Wyoming Benefits Survey 2012



A Brief Introduction to Health Insurance and Retirement Plans

Three benefits – employee health insurance, dependent health insurance, and retirement plans – constitute a significant investment for employers and provide important incentives for employees to seek employment and stay with a company. The purpose of health insurance is to insure against loss as a result of illness or bodily injury (WebFinance, 2012). "Having health insurance is important because coverage helps people get timely medical care and improves their lives and health" (Bovbjerg & Hadley, 2007).

Health insurance can be directly purchased by an individual, or it may be provided through an employer. Medicare and Medicaid are federally administered programs that provide health insurance to elderly, disabled, or low-income individuals. There are a number of companies which provide private health insurance (WebFinance, 2012).

There are also other public health insurance programs such as those provided by federal and state governments, the military, and the U.S. Department of Veterans Affairs (Claxton, 2002). A lack of insurance may contribute to individuals' financial uncertainty. "Uninsured families report medical bill problems at double or triple the rate of insured families, and medical bills have been found a contributing factor in a sixth or more of bankruptcies, according to various surveys" (Bovbjerg & Hadley, 2007). Insurance offered by private providers combines or pools the risk of expensive health care costs for many people, which permits them (or employers on their behalf) to pay a premium (the amount paid for coverage) based on the average cost of health care for a given group of people. By spreading risk across individuals, the cost of medical care is relatively affordable for most people (Claxton, 2002).

Retirement plans are also an important benefit many employers provide. Traditional retirement generally requires individuals to work and save consistently over a 30- to 40-year period, after which people take an extended period of leisure (Brandon, 2010). How much individuals need to save depends on a number of factors including the expected duration of retirement, anticipated medical costs, personal preferences, and other considerations (Moeller, 2011).

Two basic types of retirement plans are examined: defined-contribution plans and defined-benefit plans. In a defined-contribution plan, employees and/or employers make specific contributions, such as a certain percentage of wages from each pay period. Benefits from this type of account depend on the amount contributed and the investment's performance. Defined-contribution plans, in particular 401(k) plans, originated in the 1980s in the Internal Revenue Service (IRS) code as a way for firms to provide additional retirement benefits to high-ranking executives beyond defined pensions. Over time, most employers have shifted to 401(k) plans to give employees power over their own investments and to save firms money (Miller, 2009). Businesses receive federal tax advantages for offering 401(k) plans to their employees, increasing the likelihood that businesses will make a plan or plans available (Morgan, 2001). In addition, defined-contribution plans such as 401(k)s are usually portable, meaning that the assets in the plan can be transferred to another employer's 401(k) plan, rolled over into an individual retirement account (IRA), left in the current employer's plan if permitted, or cashed out (Bowen, 2012).

In contrast, defined-benefit plans (also known as pensions) specify the level of benefits retirees receive based upon the employee's years of service and highest salary. American Express founded the first private defined-benefit plan in 1875. The federal government did not offer pensions to its employees until 1920. Prior to the 1920s, the growth of private-sector employers offering defined-benefit plans was slow, after which state laws changed, leading to growth in pension plans offered. By 1930, about 10% of private wage and salary workers were offered pensions. By the mid-1980s, nearly half of all wage and salary workers were offered pensions (Costa, 1998). Defined benefit plans tend to be less portable than defined-contribution plans (Wiatrowski, 2011). Some employers offer both a defined-benefit plan and a defined-contribution plan.

From the employee's perspective, health insurance and retirement plans are usually inherently good. However, not all health insurance plans are created equal. According to Consumer Reports (2009), a good health insurance plan should pay for necessary care without leaving individuals with substantial debt or high out-of-pocket costs. That includes hospital, ambulance, emergency room, and physician fees; prescription drugs; outpatient treatments; diagnostic and imaging tests; chemotherapy, radiation, rehabilitation and physical therapy; mental-health treatment; and durable medical equipment, such as wheelchairs. Health insurance is designed to protect consumers in case of a catastrophically expensive illness, not simply cover routine costs a generally healthy person might incur. Many individual plans are lacking in this regard.

As with health insurance, the quality of retirement plans varies. Mark Riddix (n.d.), founder and president of an independent investment advisory firm, states, "A good plan can help you reach your investment goals and allow you to retire on time. A bad plan can put you behind the eight ball and make saving your money seem like a pointless endeavor and make retiring very difficult."

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