EMPLOYEE BENEFITS IN MEDIUM AND LARGE FIRMS, 1986

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP90-00530R000400730003-0
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 18
• Document Creation Date: December 22, 2016
• Document Release Date: August 27, 2012
• Sequence Number: 3
• Publication Date: June 1, 1987
• Content Type: MISC

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F)CCEETTLS
Employee Benefits in Medium
and Large Firms, 1986
U.S. Department of Labor
William E. Brock, Secretary
Bureau of Labor Statistics
Janet L. Norwood, Commissioner
June 1987
Bulletin 2281
For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, D.C. 20402
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Chapter 2. Highlights
The great majority of full-time workers within the scope
of the survey were provided with health and life insurance
and private retirement plans, as well as paid holidays and
vacations (table 1). Provisions of many employee benefits
differed markedly between white- and blue-collar workers.
Most paid leave provisions studied in the survey were
available to a majority of employees. On the average, cov-
ered employees could expect to receive:
? Rest periods of 26 minutes a day
? 10 holidays each year
? Vacations of 9 days at 1 year of service, 16 days at
10 years, and 21 days at 20 years
? 3 days of funeral leave per occurrence
? 12 days of military leave per year
? Jury duty as needed
? Sick leave of 15 days per year with full pay at 1 year
of service
? Sickness and accident insurance plans averaging about
26 weeks of coverage.
Ninety-four percent of the employees had some protec-
tion against temporary loss of income due to illness or acci-
dent through either sick leave (46 percent), sickness and
accident insurance (24 percent), or both (25 percent). Most
employees also had some protection against extended loss
of income due to disability:
? 48 percent had long-term disability insurance
? 37 percent were covered under pension plans that
provided immediate disability benefits.
Virtually all of the employees studied were participants
in health and life insurance programs. Of the participants
in these plans:
? 57 percent paid nothing for their own health insurance,
and 37 percent paid nothing for family coverage
? All but 1 percent received benefits for hospitalization,
surgical care, diagnostic testing, and mental health
care
? 71 percent received dental care
? 80 percent were protected against catastrophic health
expenses, either through stop-loss provisions in major
medical plans or enrollment in health maintenance
organizations
? 34 percent would receive some employer-financed
health care during a layoff
? 66 percent were covered by an amount of life insurance
determined by earnings
2
? 17 percent received insurance on the lives of their
spouses.
Seventy-six percent of the employees in the survey were
covered by defined benefit pension plans, which have for-
mulas for determining an employee's annuity:
? 72 percent of participants were in plans with formulas
based on earnings, most frequently on earnings dur-
ing the last 5 years of employment
? Benefit formulas were integrated with Social Security
benefits in plans affecting 62 percent of participants
? Common eligibility requirements for a normal, or un-
reduced, pension were age 65 with no specified length
of service, age 62 with 10 years' service, and 30 years
of service with no age requirement
? 66 percent of covered workers could retire with a
reduced pension at age 55, most commonly after
10 years' service.
Sixty percent of the employees participated in one or more
of the following defined contribution plans: Savings and
thrift, employee stock ownership, profit-sharing, money pur-
chase, or stock bonus plans. One-third of employees were
in plans with cash or deferred arrangements, authorized by
sections 401(k) and 403(b) of the Internal Revenue Code.
The majority of these employees were in salary reduction
plans, where current income is channeled to a retirement
plan, and taxes on that income are deferred until benefits
are distributed.
? Employers matched employee contributions to savings
and thrift plans most frequently at the rate of 50 per-
cent, up to the first 6 percent of earnings
? 28 percent of employees were in payroll-based stock
ownership plans (PAYSOP'S)
? Employer profit sharing was based on a predetermined
formula for 59 percent of participants in such plans,
and allocation of profits to individual accounts was
generally based on earnings.
Defined contribution plans that restricted employee access
to employer contributions were considered retiremer.t plans
in the survey. Eighty-nine percent of employees had some
retirement income benefits, either through defined benefit
plans, defined contribution plans, or both.
Flexible benefits plans and reimbursement accounts were
included in the survey for the first time in 1986. While such
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plans have attracted much attention recently, only 5 percent
of all employees covered by the survey were eligible for
reimbursement accounts, and only 2 percent were offered
flexible benefits plans. Reimbursement accounts are used to
pay for expenses not covered by a company's regular benefits
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package, such as insurance premiums, child care, or health
care deductibles. A flexible benefits plan was defined in the
survey as a plan giving employees a choice among two or
more types of benefits.
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Table 1. Summary: Percent of full-time employees by participation' In employee benefit programs, medium and large
firms,' 1986
Employee benefit program
All employees
Professional and
administrative employees
Technical and clerical
employees
Production employees
Paid:
Holidays
Vacations
Personal leave
Lunch period
Rest time
Funeral leave
Jury-duty leave
Military leave
Sick leave
Sickness and accident insurance
Wholly employer financed
Partly employer financed
Long-term disability insurance
Wholly employer financed
Partly employer financed
Health insurance'
Employee coverage:
Wholly employer financed
Partly employer financed
Family coverage:
Wholly employer financed
Partly employer financed
Life insurance
Wholly employer financed'
Partly employer financed
Retirement'
Defined benefit pension
Wholly employer financed'
Partly employer financed
Defined contribution plan
Wholly employer financed'
Partly employer financed
Capital accumulation'
Wholly employer financed'
Partly employer financed
. - .. .
se
100
25
10
72
88
93
86
70
49
41
e
48
38
10
95
54
41
35
60
96
87
10
89
76
71
5
47
. 33
15
23
6
18
se
99
33
3
58
87
96
74
93
28
22
6
ee
52
16
96
52
45
33
64
97
87
10
92
78
73
5
53
33
20
31
6
25
100
100
35
4
69
87
96
72
93
35
28
7
60
47
13
94
45
49
28
66
96
87
9
92
78
74
3
55
36
19
29
6
23
se
100
15
17
82
88
90
58
45
69
59
9
30
24
6
96
61
35
41
55
95
86
9
87
74
es
5
40
31
9
16
5
11
raructpants are workers covered by a paid time off, insurance,
retirement, or capital accumulation plan. Employees subject to a
minimum service requirement before they are eligible for a benefit are
counted as participants even if they have not met the requirement at
the time of the survey. If employees are required to pay part of the
cost of a benefit; only those who elect the coverage and pay their
share are counted as participants. Benefits for which the employee
must pay the full premium are outside the scope of the survey. Only
current employees are counted as participants; retirees are excluded.
See appendix A for scope of study and definitions of occupa-
tional groups.
? Includes less than 0.5 percent of employees in plans that did not
offer family coverage.
' Includes participants in noncontributory basic plans who may
contribute to the cost of supplemental plans In these benefit areas. Sup-
plemental plans are not tabulated in this bulletin.
The total is less than the sum of the individual Items because
4
many employees participate in both defined benefit and defined con-
tribution plans. Defined contribution plans include money purchase
pension plans, and profit sharing, savings and thrift stock bonus, and
employee stock ownership plans in which employer contributions
must remain in the participant's account until retirement age, death,
disability, separation from service, age 591/2, or hardship.
