Benefits

Benefits
Authored by Andrew Wampler

Wilson 1bca35f096d56ee718c45bfa7080d4cdc0dac51aa6b2e653b2ea8ce1b527da5a

Introduction to benefits

When Congress enacted the Employee Retirement Income Security Act (ERISA) in 1974, it wanted to balance two competing concerns:


  1. protecting employees who had been promised certain benefits by their employers

     

  2. giving employers a set of rules by which they could operate and maintain uniform employee benefit plans for numerous facilities without interference from varying state laws. 

     

Therefore, while providing plan participants with certain causes of action to sue their employers in federal court (or, sometimes, state court) if they are not provided the benefits they were promised and imposing certain disclosure obligations on employers that maintain “employee benefit plans” (as defined in the law), ERISA also provides nearly exclusive regulation of such plans. ERISA preempts state laws that attempt to regulate employee benefit plans, except certain laws that regulate insurance, securities, or the banking industry. Therefore, any claim that an employee may bring that relates to an employee benefit plan (other than the exceptions noted within), such as a claim for benefits or for breach of fiduciary duty, must be brought under ERISA. 

The U.S. Supreme Court ruled in 2013 that individuals in legal same-sex marriages are required to be treated as married under federal law. The IRS has issued a notice clarifying that qualified retirement plans must comply with this decision. Plans are not required to apply the requirements of the decision retroactively, but plans with terms inconsistent with the opinion must be amended by December 31, 2014. These requirements apply only to qualified retirement plans. However, non-qualified plans, severance agreements, incentive plans, and other agreements often include the similar terminology in discussing employees and relationships. Thus, employers should take care to consider its uses of these terms.

 

What is an employee benefit plan?

ERISA defines an “employee benefit plan” as either an “employee welfare benefit plan” or an “employee pension benefit plan.” An employee benefit plan does not include:


  • governmental plans

     

  • church plans (although church plans can opt into ERISA coverage if they wish)

     

  • plans intended solely to comply with state laws, such as worker’s compensation, unemployment compensation, and disability plans maintained outside the United States substantially for non-resident immigrants

     

  • excess benefit plans, which are plans maintained solely for the purpose of providing benefits for certain management level or other highly compensated employees in excess of the limitations on contributions and benefits imposed by the Internal Revenue Code (IRC) and ERISA.

     

Employee welfare benefit plan

An employee welfare benefit plan includes the following plans maintained by an employer for the benefit of its employees or their beneficiaries: 



  • health plans




  • life insurance plans




  • disability plans




  • accidental death and dismemberment benefit plans




  • certain scholarship plans




  • certain pre-paid legal service plans




  • severance plans.

     



This list is not all-inclusive. Furthermore, the U.S. Department of Labor (DOL) has issued regulations and guidelines that make an exception to programs or arrangements that have these benefits as a part of the program or arrangement. The programs or arrangements might include salary continuation programs in the event a participant suffers a temporary disability. 

 

Employee pension benefit plans

An employee pension benefit plan is a plan, fund, or program that provides retirement income to employees or their beneficiaries, or results in a deferral of income by employees extending to the termination of employment or beyond. These plans include:

Defined benefit pension plans

These plans determine a participant’s retirement benefit based on a specified formula.  Common types of defined benefit plans are traditional retirement plans and cash balance plans. Under these plans, the employer maintains the risk of loss from the plan’s investments. 

 

Defined contribution pension plans

These plans provide participants with an account. The employer may invest the assets of the plans, but more typically, the employer gives participants the right to determine their investment options from a menu of available investment alternatives. Typical defined contribution plans include profit sharing plans, 401(k) plans, money purchase pension plans, and SIMPLE plans.

ERISA requirements

ERISA imposes certain obligations on employers that sponsor an employee benefit plan, including:


  • funding certain plans

     

  • disclosing information to participants and beneficiaries

     

  • reporting certain information concerning the plans to governmental authorities

     

  • operating the plans under a fiduciary duty (an obligation to act in the best interest of a third party).

