Case 2: Galaxy Max, Inc., Employee Benefits Package

23.2 Case 2: Galaxy Max, Inc., Employee Benefits Package

Learning Objectives

In this section we elaborate on the benefits and plan structure that can be expected in a sample employee benefits portfolio:

Features of each employee benefit (eligibility, costs, exclusions, etc.)
Group life insurance and any supplemental options
Group disability insurance and any supplemental options
Group health insurance plans
Flexible benefits
Defined benefit and/or defined contribution retirement plans

Preface

This case, like Case 1, is a group project that is part of employee benefits classes taught by the author of this textbook. Following is the employee benefits portfolio of a compilation of the ten groups of the fall 2002 class (and some of the fall 2000 class), in the words of the students.The work of the following students is reflected in this case: Donna Biddick, Lavonnia Bragg, Katrina Brand, Heather Cartes, Robert Cloud, Maria Conway, Thomas Dabney Clay, Lillian Dunlevy, Daniel Fleming, Shannon Fowlkes, Caroline Garrett, Barbara Guill, Steven Hall, Georgette Harris, Shirelle Harris, Tyron Hinton, Tiffany Jefferson, Tennille McCarter, Pamela Nicholson, Hiren Patel, Susan Shaban, Carolyn Shelburne, Gaurav Shrestha, Stephanie Soucy, Christopher Speight, Cassandra Townsend, Geoff Watkins, and Tresha White, from fall 2002. Also included is the work of Margaret Maslak and Shelisa Artis from fall 2000. The case is a typical project that lasts for the students throughout the semester. The students present portions of the case as the material is covered in class. In most cases, the whole employee benefits portfolio of the hypothetical company created by the students is presented at the conclusion of the semester as part of the final grade. This case does not provide a long-term care coverage plan. Most of the retirement plans offered by the hypothetical employers of these projects are not realistic in terms of the amounts and variety. The students are requested to provide a defined benefit plan, a defined contribution plan, and a 401(k) plan in order to experience the workings of these plans. The students did not offer a complete cafeteria plan—only a flexible spending account.The students used information from the following companies and sources: Dominion Co., www.dominion.com; Dominion Virginia Power, http://www.dom.com/; Phillip Morris, USA, http://www.philipmorrisusa.com/en/cms/Home/default.aspx; Virginia Retirement System, www.state.va.us/vrs/vrs-home-htm; Henrico County, Virginia, www.co.henrico.va.us.; Minnesota Life, www.minnesotalife.com; A. M. Best Company, ambest.com; Federal Reserve Board, http://www.federalreserve.gov/; Stanley Corp.; Ethyl Corporation, http://www.ethyl.com/index.htm; Aetna, www.aetna.com; Anthem, http://www.anthem.com/; CIGNA, www.cigna.com; and more.

Welcome, Galaxy Max Employees

The Board of Directors and the corporate executives of Galaxy Max, Inc., have developed a comprehensive benefits package to meet the needs of our employees and their families. This handbook includes a brief overview of the organization and its structure and a detailed description of benefits related to group life insurance, health care, dental and vision coverage, flexible spending accounts, and retirement benefits. The information provided will enable you to understand your benefits. General information may be secured from the company’s Web site, www.galaxymax.com. Additional questions may be addressed to the Human Resources Department, 7500 Galaxy Max Road, Richmond, VA 23228; telephone 1-800-674-2900; e-mail hrgalaxymax@vcu.edu. Suggestions are always welcome as we continue to improve customer service.

Background and Current Information

Galaxy Max, Inc. (the “Company”), is a multimillion-dollar business equipment retail chain established in 1985 to service the needs of companies and consumers.
The company specializes in direct sales and e-commerce of office equipment, business accessories, and computer hardware and software, and provides technical support for all facets of the industry involved in maintaining the business environment. The company plans to expand its service capabilities throughout the global marketplace.
The corporation is headquartered in Richmond, Virginia, and has one retail outlet and two regional stores in northern Virginia and the Tidewater area (see Figure 23.4 "Galaxy Max, Inc., Organizational Structure").

Figure 23.4 Galaxy Max, Inc., Organizational Structure

Employee Description

Galaxy Max employs 758 staff members: 338 full-time salaried and 420 hourly employees. Our rapid growth in size and value allows us to provide a substantial benefit package to salaried and full-time employees.

Employee Benefits

Galaxy Max has developed a competitive and comprehensive benefits package for our employees because we value their service to the organization and we want to maintain a healthy, motivated, and high-quality staff. Our commitment to employees is to support their personal needs and financial goals for retention and to reward dedicated individuals. The benefits package is summarized in Table 23.9 "Galaxy Max Benefits Package".

Table 23.9 Galaxy Max Benefits Package

Full-Time Salaried Employees (32 or More Hours per Week)	Hourly and Part-Time Employees
Group term life insurance	None
Short- and long-term disability	None
Health	Optional
Dental	Optional
Flexible spending account	Flexible spending account
Defined benefit plan	Defined benefit plan available for those working more than 1,000 hours per year
Profit-sharing plan	Profit-sharing plan available for those working more than 1,000 hours per year
401(k) plan with matching	401(k) plan with matching available for those working more than 1,000 hours per year

Mission Statement

Galaxy Max is committed to providing superior customer satisfaction in administering sales and service to consumers while maintaining competitive prices, quality products, and active growth within the international business community. We strive for technological advancement and excellence in the delivery of services, and we promote partnerships.

Part I: Group Insurance Benefits

Life Insurance

Galaxy Max provides you with basic life insurance at one times your annual base pay (1 × annual salary) at no cost to you. Benefits are rounded to the next higher $1,000. The minimum benefit is $5,000. You may purchase supplemental coverage. The maximum benefit is five times your current annual base pay or $1,000,000, whichever is less. Table 23.10 "Group Term Life Insurance: Major Plan Provisions" outlines the main features of the company’s life insurance plan. The cost of supplemental life insurance coverage is shown in Table 23.11 "Costs for Supplemental Life and Dependent Life".