Employees participating in two or more plans are counted as
participants in wholly employer financed plans only if all plans are
noncontributory.
' Includes plans in which employer contributions may be with-
drawn from participant's account prior to retirement age, death, dis-
ability, separation from service, age 59 1/2, or hardship. Excludes
pure cash profit sharing, stock option, and stock purchase plans.
NOTE: Because of rounding, sums of individual items may not
equal totals.
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Chapter 6. Defined Benefit
Pension Plans
In medium and large firms, defined benefit pension plans
are the predominant type of employer-sponsored retirement
plan. These plans use formulas for calculating retirement
benefits and obligate the employer to provide the benefits
so determined. In 1986, three-fourths of the employees had
defined benefit pension plans?down slightly from earlier
years. (Other sources of retirement income, such as savings
plans, have been growing in importance recently. They will
be discussed in chapter 7, "Defined Contribution Plans.")
Benefit formulas (tables 54-58). Earnings-based formulas ap-
plied to 72 percent of the employees covered by defined
benefit pension plans. Such formulas pay a percent of the
employee's annual earnings per year of service (for exam-
ple, 1 percent of earnings times 30 years of service). Varia-
tions are common, however, in the approach to calculating
annual earnings and the rate paid per year of service. For
79 percent of the participants with e.arnings-based formulas,
pensions were based on earnings in the final years of em-
ployment (terminal earnings formula); for the remainder, an
average of career earnings was used. Terminal earnings were
defined as the average over a 5-year period for 84 percent
of the participants with terminal-eamings formulas. Such for-
mulas usually designated the 5 consecutive years with the
highest earnings out of the last 10 years before retirement.
Three-fifths of participants with formulas based on career
earnings were in plans having benefit rates per year of serv-
ice that varied according to service, earnings, or age. Career-
earnings formulas typically applied one rate to annual earn-
ings below's specified amount, and a higher rate above the
amount. (This is often done to lower employer costs for wage
levels upon which Social Security taxes are paid, as described
in the next section.) For example, a plan will credit an em-
ployee with 1 percent of earnings up to the first $12,000 in
each year of service plus 1.5 percent of the earnings exceed-
ing that amount. The annual pension payment is the sum of
these credits.
Formulas based on terminal earnings typically provided
participants with a flat percent of earnings per year of serv-
ice. For plans providing flat rates per year of service, the
rates averaged 1.62 percent for terminal-earnings formulas
and 1.66 percent for career-earnings formulas. This slight-
ly higher benefit percentage for career-earnings formulas is
more than offset by the lower earnings to which these for-
mulas are applied. '7 Conversely, benefits under a terminal-
earnings formula are more likely to be offset by a retiree's
53
Social Security payments. (See next section.)
Most plans that did not use a percent-of-earnings benefit
formula specified a dollar amount to be paid for each year
of service, such as $15 monthly per year of service, yield-
ing a pension of $450 after 30 years. Dollar-amount formu-
las applied to one-fourth of pension plan participants,
continuing a decline from 32 percent in 1981. While the dol-
lar amount in these formulas sometimes varied with an em-
ployee's earnings or service, the predominant method was
to multiply a uniform (single) dollar amount by years of serv-
ice. Uniform amounts credited per year averaged $15.51 a
month.
The basis of pension payments differed sharply by em-
ployee group. While a large majority of white-collar par-
ticipants were provided earnings-based pensions,
dollar-amount formulas applied to nearly half of the blue-
collar participants.
Thirty-seven percent of all pension plan participants would
receive benefits from either primary or alternative formu-
las, whichever was greater. Alternative formulas were often
included to provide at least a minimum level of benefits for
persons with short service or low earnings. For example,
a plan may have a primary formula of 1.25 percent of aver-
age career earnings times years of service, and an alterna-
tive formula of $15 a month for each year of service. In this
case, the alternative formula would provide a higher benefit
for persons with average career earnings of less than $14,400
a year.
Private benefits and Social Security payments (table 59). Em-
ployers providing private retirement plans also share the cost
of Social Security coverage equally with their employees.
Because many plan sponsors feel that private pension and
Social Security benefits should not be duplicative, formulas
for calculating private pensions often contain an offset pro-
vision requiring part of the Social Security pension to be sub-
tracted from the annuity. Other plans have "excess"
formulas that apply lower pension benefit rates to an em-
ployee's earnings below a specified level (which is either
the Social Security taxable wage base?usually the career
'7An employee who worked 30 years with a 5-percent pay increase each
year and who earned $25,000 in the last year of service would have career
average earnings of $13,451 a year, while the final 5-year average would
be $22,730. The difference between the career and final averages lessens
with shorter lengths of service.
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average--or a dollar amount equal to a past taxable wage
base).
Sixty-two percent of all pension plan participants had
benefit formulas "integrated" with Social Security.
Terminal-earnings formulas of integrated plans tended to
adopt the offset approach, while career-earnings formulas
tended to incorporate the excess approach. Dollar-amount
formulas were rarely coordinated with Social Security; blue-
collar employees, therefore, were less likely to have integrat-
ed benefits .18
Maximum benefit provisions (table 60). The Employee
Retirement Income Security Act (EitisA) and subsequent
amendments place ceilings on the size of annual pension
benefits from defined benefit plans. These restrictions largely
affect only highly compensated employees. Many plans,
however, have provisions that restrict benefit levels for all
participants. For example, 36 percent of participants were
in plans that limited the number of years of service included
in benefit computation; maximums of 30 or 35 years were
most common. For 7 percent of the participants, annual pen-
sions (usually including Social Security payments) could not
exceed a specified percent of average annual career or ter-
minal earnings.
Replacement rates (table 61). A commonly used indicator
of pension adequacy is the portion of a retiree's final year's
earnings that is "replaced" by the retirement benefit. To cal-
culate replacement rates for 1986 pension plans, the maxi-
mum private benefit under each surveyed plan, not reduced
for early retirement or joint-and-survivor annuity, was de-
termined under several assumed combinations of final an-
nual earnings and years of service. These benefit levels were
then expressed as percents of earnings in the last year of em-
ployment. The calculations assume employees retired on
January 1, 1986, and final earnings are for 1985."
Table 61 presents average replacement rates resulting from
defined benefit pension plans alone and in combination with
primary Social Security benefits (that is, excluding benefits
for spouse and other dependents)." For private pension for-
mulas that are integrated with Social Security and for com-
putation of Social Security benefits, the worker is assumed
to have retired at age 65 and to have paid into Social Securi-
ty for 40 years. (For workers who reached age 65 in 1986,
however, the Social Security benefit was the same for work-
ers with similar final earnings who had 26 years or more
under Social Security.)
'8 For a comprehensive analysis of formulas with Social Security integra-
tion characteristics, see Donald Bell and Diane Hill, "How Social Security
Payments Affect Private Pensions," Monthly Labor Review, May 1984,
pp. 15-20.
"Earnings histories, necessary for applying the pension formulas, were
constructed for each final earnings level based on data provided by the So-
cial Security Administration.
