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Chapter 13
Benefit Options
1. A comparison of employee benefits for private and state and local government sector
reveals that:
A. private sector pays out better benefits in the long run.
B. both wages and benefits are higher in the state and local governments.
C. private sector paid out better wages than state and local governments.
D. state and government sector paid out better wages but benefits were relatively lesser.
4. Jennifer is hurt at work while driving a forklift. Her employer claims that she was driving
too fast and therefore she is responsible for her own injury and is not eligible for workers'
compensation. What will be the outcome of the employer's challenge to her worker's
compensation claim?
A. She will likely receive workers' compensation benefits.
B. She will get nothing.
C. Jennifer and her employer will share the blame and split the costs.
D. The employer has the final word in determining Jennifer's eligibility.
13-1
Chapter 13 - Benefit Options
6. Experts attribute the decline in dollar cost of workers' compensation cost after 2005 to:
A. increased variable component.
B. devaluation of the dollar.
C. employer safety programs.
D. relaxed federal regulations.
7. _____ relieve an employer's liability when a preemployment injury combines with a work-
related injury to produce a disability greater than that caused by the latter alone.
A. Collateral funds
B. Second-injury funds
C. Insolvency fund
D. Preemployment fund
8. Which of the following types of workers are generally not covered by workers'
compensation?
A. State government employees
B. Coal miners
C. Railroad employees
D. Farm workers
13-2
Chapter 13 - Benefit Options
10. The rising costs of Social Security have been covered by:
A. increases in the maximum earnings base and the tax rate at which it is taxed.
B. reduction in Social Security benefits by providing market-driven options.
C. progressive reduction in the coverage.
D. welfare grants and annual supplements from Congress.
11. All of the following are benefits under Social Security except:
A. lump-sum death payments.
B. medical expenses for work-related injuries.
C. benefits for dependents of retired workers.
D. benefits for surviving family members of deceased workers.
12. For an employee to gain lifetime coverage under Social Security, they must have worked
for_____ quarters during which they were covered by the Act.
A. 20
B. 30
C. 40
D. 50
14. All of the following are ways to control unemployment taxes except:
A. dismiss employees "for just cause" rather than by layoffs.
B. implement good human resource planning.
C. step up enforcement of sanctions against fraudulent claims.
D. monitor claimant behavior after termination.
13-3
Chapter 13 - Benefit Options
15. Steve has a small company with 12 employees. One of his employees, Larry, has been laid
off because his work has been outsourced. Larry had health coverage through Steve's
company and he wants to continue that coverage after being laid off. According to
C.O.B.R.A. how long can Larry continue his coverage through Steve's Company?
A. 36 months
B. 24 months
C. 18 months
D. 0 months
16. Which of the following acts has caused HR and information technology staff considerable
difficulty regarding compliance and privacy?
A. COBRA
B. HIPPA
C. FMLA
D. ERISA
17. _____ was designed to reduce an employer's ability to deny coverage to an employee
based upon a preexisting condition.
A. COBRA
B. OSHA
C. HIPPA
D. FMLA
18. Today, _____ percent of the workforce is covered under the pension plan coverage by
their employers.
A. sixty-four
B. fifty-eight
C. fifty-six
D. forty-three
13-4
Chapter 13 - Benefit Options
19. The majority of defined benefit plans calculate average earnings over the last _____ years
of service for a prospective retiree.
A. 2 to 4
B. 3 to 5
C. 6 to 8
D. 7 to 9
20. In a _____ plan an employer agrees to provide a specific level of retirement pension,
which is expressed as either a fixed dollar or a percentage-of-earnings amount that may vary
(increase) with years of seniority in the company.
A. defined benefit
B. noncontributory benefit
C. 401 (k)
D. shared-benefit
21. Advantages of defined contribution plans versus defined benefit plans include all of the
following except:
A. vesting is usually faster.
B. pre-retirement contributions are smaller.
C. pension costs are more predictable.
D. employee mobility is facilitated.
23. _____ plans are more favorable to long-term than to short-term employees.
