In light of the COVID-19 crisis, do you have the necessary Directors and Officers coverage?
With the addition of the global COVID-19 pandemic, an already tumultuous D&O insurance environment has the potential to get much worse.
What is the significance of vesting and waiting periods?
A functional objective of an employee benefit plan is to attract and retain valued employees. A social objective of an employee benefit plan is to provide a safety net for the workforce. Of course, the key constraint placed on both objectives is cost. A plan that includes vesting requirements and/or a waiting period keeps the cost lower, thereby enabling employers to provide an essential component of the employees’ safety net.
For true group long-term care plans, the employer takes on some responsibility for the cost of long-term care benefits for its employees. Hence, the employer can share some cost with employees and limit its exposure only to those employees who are employed for a longer term with vesting requirements and a waiting period. These features perform two functions: the employer is rewarding the employees who stay for a longer period of time, and the cost of the program is reasonable when spread over longer working lifetimes of employees.
How do waiting and vesting periods work?
A waiting period requires that employees work for the organization for a certain time period before they can participate in the plan. Waiting periods take place prior to the beginning of vesting periods. They reduce administrative costs for short-term employees as well as overall costs because fewer employees participate. On the other hand, a very long waiting period can undermine the objective of attracting employees. Typical waiting periods for pension plans are 3 months, 6 months, 9 months and 12 months.
Since true group long-term care plans incorporate both employer and employee contributions, vesting rules indicate whether plan participants are eligible for benefits funded by employer contributions once they leave employment. A fully vested participant “owns” the benefits that have been funded by the employer through the date of departure. Once a vested employee departs, the employer does not make further planned contributions. Because vesting allocates benefit dollars to those employees who have been with the employer the longest, it serves to retain valuable employees while keeping the per employee cost lower.
What are the associated cost savings?
Note: “10 Years & Age 50” indicates a vesting rule similar to some pension vesting rules where a person must have at least 10 years in the plan and be at least 50 years old. The actual values will vary, depending on an employer’s turnover rates and age distribution.
Vesting and waiting periods align employer and employee interests
What is the significance of vesting and waiting periods? A functional objective of an employee benefit plan is to attract and retain valued employees. A social objective of an employee benefit plan is to provide a safety net for the