Table 23.10 Group Term Life Insurance: Major Plan Provisions

Benefits	Basic life insurance is equal to one times your annual base pay—employer pays Additional coverage up to five times your annual base pay as supplemental coverage—you pay (see costs in Table 23.11 "Costs for Supplemental Life and Dependent Life")
	Added coverage for dependents—you pay (see costs in Table 23.11 "Costs for Supplemental Life and Dependent Life")
	Accidental death and dismemberment (AD&D)—employer pays
	Waiver of premium in case of disability (life coverage continues without charge)—part of the basic coverage
	Convertibility (in case of termination of the term life, you can convert the policy to whole life policy without evidence of insurability)—part of basic coverage Accelerated benefits (living benefits)—in case of becoming terminally ill, you can collect up to 50 percent of the policy benefits while still living—part of basic coverage
Eligibility	Regular, full-time employees (working 32 hours per week or more) who are active at work
Enrollment	Coverage is automatic
When coverage begins	30 days after employment date
Cost	The company pays the full cost of basic life insurance; you pay for any additional coverage (supplements of 2×, 3×, 4×, or 5× annual salary, and for dependent coverage)
Evidence of insurability	For basic coverage paid by the employer, no evidence of insurability is required
Evidence of insurability	For supplemental amounts greater than $150,000, evidence of insurability is required
Provider, A.M. Best Rating	Minnesota Life (Minnesota, USA), A++ Rating
Taxes	Premiums on coverage greater than $50,000 are taxable income to you (based on IRS Table PS-58)
Taxes	Death benefits paid to the beneficiary are not taxed

Table 23.11 Costs for Supplemental Life and Dependent Life

Supplemental Term Life
Age	Cost per Month per $1,000 of Coverage	Age	Cost per Month per $1,000 of Coverage
29 and under	$0.06	50–54	$0.42
30–34	$0.07	55–59	$0.69
35–39	$0.09	60–64	$1.10
40–44	$0.15	65–69	$2.00
45–49	$0.25	70 and over	$3.60

Dependent: Rates for Spouse
Amount	Cost
$5,000	$0.58
$10,000	$1.15
$15,000	$1.73
$20,000	$2.31
$25,000	$2.88

Beneficiary

The employee names the beneficiary. It cannot be the employer.

Termination

Coverage shall terminate automatically when any of the following conditions exist:

The employee terminates employment.
The employee ceases to be eligible.
The policyholder terminates the master contract.
The insurer terminates the master contract.
Contributions have not been made.

Important Features of Your Life Insurance Plans

Wavier of the payment of your premium if you become disabled
The right to convert to an individual policy if you terminate your employment
Accelerated benefits if you become terminally ill

Accelerated Benefits

If a covered employee is diagnosed with a qualifying condition, the employee may request that an accelerated benefit be paid immediately. The amount payable is 50 percent, up to a maximum benefit of $50,000. Qualifying conditions include the following:

The diagnosis of a terminal illness that is expected to result in death within six to twelve months
The occurrence of a specified catastrophic illness, such as AIDS, a stroke, or Alzheimer’s disease

Dependent Life Insurance

Life insurance on a spouse can be purchased by full-time employees in increments of $5,000 up to $25,000. Life insurance on children can be purchased in the amount of $5,000 per child.

Accidental Death and Dismemberment

Benefits under the accidental death and dismemberment (AD&D) plan are in addition to any benefits payable under the life insurance plan. AD&D benefits are payable in the event of an accident resulting in the following:

Your death
Loss of one or more of your body parts (such as hand or foot)
Loss of sight in one or both eyes

Table 23.12 "AD&D Plan Provisions" outlines the main features of the Company’s AD&D plan. If you survive an accident but sustain certain injuries, AD&D benefits would be payable as shown in Table 23.13 "AD&D Loss Provisions".

Table 23.12 AD&D Plan Provisions

Benefit	In case of accidental death, the basic and supplemental amounts are doubled (in case of a loss, see Table 23.13 "AD&D Loss Provisions")
Eligibility	Regular, full-time employees (working 32 hours per week or more) who are active at work
Enrollment	Coverage is automatic
When coverage begins	30 days after employment date
Cost	The company pays the full cost of basic AD&D insurance; you pay for any additional coverage (supplements of 2×, 3×, 4×, or 5× annual salary)
Evidence of insurability	Same as for regular group term life
Provider, A.M. Best Rating (periods as elsewhere)	Minnesota Life, A++ Rating

Table 23.13 AD&D Loss Provisions

If You Have This Loss	You Will Receive This Percentage of Your AD&D Coverage
Loss of hand	50%
Loss of foot	50%
Loss of eye	50%
Multiple loss	100%

Life insurance will not pay out if you survive an accident; it pays only in the event of your death.

Losses not covered under AD&D include the following:

Bodily or mental infirmity
Disease, ptomaine, or bacterial infection, unless resulting directly from the injury or any resulting surgery
Medical or surgical treatment, unless resulting directly from the injury or any resulting surgery
Suicide or attempted suicide while sane or insane
Intentionally self-inflicted injury
War or any act of war, whether declared or undeclared

Provider

Life insurance is provided by Minnesota Life Insurance Company, which is rated A++ by A.M. Best.

Life Insurance Loss/Benefit Examples

Life Insurance Example 1

A forty-year-old employee making annual base salary of $45,000 dies in an automobile accident. He had chosen to purchase supplemental insurance for both life (one times salary) and AD&D (one times salary).

Beneficiary will receive the following:

1 times pay or $45,000 from Minnesota Life for basic life
1 times pay or $45,000 from Minnesota Life for AD&D
1 times pay or $45,000 for his supplemental life
1 times pay or $45,000 for his supplemental AD&D

Total received is $180,000.