A. 401 K
B. Cash balance
C. Profit sharing
D. Traditional defined benefit
13-5
Chapter 13 - Benefit Options
24. An employer experiencing high turnover and seeking to reduce pension cost is likely to
prefer:
A. full vesting after three years.
B. full vesting after six years.
C. full vesting after seven years.
D. to offer portability rights.
26. The first question to ask in determining how much retirement income an employer should
provide is:
A. Should Social Security payments be considered?
B. How should seniority be factored into the payout formula?
C. What level of retirement compensation should be provided?
D. Should other, non-Social Security income sources be considered?
27. An employee who changes jobs four or more times during their career will likely
experience a pension approximately _____ as that of an employee whose working career is
spent with one employer.
A. twice as large
B. the same size
C. one fourth the size
D. half the size
28. Roughly _____ of all employees have access to paid life insurance.
A. three-fourths
B. half
C. one-third
D. a quarter
13-6
Chapter 13 - Benefit Options
29. A type of general health care plan in which health services are provided for a fixed fee at a
specific site is:
A. a PPO.
B. an HMO.
C. a POS.
D. the traditional health care.
30. The general health care plan that uses a direct contractual relationship between employers,
health-care providers and third-party payers is:
A. the traditional coverage plan.
B. an HMO.
C. a PPO.
D. a POS.
31. _____ represent a variation on health-care delivery in which there is a direct contractual
relationship between and among employers, health-care providers, and third-party payers.
A. PSOs
B. HMOs
C. Traditional coverage plans
D. PPOs
32. _____ is a hybrid health plan combining features of HMO and _____.
A. Point-of-service, preferred provider organization
B. POS, Blue-Cross
C. Managed care, POS
D. Consolidated health, PPO
33. All of the following are examples of methods to motivate employees to change their
demand for health care except:
A. using intranet allowing employees access to medical information.
B. promotion of preventive health plans.
C. co-pays.
D. setting maximum benefit levels.
13-7
Chapter 13 - Benefit Options
35. Which of the following is not an example of a method to control health care costs by
changing the structure of health care delivery systems?
A. HMO
B. No health care plan offered
C. POS
D. In-house medical teams
36. The most prevalent practice these days, in place of short-term sick leave is:
A. paid time off.
B. short-term disability.
C. accumulated medical leaves.
D. incentives for non-usage of sick leave.
37. Dental insurance is provided by _____ percent of all employers with above 500
employees.
A. 30
B. 90
C. 70
D. 85
38. The major reasons motivating U.S. corporations to provide domestic partner benefits
include all of the following except:
A. Fairness to all employees regardless of their sexual orientation or marital status
B. Market competition
C. Diversity in today's tight labor market
D. Federal legislation mandating these provisions
13-8
Chapter 13 - Benefit Options
40. Contingent workers receive _____ benefits than regular workers; contingent workers'
benefits cost employers _____ than regular workers.
A. more, less
B. fewer, more
C. more, more
D. fewer, less
41. As benefit costs have skyrocketed, especially health care, the popularity of employee
benefits have declined.
True False
42. If a man's wife died while driving a truck for her employer, and if she was responsible for
the accident, the husband is not eligible to receive compensation for the loss.
True False
43. Workers' compensation covers the costs of both medical expenses and rehabilitation for
work-related injuries.
True False
44. Work-related injuries are covered by workers' compensation but not industrial diseases
such as black lung and asbestosis.
True False
13-9
Chapter 13 - Benefit Options
45. Of the many benefit claims, temporary total disability is the most frequent.
True False
46. Workers' compensation disability payments are tied directly to the nature of the loss and
not factors such as the employee's earnings or number of dependents.
True False
48. In 48 states, employers are not allowed to self-insure their workers' compensation
program but must participate in the state's program.