" The Social Security spouse benefit, which is 50 percent of the primary
benefit, is paid in addition to the primary benefit while both partners are
alive (unless the spouse is eligible for a larger primary benefit).
54
Chart 4 displays replacement rates based on 30 years of
service for each of the earnings assumptions. Except for the
lowest earnings assumption ($15,000), the private pension
plan replaced on average about 28 percent of the final year's
earnings; the rate for $15,000 was about 32 percent.
When combined with primary Social Security payments
available at age 65, however, replacement rates differed sub-
stantially as earnings increased. They ranged from nearly
three-fourths at the lowest assumed level of earnings to just
over one-half at the highest earnings level computed. Ex-
cept for the two highest assumptions ($35,000 and $40,000),
the primary Social Security benefit payment was larger than
the average private pension.
Although private pension replacement rates (excluding So-
cial Security) for white-collar employees remained fairly
constant at higher earnings levels, rates for blue-collar work-
ers dropped by almost a third. Table 54 provides an expla-
nation: Nearly half of all production workers have dollar-
amount formulas, paying workers with the same years of
service the same benefit, regardless of earnings history. The
result is a steady decrease in the replacement rate as final
earnings increase. Average replacement rates for earnings-
based formulas, on the other hand, increase slightly with
higher final earnings.
While average replacement rates show a consistent rela-
tionship between pensions and service, earnings, and type
of formula, the range of pensions payable is quite broad.
Chart 5 shows that calculated monthly pensions for em-
ployees retiring with 20 or 30 years' service and final earn-
ings of $30,000 varied from less than $200 to $1,000 or
higher 21
Normal retirement (table 62). Although unreduced Social
Security benefits are not available before age 65, most pri-
vate pension plan participants were not required to work to
that age for full private pensions (normal retirement). Thirty-
six percent were covered by plans that specified age 65 as
the earliest age for normal retirement. While employees in
plans specifying age 65 usually did not have to satisfy a mini-
mum service requirement, plans permitting normal retire-
ment at earlier ages typically had length-of-service
requirements. One to ten years' service were required for
half of the 36 percent of participants who could first retire
at ages 60 through 64; 20 or more years were typically need-
ed for retirement at ages 55 through 59 (affecting 4 percent of
participants) 22
Another 11 percent of participants could qualify when the
sum of age plus service reached a specific amount, such as
2' For a more complete discussion of replacement rates, see Donald G.
Schmitt, "Today's Pension Plans: How Much Do They Pay?" Nonthly
Labor Review, December 1985, pp. 19-25.
22 In 1980, 45 percent of participants had to work until age 65 to be eligible
for an unreduced benefit. Gradual liberalization of retirement requirements
has contributed to an increase in average replacement rates for both nor-
mal and early retirement since 1974, as observed by Donald Bell and Wil-
liam Marclay, "Trends in Retirement Eligibility and Pension Benefits,
1974-1983," Monthly Labor Review, April 1987, pp. 18-25.
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Chart 4. Replacement rates under pension plans including and excluding Social Security payments:
Average benefits based on 30 years of service, medium and large firms, 1986
Average replacement
rate (percent)
80
Combined
private
pension
and
Primary
Social
Security
payment
85. A minimum age of 55 was generally included for meet-
ing these requirements. Minimum lengths of service were
less common.
Thirteen percent of all participants were covered by plans
permitting normal retirement at any age with 30 years of serv-
ice; the major concentration (19 percent) was among produc-
tion workers. Plans that featured such a provision almost
always offered other normal retirement opportunities at speci-
fied ages with lower service requirements. (If a plan had al-
ternative age and service requirements, the earliest age and
associated service were tabulated for this survey; if one al-
ternative did not specify an age, it was the requirement that
was tabulated.)
Early retirement (tables 63 and 64). Virtually all of the em-
ployees participating in a pension plan could retire before
normal retirement age and receive an immeciiate, reduced
pension. In some cases, employer approval was required for
such early retirement benefits.
The amount of an early retirement pension is lower for
two reasons: First, fewer years of service are applied to the
55
benefit formula because an employee has not worked until
normal retirement age. Second, because benefits begin at an
earlier age, the retiree is expected to receive plan payments
over a longer period of time.
The normal benefit is reduced by a percentage (factor) for
each year between the actual and normal retirement ages.
If a plan's normal retirement age is 62, for example, and
the reduction factor is 6 percent, a person retiring at age 59
would receive 82 percent of the normal formula amount (100
percent minus 3 years times 6 percent). In addition to the
18-percent reduction for early retirement, the annuity in this
example would be based on fewer years of service and pos-
sibly lower earnings than at age 62.
The reduction factor may be uniform or may vary by age
or service. Reduction factors that differed for each year of
early retirement, based on the employee's life expectancy
at that age (actuarial reductions), were used in plans cover-
ing one-eighth of participants with early retirement oppor-
tunities. Other methods of reducing benefits approximate an
actuarial reduction. For example, for three-eighths of the par-
ticipants, the reduction factor differed for age brackets of
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ers participating, to provide surveywide estimates for each
example. As shown in the tabulations below, the length of
retirement was a significant factor in determining the size
of pension adjustments, with larger increases paid to per-
sons retired longest. Also where maximum increases were
specified, retirees with higher original pensions had lower
percentage increases.
Monthly pension on
December 31, 1980
$250:
Average pension on December 31, 1985
Percent change, December 31, 1980-85
$750:
Average pension on December 31, 1985
Percent change, December 31, 1980-85
Years of retirement
5
$292
17
$832
11
10
$319
27
$914
22
15
$344
37
$988
32
The BLS Consumer Price Index for All Urban Consumers
(cm-u) rose 31 percent over the 5-year period studied.26 For
retirees in plans with ad hoc adjustments, and with monthly
pensions and years of retirement shown above, average ad-
justments ranged from 35 to 119 percent of the price rise.
Only 3 percent of all participants were in plans that provid-
ed for automatic increases in pension benefits to compen-
sate for increases in the cost of living. In most instances,
these cost-of-living-adjustment formulas provided for benefit
adjustments proportional to increases in the BLS Consumer
Price Index. Nevertheless, ceilings on individual increases
limited periodic adjustments to 4 percent or less for most
of the covered workers. Nearly all of the affected participants
were in plans calling for annual adjustments. Lifetime ceil-
ings on increases were uncommon.
For the first time, the survey collected information on the
incidence of lump-sum payments made to current retirees.
In 1986, 6 percent of participants were in plans which gave
retirees at least 1 lump-sum payment during the 1981-85
period. These payments ranged from $100 to $1,000.
Retirees receiving these lump sums normally also received
permanent pension increases between 1981 and 1985. In fact,
they often received both adjustments in the same year.
Vesting (table 68). Even when an employee leaves an em-
ployer without qualifying for either a normal, early, or dis-
ability retirement benefit, a pension may ultimately be paid.
If certain conditions are satisfied at the time of separation,
workers have a vested interest in all or a portion of their ac-
crued pension benefits and may begin receiving benefits years
later.