Life Insurance Example 2

A life insurance claim was filed by Mary Jones after the death of her husband, Robert, in June 2002. He died after a short battle with cancer. He was a full-time employee at Galaxy Max for five years and his salary at the time was $55,000 annually. He has life insurance in the amount of three times his salary: $55,000 × 3 = $165,000. Therefore, his benefit is $165,000, payable to his beneficiary, which is his spouse, Mary Jones. Mrs. Jones filed the claim within two weeks of Mr. Jones’s death. Mrs. Jones had to present a copy of his death certificate and fill out the required forms. She was informed that she would receive her benefit within sixty days from the date of the claim.

Mrs. Jones has chosen to receive the life insurance benefit in a lump-sum payment. She received this payment fifty-eight days from the date of the claim.

Internal Revenue Service Code Section 101 provides that the death benefits are not counted toward taxable income.

Sick Leave, Short-Term Disability, and Long-Term Disability

Table 23.14 "Sick Leave, Group Short-Term Disability, and Group Long-Term Disability—Major Plan Provisions" summarizes all the disability plans provided by Galaxy Max.

Table 23.14 Sick Leave, Group Short-Term Disability, and Group Long-Term Disability—Major Plan Provisions

Benefits	Sick leave—7 days, 100% of pay
	STD (7 days to 6 months)—80% of pay up to $5,000 benefit per month
	LTD (6 months to age sixty-five)—60% of pay up to $6,000 benefit per month coordinated with workers’ compensation and Social Security
Eligibility	Regular, full-time employees (working 32 hours per week or more) who are active at work
Enrollment	Coverage is automatic
When coverage begins	30 days after employment date
Cost	The company pays the full cost of STD; employee pays for LTD through payroll reduction
Definition of disability	Sick leave and STD—unable to do your own job due to nonoccupational injury or illness
Definition of disability	LTD—from 6 months to 2 years, unable to do any job relating to your training and education; after two years, unable to do any job
Evidence of insurability	Required if joining after open enrollment
Provider, A. M. Best Rating	Sick leave and STD—self-insured
Provider, A. M. Best Rating	LTD—Aetna (rated “A” for excellent by A.M. Best)
Taxes	Employees do not pay taxes on premiums paid by employer for STD; but in the case of receiving benefits, taxes will be paid on the benefits
Taxes	For LTD, employee pays the premium from income after taxes, and benefits in the case of disability are nontaxable

Sick Leave

Benefits

The employee will receive regular pay for time missed due to illness or injury (nonoccupational) up to seven days per calendar year.

Cost of Sick Time

Galaxy Max pays for sick leave from its operating budget.

Short-Term Disability

Definition of Disability

“Disability” is the total and continuous inability of the employee to perform each and every duty of his or her regular occupation.

Benefits

Short-term disability (STD) benefits are 80 percent of salary up to $5,000 per month after a seven-day waiting period. The maximum length of the benefit is six months. There is no integration of benefits under short-term disability.

Premium

Galaxy Max pays STD premiums and deducts such as normal business expense. Galaxy Max will continue to pay premiums for disabled employees.

Exclusions

An employee cannot collect STD benefits under the following conditions:

For any period during which the employee is not under the care of a physician
For any disability caused by an intentionally self-inflicted injury
If the employee is engaged in any occupation for remuneration
If the disability was incurred during war, whether declared or undeclared
If the disability was incurred while participating in an assault or felony
If the disability is mental disease, alcoholism, or drug addiction

Termination

Disabled employees will not be considered terminated and, when able to return to work, will not have to satisfy any waiting period for coverage.

Long-Term Disability

Definition of Disability

Long-term disability (LTD) is defined as the total and continuous inability of the employee to engage in any and every gainful occupation for which he or she is qualified or shall reasonably become qualified by reason of training, education, or experience for the first two years. After two years, it is the inability to engage in any gainful employment.

Benefits

LTD provides for the following:

LTD benefit amount is 60 percent of your basic monthly earnings, to a maximum monthly benefit of $6,000.
Monthly LTD benefit will be reduced by amounts received from other benefit programs such as Social Security, workers’ compensation, and any other coinciding retirement plan. However, your monthly benefit can never be less than 10 percent of the gross benefit or $100, whichever is greater.
LTD benefit is 60 percent of your basic monthly earnings to a maximum benefit of $6,000 per month. Your benefit is coordinated with (that is, reduced by) other income benefits received.

“Basic monthly earnings” means your monthly salary in effect just prior to the date disability begins. It includes earnings received from commissions and incentive bonuses but not overtime pay or other extra compensation. Commissions and incentive bonuses will be averaged for the thirty-six-month period of employment just prior to the date disability begins.

Cost of Coverage

The employee will pay the full cost through payroll deduction. The Human Resources representative will advise of the contribution amount, which is based on a rate per $1,000 of your annual base pay. The cost of coverage is determined by the insurance company, Aetna (rated “A” for excellent by A.M. Best). Galaxy Max will notify you in advance in the event of a rate change.

LTD Exclusions

An employee cannot collect LTD benefits under the following conditions:

Any disability caused intentionally
Any period not under the care of a physician
Active participation in a riot
War, declared or undeclared, or any act of war

Taxation

Because the employee pays the entire premium from income after taxes, benefits are not taxable to the employee.

Rehabilitation

A disabled employee may enter a trial work period of up to two years in rehabilitative employment. During this time, benefits will be reduced by 50 percent. If the trial is unsuccessful, original long-term benefits will resume without penalty.

Termination

Disabled employees will not be considered terminated and, if able to return to work, will not have to satisfy any waiting period for coverage. Long-term disability coverage cannot be converted upon termination of employment.

Health Insurance Coverage

Galaxy Max offers two plans for health insurance, an HMO and PPO. The broad benefits are described in Table 23.15 "Health Plan Provisions". The medical plans pay the cost of necessary and reasonable medical expenses for non-work-related illness or injury and are completely optional.

