters of coverage is fully insured if he or she has credit for at least as many quarters of coverage as there are years elapsing after 1950 (or after the year in which age 21 is reached, if later) and before the year in which he or she dies, becomes disabled, or reaches age 62, whichever occurs first. Therefore, a worker who reached age 21 in 1988 and who died in 2000 would need credit for only 11 quarters of coverage for his or her family to be eligible for survivors' benefits.

Currently Insured
If a worker is fully insured under Social Security, there is no additional significance to being currently insured. However, if a worker is not fully insured, certain survivors benefits are still available if a currently insured status exists. To be currently insured, it is only necessary that a worker have credit for at least 6 quarters of coverage out of the 13-quarter period ending with the quarter in which death occurs.

Disability Insured
To receive disability benefits under Social Security, it is necessary to be disability insured. At a minimum, a disability insured status requires that a worker (1) be fully insured and (2) have a minimum amount of work under Social Security within a recent time period. In connection with the latter requirement, workers aged 31 or older must have credit for at least 20 of the past 40 quarters ending with the quarter in which disability occurs; workers between the ages of 24 and 30, inclusively, must have credit for at least half the quarters of coverage from the time they turned 21 to the quarter in which disability begins; and workers under age 24 must have credit for 6 out of the past 12 quarters, ending with the quarter in which disability begins.

A special rule for the blind states that they are exempt from the recent-work rules and are considered disability insured as long as they are fully insured.

SOCIAL SECURITY: ELIGIBILITY

To be eligible for benefits under Social Security, an individual must have credit for a minimum amount of work under the program. This credit is based on quarters of coverage. For 2001, a worker receives credit for one quarter of coverage for each $830 in annual earnings on which Social Security taxes are paid, up to a maximum of four quarters in any one calendar year, even if all wages are earned within one calendar quarter. Consequently, a worker paying Social Security taxes on as little as $3,320 (that is, $830 × 4) during the year will receive credit for the maximum four quarters. As in the case of the wage base, the amount of earnings necessary for a quarter of coverage is adjusted annually for changes in the national level of wages.

Quarters of coverage are the basis for establishing an insured status under Social Security. The three types of insured status are fully insured, currently insured, and disability insured.

Fully Insured
A person is fully insured under Social Security if either of two tests is met. The first test requires credit for 40 quarters of coverage. Once a person acquires such credit, he or she is fully insured for life even if employment covered under Social Security ceases.

Under the second test, a person who has credit for a minimum of six quarters of coverage is fully insured if he or she has credit for at least as many quarters of coverage as there are years elapsing after 1950 (or after the year in which age 21 is reached, if later) and before the year in which he or she dies, becomes disabled, or reaches age 62, whichever occurs first. Therefore, a worker who reached age 21 in 1988 and who died in 2000 would need credit for only 11 quarters of coverage for his or her family to be eligible for survivors' benefits.

Currently Insured
If a worker is fully insured under Social Security, there is no additional significance to being currently insured. However, if a worker is not fully insured, certain survivors benefits are still available if a currently insured status exists. To be currently insured, it is only necessary that a worker have credit for at least 6 quarters of coverage out of the 13-quarter period ending with the quarter in which death occurs.

Disability Insured
To receive disability benefits under Social Security, it is necessary to be disability insured. At a minimum, a disability insured status requires that a worker (1) be fully insured and (2) have a minimum amount of work under Social Security within a recent time period. In connection with the latter requirement, workers aged 31 or older must have credit for at least 20 of the past 40 quarters ending with the quarter in which disability occurs; workers between the ages of 24 and 30, inclusively, must have credit for at least half the quarters of coverage from the time they turned 21 to the quarter in which disability begins; and workers under age 24 must have credit for 6 out of the past 12 quarters, ending with the quarter in which disability begins.

A special rule for the blind states that they are exempt from the recent-work rules and are considered disability insured as long as they are fully insured.

CHARACTERISTICS OF SOCIAL INSURANCE

Even though there are variations in social insurance programs and exceptions to the rule always exist, social insurance programs tend to have the following distinguishing characteristics:

- Compulsory employment-related coverage

- Partial or total employer financing

- Benefits prescribed by law

- Benefits as a matter of right

- Emphasis on social adequacy

Compulsory Employment-Related Coverage
Most social insurance programs are compulsory and require that the persons covered be attached—either presently or by past service—to the labor force. If a social insurance program is to meet a social need through the redistribution of income, it must have widespread participation.

Partial or Total Employer Financing
While significant variations exist in social insurance programs, most require that the cost of the program be borne fully or at least partially by the employers of the covered persons. This is the basis for including these programs under the broad definition of employee benefits. The remaining cost of most social insurance programs is paid primarily by the persons covered under the programs. With the exception of Medicare and certain unemployment benefits, the general revenues of the federal government and state governments finance only a small portion of social insurance benefits.