True False
49. The majority of those receiving social security benefits are disabled workers and their
dependents and survivors of deceased beneficiaries.
True False
50. The basic purpose of social security is to provide basic financial security for Americans
and their families.
True False
51. A major problem with social security is a rising number of retirees without a
corresponding increase in contributors.
True False
13-10
Chapter 13 - Benefit Options
54. Jim was a full-time student for four years, but could not find a job after graduating. Jim is
likely eligible to collect unemployment insurance.
True False
55. Employers who have frequent layoffs pay higher unemployment rates than those with few
layoffs.
True False
56. An eligible unemployed person may collect unemployment insurance benefits for 36
weeks in most states.
True False
57. To be eligible for FMLA, an employee has to have worked for an employer at least 1,250
hours in the previous year.
True False
58. The two generic types of pension plans are contributory plans and noncontributory plans.
True False
59. Companies are turning away from 401K type pension plans because they require putting
money in "up front" rather than when workers retire.
True False
60. Most employers prefer defined contribution pension plans to defined benefit plans.
True False
13-11
Chapter 13 - Benefit Options
65. The Employee Retirement Security Act states that employers must offer a retirement plan
to their employees if they work at least 1250 hours per year.
True False
66. Vesting is the amount of time an employee must work for an employer to be entitled to
their employer's contributions to a pension.
True False
67. Under the Economic Growth and Tax Reconciliation Act of 2001, employers have three
vesting schedule options.
True False
68. The Pension Benefit Guarantee Corporation protects vested benefits of people in
terminated pension plans.
True False
13-12
Chapter 13 - Benefit Options
71. Employers have recently begun reducing the number of paid holidays.
True False
73. What are the areas covered as part of the no-fault insurance under workers'
compensation?
13-13
Chapter 13 - Benefit Options
74. What is the central challenge of social security payments? How are they tackled?
13-14
Chapter 13 - Benefit Options
13-15
Chapter 13 - Benefit Options
1. (p. 444) A comparison of employee benefits for private and state and local government sector
reveals that:
A. private sector pays out better benefits in the long run.
B. both wages and benefits are higher in the state and local governments.
C. private sector paid out better wages than state and local governments.
D. state and government sector paid out better wages but benefits were relatively lesser.
Difficulty: Medium
2. (p. 445) Which of the following is not a benefit that is required by statutory law?
A. Workers' compensation
B. Social Security
C. Pension and retirement benefits
D. Unemployment compensation
Difficulty: Medium
3. (p. 446) _____ has been described as a major cost of doing business.
A. Social Security
B. Unemployment insurance
C. FMLA
D. Workers' compensation
Difficulty: Medium
13-16
Chapter 13 - Benefit Options
4. (p. 446) Jennifer is hurt at work while driving a forklift. Her employer claims that she was
driving too fast and therefore she is responsible for her own injury and is not eligible for
workers' compensation. What will be the outcome of the employer's challenge to her worker's
compensation claim?
A. She will likely receive workers' compensation benefits.
B. She will get nothing.
C. Jennifer and her employer will share the blame and split the costs.
D. The employer has the final word in determining Jennifer's eligibility.
Difficulty: Medium
Difficulty: Medium
6. (p. 446) Experts attribute the decline in dollar cost of workers' compensation cost after 2005
to:
A. increased variable component.
B. devaluation of the dollar.
C. employer safety programs.
D. relaxed federal regulations.
Difficulty: Difficult
7. (p. 446-447) _____ relieve an employer's liability when a preemployment injury combines with
a work-related injury to produce a disability greater than that caused by the latter alone.
A. Collateral funds
B. Second-injury funds
C. Insolvency fund
D. Preemployment fund
Difficulty: Difficult
13-17
Chapter 13 - Benefit Options
8. (p. 447) Which of the following types of workers are generally not covered by workers'
compensation?
A. State government employees
B. Coal miners
C. Railroad employees
D. Farm workers
Difficulty: Medium
9. (p. 436) Approximately _____ percent of social security benefits go to retirees and their
dependants.