     

In addition, ERISA (and the IRC, if the employer wishes to retain the plan’s tax-qualified status) requires that employee benefit plans contain a number of provisions. These obligations are discussed in the following paragraphs. 

 

Funding obligations

Plan sponsors have the obligation to fund defined benefit plans and money purchase pension plans. Unless benefits are paid for through insurance contracts, employee pension benefit plan assets must be held in trust for the benefit of the participants and beneficiaries in order to pay the benefits when they come due. An informal promise to pay an employee when he/she retires may subject the employer to ERISA’s funding as well as other ERISA requirements. In addition, retirement plans must meet minimum funding levels to pay participants or their beneficiaries the retirement benefits promised to them under the plan. Most welfare benefit plans are not subject to ERISA’s funding requirements, although ERISA requires that assets intended to fund benefits must be contained in trust or funded by insurance.

 

Disclosure obligations

All plans subject to ERISA must be in writing. An employee benefit plan that is not in writing (such as an informal promise to pay retirement benefits) is still subject to ERISA. ERISA requires the plan sponsor to maintain a plan document and to explain the plan to participants in a summary plan description. These summary plan descriptions are generally a summary of the plan and must be drafted in a manner calculated to be understood by the average plan participant. Summary plan descriptions also must contain certain provisions, including a statement of ERISA rights and claims review procedures. Summary plan descriptions are more than a summary of plan terms, however. They are typically the only document a participant receives that describes the benefits, and some courts have determined that a participant can sue based on the terms of the summary plan description, even if the terms conflict with the plan document. For this reason, great care should be taken in drafting summary plan descriptions.

If a participant requests documents used by the plan administrator to operate the plan, they must be provided within 30 days of the request. Failure to provide the documents within this time period could result in a fine of up to $110 per day. 

 

Reporting obligations

Most ERISA plans are required to file a Form 5500 with the IRS. Excepted from this filing requirement are unfunded or fully insured welfare plans (or a combination) with fewer than 100 participants. Failure to file a Form 5500 could result in the imposition of a penalty of up to $1,100 per day.

 

Fiduciary duty

Under ERISA, any individual who is able to make decisions in administering an employee benefit plan or who handles the assets of the plan is a fiduciary, and must comply with the statute’s fiduciary responsibility provisions including certain bonding requirements. Fiduciaries must perform their duties prudently and solely in the interests of the participants and beneficiaries. Fiduciaries can be personally liable for losses to a plan.

 

ERISA's rights for employees

ERISA gives participants or beneficiaries the right to sue the employer or the plan for benefits due to them under the plan’s terms and for penalties for the plan administrator’s failure to provide requested documents. Participants may also sue for breach of fiduciary duty. Most lawsuits under ERISA must be filed in federal court; or the defendant will be allowed to have the case sent to federal court, a process called removal. ERISA does not give a participant a right to a jury trial, so most cases are decided by a judge. 

 

ERISA’s substantive requirements

Most of the substantive requirements for employee benefit plans are governed by the IRC. Aside from the tax consequences for failure to comply with the IRC, ERISA imposes certain requirements, which if not complied with, could allow an individual to file a lawsuit against the plan, employer, and/or it's fiduciaries. These requirements include:


  • minimum participation (generally, a maximum two-year waiting period)

     

  • vesting (generally, no longer than seven years or six years for matching contributions) and funding requirements for pension plans

     

  • COBRA and HIPAA requirements for group health plans.  (See also Health insurance.)

     

Insured welfare benefit plans must also comply with state insurance laws.

Furthermore, an important provision of ERISA is that pension benefits may not be assigned or transferred other than to the participant or a beneficiary. The exceptions to this rule are if the IRS garnishes the plan account or a qualified domestic relations order (QDRO) is submitted. Not all state court divorce orders that award pension benefits to the non-participating spouse meet the QDRO requirements and, until these orders are revised to meet the requirements, a distribution should not be allowed. Only state court orders that comply with the IRS rules and parallel ERISA requirements will allow such a distribution. Generally, in order to be a QDRO, the domestic relations order must be a judgment from a court, signed by a judge, which relates to child support, alimony payments, or marital property rights under state domestic relations law. Furthermore, it must specify certain things, including:


  • the name of the plan to which the order relates

     

  • the number of payments or period to which the order applies

     

  • the amount or percentage of the participant’s benefit to which the payee is entitled

     

  • other various requirements.