Benefits Prescribed by Law
Although benefit amounts and the eligibility requirements for social insurance benefits are prescribed by law, benefits are not necessarily uniform for everyone. They may vary by such factors as wage level, length of covered employment, or family status. These factors are incorporated into the benefit formulas specified by law, and covered persons are unable to either increase or decrease their prescribed level of benefits.

Benefits as a Matter of Right
Social insurance benefits are paid as a matter of right under the presumption that a need for the benefits exists. This feature distinguishes social insurance programs from public assistance or welfare programs under which applicants, to qualify for benefits, must meet a needs test by demonstrating that their income or assets are below some specified level.

Emphasis on Social Adequacy
Benefits under social insurance programs are based more on social adequacy than on individual equity. Under the principle of social adequacy, benefits are designed to provide a minimum floor of income to all beneficiaries under the program, regardless of their economic status. Above this floor of benefits, persons are expected to provide additional resources from their own savings, employment, or private insurance programs. This emphasis on social adequacy also results in disproportionately large benefits in relation to contributions for some groups of beneficiaries. Under some programs, high-income persons, single persons or small families, and the young are subsidizing low-income persons, large families, and the retired.

If social insurance programs were based solely on individual equity, benefits would be actuarially related to contributions, just as they are under private insurance programs. While this degree of individual equity does not exist, there is some relationship between benefits and income levels (and thus contributions). Within certain maximum and minimum amounts, benefits are a function of a person's covered earnings under social insurance programs. However, the major emphasis is on social adequacy.

REASONS FOR SOCIAL INSURANCE

The existence and scope of social insurance programs are the result of several factors, probably the most significant of which is the need to solve the major social problems that affect a large portion of society. The industrialization of American society and the decreasing self-sufficiency of families resulted in a greater dependence on monetary income to provide economic security. The widespread lack of such income during the Great Depression led to the passage of the Social Security Act as an attempt to provide economic security by attacking the sources of economic insecurity, including old age and unemployment.

A second reason for the existence of social insurance programs is the difficulty of privately insuring against certain types of losses. For example, the inability to predict future unemployment rates and the potential for catastrophic losses make the peril of unemployment virtually uninsurable in the private sector. In addition, broad medical expense coverage for the aged can be marketed commercially only at a price beyond the financial means of many retirees.

Finally, many Americans have come to expect the government to provide at least a degree of economic security against the consequences of premature death, old age, disability, and unemployment. As a result, social insurance programs enjoy widespread public acceptance.

SHOULD BENEFIT ADMINISTRATION BE OUTSOURCED?

Historically, most organizations have fully administered their benefit programs with their own employees. However, it has not been unusual for an organization to outsource some administrative functions to other parties. For example, third-party administrators have been used to administer self-funded medical expense plans, and actuaries have been used to perform some of the compliance functions for qualified retirement plans.

More recently there has been a significant increase in the outsourcing of employee benefit administration, with estimates indicating that between 40 and 50 percent of all employers currently use outsourcing to some degree. Surveys also indicate that another 15 to 20 percent of employers are actively exploring the use of outsourcing. The reasons for outsourcing are identified. In addition, the types of functions commonly outsourced and the types of vendors used for outsourcing are described. Finally, the factors that must be considered when entering into a contract for outsourcing are discussed.

Reasons for Outsourcing
There are many reasons why an employer might decide to outsource benefit administration. The most common reason is that the organization lacks the technical and regulatory expertise to perform many of the necessary functions. For example, few employers have a staff with the expertise to perform actuarial calculations or utilization reviews. Functions of this nature are best left to firms that have a staff of specialists in these areas. Closely correlated with this reason is the desire of firms to seek more value for the dollars spent on benefits. While outsourcing costs money, it is often cheaper than performing the same functions in-house. Some of this savings is because of the high cost of the hardware and software that is increasingly needed. An outside vendor can spread this cost over many customers.

Better service to employees is also an often cited reason for outsourcing. Vendors frequently have toll-free numbers and a staff that specializes in specific benefit functions. Persons who answer telephones are typically trained to have the ability to handle 90 percent or more of the inquiries they receive. But more important, they have the ability to transfer the more complex calls to the appropriate person to handle the issue.

Another cited reason for outsourcing is that the organization should focus its attention on the firm's core activities. Outsourcing enables a firm to lower the size of the staff that administers its benefits or at least have the staff remain stable or grow more slowly in an era when benefit administration is becoming increasingly complex.

