Employee Benefits Ninth Edition

Chapter 5 Study Questions Answer Key

1. There are three distinguishing characteristics of group insurance: There is a group insurance contract that provides coverage to a number of persons under a single contract issued to someone other than the persons who are insured. The insured will usually be the employer or a trust formed to provide benefits. Unless a group is very small the actual experience of the group is a factor in determining the premium the policyholder will be charged. Individual persons are not usually required to show evidence of insurability. It is the group, not the individual, that is underwritten. Many factors are considered when evaluating a group benefit proposal: the reason for the existence of the group. A group should be formed for some purpose other than to obtain insurance for its members. stability. A reasonable but steady flow of persons through a group is desirable. A high turnover results in greater administrative costs. A low turnover results in an increasing average age and premium. persistency. Unless a group insurance case stays on the books for a number of years, the insurance company will lose money. determination of benefits. An employee should not be able to determine his or her own level of benefits. These should be determined by some type of a benefit schedule. In addition, the overall benefit level under the plan should not be so high that it encourages overutilization and malingering. determination of eligibility. Adverse selection and administrative costs are minimized through the use of probationary periods and limiting eligibility to fulltime employees. premium payments. From an underwriting standpoint a noncontributory plan is desirable. Adverse selection is minimized since all employees are covered. administration. The employer should be willing and able to do the administrative functions required by the insurance company. prior experience. Prior experience is an indication of future experience. If prior experience is bad, provisions can often be put in a new plan to minimize poor future experience. size. Past experience for large groups is much more credible than past experience for small groups. In addition, administrative costs for small groups tend to be high in relation to the premium. compensation. Age, sex, and income are often taken into consideration. Females have lower death rates than males. However, they also have more medical expenses and disability claims. Employees with high income levels tend to incur higher-than-average medical and dental expenses, and older employees generally have more claims than younger employees. industry. Some industries have higher claims than other industries. In addition, some industries are characterized by a lack of stability and persistency.

2.

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Employee Benefits Ninth Edition

geographic location. Some claims, particularly medical claims, vary by geographic region. In addition, an employer with employees scattered around the country will pose more administrative problems and probably result in greater administrative expense than a group in a single location.

3.

Employers have increasingly turned to alternative funding as a method to minimize using costs of providing group insurance benefits. (Alternative funding methods are covered in detail in chapter 16.) a. Many types of products are available, but life insurance is the most popular. It can vary from term insurance to variable universal life insurance and include accidental death and dismemberment insurance. Short-term and long-term disability income insurance are the most prevalent health insurance products, but medical, dental, and vision products are also sold. b. Coverage may be individually underwritten, but simplified issue and guaranteed issue are generally used. With guaranteed issue, an employee does not have to show evidence of insurability. With simplified issues, underwriting is based on questions answered in an abbreviated application. c. Premiums for active employees are almost always on a payroll-deduction basis. d. Individual products are always portable. Group coverage can usually be continued on a direct-bill basis.

4.

5.

a. Negotiated trusteeships are usually financed by contributions based on the number of hours worked by union members covered under the bargaining agreement. Whether or not the union members are eligible for benefits under the negotiated trusteeship, eligibility for benefits is based on number of hours worked in a previous period of time. As a result, the persons covered may not actually be employed at the time they are eligible for benefits. b. Under a labor union group, a labor union rather than a trust is the policyholder. In addition, premiums must come directly from union funds or from a combination of union funds and union members. The employer is prohibited from paying any of the cost of benefits provided.

6.

Some of the underwriting standards aimed at minimizing adverse selection and high administrative costs for small groups are the following: more stringent participation requirements probationary periods for new employees restrictive provisions for preexisting conditions a requirement that life insurance coverage be purchased limitations on the period of time for which rates are guaranteed limitations on the amount of coverage available

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Employee Benefits Ninth Edition

7.

a list of ineligible groups that are characterized by poor loss experience or higher turnover rates

The funding of benefits under a multiple-employer welfare arrangement can be accomplished by purchasing an insurance contract from an insurance company or by selffunding. The administration may be provided by an insurance company or a third-party administrator. There are variations in the way states regulate insurance. However, most states regulate provisions found in insurance contracts such as the grace period, conversion, and incontestability. States increasingly are mandating benefits. In some cases benefits must be offered to employees; in other states certain benefits must be included in any group insurance contract written. State premium taxes put insurance companies at a competitive disadvantage since this is a cost which is ultimately passed on to the consumer. Many alternative funding methods, particularly self-insurance, are designed so that no premium taxes are payable. a. The agent is probably incorrect. Most insurance companies hesitate to deliver group insurance contracts in any state unless the principal administrative functions pertaining to the contract will be performed there and unless a corporate officer who can accept the contract is also located in the state. However, all three states have a significant relationship to the insurance transaction. Consequently some insurance companies will consider any of the three states to be an acceptable situs for the contract and deliver it where the corporation desires. b. The major reason for choosing one state over another is that the state of delivery will have regulatory jurisdiction over the contract. Thus the insurance laws of that state, which the corporation might find more favorable, will be applicable.