Although all pension participants are entitled to vested
benefits under the Employee Retirement Income Security Act
of 1974 (ERBA), some variations exist as to when this oc-
26 The rate of increase was determined by dividing the annual average
CPI-U for 1985 by the annual average CPI-U for 1980. For a discussion of
postretirement increases, see Donald G. Schmitt, "Postretirement Increases
Under Private Pension Plans," Monthly Labor Review, September 1984,
pp. 3-8.
58
curs. Most pension plans require 10 years of service before
benefits are guaranteed. While over two-thirds of the par-
ticipants were covered by the 10-year rule regardless of age,
one-sixth were affected by the plan sponsor's right to ex-
clude years of service before a specified age in determining
vesting eligibility.27
Unreduced vested pension payments begin at a plan's nor-
mal retirement age, based on the benefit formula in effect
when an employee left the plan. Also, terminated and vest-
ed participants can receive a reduced pension under a plan's
early retirement provision if the participant had satisfied the
corresponding service requirement when leaving the plan.
For terminated and vested employees who wish to receive
a pension beginning at the early retirement age, ERISA re-
quires the benefit to be at least the actuarial equivalent of
what would have been received starting at age 65. The actu
anal equivalent benefit is a reduced amount determined b:
the life expectancy at the age that pension payments begin
Although under ERISA the reduction factor used in detennin
ing the pension for a terminated employee can be more se
vere than for early retirement, the same factor was used in
plans covering 65 percent of the participants with early retire-
ment provisions. 28
Postretirement survivor benefits (table 69). ERISA also re-
quires the availability of a form of pension in which at least
50 percent of the retiree's payments continue to the spouse
after the retiree's death. When this type of pension?called
a joint-and-survivor annuity?is paid, the employee will
generally receive a lower benefit during retirement since pay-
ments are likely to be made over a longer period of time.
When the retiree dies, the spouse will receive part or all of
the retiree's monthly pension benefits.29
Joint-and-survivor annuities are based on an actuarial or
arithmetic reduction of the employee's pension. Nearly one-
fifth of the participants were in plans offering only a joint-
and-survivor option that provides a surviving spouse 50 per-
cent of the retiree's adjusted pension. Sixty-six percent of
27 Among other provisions, the Retirement Equity Act of 1984 amended
ERISA by lowering from 25 to 21 the age after which employers must en-
roll workers in defined benefit and defined contribution plans, and lower-
ing from 22 to 18 the age after which employees must earn vesting credits.
In addition, the act requires that the spouse of a deceased vested employee
be entitled to survivor benefits regardless of employee's age at death. For
most plans, the Internal Revenue Service extended the deadline for com-
pliance with provisions of the act until June 30, 1986. (Collectively bar-
gained plans had to comply by January 1, 1987.) Since the survey was
conducted from January to June 1986, previous ERISA rules were in effect
when the surveyed establishments were visited.
28 Due to changes in the Tax Reform Act of 1986, benefits from most
defined benefit plans will vest more rapidly beginning in 1989. Vesting pro-
visions differ significantly between defined benefit and some types of de-
fined contribution plans. The next chapter discusses these differences.
29 ERISA requires that the joint-and-survivor coverage be automatic for
married retirees, and that waiver of this option must be requested in writ-
ing. The Retirement Equity Act (see footnote 27) further directs that spouse
coverage can be waived only if both husband and wife sign the request.
For a more complete discussion of survivor benefits, see Donald Bell and
Avy Graham, "Surviving Spouse's Benefits in Private Pension Plans,"
Monthly Labor Review, April 1984, pp. 23-31.
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participants (up from 59 percent in 1980) had a choice of
two or more alternative percentages (frequently 50, 67, and
100 percent) to be continued to the spouse, with correspond-
ing reductions in their annuities.
Two percent of participants were in plans where the spouse
receives a joint-and-survivor annuity and either a monthly
cash payment or a portion of the retiree's pension. A larger
group, 7 percent of participants, were in plans providing a
portion of the retiree's benefit. In these latter plans, the
spousal annuity is close to what a 50-percent joint-and-
survivor annuity might provide. In both of these types of
plans, there is no reduction to the employee's pension for
the joint-and-survivor annuity.
Preretirement survivor benefits (table 70). Nearly all par-
ticipants were in plans providing for survivor payments in
case the employee died before retirement. Pensions usually
had to be vested before any death benefits were payable.30
For nearly two-thirds of the participants, a surviving spouse
would receive an annuity equivalent to the amount payable
if the employee had retired on the day prior to death with
a joint-and-survivor form of payment in effect. Most sur-
vivor pensions of this nature were based on an early retire-
ment benefit and were provided at no cost to the employee.
However, for 14 percent of participants (down from 24 per-
cent in 1980), preretirement joint-and-survivor protection in-
volved an extra cost to the employee and was available only
if elected. The cost was usually paid by the employee through
a small deduction in the pension ultimately payable to either
employee or spouse.
The remaining one-third of pension plan participants gener-
ally had a preretirement survivor annuity calculated as a por-
tion of the employee's accrued benefit (the benefit earned
as of the date of the employee's death). The incidence of
this type of annuity increased by slightly over 40 percent be-
tween 1984 and 1986, in part due to the Retirement Equity
Act of 1984. If an active employee dies after completion of
the vesting requirement, a typical survivor would receive an
annuity equal to 50 percent of the employee's accrued benefit
to date. Payments would be reduced by the early retirement
adjustment, and would begin when the employee would have
" See footnote 27 for changes required by the Retirement Equity Act.
59
reached early retirement age. If the employee lives to be-
come eligible for early retirement, the survivor benefit in
many cases switches to the equivalent of a 50-percent joint-
and-survivor benefit calculated as if the employee had re-
tired on the day of death. (The earliest available preretire-
ment survivor annuity was tabulated.)
Employee contributions. The employer paid the full cost of
defined benefit pension plans for 94 percent of the par-
ticipants. Of the employees who had to pay part of the cost,
virtually all paid a percent of earnings. The majority of par-
ticipants in contributory plans paid one rate (usually 2 to 4
percent) on earnings above a specified level, and a lower
rate (or frequently zero) below that earnings level. The an-
nual earnings level at which this break occurred ranged from
$3,000 to the $42,000 Social Security taxable wage base in
effect during 1986. Plans with varying employee contribu-
tions usually coordinate private benefits with Social Securi-
ty payments; as discussed earlier, pension benefit
computation rates used in these plans are higher on earnings
above the Social Security taxable wage base. One-fourth of
the participants in contributory plans paid a flat rate?none
paid more than 3 percent.
Participation requirements (table 71). Two-fifths of the em-
ployees with pension plans had immediate coverage. Another
one-fifth could participate regardless of age but had a serv-
ice requirement, seldom more than 1 year. The remaining
employees could not enter the pension plan until they reached
a specified age and completed 1 year of service, the most
restrictive requirement permitted under ERISA.31
Three-fifths of pension plan participants were in plans with
a maximum age, usually 59, beyond which newly hired em-
ployees were not eligible. Maximum age conditions are per-
mitted under ERISA regulations as long as the specified age
is within 5 years of a plan's normal retirement age.32
" See footnote 27 regarding the Retirement Equity Act's changes to
ERISA.