Table 23.15 Health Plan Provisions

Benefits	You have a choice between an HMO and a PPO.
Eligibility	Regular, full-time salaried and part-time employees scheduled to work at least 32 hours per week and their eligible dependents: spouse; unmarried dependent child under age 19, or under age 25 in school full-time; disabled dependent child; eligible child with qualified medical child support order.
Enrollment	You may enroll when eligible. You may elect to enroll eligible dependents for extra charges provided they meet the qualifications of a “dependent.”
Enrollment	Annual open enrollment period for current plan participants is October 1 to November 1 every year. Changes made during open enrollment become effective January 1 the following year.
Waiting period	30 days after the first day of employment
Coverage categories	Employee only
	Employee and child(ren)
	Employee and spouse
	Employee and family
Cost	You and Galaxy Max share the cost of coverage (see Table 23.17 "Employee Premiums")
What is covered	Medically necessary services and supplies
	Inpatient and outpatient hospital care
	Doctors’ care and treatment
	Home or office visits
	Prescription drugs
	In-patient and out-patient mental health care
	Routine physical exams and preventive care (in network only)

Insurers

Galaxy Max has chosen Healthkeepers, Inc., for HMO coverage. Healthkeepers’ most recent A.M. Best rating is “A” (excellent). Cigna Healthcare of Virginia, Inc., is Galaxy Max’s PPO provider and has also earned A.M. Best’s rating of “A.” Benefits paid are at the discretion of the insurance companies.

Benefits

The benefits under each plan are explained in Table 23.16 "HMO and PPO Plan Benefits".

Table 23.16 HMO and PPO Plan Benefits

	HMO	PPO in Network	PPO out of Network
Annual Deductible
	None	None	$300/individual, $600/family
Outpatient Care
	Copay per Visit ($)	Coinsurance (%) or Copay ($) per Visit	Coinsurance (%) per Visit
Primary care physician	$10	$15*	30%
Diagnostic labs/X-rays	Fully covered	10%	30%
Preventive care	$10	$15†	30%
Well-baby care	$10; no age limit	$15 plus 10% of screening and diagnostic tests; through child’s seventh birthday†	30%
Maternity care for all routine pre and postnatal care of mother rendered by ob/gyn	Routine care fully covered; $10 for diagnostic testing	$15 for initial visit if doctor submits one bill after delivery	30%
Mammogram screenings	$20	20%	30%
Ob/gyn visit (includes pelvic exam, breast exam, and pap smear)	$10	$15	30%
Specialist office visit	$20 with PCP referral	$15	30%
Emergency services	$50 (waived if admitted)	$50 plus 20%; $15 for doctor’s services	30%
Annual vision exams	$10	no
Out-patient surgery	$75	$50 plus 20%; $15 for doctor’s services	30%
Out-patient nonsurgical services	$20	$50 plus 20%; $15 for doctor’s services	30%
Mental health and substance abuse	$20	26 visits per calendar year: $15 for visits 1–13; 50% for visits 14–26	30%
Home health care	Fully covered	Fully covered	30%
Out-patient physical, speech, and occupational therapy	$20 (90 days maximum) §	limits per calendar year: physical, $2,000; speech, $750; occupational, $2,000	30%
In-Patient Care (Preauthorization Required)
	Copay per Visit ($)	Coinsurance (%) or Copay ($) per Visit	Coinsurance (%) per Visit
Hospital care for illness, injury, or maternity in a semiprivate room	$250 per admission	$250 plus 10% per admission	30%
In-hospital physician’s services	Fully covered	10%	30%
In-patient mental health and substance abuse	$250 per admission§	$250 plus 10% per admission	30%
Skilled nursing facility care	Fully covered (limited to 100 days per illness or condition)§	20% (limited to 100 days per illness or condition)	30%
Durable medical equipment and supplies	Fully covered up to $1,000 per calendar year§	10%; limited to $5,000 per calendar year§	30%
Hospice services	Fully covered for patients diagnosed with a terminal illness with a life expectancy of 6 months or less	Fully covered for patients diagnosed with a terminal illness with a life expectancy of 6 months or less	30%
Annual Out-of-Pocket Expense Limit Through Deductibles, Coinsurance, and Copayments for Covered Services
Individual	$1,000	$2,000	$4,000
Family	$2,000	$4,000	$8,000
Lifetime Maximum
	$500,000	$750,000	$750,000
* Primary care physician or specialist visit.
† Coverage includes annual checkups, annual gynecological exam and pap smear, prostate specific antigen (PSA) test and prostate exams for men age forty and over, one baseline mammogram for women ages thirty-five to thirty-nine, annual mammogram for women age forty and over, and annual colorectal cancer screening; up to $200 per calendar year for family members age seven and older for all other routine immunizations, labs, and X-rays done in connection with annual checkups whether received in-network or out-of-network.
† No coinsurance for immunizations.

Financing

Galaxy Max will pay a generous 85 percent of the health care premiums. Table 23.17 "Employee Premiums" lists employee obligations.

Table 23.17 Employee Premiums

Plan	HMO	PPO
Biweekly premium per insured	$35.67	$51.09
Each additional dependent	$12.00	$18.00

Coverage Area

The PPO is comprised of specific in-network offices. Consult your Benefits Liaison for a complete list of providers in your area. All employees residing in Virginia are considered in-area.

Exclusions

The items listed below, among others, are not covered in any of the plans. If you have any questions regarding the coverage of a treatment or service, you must contact the appropriate provider.

Treatment that is not medically necessary in accordance with the designated insurers
Experimental drugs or investigative procedures
Chiropractic services

Termination of Coverage

Coverage is terminated at the following times:

The date on which employment terminates
The date on which the employee becomes ineligible
The end of the last period for which the employee has made any required contributions

Dependent coverage is terminated in the following cases:
The date on which the dependent ceases to meet the definition of a dependent
The date on which the dependent receives the maximum benefit of major medical coverage

Conversion

The employee may convert to individual health coverage within thirty-one days of losing eligibility. Galaxy Max complies with all local, state, and federal legislation with regard to group health plans.