Functions Outsourced
Significant variations exist with respect to the benefit functions that are outsourced. Systems, staff, or both can be outsourced. Systems outsourcing refers to the use of an outsourcing organization's computer and other systems while retaining an in-house staff to perform administrative functions. Staff outsourcing refers to the outsourcing of people but the continued use of the organization's systems.

Outsourcing can also be classified as either partial or full. With partial outsourcing, an employer uses an outsourcing organization's personnel and/or staff for some benefit functions but continues other functions in-house. The term full outsourcing refers to those situations where most benefit functions are outsourced. Even with full outsourcing, some functions, such as financial management of benefit plans and benefit plan design, remain the responsibility of senior personnel at the firm.

Most employers use partial outsourcing. Among the most common functions to be outsourced are the following:

- COBRA administration

- Administration of medical and dental claims

- Utilization review

- Vision care programs

- Record keeping of defined-benefit pension plans

- Record keeping and administration of defined-contribution retirement plans

- Record keeping and administration of flexible spending accounts

- Preretirement planning

- Benefit communication

Vendors Used for Outsourcing
Many types of organizations operate as vendors for outsourcing. In addition, employers who outsource may use several vendors because vendors often specialize in a limited number of activities. In fact, some vendors are very specialized. For example, some vendors may specialize in only one type of benefit such as vision care.

The major providers of outsourcing services include benefit consulting firms, insurance companies, stock brokerage firms, mutual funds, and third-party administrators. Stock brokerage firms and mutual funds tend to be involved almost solely in functions relating to retirement plans. While the other vendors often engage in a wide variety of activities, they may also specialize in a limited number of outsourcing services. For example, benefit consulting firms frequently focus their activities on regulatory compliance, eligibility determination, and enrollment.

Recently a small number of large organizations have been marketing themselves as having the ability to provide complete outsourcing for an employer. The number of firms that do all their outsourcing with only one vendor is still very small but likely to grow.

The Decision To Outsource
The decision to outsource is not a simple task. An organization must determine what functions should be outsourced and what functions can best be performed in-house. Consideration also needs to be given to the firm's personnel. Outsourcing often involves working with computers and other systems. It is important that people with expertise in these areas be involved. In addition, the help of the internal benefit staff is vital. However, their assistance may be affected by the fact—either real or perceived—that outsourcing may result in the loss of their jobs.

Once a vendor has been selected to provide an outsourcing service, the process of changing vendors can be complex and expensive. Therefore a high degree of care should go into the vendor-selection process. There should also be contingency plans for changing vendors if that need arises.

A formal outsourcing process begins with a request for proposal (RFP) in which vendors are asked to bid to provide services. The RFP should clearly spell out the goals of outsourcing and identify the major responsibilities of the potential parties to an outsourcing contract.

The outsourcing contract itself needs to clearly establish responsibilities of both the vendor and the employer but yet be flexible enough to address situations that may arise in the future. Proper planning must be done with respect to data to make sure data important to the employer are not destroyed by the vendor—for example, while converting the data to the vendor's systems. It is also important for the employer to be able to retrieve data if the contract with the vendor terminates.

A good outsourcing contract (at least from the employer's standpoint) will contain performance guarantees. These guarantees may relate to factors such as timeliness, accuracy, productivity improvements, and employee complaints.

Because the primary purpose of outsourcing is to save money in the long run, it is also very important to address vendor compensation. The contract should not be so open-ended that unforeseen costs are automatically passed on to the employer. Even fixed-price contracts may prove to be expensive if a firm downsizes but the vendor gets the same compensation for servicing a smaller number of employers.

Some other issues that must be addressed include confidentiality and security of data, vendor responsibility for systems upgrades and employer responsibility to pay for them, insurance and/or bonding requirements, and procedures for resolving disputes among the parties.

Employee Benefits: Methods of Communication

The communication of benefit plans to employees is now regarded as a highly sophisticated task. No single method of communication is likely to accomplish all the desired objectives, so several methods should be combined. To meet these objectives, many employers hire communications experts who generally report to the person who is responsible for employee benefits. Other employers use the services of benefit-consulting firms, many of which have developed specialized units for advising their clients in this particular area. Benefit plans can be communicated to employees in audiovisual presentations, in face-to-face meetings, through printed materials, and, more recently, with computers.

Audiovisual Presentations
Audiovisual presentations are a very effective way to communicate benefit plans to new employees or to explain significant changes in existing benefit plans to current employees. It is much easier to require employees to view audiovisual presentations than to read printed materials. In addition, if properly done, audiovisual presentations can convey the employer's concern for the well-being of its employees, and they can explain proper benefit use more effectively than printed materials. In the past, many audiovisual presentations have been dull and sometimes uninformative. Recently, however, many employers have adopted more sophisticated communications methods, and they view these presentations, if not their entire communications program, as a way of advertising their employee benefit plans. In fact, some employers have actually hired advertising firms to design not only their audiovisual programs but other aspects of their communications program as well.