A. 20
B. 40
C. 50
D. 70
Difficulty: Difficult
10. (p. 448) The rising costs of Social Security have been covered by:
A. increases in the maximum earnings base and the tax rate at which it is taxed.
B. reduction in Social Security benefits by providing market-driven options.
C. progressive reduction in the coverage.
D. welfare grants and annual supplements from Congress.
Difficulty: Medium
11. (p. 450) All of the following are benefits under Social Security except:
A. lump-sum death payments.
B. medical expenses for work-related injuries.
C. benefits for dependents of retired workers.
D. benefits for surviving family members of deceased workers.
Difficulty: Easy
13-18
Chapter 13 - Benefit Options
12. (p. 450) For an employee to gain lifetime coverage under Social Security, they must have
worked for_____ quarters during which they were covered by the Act.
A. 20
B. 30
C. 40
D. 50
Difficulty: Difficult
Difficulty: Medium
14. (p. 452-452) All of the following are ways to control unemployment taxes except:
A. dismiss employees "for just cause" rather than by layoffs.
B. implement good human resource planning.
C. step up enforcement of sanctions against fraudulent claims.
D. monitor claimant behavior after termination.
Difficulty: Difficult
15. (p. 452) Steve has a small company with 12 employees. One of his employees, Larry, has
been laid off because his work has been outsourced. Larry had health coverage through
Steve's company and he wants to continue that coverage after being laid off. According to
C.O.B.R.A. how long can Larry continue his coverage through Steve's Company?
A. 36 months
B. 24 months
C. 18 months
D. 0 months
Difficulty: Medium
13-19
Chapter 13 - Benefit Options
16. (p. 452) Which of the following acts has caused HR and information technology staff
considerable difficulty regarding compliance and privacy?
A. COBRA
B. HIPPA
C. FMLA
D. ERISA
Difficulty: Medium
17. (p. 452) _____ was designed to reduce an employer's ability to deny coverage to an
employee based upon a preexisting condition.
A. COBRA
B. OSHA
C. HIPPA
D. FMLA
Difficulty: Medium
18. (p. 452) Today, _____ percent of the workforce is covered under the pension plan coverage
by their employers.
A. sixty-four
B. fifty-eight
C. fifty-six
D. forty-three
Difficulty: Difficult
19. (p. 453) The majority of defined benefit plans calculate average earnings over the last _____
years of service for a prospective retiree.
A. 2 to 4
B. 3 to 5
C. 6 to 8
D. 7 to 9
Difficulty: Medium
13-20
Chapter 13 - Benefit Options
20. (p. 453) In a _____ plan an employer agrees to provide a specific level of retirement pension,
which is expressed as either a fixed dollar or a percentage-of-earnings amount that may vary
(increase) with years of seniority in the company.
A. defined benefit
B. noncontributory benefit
C. 401 (k)
D. shared-benefit
Difficulty: Difficult
21. (p. 453-454) Advantages of defined contribution plans versus defined benefit plans include all
of the following except:
A. vesting is usually faster.
B. pre-retirement contributions are smaller.
C. pension costs are more predictable.
D. employee mobility is facilitated.
Difficulty: Medium
22. (p. 453-454) Which of the following is not a defined contribution plan?
A. 401 K
B. ESOP
C. Cash-back
D. Profit sharing
Difficulty: Medium
23. (p. 453-454) _____ plans are more favorable to long-term than to short-term employees.