COBRA

The Consolidated Omnibus Budget Reconciliation Act (COBRA) extends coverage for eighteen to thirty-six months following a qualifying eventA qualifying event is a marriage or divorce, adoption of a child, death of a covered dependent, a change in status or eligibility of a dependent, and so forth. that causes the employee to lose eligibility. The employer does not have to pay the premium, and the premium may be increased to a maximum of 102 percent of the group rate. The employee may elect COBRA within sixty days of the qualifying event. As noted above, the thirty-one-day period of conversion may be applied after COBRA coverage. COBRA does not protect an employee who is fired for cause.

HIPAA

The Health Insurance Portability and Accountability Act (HIPAA) forbids insurers from imposing preexisting-condition exclusions when an eligible individual transfers from one plan to another. After you have been covered in a health plan for twelve months, preexisting-condition exclusions are no longer in effect. Prior coverage would not qualify if there is a break in health insurance coverage for more than sixty-three days.

Group Dental

Group dental provides coverage for any dental work you may incur. Like group medical, group dental has many variations, and coverage can be obtained from two different providers. However, there are some clear differences between the two plans. For example, group dental plans are more likely to provide benefits on a fee-for-service basis but provide the benefits under a managed-care arrangement.

Eligibility

Full-time (thirty-five hours or more per week) and salaried employees are eligible to enroll for group dental coverage. You may enroll your spouse and child(ren) for an additional premium.

Waiting Period

You may enroll when eligible. Coverage becomes effective the first day of the month following employment. For example, if you start employment on the first of the month, coverage begins immediately.

Plan Highlights

Table 23.18 "Major Dental Plan Provisions" summarizes the key features of the dental plan, including benefits, types of service, and cost information.

Table 23.18 Major Dental Plan Provisions

Annual deductible		$30 per person, with $90 family maximum
Cost		You and the company share the cost
Plan maximums		$1,000 per person per year
Plan maximums		$1,000 lifetime under age 19 for orthodontics
Coverage	Examples of Items Covered	Plan Pays Up To …
Preventive	Nonorthodontics X-rays, oral exams, and cleaning of teeth	100% of reasonable and customary fees (R&C) for cleanings, X-rays, exams, fluoride treatments
Restorative	Fillings, extractions	80% R&C fillings, extractions
Prosthodontics	Replacement of natural teeth with bridgework or dentures	50% R&C for bridgework
Orthodontics	Straightening of teeth with braces	50% of R&C for orthodontic services

Conversion

Dental coverage cannot be converted to an individual policy if employment terminates. You, your spouse, or your dependent children may elect to continue coverage under the company’s dental plan as provided by COBRA if the original coverage ends because of one of the following life events:

Termination of employment by employee
Retirement
Disability
Death
Reduction in hours to less than full-time

Provider

Galaxy Max has chosen Cigna Corporation for dental coverage because the company has a strong presence in the insurance business and has been one of the leaders in coverage. Cigna’s A.M. Best rating is NR-5, meaning that they have not been formally evaluated for the purpose of assigning a rating opinion.

Flexible Spending Account

To accommodate the needs of our diverse work force, Galaxy Max has created a flexible spending account (FSA) plan to help employees to meet expenses that are not covered under any benefit plan. Money deposited in these accounts is not taxed when it goes into the accounts or when it is paid back to you. Employees can use these pretax dollars to pay for miscellaneous items such as eyeglasses or unreimbursed medical/dental expenses. This plan also allows employees to pay dependent care expenses with pretax dollars. Any amount not spent at the end of the plan year is forfeited by the employee (use it or lose it). See Table 23.19 "Summary of FSA: Major Plan Provisions" for details. In addition, a premium conversion plan is offered to employees for payment of health insurance premiums on a pretax basis.

Table 23.19 Summary of FSA: Major Plan Provisions

Eligibility	Regular, full-time salaried employees and part-time employees scheduled to work 1,000 hours or more during a year
When coverage begins	Employment date; or
	Each January, following annual open enrollment; or
	Date of life event
When coverage ends	Employment termination or your pay ceases for any reason (death, retired, or disabled)
When coverage ends	You or your survivors may continue to submit claims expenses incurred prior to the date you left the payroll
Contributions	Your selected contributions will be deducted from each pay before federal income tax and, in most cases, state income tax and Social Security tax are withheld
	Minimum annual contribution: health care and/or dependent day care: $120
	Maximum annual contribution: health care and/or dependent day care: $5,000
Accounts	Health care accounts for tax-deductible health care expenses
Accounts	Dependent day care accounts for work-related dependent day care expenses
Maximums	Health care: $5,000 per year to each account
	For dependent day care:
	Amount of spouse’s earnings, if less than $5,000
	Maximum of $2,500 if married and filing separate returns
Reimbursement	Eligible claims paid monthly
	Minimum claim of $10/month
	Claims must be received by administrator by April 1 for prior year’s expenses
	Unclaimed account balances must be forfeited

Part II: Pension Plan

Galaxy Max offers to its eligible employees a defined benefit pension plan. The pension plan is designed to provide you or your beneficiary with monthly benefit payments at retirement. The pension plan is funded entirely by the company; employees do not contribute. In addition, Galaxy Max offers a 401(k) plan and a profit-sharing plan.

Defined Benefit Plan

A defined benefit plan explicitly defines the amount of benefit available at retirement. Table 23.20 "Defined Benefit Plan" summarizes the major pension program provisions.

