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The Legal Landscape of Employee Benefits

Prior to 1974, workers had no guarantee that they would receive the pensions promised by their employers. The movement for pension reform gained momentum in the early 1960s when the Studebaker Corporation, an automobile manufacturer, closed its plant and announced that the pension plan was so poorly funded it could not afford to provide all employees with their pension. Around the same time, President Kennedy created the President’s Committee on Corporate Pensions. The issue came to a head in 1972 when NBC broadcast Pensions: The Broken Promise, an hour-long special that showed the consequences of poorly funded pension plans and onerous vesting requirements. On September 2, 1974, Labor Day, President Ford signed the Employee Retirement Income Security Act (ERISA) into law.¹

Beyond the mandated benefits discussed in Chapter 21 (Employee Benefits), there are federal, state and local laws that affect employee benefits. It is important to have a basic understanding of them when designing a benefit program. Discussed here are federal laws. Guidance should be sought for state-specific laws and regulations.

Family and Medical Leave Act (FMLA) of 1993

FMLA is a mandated benefit that provides job protected leave to eligible employees. Employers with 50 or more employees (full-time or part-time) who work within 75 miles of a given workplace are required to provide this leave for certain qualifying events. An employee must have worked for the employer at least 12 months and 1,250 hours during the prior 12 months to be eligible. An employee generally must be returned to the same or an equivalent position unless he or she is unable to perform an essential function of the job because of the serious health condition.

Group health coverage must be maintained for an employee during his or her FMLA leave period on the same basis as such coverage was provided before the leave was taken. An employee’s entitlement to benefits other than group health benefits during a period of FMLA leave (for example, holiday pay) is also required on the same basis as they are provided for other forms of leave.

Eligible employees may take up to 12 weeks during a compliance year specified by the employer because:

    Of the birth of a child or the placement of a child for adoption or foster care (leave for this reason must be taken within one year of the event).

    The employee is needed to care for a family member with a serious health condition.

    The employee’s own serious health condition makes the employee unable to do his or her job.

Eligible employees may take up to 26 weeks during a single 12-month period for military caregiver leave on a per-covered service member, per-injury basis:

    Because of a “qualifying exigency” arising out of a covered family member’s active duty or call to active duty in the Armed Forces in support of a contingency plan.

    To care for a covered family member who has incurred an injury or illness in the line of duty while on active duty in the Armed Forces, provided that such injury or illness may render the family member unfit to perform duties of the member’s office, grade, rank, or rating.

    Appendix: Key Definitions Under FMLA.

Employees cannot waive their rights under FMLA, nor can an employer require an employee to accept a light-duty assignment instead of FMLA leave. However, an employer can offer, and the employee can voluntarily accept, a light-duty assignment while recovering from a serious health condition.

Employers may require employees to substitute accrued paid leave for FMLA leave, provided the reason for the leave is consistent with the employer’s leave plan.

Employers are required to provide written guidance to employees, which can be included in the employee handbook. Additional notice advising the employee of his or her rights and obligations at the time the employee takes leave should also be provided.

The employee has an obligation to provide the employer with notice of the need for FMLA leave. When the leave is foreseeable, the employee should give 30 days’ notice. Although the notice only needs to be verbal, it is good practice to require an employee who requests leave to submit a written request.

It is the company’s responsibility to designate leave as FMLA covered leave and to assure that the employee has been advised of all of his or her rights under the law. There may be times that the employee does not specifically request a leave. Nevertheless, there may be an underlying situation or issue that would lead the employer to suspect that a leave may be warranted. Situations involving chronic absenteeism could be symptoms of serious medical conditions. Leave may be delayed for an employee’s failure to comply with the employer’s notice policy. In certain circumstances, if the employee fails to comply, a company may count any absences during the delay (in notification) as non-FMLA absences and apply the employer’s attendance policy to those absences.

If an employee is placed on FMLA leave, all contact with the employee and the company should take place through one designated source, such as the human resources department. This will assure that all communication is consistent with policy and the legal requirements.