     

Also, the order cannot require the plan to make payments in a form or a manner for which the plan does not provide. It is important that employers be sure that court orders specifically comply with the QDRO rules before allowing a distribution from a qualified pension plan. 

 

More information

This chapter is intended as a brief overview of some of the requirements and obligations ERISA imposes on employers. It is by no means exhaustive.  For more information visit:

•     www.dol.gov/ebsa, or consult an ERISA attorney.

The impact of healthcare

reform on employee benefits

The Patient Protection and Affordable Care Act (PPACA) became law during March 2010.  The PPACA makes several significant changes to health insurance in the United States. The majority of changes became effective in 2014. There are significant changes for the health industry, individuals, and employers. This summary addresses changes for employers. 

Changes implemented before 2014

Small employers that pay 50% or more of specified insurance costs may receive a tax credit of up to 35% of their contributions. Those amounts vary based upon the number of employees and wages paid to them. 

 

Changes that began in 2014

Most of the PPACA changes began phasing in in 2014. Employers should monitor releases from the government as some requirements are being delayed. Changes so far include:



  • exchange items




  • taxes




  • coverage.

     



Some of the significant aspects of the act include: 



  • Insurance availability 

    Every insurance carrier will be required to accept every employer. 

     


  • Renewability guaranteed

    Insurance carriers must renew employers. 

     


  • Non-discrimination

    Insurance carriers may no longer discriminate against an employer’s population in group coverage based on the claims experience or health status of the employees. 

     


  • Cost controls

    Premium increases and deductibles will be controlled for small business. 

     


  • Deductible cap

    Deductibles will be limited to the health savings account maximum. 

     


  • No dollar limits

    Annual dollar limits on insurance coverage will be eliminated. 

     


  • Capped waiting periods

    Waiting periods may not be longer than 90 days. 

     


  • Large employer enrollment period

    Employers with more than 200 employees must automatically enroll employees in the health insurance plan, but employees may opt out of coverage. 

     


  • Tax changes

    Employers will be charged a 40% excise tax on self-insured plan coverage exceeding $10,200 for individuals, and $27,500 for families.

     


  • Premium assistance credit

    When an employer’s plan covers less than 60% of an employee’s cost, or the plan premium exceeds 9.8% of the employee’s income, employees will be eligible for premium assistance credit to purchase coverage through an insurance exchange. For employer’s with 50 or more employees, which do not offer health insurance coverage or who have one or more employees receiving premium assistance credit, employer’s will be assessed $2,000 per each full time employee, after the first 30 employees. There may be a $3,000 fee assessed for large employers that do not offer health insurance coverage. If an employee is not eligible for premium assistance credit, but has premium costs in excess of 8% of income, the employer is required to provide a free-choice voucher if the employee enrolls in an exchange, for use in purchasing coverage, in the amount that the employer would have provided in coverage to that employee.

Same-sex spouses

In February 2015, the U.S. Department of Labor (DOL) amended the definition of “spouse” to include same-sex spouses. As a result, eligible employees in legal same-sex marriages were able to take FMLA leave to care for their spouses or family members, regardless of which state they live in. In June 2015, the U.S. Supreme Court struck down state laws from several jurisdictions that refused to recognize same-sex marriages. Same-sex marriages are now legal in all 50 states. The ruling itself does not require any federally mandated amount of health plan coverage. The applicability of benefit plans to spouses for self-insured employers will require review of how the term spouse is defined by the plan. Under IRS guidance from 2013, same-sex spouses were already able to purchase health plan coverage using pre-tax dollars for federal income tax purposes.