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9.

10.

11.

There are two general approaches that can be used for reducing benefits under the Age Discrimination in Employment Act. Under the first approach, called the benefit-bybenefit approach, each benefit may be reduced to the extent that such reduction can be justified on a cost basis. Under the second approach, called the benefit-package approach, the entire benefit package may be viewed in its entirety. Some benefits may be reduced or eliminated as long as other benefits are not reduced or other benefits are added. If reductions in a group term life insurance plan are based on 5-year brackets, a reduction of 35 percent appears justified at age 65. On an annual basis, a reduction of 11 percent per year starting at age 65 seems appropriate. Similarly, a 1 percent reduction can be used if benefits are reduced on a monthly basis. For short-term disability income benefits, a reduction of 20 percent appears justified for persons between the ages of 65 and 69, with additional decreases of 20 percent of the previous benefit for each consecutive 5-year period. Long-term benefits may be reduced in either amount or duration period. Examples of these reductions are found in Chapter 8.

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Employee Benefits Ninth Edition

13.

The medical expense plan does not conform to the Pregnancy Discrimination Act since benefits for pregnancy-related conditions must be provided to female employees regardless of marital status. However, the other exclusions in the medical expense plan are acceptable. It is not required that benefits for pregnancy-related conditions be provided to female dependents other than spouses. It is also permissible to exclude abortions unless the life of the mother is in danger. The short-term disability plan also does not conform to the act unless benefits for all types of disabilities are limited to six weeks. Disability benefits for pregnancy-related conditions must be paid on the same basis as other medical conditions.

14.

a. Title I of the Americans with Disabilities Act applies to employers with 15 or more employees. b. Title I of the ADA, which pertains to employment, makes it unlawful to discriminate on the basis of disability against a qualified individual with respect to any term, condition or privilege of employment. This includes employee benefits. Other provisions of the act deal with public services, public accommodations, and telecommunications.

15.

Reasonable accommodation must be made unless it would cause undue hardship for an employer. The Act defines undue hardship as a significant difficulty or expense by the employer in light of such factors as the cost of the accommodation, the employers financial resources, and the impact on other employees. With one exception, reasonable accommodation is for specific individuals for an individual job; it need not be made just because a disabled person may someday apply for work. The exception is that an employer must make facilities for applying for a job accessible to the handicapped and provide employment information that is usable by persons who are hearing-impaired or vision-impaired. a. EEOC guidelines recognize that certain coverage limitations are acceptable. For example, a lower level of benefits than is provided for physical conditions is permissible for mental and nervous conditions. Even though such a limitation may have a greater impact on certain persons with disabilities, the limitation is not considered discriminatory because it applies to the treatment of many dissimilar conditions and affects individuals both with and without disabilities. The guidelines also allow coverage limits for procedures that are not exclusively, or nearly exclusively, utilized for the treatment of a specific disability. This category includes, for example, limits on the number of blood transfusions or X-rays, even though such limits may adversely affect persons with certain disability. b. EEOC guidelines allow blanket preexisting-conditions clauses that exclude from coverage the treatment of conditions that predate an individuals eligibility for benefits under a plan. However, disability-based provisions are not allowed. These include the exclusion or limitation of benefits for (1) a specific disability, such as deafness, AIDS or

16.

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Employee Benefits Ninth Edition

schizophrenia; (2) a discrete group of disabilities, such as cancer, muscular dystrophy or kidney disease; and (3) disability in general. 17. a. Nonpublic information can come from the following: Customer applicants Credit bureaus and other third-party sources b. A person must receive a notice of a firms privacy policies and practices when a customer relationship begins annually thereafter as long as the relationship continues. The notice must present information under the following headings: Confidentiality and security practices Types of information collected Categories of parties to whom information is disclosed Accuracy of information possessed, including a customers right to access the information and to amend, correct, or delete information that is erroneous Notification of privacy policy changes In some cases, a customer can opt-out to certain disclosures of information. c. Federal agencies have jurisdiction over most financial institutions for compliance with the acts provisions. However, state insurance departments also have responsibilities for implementing privacy provisions.

2012 Kaplan, Inc.