Employee Benefits  Group 6: Kyle Devan Kyle Devan Kara Kroeger Kara Kroeger Nathan Lang Nathan Lang Aaron Standeford Aaron Standeford James Thomas James Thomas Ahmed Zarrugh Ahmed Zarrugh  Income Protection  Social Security  Pension Plans

 What is Income Protection?

Social Security  In 1935, Congress passed and President Franklin D. Roosevelt signed into law the "Social Security Act." This law created "a system of Federal old-age benefits" for workers and their families.  In 1956, the law was amended to also provide disability benefits.  Social Security is composed of two separate entities: The "Old Age and Survivors" program and the "Disability" program

Social Security taxes and Medicare taxes make up the Federal Insurance Contributions Act - FICA FICA tax rates for people who are self-employed: FICA tax rates for people who are employees: The FICA tax amounts that appear on paychecks generally do not account for the taxes that employers pay. Social Security Tax 12.40% Medicare Tax 2.9% 2.9% FICA Tax (total) 15.30% Social Security Tax Medicare Tax FICA Tax (total) Employee tax 6.20%1.45%7.65% Employer tax 6.20%1.45%7.65% Total12.40%2.90%15.30%

Social Security taxes are subject to a wage threshold. Any income earned above the threshold is not taxed. In 2000, the threshold was $76,200, and in 1935 it was $3,000. Social Security tax rate history: Year Social Security Tax Rate 19503% 19606% % % % %

Financial Stability of SS  Since 1982, the Social Security program has had surpluses ranging between 89 and 153,312 million dollars per year.  By law, Social Security surpluses must be invested in federal securities. In other words, the only thing that the Social Security program can do with its surplus money is to loan it to the federal government. The federal government is required by law to pay this money back to the Social Security program with interest.  According to projections, in 2015, the Social Security program will begin to spend more money than it collects in taxes. At that point, the Social Security program will begin to collect on the money that it has loaned to the federal government.  According to projections, in 2015, the Social Security program will begin to spend more money than it collects in taxes. At that point, the Social Security program will begin to collect on the money that it has loaned to the federal government.  According to projections, between 2015 and 2037, the annual shortfalls of the Social Security program will be covered by the money that federal government will pay back to the Social Security program.

 In 2037, it is projected that the money and interest that the federal government owes to the Social Security program will be paid in full.  Between 2037 and 2075, the Social Security program is projected to run annual deficits totaling 30 trillion dollars.  To keep the Social Security program solvent, the tax rate would need to be raised by about 50%, or the benefits would need to be cut by about 33%. Recap: Time Period Financial Status The Social Security program brings in more money than it spends. The surplus money is loaned to the federal government The Social Security program spends more money than it collects in taxes. The federal government pays back the money that the Social Security program has loaned to it with interest The SS program runs annual deficits totaling 30 trillion dollars.

Pension Plans  Provides Income to individuals in their retirement  Over 50% of full-time employees participate in some type of pension plan  Pension Plan distinctions: Contributory vs. Noncontributory Plans Contributory vs. Noncontributory Plans Defined Contribution Plans vs. Defined Benefit Plans Defined Contribution Plans vs. Defined Benefit Plans Qualified vs. Nonqualified Plans Qualified vs. Nonqualified Plans

Contributory vs. Noncontributory  Contributory: Employees contribute to a pension plan with regular payroll deductions. Employer often matches the value of employee contribution or a % of the contribution Employer often matches the value of employee contribution or a % of the contribution All Contributions are tax deductible All Contributions are tax deductible Increased flexibility of investment options (mutual funds, bonds) Increased flexibility of investment options (mutual funds, bonds) Increasingly popular among employers (ease of administration & tax benefits) Increasingly popular among employers (ease of administration & tax benefits) Ex: 401K Ex: 401K  Noncontributory: Plan is funded entirely by the employer Retirement benefit to be received is based on salary and years of service while a participant is in the plan. Retirement benefit to be received is based on salary and years of service while a participant is in the plan. Low risk – low return – low flexibility Low risk – low return – low flexibility

Defined Contribution Plans vs. Defined Benefit Plans  Defined Benefit: Employees know the benefit he/she will receive Benefit usually determined by formula that considers pre- retirement pay and number of years with the firm Benefit usually determined by formula that considers pre- retirement pay and number of years with the firm Similar to Social Security Similar to Social Security Common defined benefit: Final average plans Common defined benefit: Final average plans = % x (Avg. 5yr. Salary) x (years w/company) = % x (Avg. 5yr. Salary) x (years w/company) pros : No investment risk for employees pros : No investment risk for employees cons : Not beneficial to employees who leave before retirement cons : Not beneficial to employees who leave before retirement  Defined Contribution: Benefits determined by the amount contributed to the account Benefits determined by the amount contributed to the account Pros : Participants can benefit from good investment results Pros : Participants can benefit from good investment results Cons : Participants bear investment risk Cons : Participants bear investment risk EGTRRA raises max contribution $10,500 in 01 to $15,000 in 06 EGTRRA raises max contribution $10,500 in 01 to $15,000 in 06

Qualified vs. Nonqualified  Qualified Plans: A plan that meets the requirements of the Employee Retirement Income Security Act (ERISA) ERISA: Protects pensions of workers and stimulates pension plan growth. ERISA: Protects pensions of workers and stimulates pension plan growth. Contributions made by the employer are tax-deductible Contributions made by the employer are tax-deductible The plan assets are safe from the employer's creditors The plan assets are safe from the employer's creditors  Nonqualified Plans: Do not meet ERISA requirements Provide Supplemental benefits Provide Supplemental benefits Not subject to contribution limits Not subject to contribution limits Do not qualify for as many tax breaks Do not qualify for as many tax breaks Common among non-profit employers in which taxation issues are minor or non-applicable Common among non-profit employers in which taxation issues are minor or non-applicable