32 The 1986 Budget Reconciliation Act (described in footnote 25) changes
the ERISA requirements beginning in 1988. Plans will no longer be allowed
to exclude employees from participation due to age. Instead, the plan may
require the employee to participate for 5 years before becoming eligible
for benefits, even if that date is beyond the normal retirement age.
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Table 61. Defined benefit pension plans:' Average replacement rates for specified final earnings and years of service,'
medium and large firms, 1986-Continued
Final annual earnings
Years of service'
10
15
20
25
30
35
40
Production
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
Combined private pension and primary' Social Security benefit
54.1
49.1
43.4
38.1
34.1
31.0
59.7
53.8
47.7
42.3
38.2
35.0
65.1
58.4
52.0
46.3
42.1
38.8
70.4
63.0
56.1
50.2
45.8
42.4
75.4
67.3
60.1
54.0
49.4
45.8
80.1
71.2
63.6
57.3
52.5
48.7
84.5
74.9
66.8
60.2
55.3
51.3
' Excludes supplements pension plans.
Retirement annuity as a percent of earnings in the final year of work.
The maximum private pension available to an employee, not reduced for
early retirement or joint-and-survivor annuity, was calculated under each
pension plan using the earnings and service assumptions shown. This
benefit level was then expressed as a percent of earnings in the last year
of employment.
These calculations assume employees retired on January 1, 1986,
and final earnings are for 1985. Earnings histories, necessary for
applying the pension formulas, were constructed for each final earnings
level based on data provided by the Social Security Administration.
For private pension formulas that are integrated with Social Security
(see table 59) and for computation of Social Security benefits, the worker
is assumed to have retired at age 65 and paid into Social Security for 40
years. Computations exclude 2 percent of participants in cash account
pension plans or plans with benefits based on career contributions.
The years of service intervals represent total service with the
employer. Time spent satisfying service requirements fcr plan participation
was excluded from the calculation of replacement rates, unless the pension
plan specified that such time was to be included in benefit computations.
' Excludes benefits for spouses and other dependents.
N
- Table 62. Defined benefit pension plans:' Percent of full-time participants by minimum age and associated service
requirements for normal retirement,' medium and large firms 1986
Age and service requirement'
All par-
ticipants
Profes-
sional
and ad-
ministra-
tive par-
ticipants
Technical
and cleri-
cal par-
ticipants
Produc-
lion par-
pants
Age and service requirement3
All par-
. .
trapants
Profes-
sional
and ad-
ministra-
tive par-
ticipants
Technical
and cleri-
cal par-
ticipants
Produc-
tion oar
. - -
pants
Total
No age requirement
30 years' service
More than 30 years' service
Age 53
30 years' service
Age 55
20 years' service
25 years' service
30 years' service
More than 30 years' service
Age 56-59
15 or 20 years' service
30 years' service
More than 30 years' service
Age 60
No service requirement
1-5 years' service
10 years' service
15 years' service
20 years' service
25 years' service
30 years' service
More than 30 years' service
Age 61
5 years' service
20 years' service
26 years' service
' Fyrii nine al innharnetn? .1 ........1.......
100
13
13
(1
(4)
(4)
3
2
(4)
1
0
1
(4)
(4)
1
14
4
3
3
1
(4)
(4)
3
()
1
(4)
(4)
(4)
...1--
100
5
5
-
_
_
5
4 .
(4)
1
(4)
(4)
_
_
(4)
20
6
5
3
1
(4)
(4)
4
(4)
1
(4)
(4)
1
100
10
10
0
-
1
1
(4)
1
(4)
1
(4)
(4)
(4)
15
5
3
3
1
(4)
(4)
4
-
1
(4)
C)
1
100
20
19
0
(4)
(4)
3
1
(4)
2
(4)
2
1
1
1
10
3
1
3
1
1
(4)
2
C)
C)
_
(4)
Age 62
No service requirement
1-4 years' service
5 years service
8 years' service
10 years' service
14 years' service
15 years' service
20 years' service
25 years' service
30 years' service
Age 63-64
No service requirement
10 years' service
20 years' service
Age 65
No service requirement
1-4 years' service
5 years' service
10 years' service
Sum of age plus services
Equals less than 80
Equals 80
Equals 85
Equals 90
Equals more than 90
19
4
(4)
1
(4)
7
(4)
2
2
1
1
2
(4)
2
(4)
36
32
(4)
2
2
11
1
1
5
3
1
19
4
(4)
1
(4)
7
(4)
3
2
1
1
2
(4)
2
-
33
31
_
1
1
14
2
1
7
2
1
20
5
(4)
1
(4)
6
(4)
4
2
1
1
4
(4)
3
-
36
34
_
1
1
13
2
(4)
4
6
1
18
4
(4)
(4)
_
8
_
1
3
1
1
2
_
1
1
38
32
(4)
3
3
7
(4)
(4)
4
2
1
2 Normal retirement is defined as the point at which the participant
could retire and immediately receive all accrued benefits by virtue of
service and earnings, without reduction due to age.
3 If a plan had alternative age and service requirements, the earliest
age and associated service were tabulated; if one alternative did not
specify an age, it was the requirement tabulated.
Less than 0.5 percent.
5 In most plans, participants must also satisfy a minimum age or serv-
ice requirement.
NOTE: Because of rounding, sums of individual items may not equal
totals. Dash indicates no employees in this category.
68
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Table 67. Defined benefit pension plane Percent of full-time participants in plans granting ad hoc postretire-
ment annuity increases,' medium and large firms, 1986?Continued
Characteristic
Benefit formula for most recent
Increase
Total
Flat increase
38 40

35
Monthly dollar amount
8
Less than $10.00
$10.00
4
$10.01-$15.00
2
$15.01-$20.00
Production partici-
pants
100
More than
$20.00
Varies by date of retirement
Percent of present benefit

5.0
Less than 5.0
32
3
1
38
1
-
(3)
1
1
25
3
5.1-7.4
7.5-9.9
10.0
10.1-14.9
15.0
More than 15.0
Varies by date of
retirement

Type of fiat increase not determinable
Increase per year of retirement
Monthly dollar amount
Percent of present benefit

Less than 2.0
5
2.0
2
3.0
2
4.0
2
4.1-4.9
5
5.0
6.0
4
Varies by date of retirement
(3)
4

(3)
(3)
(3)
4
1
20
(3)
14
1
32
24
30
36
38
1
23
Increase per year of service
Monthly dollar amount
Less than $.50 39
13
$.50 38
$1.00 2
$1.01-$1.99 18 3
$2.00 26
More than $2.00
Varies by date of retirement
Percent of present benefit
Combination of two or more benefit formulas
Type of formula not determinable
Excludes supplemental pension plans
2 Unscheduled increases in pension payments for employees
retiring prior to 1986. Excludes one-time lump-sum payments.
3 Less than 0.5 percent.
73
1
5
1
2
(3)
NOTE: Because of rounding, sums of individual items may
not equal totals. Dash indicates no employees in this category.