Meetings with Employees
Face-to-face meetings with employees can also be an effective way to explain employee benefit plans and to answer employees' questions. For small employers, this technique is generally used to present benefit plans to new employees or to explain the changes in existing plans. Large employers often combine meetings with audiovisual presentations. It is obvious that whoever conducts these meetings—be it the employer, agent, broker, consultant, or provider representative—must be truly knowledgeable about the plan. In addition, it is just as important that they be able to effectively communicate this knowledge to the employees.

The number of employees that attend a meeting may have an impact on its effectiveness. A large meeting may be satisfactory if its purpose is primarily to present information. However, a series of small meetings may be more manageable and appropriate if employees' opinions or questions are being solicited. These small meetings can be used in lieu of a large meeting or as follow-up meetings to a large group presentation. When employees must make decisions regarding their benefit plans, meetings with individual employees may also be necessary.

Group meetings can be used for purposes other than explaining new or changed benefit plans. They can be held periodically to reexplain benefits, to answer employees' questions, or to listen to employees' concerns and suggestions. In addition, every employer should have a procedure by which employees can have ready access to a knowledgeable person when they have any problems to discuss or questions to ask. Although this can often be accomplished by telephone, face-to-face meetings should be used when necessary.

The employer's attitude toward a group meeting can influence its effectiveness. Employers should not regard these meetings as necessary formalities; rather, they should view them as a way to communicate their concern about the security of their employees and the benefits with which they are provided. The success of face-to-face meetings may also be affected by when and where they are held. To achieve maximum employee interest and attention, the facilities should be comfortable and not overcrowded. In addition, meetings should be held during normal working hours, but not at the end of the working day, when many employees may be concerned with whether the meeting will end on time.

Printed Materials
Virtually every employer provides employees with some printed materials about its employee benefit plans. At a minimum, this material consists of group insurance certificates and the information that is required to be distributed under the disclosure provisions of the Employee Retirement Income Security Act (ERISA). The next most commonly provided source of information is the benefit handbook. If there is a typical benefit handbook, it can best be described as a reference book that summarizes the benefit plans that are available to all employees. In addition to describing group insurance benefits, it will include information about an organization's retirement plan, vacation policy, and possibly other benefits, such as educational assistance. Each plan will be described in terms of eligibility, benefits, and what employee contributions are required.

Traditionally, these benefit handbooks merely described each benefit plan separately; they did not discuss the relationship between the various benefit plans or what social insurance benefits might be available. Newer benefit handbooks are more likely to focus on the potential causes of lost income to an employee or his or her family. For example, rather than discuss short-term and long-term disability income plans separately, they will include a single section on disability income that describes how a short-term disability plan will initially pay benefits, and at what point it will be replaced by the long-term disability plan and Social Security.

Because of the general nature of benefit handbooks, many employers also give each employee a personalized benefit statement, usually on an annual basis. The most common form of personalized benefit statement specifies the plans for which the employee is eligible and what benefits are available to that particular employee (or his or her family) under each of these plans. (Note that such a statement will comply with the personal benefit statement that is required for qualified retirement plans.) Figure 2-3 shows a portion of one such statement. In addition, some employers feel that employees will better appreciate the value of their benefits if they are aware of the magnitude of the cost to the employer. Figure 2-4 is an example of one form that is used for reporting this information.

Interactive Voice-Response Systems
Employers are increasingly turning to newer technologies to communicate and manage benefit plans. One of these technologies is the telephone and the use of interactive voice-response systems. At one extreme, a telephone system can be as simple as merely giving information to all employees about such matters as times for employee meetings, enrollment deadlines, and plan changes. However, this use of the telephone requires all employees to have either a telephone or some alternative method to receive the information. From this point, telephone systems can get increasingly complex. At the next level, the system can allow employees, through a menu of options, to request general information and materials such as enrollment forms. Carried even further, the system can enable employees to obtain specific information about their own benefits, such as the amount of life insurance they have or the balance in their 401(k) account. Of course, if personal information is available, employees will need to be given a personal identification number to access the information. At the most complex extreme, telephones can be used to allow employees to make benefit elections and changes. For example, an employee may be able to change investment options for a 401(k) plan or to change from one medical expense plan to another during open enrollment periods.

There are both advantages and disadvantages to the use of telephone systems for benefit communication. Among the advantages:

- Employees can have 24-hour access.

- Employees can get quick and accurate responses.

- Employees can maintain a degree of anonymity by not having to disclose information to in-house personnel.