Employers may, and it is a good practice to, require that a leave to care for the employee’s own, or a family member’s, serious medical condition be supported by a certification issued by the attending healthcare provider. There are additional certifications for Military Caregiver Leave.

    The Family and Medical Leave Act is enforced by the Department of Labor’s Wage & Hour Division. Additional information can be found at www.dol.gov/whd/fmla/index.htm.

Finally, many states have family and medical leave legislation with requirements that exceed those of the federal law. Employees are entitled to the maximum protection afforded under both federal and state law. Therefore, it is important that an employer be familiar with any state or local requirements.

Employee Retirement Income Security Act (ERISA), 1974

ERISA established uniform and minimum standards for employee benefit plans. It set increased reporting requirements, required that pension funds be separate from operating funds, set vesting schedules for retirement plan participants, required employers to provide summary plan descriptions of its plans to employees, and set minimum standards for fund management.

    Employee participation. ERISA set eligibility requirements for retirement plan participation. In general, employees must be 21 years old and have completed 12 months of service.

    Fiduciary responsibility. ERISA established the prudent person rule, which states that an ERISA plan fiduciary has legal and financial obligations not to take more risks when investing employee benefit program funds than a reasonably knowledgeable, prudent investor would under similar circumstances.

    Vesting schedules. ERISA defined minimum vesting schedules for retirement plans for funds contributed by the employer. Vesting is the point at which the employees own the contributions of the employer. Employees always own their personal contributions If employees are not immediately vested when they are eligible to participate in the plan, their vesting is delayed in one of the following ways:

    Cliff vesting, in which participants become 100 percent vested after a specified period of time; or

    Graded vesting, in which participants are partially vested each year for a specified number of years.

    Reporting requirements. ERISA requires employers to:

    Prepare and distribute Summary Plan Descriptions (SPDs) to plan participants. SPDs are written summaries about the plan’s provisions, policies and rules, and the participants’ rights and benefits. They must be written in language that can be easily understood.

    Prepare and distribute Summary Annual Reports (SARs) containing financial information about the plan.

    Prepare and file an annual report (Form 5500) with the IRS, and make it available for inspection by participants. Form 5500 is required for qualified retirement plans and for employers that have at least 100 employees participating in welfare plans. Employers with fewer than 100 plan participants are required to file Form 5500-SF. These forms must be electronically filed each year for the employee benefit plan to satisfy annual reporting requirements.

    The Pension Benefit Guaranty Corporation insures payment of certain pension plan benefits if a private-sector defined benefit pension plan does not have sufficient funds to pay the promised benefits.

The Department of Labor’s Employee Benefits Security Administration (EBSA) has jurisdiction over ERISA reporting, disclosure, and fiduciary responsibility. The Internal Revenue Service (IRS) has jurisdiction over funding, eligibility, and other tax-related matters. In order to receive tax advantages for its benefit programs, employers must conform to the Internal Revenue Code.

    See www.dol.gov/agencies/ebsa/employers-and-advisers/plan-administration-and-compliance, which contains guidance on health insurance, COBRA, retirement, and 401(k) plans; reporting and filing requirements; and employer’s fiduciary responsibilities.

Retirement Equity Act, 1984

The Retirement Equity Act provides certain legal protections for spousal beneficiaries of qualified retirement plans. It requires written approval from a spouse if the participant did not want to provide survivor benefits and put restrictions on the conditions that could be placed on provider benefits. It also provides for Qualified Domestic Relations Orders (QDROs), which recognize the right of a spouse, former spouse, child, or dependent to receive a portion of an employee’s pension benefits. QDROs are issued by state courts under domestic relations laws.

Health Insurance Portability and Accountability Act (HIPAA), 1996

HIPAA contains provisions for:

    Portability by providing for continuity of group health coverage. Health plans can apply only limited exclusions for preexisting medical conditions and must allow certain enrollments during the year.