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Chapter 7. Defined
Contribution Plans
Sixty percent of the employees within the scope of the 1986
survey (seven-tenths of the white-collar workers and one-
half of the blue-collar workers) participated in one or more
defined contribution plans. These plans, which are wholly
or partly financed by employers, are designed to provide
retirement income, capital accumulation, or both. Retirement
plans, as defined in this study, do not allow withdrawal of
employer contributions until retirement age, death, disabili-
ty, separation from service, age 59 1/2, or hardship. Capi-
tal accumulation plans, on the other hand, impose less
stringent restrictions for withdrawal of employer contribu-
tions." Examples of these less stringent restrictions include
permitting only one or two withdrawals per year, or impos-
ing a service requirement of 2 or 5 years before withdrawal.
Two-thirds of the employees within the scope of the sur-
vey were in retirement plans only, and 22 percent were in
both retirement and capital accumulation plans; 1 percent
had capital accumulation but no retirement plans (table 72).
As noted in chapter 6, three-fourths of employees partici-
pated in a defined benefit pension plan. But when defined
contribution retirement plans are considered along with de-
fined benefit pension plans, retirement coverage rises to 89
percent.
Whether for retirement or capital accumulation, defined
contribution plans usually specify a contribution rate by the
employer, but not a formula for determining benefits, as in
a defined benefit pension plan. Instead, individual accounts
are set up for participants, and benefits are based on amounts
credited to these accounts, plus investment earnings.
As shown in table 73, various types of defined contribu-
tion plans are available for retirement and capital accumula-
tion purposes: 30 percent of the employees participated in
employee stock ownership plans, 28 percent in savings and
thrift plans, 22 percent in profit-sharing plans, 2 percent in
money purchase pension plans, and less than one-half of 1
percent in stock bonus plans. 34 Another 3 percent of the em-
ployees were currently purchasing company stock, through
33 BLS used these definitions for analytic purposes, but it should be noted
that most defined contribution plans can be used to provide retirement in-
come or accumulate financial assets. Capital accumulation plans may pro-
vide retirement income, because withdrawals of the employer's contributions
are voluntary, not mandatory. Similarly, defined contribution retirement
plans can be used to accumulate assets, because these plans nearly always
permit preretirement withdrawals of the employer's contributions (for ex-
ample, at age 591/2, upon termination of employment prior to retirement,
or upon disability). Many of these plans also permit employees to receive
a lump sum, rather than an annuity, upon retirement).
77
payroll deductions, at less than market price (stock purchase
plans), and less than one-half of 1 percent of employees were
eligible to purchase stock in the future at a designated price
(stock option plans). As table 74 shows, it was common for
employees to participate in more than one defined contribu-
tion plan.
Seventy percent of participants in defined contribution
retirement plans had their benefit wholly financed by the em-
ployer. In contrast, capital accumulation plans were jointly
financed for 78 percent of the participants. A large majority
of capital accumulation plans were savings and thrift plans,
which involve employer matching of employee contributions.
It was common for employees to participate in both a de-
fined benefit or money purchase pension plan and one or
more other retirement or capital accumulation plans. Sixty
percent of participants in pension plans of medium and large
firms (70 percent of white-collar and 45 percent of blue-collar
participants) also had at least one additional plan, up from
50 percent in 1985.
The likelihood of a combination of plans varied with the
type of plan. For example, two-thirds of profit-sharing plan
participants did not have a pension plan available to them.
Conversely, almost 90 percent of savings and thrift plan par-
ticipants were also defined benefit plan participants. Profit-
sharing plans often substitute for pensions, while savings and
thrift plans commonly are supplements.
Cash or deferred arrangements (table 75)
One-third of the employees within the scope of the survey
were in plans with a cash or deferred arrangement." These
arrangements allow participants to choose between receiv-
ing currently taxable income, or deferring taxation by plac-
ing the money in a retirement account. Cash or deferred
arrangements took the form of either salary reduction plans
or deferrals of profit-sharing allocations.
34 A money purchase pension plan provides for a pension annuity or other
form of retirement income that is determined by fixed contribution rates
plus earnings credited to the employee's account. A stock bonus plan is
a plan whereby the employer or the employee and the employer jointly con-
tribute to a trust fund which invests in various securities. Proceeds from
the investments are usually paid to the employees in the form of company
stock. Savings and thrift, employee stock ownership, and profit-sharing plans
are described later in this chapter.
35 The survey determined the number of employees actually contribut-
ing to freestanding 401(k) plans. It also determined the number participat-
ing in employer-financed plans allowing employee contributions with pretax
dollars, but not the number of employees actually making such contributions.
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Salary reduction plans (available to 31 percent of em-
ployees) allowed employees to contribute a part of their earn-
ings to a retirement plan, and defer income taxes on those
contributions and their earnings until distribution. Such con-
tributions are referred to as "employee elective deferrals"
or "pretax contributions."
Deferrals of profit-sharing allocations (available to 2 per-
cent of employees) provide employees with the choice of
receiving an employer's profit-sharing contribution immedi-
ately, or deferring the contribution and postponing taxation
until distribution.
Participation in plans with salAry reduction features, which
are authorized by sections 401(k) and 403(b) of the Internal
Revenue Code, increased from 26 to 31 percent of employees
between 1985 and 1986.36 Forty-two percent of the white-
collar and 19 percent of the blue-collar employees partici-
pated. Two-thirds of all participants (white- and blue-collar
combined) could elect to make their contributions to an ex-
isting savings and thrift plan where the employer matched
at least part of the employee's contribution; the remaining
one-third of the participants were in freestanding plans (no
employer contribution), profit-sharing plans, or money pur-
chase pension plans.
From a different perspective, 49 percent of all participants
in defmed contribution plans could make tax-deferred con-
tributions to their plan. The incidence, again, was higher for
white-collar (55 percent) than for blue-collar (38 percent)
employees. The following tabulation shows the percent of
defined contribution plan participants in plans with salary
reduction features:
Percent of
participants
Savings and thrift
75
Deferred profit sharing 28
Money purchase pension 34
Savings and thrift plans
Twenty-eight percent of employees participated in savings
and thrift plans-38 percent of white-collar and 17 percent
of blue-collar workers. Under these plans, employees con-
tribute a predetermined portion of earnings to an account,
all or part of which is matched by the employer. Contribu-
tions are invested in various ways, such as stocks, bonds,
and money market funds, as directed by the employee or em-
ployer, depending upon the provisions of the plan. Although
usually designed as a long-term savings program, savings
and thrift plans allow for withdrawals subject to specified
conditions and, possibly, penalties.
Employee contributions (tables 76-77). Savings and thrift
plans allow employees to choose from a range of possible
36 Most participants in cash or deferred arrangements were in plans that
qualified under section 401(k) of the Internal Revenue Code. A small num-
ber of plans under section 403(b) were observed in not-for-profit organi-
zations.
78
contribution rates. A typical plan allows employees to con-
tribute (in whole percentages) anywhere from 6 to 16 per-
cent of pay. Nearly three-tenths of the participants could
contribute up to 16 percent of their earnings; 10 percent and
12 percent were other common maximums.