A. 401 K
B. Cash balance
C. Profit sharing
D. Traditional defined benefit
Difficulty: Medium
13-21
Chapter 13 - Benefit Options
24. (p. 456) An employer experiencing high turnover and seeking to reduce pension cost is likely
to prefer:
A. full vesting after three years.
B. full vesting after six years.
C. full vesting after seven years.
D. to offer portability rights.
Difficulty: Difficult
25. (p. 456) An employer seeking to use pensions to reduce turnover is likely to prefer:
A. fully vested after three years.
B. vesting 20 percent after 2 years and 20 each year thereafter.
C. fully vested after two years.
D. vesting schedules are unlikely to affect turnover.
Difficulty: Difficult
26. (p. 457) The first question to ask in determining how much retirement income an employer
should provide is:
A. Should Social Security payments be considered?
B. How should seniority be factored into the payout formula?
C. What level of retirement compensation should be provided?
D. Should other, non-Social Security income sources be considered?
Difficulty: Medium
27. (p. 458) An employee who changes jobs four or more times during their career will likely
experience a pension approximately _____ as that of an employee whose working career is
spent with one employer.
A. twice as large
B. the same size
C. one fourth the size
D. half the size
Difficulty: Difficult
13-22
Chapter 13 - Benefit Options
28. (p. 458) Roughly _____ of all employees have access to paid life insurance.
A. three-fourths
B. half
C. one-third
D. a quarter
Difficulty: Medium
29. (p. 459-460) A type of general health care plan in which health services are provided for a
fixed fee at a specific site is:
A. a PPO.
B. an HMO.
C. a POS.
D. the traditional health care.
Difficulty: Medium
30. (p. 460) The general health care plan that uses a direct contractual relationship between
employers, health-care providers and third-party payers is:
A. the traditional coverage plan.
B. an HMO.
C. a PPO.
D. a POS.
Difficulty: Medium
31. (p. 461) _____ represent a variation on health-care delivery in which there is a direct
contractual relationship between and among employers, health-care providers, and third-party
payers.
A. PSOs
B. HMOs
C. Traditional coverage plans
D. PPOs
Difficulty: Medium
13-23
Chapter 13 - Benefit Options
32. (p. 461) _____ is a hybrid health plan combining features of HMO and _____.
A. Point-of-service, preferred provider organization
B. POS, Blue-Cross
C. Managed care, POS
D. Consolidated health, PPO
Difficulty: Easy
33. (p. 462) All of the following are examples of methods to motivate employees to change their
demand for health care except:
A. using intranet allowing employees access to medical information.
B. promotion of preventive health plans.
C. co-pays.
D. setting maximum benefit levels.
Difficulty: Medium
34. (p. 462) An account set up to cover part of a high health care deductible is a:
A. POS.
B. flexible spending account.
C. PCA.
D. PPO.
Difficulty: Difficult
35. (p. 463)) Which of the following is not an example of a method to control health care costs
by changing the structure of health care delivery systems?
A. HMO
B. No health care plan offered
C. POS
D. In-house medical teams
Difficulty: Medium
13-24
Chapter 13 - Benefit Options
36. (p. 464) The most prevalent practice these days, in place of short-term sick leave is:
A. paid time off.
B. short-term disability.
C. accumulated medical leaves.
D. incentives for non-usage of sick leave.
Difficulty: Medium
37. (p. 465) Dental insurance is provided by _____ percent of all employers with above 500
employees.
A. 30
B. 90
C. 70
D. 85
Difficulty: Medium
38. (p. 467) The major reasons motivating U.S. corporations to provide domestic partner benefits
include all of the following except:
A. Fairness to all employees regardless of their sexual orientation or marital status
B. Market competition
C. Diversity in today's tight labor market
D. Federal legislation mandating these provisions
Difficulty: Difficult
39. (p. 467) _____ percent of employers offer health benefits to domestic partners.
A. 42
B. 31
C. 18
D. 8
Difficulty: Difficult
13-25
Chapter 13 - Benefit Options
40. (p. 468) Contingent workers receive _____ benefits than regular workers; contingent
workers' benefits cost employers _____ than regular workers.
A. more, less
B. fewer, more
C. more, more
D. fewer, less
Difficulty: Medium
41. (p. 443) As benefit costs have skyrocketed, especially health care, the popularity of employee
benefits have declined.