Table 23.20 Defined Benefit Plan

Benefit formula	(1.3% of your final average salary up to the Social Security–covered compensation level) + (1.8% of your final average salary in excess of the Social Security–covered compensation level, if any) × (years of creditable service). See example in Table 23.21 "Example of Defined Benefit Formula".
Eligibility	Full- or part-time employees who are scheduled to work or who actually work at least 1,000 hours in a twelve-month period are eligible
Eligibility	Participation begins on your date of hire or your twenty-first birthday, whichever is later
Normal retirement	You may retire and receive normal retirement benefits the first day of the month on or after your sixty-fifth birthday
Early retirement	You may retire and receive an early retirement benefit on or before you reach age sixty-five
Early retirement	You are eligible for early retirement on the first day of the month on or after your fifty-fifth birthday with three years of vesting service
Insured	Plan is insured by the Pension Benefit Guaranty Corporation
Vesting	You become fully vested when you complete three years of vesting service (including vesting service with an acquired company) or reach age sixty-five
Vesting	Vesting credit begins when you are eligible for the pension program

Payments

Your pension benefit is paid to you in monthly installments at the end of the month. Your benefits will be paid as a lump-sum payment if the present value of your pension is $5,000 or less. The normal form of benefit paid by the retirement plan is based on your marital status. Unless you elect a different option, you will receive your benefit in one of the following forms, which are actuarially equivalent:

If you are single, you will receive a single life pension.
If you are married, you will receive a 50 percent survivorship pension with your spouse as the beneficiary. If you are married and would like to receive your benefit in another form, you will need to provide your spouse’s written consent.

The survivorship option pays you for as long as you live. When you die, benefits continue to be paid to your designated beneficiary, assuming your beneficiary survives you. Written spousal consent is required before you can designate a beneficiary other than your spouse. Benefits are reduced for the survivorship option because payments will be made over two lives rather than one. Payments depend on your age and your beneficiary’s age when you begin receiving payments. If you choose the survivorship option and your beneficiary dies before you do, your payment will be increased to the amount that you would have received under the single life option. Additionally, you may choose the amount (50 percent, 75 percent, or 100 percent) your surviving beneficiary will receive after you die.

Formula and Calculations

The traditional formula used in calculating your retirement benefit is based on your final average salary, your creditable service, and the Social Security–covered compensation level based on your age. Your retirement pension benefit may not be more than 100 percent of your final average salary, or $160,000 in 2002. These formula components are outlined below. See Table 23.21 "Example of Defined Benefit Formula" for an example of how the formula works.

Table 23.21 Example of Defined Benefit Formula

Suppose Joe, a sales representative for Galaxy Max, was born in 1942 and retired after thirty years of service to Galaxy Max with a final average salary of $40,000. At the time of Joe’s retirement, the Social Security–covered compensation level is $37,212. To calculate Joe’s benefit:
1. Multiply Joe’s final average salary, up to Social Security–covered compensation level, by the benefit percentage	$37,212 × 1.3% = $484
2. Multiply Joe’s final average salary in excess of Social Security–covered compensation level by the excess benefit percentage	($40,000 – $37,212) × 1.8% = $50
3. Add amounts calculated	$448 + $50 = $534
4. Multiply by years of service to calculate Joe’s annual retirement benefit	$534 × 30 = $16,018
Thus, Joe’s annual pension benefit from Galaxy Max is $16,018.

Final Average Salary

Your final average salary is your highest average annual compensation during any consecutive sixty-month period. It includes base pay, commission payments, bonuses, and overtime.

Creditable Service

Your service with Galaxy Max, including approved leaves of absence up to six months, certain periods of military and public service, and periods in which you are totally disabled (as defined in the LTD plan), is considered your creditable service. Service for part-time work is reduced to the equivalent portion of the year worked.

Social Security Compensation Level

The average of the Social Security wage bases (maximum amount on which you pay Social Security taxes) for the thirty-five years before the date of your retirement is the Social Security compensation level that is used to calculate your benefits. These amounts change each year according to the Covered Compensation Table provided by the Social Security Administration.

Vesting

We at Galaxy Max chose to use a cliff vesting option. You become 100 percent vested after three years of creditable service. Our plan provides you with a cash settlement option if your employment at Galaxy Max is terminated. The cash settlement option is effective on your termination date. This distribution is considered taxable income in the year the distribution is made. The only exception to this rule is if you choose to shift this payment into an IRA.

Loans

Loans are not available under the retirement plan

Distributions

As a valued employee of Galaxy Max, you or your beneficiaries may choose one of the following distribution options:

Guaranteed Payment

You may choose to have your pension payments guaranteed for a certain period of time after retirement. The payment options include either five or ten years for a single life pension or five years for a survivorship pension benefit.

Lump-Sum Payment

You may request a lump-sum payment of $1,000 or more (in $100 increments) to your designated beneficiary from your pension benefit, payable after you die.

Level Income Payment

If you retire early and want to start receiving benefits before age sixty-two, you may choose this payment feature. You will receive larger benefit payments prior to age sixty-two and then receive lower benefit payments upon reaching age sixty-two. At age sixty-two, you will be eligible to receive Social Security benefits. The intent of this plan is to provide level retirement income before and after Social Security payments begin at age sixty-two.

So … When Can I Retire and Receive Benefits?

Depending on your age and length of service, you may choose normal retirement or early retirement. Normal retirement is when you retire at or after age sixty-five. If you choose this option, you will receive normal retirement pension benefits.

Early Retirement

You become eligible for early retirement benefits when you reach age fifty-five with three years of vested service. You can retire on the first day of any month on or after your fifty-fifth birthday. If you retire before you reach age sixty-five, the date you retire will be known as your early retirement date.

Benefits for early retirement are less than normal retirement benefits because the plan adjusts the payment amount to allow the benefits to be paid over a longer period of time. The amount of your normal retirement benefit is available to you, without reduction, if you retire early on or after your sixtieth birthday. If you retire on or after your fifty-fifth birthday and before your sixtieth birthday, your pension benefit will be reduced, as explained in Table 23.22 "Early Retirement Reduction in Defined Benefit Plan".