Three-fourths of the participants in savings and thrift plans
were allowed to make pretax contributions, up from 65 per-
cent in 1985. Thirty-nine percent were given the option to
contribute either pretax or posttax earnings in 1986, while
36 percent were required to make contributions on a pretax,
salary reduction basis. Half of the participants in plans man-
dating pretax contributions were required to contribute only
an initial amount pretax. For example, a plan may allow a
maximum contribution of 16 percent with only the first 6
percent required on a pretax basis.
Employer matching contributions (table 78). Employers pro-
vide an incentive for participation in a savings ahd thrift plan
by matching all or a portion of the employee's contribution
and adding this amount to the employee's account. Usually
the employer matches a portion of the employee's contribu-
tion up to a specified percent of the employee's earnings.
For example, the most common provision found in 1986 was
for an employer to match 50 percent of the employee's con-
tribution up to the first 6 percent of earnings. Assuming the
employee contributed 8 percent of earnings, the employer
would add 3 percent (50 percent of the first 6 percent of the
employee's earnings). In contrast with these straight percen-
tage matches, nearly one-fourth of the participants received
matching contribution rates varying by length of service,
level of employee contribution, or company profits.
Investment decisions (table 79). Nine out of ten participants
in savings and thrift plans were allowed to choose how they
wanted their own contributions invested. Common invest-
ment vehicles offered by these plans included company stock,
common stock funds, guaranteed investment contracts,
government securities, corporate bonds, and money market
funds. The number of choices in these plans varied from two
to five or more, with three choices being the most common.
Employees were nearly always allowed to split their contri-
butions among the various options and were allowed to
change their investment choices periodically.
Employees generally had less flexibility when it came to
employer contributions. Only one-half of the participants
were permitted to choose how the matching contribution was
to be invested. Where no choice was permitted, the plan typi-
cally specified that the matching contribution was invested
in company stock.
Withdrawals and loans (table 80). Eight-tenths of the par-
ticipants in savings and thrift plans were allowed to with-
draw all or a portion of employer contributions prior to
normal payout (retirement, disability, or termination of em-
ployment). Twenty-six percent, however, were only allowed
to withdraw employer contributions for hardship reasons
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(medical, educational, home improvements, etc.). The re-
maining participants could withdraw employer contributions
for any reason. Two-thirds of the participants who could
withdraw for any reason were subject to a penalty?usually
suspension of employer and employee contributions for 6
or 12 months, or forfeiture of non-vested employer contri-
butions.
The ability of the participants to withdraw their own con-
tributions prior to retirement, death, disability, age 59 1/2,
or termination of employment depends upon whether the
money was contributed pretax or posttax. Pretax contribu-
tions are subject to Internal Revenue Code provisions and
can only be withdrawn for hardship. Posttax contributions
are not subject to hardship rules, and many plans allow these
amounts to be withdrawn for any reason. However, a penalty
in the form of a 6- or 12-month suspension from further con-
tributions to the plan is common.
Another method of accessing an employee's account prior
to final payout is through loan provisions--one-fourth of par-
ticipants in savings and thrift plans were allowed to borrow
from their accounts. One-half of the participants in plans per-
mitting loans were also able to withdraw part of their ac-
count for any reason. The other half were in plans that
prohibited withdrawals or allowed them only for hardship
reasons. Interest rates on employee loans were typically de-
termined by a specific economic indicator (such as the prime
rate or U.S. Treasury bill rate) or were at the discretion of
the plan sponsor (employer, employer association, or union).
Loans were generally required to be repaid within 5 years,
but longer payment periods applied for home purchase or
renovation loans.
Distribution (table 81). At retirement, savings and thrift plans
virtually always allowed for payout in the form of a lump
sum, lifetime annuity, or installments over a specified time
period. Many participants were given a choice from among
two or all three of these options.
Employee stock ownership plans (table 82)
Thirty percent of all employees in medium and large firms
participated in an employee stock ownership plan (ES0P), up
from 24 percent in 1985.37 These plans, usually funded en-
tirely by the employer, provide employees with stock in their
company. The employer pays a designated amount to a fund
that is invested primarily in company stock and makes benefit
distributions in either company stock or cash. The majority
of participants in ESOP's were in payroll-based plans (PAY-
soP's). Companies received a Federal tax credit of up to 0.5
percent of the plan participants' payroll for funds used to
purchase company stock to distribute to the participants' ac-
counts. This tax credit expired on December 31, 1986.
While the maximum employer contribution to a PAYSOP
37 This proportion is limited to plans where stock was credited to em-
ployee accounts during 1986.
79
was fixed by law at 0.5 percent of payroll, employers had
some discretion in allocating that money to individual em-
ployees. Nearly 80 percent of 1986 participants were in plans
that allocated benefits in proportion to salaries. (By law, only
salaries up to $100,000 per year could be included in such
calculations.) The remaining participants were in plans that
allocated benefits equally to all participants.
The PAYSOP provisions in the Internal Revenue Code al-
lowed employer contributions to be distributed after they had
been held in an employee's account for 7 years. Despite this
provision, 85 percent of PAYSOP participants had to wait until
termination of employment, death, or disability to have
benefits distributed. Only 15 percent of participants could
gain access to their benefits after 7 years. With the expira-
tion of the PAYSOP tax credit, employers who terminate their
plans may distribute accumulated benefits immediately.
Final distribution of PAYSOP benefits was in the form of
stock for 58 percent of participants. The remaining par-
ticipants could choose between a distribution in stock or the
equivalent in cash.
Profit-sharing plans (table 83)
Twenty-two percent of all employees had profit-sharing
plans in 1986, up from 18 percent in 1985. There are three
types of profit-sharing plans?cash plans (covering 1 per-
cent of the workers), deferred plans (18 percent), and plans
that offer a combination of cash and deferred benefits (3 per-
cent). In a cash plan, benefits are paid directly to the par-
ticipants in cash, usually at the end of the year, while a
deferred plan holds money in employee accounts until retire-
ment or another condition stipulated by the plan (disability,
death, etc.). In a combined plan, the employee may auto-
matically receive a portion of the profits in cash, with the
remainder placed in a deferred account, or the employee may
be given a choice of cash or deferred benefits.
Three-fifths of 1986 participants in deferred profit-sharing
plans had employer contributions determined by a specified
formula, such as 4 percent of profits if annual sales were
$2-5 million, 8 percent if sales exceeded $5 million. The re-
maining participants were in plans where the employer con-
tribution was determined at the discretion of the employer.
Once the employer contribution is determined, it may be
allocated to individual participants in a number of ways. The
most common method of allocation was in proportion to
salary (81 percent of plan participants). Other allocation
methods included formulas based on earnings and service
(10 percent) and equal allocations to all participants (1 per-
cent). Another plan feature, loans from employee accounts,
was available to one-fourth of the participants in deferred
profit-sharing plans.
Participation and vesting (tables 84 and 85)
Minimum age and/or service participation requirements
are more common in defined contribution plans than in de-
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fined benefit plans. To begin accumulating benefits from a
savings and thrift plan, 90 percent of participants had to meet
such requirements. Participation requirements were also
common for profit-sharing plans (86 percent), and employee
stock ownership plans (74 percent). In contrast, only 59 per-
cent of defined benefit pension plan participants faced such
provisions.