- Human resources personnel have more time to spend on issues other than routine phone inquiries.

However, there are also drawbacks and limitations, some of which can be overcome with proper planning and design:

There is a lack of human interaction. This by itself will discourage some employees from using the telephone system if they can obtain the same information and perform the same transactions by calling someone personally. If the telephone system is the only way that employees can request certain information or initiate certain transactions, it is important that a new system be well publicized and possibly established in small increments. A well-designed system will be simple to use and not leave employees in an endless maze of pushing buttons. It will also give employees a method to reach a real person when they feel it is necessary to speak to one.

Telephone systems can become increasingly expensive as they are expanded to allow employees a wider range of options. For some firms, the cost may outweigh the benefits.

To the extent employees can make benefit changes and elections by merely pushing a button, there is the possibility of mistakes being made. Therefore it is necessary for the telephone response system to confirm all transactions over the phone and allow employees to enter needed corrections. In addition, a written confirmation should be sent to employees, possibly requiring the return of a signed copy of the confirmation.

Telephone systems are not conducive to inputting data such as the name of a new dependent for purposes of obtaining medical expense coverage.

Computers
While telephone systems can be used effectively for obtaining information and simple benefit plan enrollments, computers enable employers to use technology to a much greater extent.

The majority of computer benefits systems are intranet-based over a local area network of company computers. These tend to have the advantage of speed and to minimize security concerns, whether they be perceived or real. Firms can also use Internet-based systems over a public network that is secured by password access. A major advantage of the Internet is that employees can be allowed access from home or while they are traveling. In addition, the Internet is often better for providing employees with links to other useful Web sites because, for security reasons, a firm may not wish to have other links with its intranet site. A few firms have benefit systems on both its intranet and the Internet. Computerized benefit systems can be on either employees' personal computers at their workstations or on computer terminals located at centralized stations. Employees may also be able to access these systems from their home computer or from other locations. By pressing the appropriate key, an employee can get a general description of the company's various plans. By inputting appropriate data (including an identification number), an employee may also be able to obtain information about his or her own particular situation. For example, an employee could determine a potential disability income or retirement benefit. An employee may also be able to obtain the answers to "what if" questions. For example, "If I contribute $100 per month to a 401(k) plan that is expected to earn 7 percent annually, how much will I have at age 65?" Or "If I elect these options under a cafeteria plan, will any additional employer dollars remain for other benefits, or will I have to make an additional contribution through a payroll deduction?"

Employers are increasingly using the computer to allow employees to make benefit selections. To have some verification in writing, a form is either printed on the spot for an employee to sign and return or generated in the personnel office, reviewed, and sent to the employee for signing. Computers also facilitate data input, such as the name of a new beneficiary for life insurance coverage or the name of a new spouse who is being added to an employee's medical expense coverage.

Computers can be used to educate employees as well as provide benefit information. For example, employees can be given information comparing the pros and cons of a managed care plan with those of a traditional indemnity plan. Employees can also be given information to help them in their overall personal financial planning, often through links to other Internet sites.

Finally, employers are beginning to use computers to disseminate legally required information, such as summary plan descriptions.

Many of the same advantages and disadvantages of using telephone systems also apply to the use of computers. A major drawback to a computerized benefit system has been cost in relation to return on investment. (However, this drawback is becoming less of an obstacle as more employees have computer access.) Moreover, the success of such a system requires a high level of technical competence at the human resources and management information systems levels. There must be an understanding that computer communications often need to be approached differently from printed communications. Finally, employees need to feel comfortable using computerized benefit systems. This is continuing to occur as employees become more computer-literate and intranet and Internet sites evolve.

HOW SHOULD THE PLAN BE COMMUNICATED TO EMPLOYEES?

Traditionally, employers placed a low priority on the communication of their benefit plans to employees. They took the attitude that employees appreciated any benefits that were given to them. The little information that was made available tended to be only the literature that had been prepared by the insurance companies providing the coverage. Over the last few years, this situation has changed dramatically. Employers are required by federal law to disclose a substantial amount of information to employees about their benefit plans. In addition, employers have come to realize that many employees take their benefit plans for granted, that they fail to realize the value of these benefits to themselves and their families, and that they are unaware of the employer's dollar outlay. Not only will effective communication solve this problem, it may also minimize the dissatisfaction that arises from misunderstandings about the benefit program, and it may reduce turnover to the extent that employees realize the true value of their benefits. Employers have also learned that effective communication is necessary to obtain employee support if cost-containment efforts are to be successful. Finally, benefit communication is increasingly important as employees are given more choice with regard to their own benefits. This is occurring as more employees have alternative medical expense plans, cafeteria plans and retirement plans that allow investment options.