Table 23.22 Early Retirement Reduction in Defined Benefit Plan

If you retire between the ages of fifty-eight and sixty, your pension benefit will be reduced by 0.25% for each month that remains until your sixtieth birthday. For example, if you retire on your fifty-eighth birthday, your pension will be reduced by (24 months × 0.25% per month) = 6%. If you retire between the ages of fifty-five and fifty-eight, your pension will be reduced by that 6% plus an additional 0.50% for each month that remains until your fifty-eighth birthday. For example, if you retire on your fifty-sixth birthday, your benefit will be reduced by (6% + [24 months × 0.50% per month]) = 18%. This table shows the percentage your benefit would be reduced if you retired on your birthday.
Retirement Age	Benefit Reduction
60 or older	None
59	3%
58	6%
57	12%
56	18%
55	24%

The benefit in Galaxy Max’s defined plan is protected by the Pension Benefit Guaranty Corporation (PBGC). The cost of $19 per year per employee is paid by Galaxy Max.

401(k) Plan

Galaxy Max offers you a Section 401(k) plan, hereinafter referred to as the Galaxy Max 401(k) Plan, as a supplement to the retirement plan. You have the opportunity to put aside salary dollars on a pretax basis, and Galaxy Max makes employer-matching contributions to help build retirement savings more quickly. You can choose your own level of deferral, if any. The plan also offers you several investment options with varying portfolios to allow your savings to grow over time. Taxes are deferred on employer matching contributions, your pretax deferral, and investment returns until you withdraw the funds from your account.

Eligibility

All full-time and part-time employees are eligible. You become eligible for the Galaxy Max 401(k) Plan after completing one year of continuous service and must complete at least 1,000 hours of service during the year. Your enrollment commences on the first day of the month following the completion of that first year of service. You are not eligible to participate in the plan if you are no longer an employee as of fiscal year end or if you are a temporary employee.

Maximum Contributions

For employees under the age of fifty, the 2009 contribution limit is $16,500. If you are fifty years old or older, this limit is $22,000 in 2009.

Employer Matching

During each of your first five years of service, Galaxy Max will match 80 percent ($0.80 for every $1.00) that you contribute to the plan, up to 6 percent of your salary. After five years of service, our matching increases to 100 percent ($1.00 for every $1.00) that you contribute to the plan, up to 6 percent of your salary.

Vesting

Vesting is your right to the money in your 401(k) account. You are always 100 percent vested in the value of your own contributions and the earnings on your investments. You are vested on Galaxy Max’s matching contributions at the rate of 20 percent each year of service, and thus fully vested after five years. For example, if you left Galaxy Max three full years after joining the 401(k) plan, you would have the right to all your investments and their earnings and to 60 percent of the matching funds plus their earnings. The vesting schedule for the 401(k) matching contribution is summarized in Table 23.23 "Galaxy Max 401(k) Matching Contribution Vesting Schedule" below.

Table 23.23 Galaxy Max 401(k) Matching Contribution Vesting Schedule

Completed Years of Service	Percentage Vested on Employer’s Match
1	20%
2	40%
3	60%
4	80%
5	100%

Withdrawals

In-service withdrawals for certain hardships are permitted under the Galaxy Max 401(k) Plan, as long as two conditions are met:

The withdrawal must be necessary and follow severe financial hardships. Examples include the following:
- Purchasing your primary residence
- Preventing foreclosure or eviction from your primary residence
- Paying for major uninsured medical expenses for you or your eligible dependents
- Paying tuition, room and board, and related education expenses for the next twelve months for you or your eligible dependents to attend college
The funds are not reasonably available from any other resources. The requirements are met if the following circumstances exist:
- The distribution does not exceed the amount of the severe financial hardship
- The employee has obtained all other forms of distributions other than hardship distributions

Contributions will be suspended twelve months after the distribution and the maximum contribution in the next year will be reduced by the amount contributed in the prior year.

Loans

The minimum loan amount is $1,000. The maximum loan amount is the lesser of $50,000 or 50 percent of your vested balance. The following two types of loans are available under the plan.

General-Purpose

You can take between six and sixty months to repay a general-purpose loan.

Primary Residence

You can take between sixty-one and 180 months to repay this loan. Eligible residences include house, condominium, co-op, mobile home, new home construction, or land for new construction or mobile home.

Investment and Investment Risk

You bear the risk of investments in your Galaxy Max 401(k) Savings Account. However, you can choose from several investment funds through the SunTrust Classic Funds Family, commonly referred to as the STI Classic Funds. This will enable you to select your own desired level of risk.

Investment funds range from a fixed income fund (with very low risk and corresponding low return potential) to higher risk equity funds with higher return potential. The funds that you may choose from are as listed:

Galaxy Max Stock Fund
STI Classic Small Cap Growth Stock Fund
STI Classic Mid-Cap Equity Fund
STI Classic Appreciation Fund
SunTrust 500 Index Fund
STI Classic Growth and Income Fund
STI Classic Value Income Stock Fund
STI Classic Investment Grade Bond Fund
STI Classic Short-Term Bond Fund
STI Classic Prime Quality Money Market Fund

Termination

You will be terminated from the Galaxy Max 401(k) Plan if you cease to be employed by Galaxy Max.

Profit-Sharing Plan

Over the past five years, Galaxy Max has been financially successful because of the dedication and talent of our valued employees. We started the profit-sharing program to give you the opportunity to share in the success of our wonderful company. The primary purpose of this plan is to help you build retirement income. Along with the Galaxy Max 401(k) Plan and the defined benefit plan, the profit-sharing plan can provide you with the foundation for a financially secure retirement.

A profit-sharing plan is a qualified, defined contribution plan that features a flexible contribution by us. When you become eligible to participate, Galaxy Max will set up an individual account in your name. In other words, you do not need to enroll in the plan. Participation in the plan is automatic and you are not required or permitted to contribute personal funds into the plan.

Eligibility

The eligibility requirements for the Galaxy Max Profit-Sharing Plan are the same as the Galaxy Max 401(k) Plan. Please refer to that section.