FALSE
Difficulty: Medium
42. (p. 446) If a man's wife died while driving a truck for her employer, and if she was
responsible for the accident, the husband is not eligible to receive compensation for the loss.
FALSE
Difficulty: Difficult
43. (p. 446) Workers' compensation covers the costs of both medical expenses and rehabilitation
for work-related injuries.
TRUE
Difficulty: Easy
13-26
Chapter 13 - Benefit Options
44. (p. 446) Work-related injuries are covered by workers' compensation but not industrial
diseases such as black lung and asbestosis.
FALSE
Difficulty: Easy
45. (p. 435) Of the many benefit claims, temporary total disability is the most frequent.
TRUE
Difficulty: Difficult
46. (p. 446) Workers' compensation disability payments are tied directly to the nature of the loss
and not factors such as the employee's earnings or number of dependents.
FALSE
Difficulty: Medium
Difficulty: Medium
48. (p. 447) In 48 states, employers are not allowed to self-insure their workers' compensation
program but must participate in the state's program.
FALSE
Difficulty: Medium
13-27
Chapter 13 - Benefit Options
49. (p. 447) The majority of those receiving social security benefits are disabled workers and
their dependents and survivors of deceased beneficiaries.
FALSE
Difficulty: Medium
50. (p. 447) The basic purpose of social security is to provide basic financial security for
Americans and their families.
TRUE
Difficulty: Easy
51. (p. 448) A major problem with social security is a rising number of retirees without a
corresponding increase in contributors.
TRUE
Difficulty: Easy
Difficulty: Easy
53. (p. 448) Substance abuse is not an allowed disability under social security.
TRUE
Difficulty: Medium
13-28
Chapter 13 - Benefit Options
54. (p. 450-451) Jim was a full-time student for four years, but could not find a job after
graduating. Jim is likely eligible to collect unemployment insurance.
FALSE
Difficulty: Medium
55. (p. 451) Employers who have frequent layoffs pay higher unemployment rates than those
with few layoffs.
TRUE
Difficulty: Medium
56. (p. 451) An eligible unemployed person may collect unemployment insurance benefits for 36
weeks in most states.
FALSE
Difficulty: Difficult
57. (p. 452) To be eligible for FMLA, an employee has to have worked for an employer at least
1,250 hours in the previous year.
TRUE
Difficulty: Medium
58. (p. 453) The two generic types of pension plans are contributory plans and noncontributory
plans.
FALSE
Difficulty: Medium
13-29
Chapter 13 - Benefit Options
59. (p. 453) Companies are turning away from 401K type pension plans because they require
putting money in "up front" rather than when workers retire.
FALSE
Difficulty: Easy
60. (p. 453) Most employers prefer defined contribution pension plans to defined benefit plans.
TRUE
Difficulty: Easy
Difficulty: Easy
62. (p. 454) A qualified deferred compensation plan offers tax advantages to employers.
TRUE
Difficulty: Difficult
63. (p. 455) Employees are required to make contributions to cash balance plans.
FALSE
Difficulty: Medium
64. (p. 455) An IRA is retirement savings plan that is not managed by an employer.
TRUE
Difficulty: Easy
13-30
Chapter 13 - Benefit Options
65. (p. 455) The Employee Retirement Security Act states that employers must offer a retirement
plan to their employees if they work at least 1250 hours per year.
FALSE
Difficulty: Medium
66. (p. 456) Vesting is the amount of time an employee must work for an employer to be entitled
to their employer's contributions to a pension.
TRUE
Difficulty: Easy
67. (p. 456) Under the Economic Growth and Tax Reconciliation Act of 2001, employers have
three vesting schedule options.
FALSE
Difficulty: Medium
68. (p. 456) The Pension Benefit Guarantee Corporation protects vested benefits of people in
terminated pension plans.
TRUE
Difficulty: Medium
69. (p. 460) Employees have greater choice of doctors in an HMO than in a PPO.