Most benefit consultants feel an effective communications program should have four primary objectives.

- To create an awareness of and an appreciation for the way current benefits improve the financial security of employees

- To provide a high level of understanding about available benefits

- To encourage the wise use of benefits

- To comply with legal requirements

Effective Communication
Employees will obtain information about benefits in some manner. Without an effective communications program, an employee is likely to rely on the grapevine, which often provides incomplete and inaccurate information. Good communication rarely just happens. Rather, it requires that the employer set objectives in a manner similar to that used for benefit plan design. While any list of objectives is likely to include the clear and concise dissemination of information about current benefits, other objectives may change over time. For example, an employer may want to encourage employees to switch to a managed care plan.

Depending on the circumstance, communication may be ongoing or on a one-time basis. In either case, benefit consultants feel that it is important for employers to design communication materials that convey to employees that they and their needs are important to the firm, that the employer cares what employees think about benefits, and that the employer wants employees to understand their benefits. A successful long-run communications program also has a method for obtaining feedback that allows the employer to determine the effectiveness of the communications program. Steps can be taken to rectify inadequate information, and past experience can be of value in designing future communications.

Several factors can complicate the communication process. For example, an employer may have different benefit plans for different groups of employees and therefore may have to design alternative communication strategies. While it may be possible to have somewhat similar strategies, the sophistication levels of the different employee groups may call for entirely different approaches. A similar problem may occur if an employer has multiple locations. In addition, employers must take the needs of non-English-speaking employees into consideration. Finally, communication strategies may vary for new employees and existing empolyees.

Whatever form a communications plan may take, communication specialists recommend that several basic factors be present:

The communication should be written in a style that is clear and understandable. Legalese and benefit jargon should be avoided.

The communication should make it clear what a benefit means to an employee. For example, if an employer is trying to encourage enrollment in a managed care plan, the lack of any deductibles and minimal (or no) copayments should be emphasized.

The communication should explain why changes are being made. The effectiveness of the communication is likely to be lessened if an employer is not open and honest. Too many employers fail to realize that employees are smart enough to read between the lines of communications that are less than forthright.

The communication should make use of graphics and examples. Too often communication that lacks these features is boring and therefore less effective.

SOCIAL SECURITY AND MEDICARE

In a broad sense, the term Social Security can be used to refer to any of several programs resulting from the Social Security Act of 1935 and its frequent amendments over the years. The act established four programs aimed at providing economic security for the American society:

- Old-age insurance

- Unemployment insurance

- Federal grants for assistance to certain needy groups: the aged, the blind, and children

- Federal grants for maternal and child welfare, public health work, and vocational rehabilitation

The main focus in this post is on the old-age insurance program and the benefits that have been added to that program over the years. These additional benefits include survivors insurance (1939), disability insurance (1956), hospital insurance (1965), and supplementary medical insurance (1965). Taken together, these programs constitute the old-age, survivors, disability, and health insurance (OASDHI) program of the federal government. This program is often separated into two broad parts. The first part is the old-age, survivors and disability insurance (OASDI) program. Over the years, OASDI has become commonly referred to as Social Security. The remainder of the OASDHI program is called Medicare, with hospital insurance being called Part A and supplemental medical insurance being called Part B.

The following discussion of Social Security and Medicare begins with a description of the extent of coverage under the programs and the way the programs are financed. It then focuses on the eligibility requirements and benefits under the various parts of the programs. Because of the many differences between Social Security and Medicare, the discussion largely treats each program separately. This is followed by a discussion of the adequacy of the funding of these programs. Finally, there is a description of the tax implications of Social Security and Medicare benefits and contributions.

Extent of Coverage
More than 90 percent of the workers in the United States are in covered employment under the Social Security program and more than 95 percent under the Medicare program. This means that these workers have wages (if they are employees) or self-employment income (if they are self-employed) on which Social Security and Medicare taxes must be paid. The following are the major categories of workers who are not covered under the programs or who are covered only if they have met specific conditions:

Civilian employees of the federal government who were employed by the government prior to 1984 and who are covered under the Civil Service Retirement System or certain other federal retirement programs. These workers are covered by government plans that provide benefits similar to those available under Social Security. Coverage for new civilian federal employees under the Social Security program was one of the most significant changes resulting from 1983 amendments to the Social Security Act. It should be noted, however, that all federal employees have been covered under Social Security for purposes of Medicare since 1983.

Railroad workers. Under the Railroad Retirement Act, employees of railroads have their own benefit system that is similar to Social Security. However, they are covered under Medicare. In addition, there are certain circumstances under which railroad workers receive benefits from the Social Security program even though their contributions were paid to the railroad program.