Of those defined contribution plans with participation re-
quirements, most required a minimum amount of service,
commonly 1 year, and did not require an employee to be
a designated minimum age. Conversely, defined benefit pen-
sion plans that included participation requirements most often
specified a minimum age and a minimum amount of service.
Defined contribution plans are subject to ERISA vesting
rules in the same manner as defined benefit pension plans.
Vesting schedules vary significantly, however, between de-
fined benefit and defined contribution plans, and variations
are also common between individual types of defined con-
tribution plans. All vesting schedules apply to employer con-
tributions; employee contributions (including pretax
contributions) are always 100-percent vested.
Twenty-six percent of savings and thrift plan participants
so
and 29 percent of deferred profit-sharing participants had
immediate full vesting, a feature rarely found in defined
benefit plans. PAYsoP's, by law, are always 100-percent
vested. Class-year vesting, where employer contributions for
a particular year (class) become nonforfeitable after a specific
period of time, was available to nearly 30 percent of sav-
ings and thrift plan participants. Such vesting was uncom-
mon in profit-sharing plans.
Graduated vesting, where an employee's nonforfeitable
percentage increases over time and reaches 100 percent,
usually after 5 or 10 years, was most common in deferred
profit-sharing plans, with 2 of 3 participants covered by such
a provision. One-fourth of savings and thrift plans par-
ticipants had graduated vesting, and only about 10 percent
of defined benefit plan participants had such vesting. Final-
ly, "cliff" vesting, where no vesting occurs until an em-
ployee satisfies the service requirements for 100-percent
vesting, is found in the majority of defmed benefit plans,
but was required of only 20 percent of savings and thrift plan
participants and 2 percent of deferred profit-sharing plan
participants.
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Declassified and Approved For Release 2012/08/27: CIA-RDP90-00530R000400730003-0
Chapter 8. Plan Administration
In addition to the data on individual benefit plans, the sur-
vey looked at how various benefits are administered. The
great majority of the insurance and retirement plans were
sponsored by individual employers, and benefits typically
were offered independently, rather than as part of a flexible
benefits program.
Plan sponsor (table 86)
Single employers were the predominant sponsors of health,
life, sickness and accident, and long-term disability insur-
ance, and defined benefit pension plans in medium and large
firms. Nearly all plan participants in life insurance, health
insurance, long-term disability insurance, and defined benefit
pension plans were in single-employer plans. Eighty-seven
percent of sickness and accident insurance participants were
in single-employer plans; most of the remaining participants
were in State temporary disability benefit plans. (State disa-
bility plans are discussed in chapter 4.)
Multiemployer plans result from agreements between em-
ployers within an industry or related industries and one or
more labor unions. These plans allow employees moving
from one employer to another within the industry to receive
the same or similar benefits. Defined benefit pension and
health insurance plans were the most common benefits spon-
sored by multiemployer groups, and production employees
were the most likely recipients of such benefits. The scope
of the survey, which excludes several service industries and
small firms in other industries, such as contract construc-
tion and trucking, accounts for the small representation of
multiemployei plans.
Flexible benefits plans and reimbursement
accounts (table 87)
Traditionally, employers have offered their workers benefit
plans in a number of areas, such as health insurance, life
insurance, and retirement. Employees may have a choice be-
tween one or more plans in a benefit area, for example, be-
tween a commercial health insurance plan and a health
maintenance organization, but benefits in each area are
offered separately. In recent years, however, a new approach
to offering benefits has attracted considerable attention?
flexible benefits. In 1986, the Employee Benefits Survey
89
looked for the first time at two arrangements for offering
such benefits?flexible benefits plans and reimbursement ac-
counts.
Five percent of employees in medium and large firms were
offered flexible benefits plans, reimbursement accounts, or
both. These plans were more common among white-collar
workers (8 percent) than among blue-collar workers (2
percent).
exIblEbenefits plans, also known as cafeteria plans, al-
low employees to choose between two or more types of
benefits." The most common choices offered were health,
life and long-term disability insurance, pretax savings (sal-
ary reduction plans), added vacation days, and the option
of receiving cash instead of benefits. Less common choices
were added sick leave days, sickness and accident insurance,
educational assistance, child care expenses, legal expenses,
and adoption assistance. Pensions are usually fixed benefits
and not part of a flexible benefits program.
A reimbursement account, also called a flexible spending
account, provides employer funds, employee pretax money,
or both, to be used for expenses not included in a benefits
package. Typical expenses that may be reimbursed through
the account include health care coinsurance, deductibles, and
other out-of-pocket health expenses; and insurance premi-
ums, child care costs, and legal assistance. Reimbursement
accounts may be part of a flexible benefits plan or they stand
alone.
A large majority of employees participating in flexible
benefits plans or reimbursement accounts were required to
contribute toward the cost of their benefits, or were allowed
to contribute to obtain additional benefits. Most of these
contributions were in the form of a salary reduction
arrangement.39
Individual benefit plans offered through a flexible benefits
plan were analyzed and included in the tabulations for specific
benefit areas in this bulletin.
"For this survey, a plan had to allow choices among two or more types
of benefits to be classified as a flexible benefits plan. Thus, plans that per-
mitted a selection in only one benefit (for example, a choice among several
health insurance options or plans) were not classified as flexible benefits
plans.
" Regulations covering section 125 of the Internal Revenue Code allow
employees to designate a portion of their salary for full or partial payment
of certain benefit costs. Amounts so designated are known as salary reduc-
tion arrangements and are exempt from Federal income tax.
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1111ammommoviiiii,
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Table 87. Flexible benefits plans and reimbursement
accounts:' Percent of full-time employees eligible, medium
and large firms, 1986
Coverage
All em-
ployees
Profes-
sional
and
adminis-
trative
employ-
ees
Total
100
100
Provided flexible benefits and/or
reimbursement accounts
5
9
Flexible benefits
2
4
With reimbursement accounts
2
3
Reimbursement accounts
5
9
Freestanding reimbursement
accounts
3
5
Not provided flexible benefits or
reimbursement accounts
95
91
Techni-
cal and
clerical
employ.
ees
100
8
2
2
7
5
92
Produc-
tion em-
ployees
100
2
1
(2)
1
1
98
' Flexible benefits plans, also known as, flexible compensation and
cafeteria plans, allow employees to choose between two or more benefits
or benefit options, including cash, in determining their individual benefit
packages. Reimbursement (flexible spending) accounts', which are used to
finance benefits or expenses unpaid by insurance or benefit plans, may be
part of a flexible benefits program or stand alone (freestanding accounts).
These accounts may be financed by the employer, employee, or both. The
employee contribution is made through a salary reduction arrangement.
2 Less than 0.5 percent.
91
Declassified and Approved For Release 2012/08/27: CIA-RDP90-00530R000400730003-0
Declassified and Approved For Release 2012/08/27: CIA-RDP90-00530R000400730003-0
Declassified and Approved For Release 2012/08/27: CIA-RDP90-00530R000400730003-0