FALSE
Difficulty: Medium
13-31
Chapter 13 - Benefit Options
70. (p. 462) Requiring a second opinion prior to surgery is an example of a method to reduce
employee demand for health care.
TRUE
Difficulty: Easy
71. (p. 466) Employers have recently begun reducing the number of paid holidays.
TRUE
Difficulty: Medium
72. (p. 445) Which are the benefits required by statutory law?
Benefits that are required by statutory law are workers' compensation, social security, and
unemployment compensation.
Difficulty: Medium
73. (p. 446) What are the areas covered as part of the no-fault insurance under workers'
compensation?
As a form of no-fault insurance, workers' compensation covers injuries and diseases that arise
out of, and while in the course of, employment. Benefits are given for the following:
Permanent total disability and temporary total disability
Permanent partial disability—loss of use of a body member
Survivor benefits for fatal injuries
Medical expenses
Rehabilitation
Difficulty: Medium
13-32
Chapter 13 - Benefit Options
74. (p. 448) What is the central challenge of social security payments? How are they tackled?
The money to pay social security benefits comes from contributions made by employees, their
employers, and self-employed people during working years. As contributions are paid in each
year, they are immediately used to pay for the benefits to current beneficiaries. This is a major
problem with social security. While the number of retired workers continues to rise, no
corresponding increase in the number of contributors to social security has offset the costs. To
maintain solvency, there has been a dramatic increase in both the maximum earnings base and
the rate at which that base is taxed.
Difficulty: Medium
All workers except a few agricultural and domestic workers are currently covered by
unemployment insurance (UI) laws. The eligibility requirements to receive benefits are:
You must meet the State requirements for wages earned or time worked during an
established (one year) period of time referred to as a "base period."
You must be determined to be unemployed through no fault of your own [determined under
state law], and meet other eligibility requirements of State law.
Difficulty: Hard
The 1993 Family and Medical Leave Act applies to all employers having 50 or more
employees and entitles all eligible employees to receive unpaid leave up to 12 weeks per year
for specified family or medical reasons. To be eligible, an employee must have worked at
least 1,250 hours for the employer in the previous year.
Difficulty: Easy
13-33
Chapter 13 - Benefit Options
The 1996 Health Insurance Portability and Accountability Act (HIPAA) is designed to (1)
lessen an employer's ability to deny coverage for a preexisting condition and (2) prohibit
discrimination on the basis of health-related status.
Difficulty: Easy
78. (p. 453) Compare defined benefit plans and defined contribution plans.
In a defined benefit plan, an employer agrees to provide a specific level of retirement pension,
which is expressed as either a fixed dollar or a percentage-of-earnings amount that may vary
(increase) with years of seniority in the company. Defined contribution plans require specific
contributions by an employer, but the final benefit that will be received by employees is
unknown; it depends on the investment success of those charged with administering the
pension fund.
Difficulty: Difficult
79. (p. 453-454) What are the three types of defined contribution plans?
There are three popular forms of defined contribution plans. A 401(k) plan is a savings plan in
which employees are allowed to defer income up to a $12,000 maximum. The second type of
plan is an employee stock ownership plan (ESOP). In a basic ESOP a company makes a tax-
deductible contribution of stock shares or cash to a trust. The trust then allocates company
stock to participating employee accounts. Finally, profit sharing can be considered a defined
contribution pension plan if the distribution of profits is delayed until retirement.
Difficulty: Medium
13-34
Chapter 13 - Benefit Options
Cash balance plans are defined benefit plans that look like a defined contribution plan.
Employees have a hypothetical account (like a 401[k]) into which is deposited what is
typically a percentage of annual compensation. The dollar amount grows both from
contributions by the employer and from some predetermined interest rate.
Difficulty: Medium
Vesting refers to the length of time an employee must work for an employer before he or she
is entitled to employer payments made into the pension plan. Portability refers to the issue of
transferring pension benefits of employees moving to new organizations.
Difficulty: Medium
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