Some state and local government employees. Historically, employees covered under state and local government retirement plans have been covered under Social Security and Medicare only if a state entered into a voluntary agreement with the Social Security Administration. Under such an agreement, the state may either require that employees of local governments be covered or allow local governments to decide whether to include their employees. In addition, the state may elect to include all or only certain groups of employees. It is estimated that more than 80 percent of state and local government employees have Social Security and Medicare coverage as a result of such agreements. In addition, coverage under Medicare is compulsory for state and local employees hired after March 1986, and coverage under Social Security is compulsory for employees hired after July 1, 1991, if they do not participate in a public retirement system.

American citizens working abroad for foreign affiliates of U.S. employers, unless the U.S. employer owns at least a 10 percent interest in the foreign affiliate and has made arrangements with the secretary of the treasury for the payment of Social Security and Medicare taxes. However, Americans working abroad are covered under Social Security and Medicare if they are working directly for U.S. employers rather than for their foreign subsidiaries.

Ministers who elect out of coverage because of conscience or religious principles.

Workers in certain jobs, such as student nurses, newspaper carriers under age 18, and students working for the school at which they are regularly enrolled or doing domestic work for a local college club, fraternity, or sorority.

Certain family employment. This includes the employment of a child under age 18 by a parent. This exclusion, however, does not apply if the employment is for a corporation owned by a family member.

Certain workers who must satisfy special earnings requirements. For example, self-employed persons are not covered unless they have net annual earnings of $400 or more. In addition, certain agricultural workers must have annual cash wages of $150 or more, and domestic workers must earn $1,200 or more in cash wages in a calendar year.

Tax Rates and Wage Bases
Part B of Medicare is financed by a combination of monthly premiums paid by persons eligible for benefits and contributions from the federal government. Part A of Medicare and all the benefits of the Social Security program are financed through a system of payroll and self-employment taxes paid by all persons covered under the programs. In addition, employers of covered persons are also taxed. These taxes are often referred to as FICA taxes because they are imposed under the Federal Insurance Contributions Act.

In 2001, an employee and his or her employer each pay a tax of 7.65 percent on the first $80,400 of the employee's wages. Of this tax rate, 6.2 percent is for Social Security; 1.45 percent is for the hospital insurance portion of Medicare. The Medicare tax rate of 1.45 percent is also levied on all wages in excess of $80,400. The tax rates are currently scheduled to remain the same after 2001; however, the wage bases are adjusted annually for changes in the national level of wages. Therefore, if wage levels increase by 4 percent in a particular year, the wage base for the following year will also increase by 4 percent. The tax rate for the self-employed is 15.3 percent on the first $80,400 of self-employment income and 2.9 percent on the balance of any self-employment income. This is equal to the combined employee and employer rates.

Over the years, both the tax rates and wage bases have risen dramatically to finance increased benefit levels under Social Security and Medicare as well as new benefits that have been added to the program...

WHAT PROVISIONS FOR CONTROLLING COSTS SHOULD BE CONTAINED IN THE PLAN?

Employers have always been concerned about the costs of providing employee benefits. Traditionally, this concern has led to plan provisions that transfer the costs to employees rather than reducing benefits. These include probationary periods, benefit limitations, and contributory financing. Many recent attempts to control costs have been primarily directed toward the rapidly increasing costs of medical care, and, for the most part, cost-containment provisions have been designed to reduce administrative and claim costs without transferring them to employees. The focus here is on provisions and activities that can be used with all types of benefit plans.

Probationary Periods
Probationary periods reduce costs to employers because any claims that are incurred by employees during this time must be borne by the employees. In addition, probationary periods reduce the adverse selection that would most likely exist without their use. Administrative costs are also minimized for those employees who terminate employment shortly after being hired. However, probationary periods do impose hardships on newer employees who incur claims but find themselves without benefits. (Employees can minimize these hardships by proper use of COBRA and temporary medical expense policies.) Primarily for competitive reasons in attracting employees, the use and length of probationary periods, particularly in medical expense plans, have been decreasing except in high turnover situations.

Benefit Limitations
Benefit limitations in the form of deductibles, coinsurance, maximum benefits, and exclusions for certain types of expenses are common in medical expense insurance. However, some of these techniques can also be used in other types of insurance. The following are some examples:

The limiting of benefits to a maximum percentage of income in disability income plans. In addition to reducing the amount of benefits paid by the employer, a maximum percentage also minimizes the possibility of feigned and unnecessarily prolonged disabilities.

The setting of maximum benefits under dental plans for expenses such as orthodontics. There is little doubt that the availability of benefits will encourage treatment of orthodontic conditions, particularly when the treatment is primarily sought for cosmetic reasons. There is also the feeling that dentists will encourage the treatment of relatively minor orthodontic conditions if a patient has coverage for orthodontics.