Contributions

Each year, Galaxy Max will contribute a portion of its pretax income for profit-sharing purposes. The contribution is made after the end of each fiscal year. The amount allocated to your account is based on a formula that includes your compensation during the fiscal year. This contribution is made at the discretion of Galaxy Max and cannot be guaranteed every year.

Profit-Sharing Formula

Here is how the allocation formula works. Once you become a participant, we evaluate your eligible compensation (base pay, commissions, and bonuses) and the eligible compensation of all Galaxy Max employees. Your portion of the amount of profits we contribute is the proportion of your eligible compensation to that of all employees. For example, suppose that Galaxy Max will contribute $200,000 to the profit-sharing plan, your eligible compensation is $35,000, and the eligible compensation of all employees is $950,000. Your share would be $35,000/$950,000, or 3.68 percent, of $200,000. Therefore, the allocation to your account would be $7,368.42. These numbers are used only as an example. (The total contribution from Galaxy Max and eligible compensation from all employees is much larger.)

Investing Your Profit-Sharing Account

The plan’s trustee, SunTrust Bank, will invest contributions to your account. At the end of each fiscal year, investment earnings are allocated to your profit-sharing account. Because the value of your investments will fluctuate, you will assume the investment risk. Therefore, your account balance will increase or decrease in value from year to year.

Profit-Sharing Account Balance

Once all accounts have been reconciled for the fiscal year, you will receive an annual statement of your account. It will include your beginning balance, allocation of investment income, contributions, and ending balance. These statements are typically distributed to you four to five months after the fiscal year end.

Vesting

You begin earning ownership rights to your account once you complete three continuous years of service. After your second full year, you are 20 percent vested, and you earn another 20 percent each year. Once you complete six years of service, you are fully vested. If your employment ends because you become permanently disabled, die, or leave Galaxy Max after age sixty-five with at least five years of service, you and your beneficiary will be entitled to receive the full value of your account, regardless of your vesting. The vesting schedule for profit-sharing plan contributions is presented in Table 23.24 "Galaxy Max Profit-Sharing Contribution Vesting Schedule" below.

Table 23.24 Galaxy Max Profit-Sharing Contribution Vesting Schedule

Continuous Vesting Service	Vested Percentage
Less than 2 years	0%
2 years	20%
3 years	40%
4 years	60%
5 years	80%
6 years or more	100%

Loans

You may borrow from your profit-sharing account under the same provisions that apply to 401(k) loans. Please refer to that section for details.

Distributions

You can receive the vested portion of your account after you leave Galaxy Max, retire, or become permanently and totally disabled. Your designated beneficiary will receive your vested account balance if you die before receiving your benefit.

If your vested account balance is $6,000 or less, you or your beneficiary will receive the payment in a single lump sum. If your account balance is more than $6,000, you or your beneficiary can take a single lump sum, receive annual installments for up to five years, or delay receiving distributions until a later time. Generally, you can roll over the vested portion of your account balance into another qualified retirement account or individual retirement account (IRA) so that you can defer paying federal income taxes.

Termination from Plan

You will be terminated from the plan if you cease to be employed by Galaxy Max.

Limitations on Contributions

For all three plans, certain legal limits are placed on contributions to your account. The combined annual contributions to your retirement plans cannot exceed $40,000 or 100 percent of your compensation, whichever is lower. This limit applies to both your and Galaxy Max’s contributions to your 401(k), profit-sharing, and defined benefit plans, unless the defined benefit plan requires (under the minimum required annual contribution) a greater annual contribution. Thus, in summary, all qualified retirement plans combined cannot exceed the $40,000 or 100 percent of compensation annual limit, unless more contribution is necessary to meet the minimum requirements under the defined benefit plans.

Conclusion

The management of Galaxy Max hopes that the benefits we offer are clear to you. Our studies indicate that our benefits package far exceeds the norms of our industry. We are very interested in your well-being, and this has motivated us to exceed our peer group’s offerings. Should you have questions, please contact the Human Resources Department, 7500 Galaxy Max Road, Richmond, VA 23228; telephone 1-800-674-2900; e-mail hrgalaxymax@vcu.edu. Suggestions are always welcome as we continue to improve service to our employees.

Key Takeaways

In this section you studied the employee benefits package of a hypothetical company (Galaxy Max, Inc.):

Each group benefit option in an employee benefits program is explained in terms of benefits, eligibility, enrollment requirements, waiting periods, employee costs, coverage exclusions, benefit providers, tax implications, and plan termination provisions.
Employees are able to add beneficiaries and dependents (subject to eligibility requirements) for applicable benefits.
Life insurance at one-time employees’ annual salary is a typical group benefit, with options to purchase supplemental coverage wholly funded by employees.
Sick leave and short- and long-term disability options may be partially subsidized by employers, with options for employees to purchase supplemental long-term coverage.
Group health insurance usually includes a mix of HMO, PPO, or high-deductible options provided at costs shared by employer and employee.
Flexible spending accounts are offered within a cafeteria plan or as a stand-alone option to help employees pay for qualified out-of-pocket costs with pretax dollars.
Retirement plans can be a combination of a traditional defined benefit plan and various defined contribution plans.
A benefits package should explain the benefit or contribution formula of retirement plans, include payment options, clarify the requirements of early withdrawals or loans, define normal retirement age (and implications of early retirement), and stipulate vesting provisions.
Limits apply to retirement plan contributions by employers and employees; benefit plans should give an understanding of employees’ contributions and investment options.

Discussion Questions

Why are employee benefits limited for part-time (versus full-time) employees?
What is the purpose of a waiting period in employee benefits?
Why would an employer enforce a minimum benefit limit on life insurance?
Why is the definition of disability stricter in the case of LTD than in STD?
When employees pay the LTD premiums, why aren’t benefits taxable as income?
Why are long-term disability benefits coordinated with Social Security? What effect does this have?
How is the survivorship pension payment option made equitable to the retiree in the event that his or her beneficiary dies first?
How do vesting provisions protect employers?