Contributory Financing
Many benefit plans require that each employee pay a portion of the costs for his or her own coverage. This may lower the employer's costs and/or may enable the employer to use these saved dollars to provide additional or improved benefits. There are several arguments both for and against contributory financing, but in many instances it is a moot point because the decision is determined by collective bargaining or competition.

When contributory financing is used for benefits other than pension plans, employees are generally able to voluntarily elect or decline coverage. To the extent that some employees decline coverage, the costs to the employer will be further lowered. However, this savings may be offset by the adverse selection that can result because of those who do elect coverage. Furthermore, having the option to decline coverage could mean that employees or their dependents will be without coverage should a loss occur. Finally, there tend to be more administrative costs associated with a contributory plan than with a noncontributory plan.

Advocates of a contributory plan feel that sharing in the cost will increase the employees' awareness and appreciation of both the plan and the contribution the employer is making. This can be countered by the argument that payroll deductions for benefits are a source of employee dissatisfaction because they may view the employer as "cheap" for not paying the entire cost of the plan.

Although there are no empirical studies to support the contention, it has been argued that employees are less likely to misuse medical and dental benefits under a contributory plan because they realize that such misuse will probably lead to an increase in their future contributions.

Contributory financing can be used to encourage desired employee behavior. Employees who elect a managed care plan in lieu of a traditional medical expense plan often have a smaller contribution toward the cost of their coverage or possibly no contribution at all. In many cases, this lower contribution is determined by the cost savings to the employer. For example, if the cost of coverage to an employer for an unmarried employee is $150 under an HMO and $200 under an indemnity plan, the employee who elects the indemnity plan will be required to pay $50 more per month than an employee who elects the HMO. This alone will encourage many employees to elect the managed-care plan. Employers who want to encourage managed care because it tends to have lower annual cost increases might actually make the differential larger, perhaps $75.

Cost Containment
Recent attempts to control benefit costs have concentrated on either reducing the size of claims or minimizing the administrative costs associated with benefit plans. Rather than transfer the costs to employees, these techniques try to lower costs, or at least to lower the rate at which costs are increasing. Although employers are concerned primarily with their own costs, some of the advantages of this cost containment will affect the employees in the form of increased benefits or a lower rate of increase for out-of-pocket expenses.

Other than provisions or practices associated solely with medical expense plans, the following are some of the more common cost-containment techniques that are currently being used by employers:

- Alternative funding methods that lower administrative costs and improve cash flow

- Competitive bidding among insurance companies and third-party administrators that lowers administrative costs

- Wellness programs and employee-assistance plans that reduce future medical claims as well as minimize absences from work

Because many employers have coverage for dependents under their benefit plans, there is also an increasing awareness of the need to inform spouses of a firm's benefit programs. For example, spouses might be invited to benefit orientations.

Different Plans

From an administrative standpoint, it is easiest for a firm to have a single employee benefit plan that applies to all employees. Nevertheless, some firms have different plans for different groups of employees. This most commonly occurs when the benefits for union employees are determined by collective bargaining. If the benefits for the union employees are provided through a negotiated trusteeship, a separate plan must be designed for the nonunion employees. The employer must then decide whether to play "follow the leader" and provide identical benefits to the nonunion employees or design a plan that reflects their different needs. When benefits are provided through a negotiated trusteeship, the employer is more likely to develop a different plan for nonunion employees than when the employer is required to provide benefits to union employees through group insurance or pension contracts that are purchased or self-funded by the employer. Under these circumstances, employers often find it simpler administratively to purchase a single contract that covers all employees. Different plans also typically exist for retired employees and other categories of people who are not active full-time employees or their dependents.

Even when unions are not involved, an employer still may decide to have different plans for different groups of employees. Usually one plan will be limited to hourly employees and another to salaried employees. In addition, a plan that offers supplemental benefits to top management also may be provided, but it will often be publicized only to those employees who are eligible for these benefits. Some firms that have employees located in different parts of the country also have found it desirable to provide somewhat different benefits at some or all locations in order to remain competitive locally.

Having different plans for different groups of employees is not without its disadvantages. Administrative costs are usually increased, communications with employees become more difficult, and resentment can occur if one group of employees feels its benefit plan is inferior to that of another group. To minimize this latter possibility, some firms have designed their plans so that an overall comparison is difficult. Each plan will have its own positive and negative features when a comparison is made with the plans for other groups of employees.

Different plans can also result by giving a choice to employees. For example, one group of employees may elect an HMO or PPO option, while another group may elect coverage under a traditional medical expense plan. A trend in recent years has been the growth of cafeteria plans.