    Nondiscrimination by prohibiting employers from conditioning or varying eligibility, continued eligibility, or premiums for health coverage based on an individual’s health status.

    Guaranteed renewability, which generally requires insurers to renew group coverage sold to employers, except in specified situations. Insurers may not deny an employer continued access to coverage except in limited circumstances, such as non-payment of premiums or noncompliance with material plan provisions, including participation and contribution rules.

HIPAA’s requirements for healthcare coverage portability, nondiscrimination, and renewability are part of three different federal laws: ERISA, the Internal Revenue Code, and the Public Health Service Act (PHSA). The Department of Labor, the Internal Revenue Service, and the Department of Health and Human Services are responsible for implementing these provisions and have issued final regulations implementing the HIPAA portability and nondiscrimination provisions. Legislation enacted since the regulations were issued, including the Genetic Information Nondiscrimination Act (see Chapter 3, The Legal Landscape of Employee Rights) and the Patent Protection and Affordable Health Care Act, has affected the HIPAA portability, nondiscrimination, and renewability obligations.

    HIPPA also has privacy standards, which are discussed in Chapter 29 (Risk Management).

    For additional information, see www.hhs.gov/hipaa/index.html and www.dol.gov/EBSA.

Older Worker’s Benefit Protection Act (OWBPA), 1990

Older Worker’s Benefit Protection Act amended the Age Discrimination in Employment Act (ADEA). It prohibits discrimination in employee benefits and requires employers to offer workers who are at least 40 years old benefits that are equal to, or that cost the employer as much as, the benefits offered to younger workers. It also sets minimum standards for an employee waiver of the right to sue for age discrimination, ensuring that the waiver is knowing and voluntary. Older workers must be given 21 days to consider the waiver or agreement and consult with an attorney. If a group of employees is being terminated, the workers must receive 45 days. These waivers are legal agreements that carry a number of binding provisions. For this reason, legal advice should be sought.

    The Age Discrimination in Employment Act is discussed in Chapter 3 (The Landscape of Employee Rights).

    The OWBPA is also discussed in Chapter 30 (Ending the Employment Relationship).

Uniformed Services Employment and Reemployment Rights Act (USERRA), 1994

The Uniformed Services Employment and Reemployment Rights Act was passed to ensure that discrimination does not take place against individuals who serve in the Armed Forces. It:

    Prohibits discrimination on the basis of military obligation.

    Requires military leave for up to five years (extended in some circumstances).

    Requires oral or written notice of the need for leave.

    Gives employees on military leave the same non-seniority-based benefits and rights generally provided to other employees with similar seniority, status, and pay on other types of leave.

    Gives employees on military leave the same seniority-based benefits they would have received if they had not taken military leave.

    Requires that military leave not create a break in service for retirement plan purposes.

    Requires employers to give affected employees notice of rights and obligation under the law.

    The USERRA is enforced by the Department of Labor (DOL). For additional information, please visit their website at www.dol.gov/elaws/vets/userra/userra.asp.

    The DOL has developed a model poster, which can be found at www.dol.gov/vets/programs/userra/USERRA_Federal.pdf.

Many states may provide protections for employees beyond the requirements of USERRA. Therefore, it is important that an employer be familiar with any state or local laws.

Mental Health Parity Act, 1996

The Mental Health Parity Act requires the same dollar limits for mental health and medical benefits. It does not apply to substance abuse nor require a plan to offer mental health benefits.

Patient Protection and Affordable Care Act (PPACA or ACA), 2011

The Patient Protection and Affordable Care Act of 2011 is an integral part of healthcare reform. It has placed many new compliance obligations on employers that are complicated and technical. Employers should seek continuing advice from their benefits and legal consultants, especially since many provisions take effect on a phased basis.

Requirements and prohibitions affecting employers and plans include:

    Lifetime and annual dollar limits on “essential health benefits” are prohibited.

    There can be no retroactive revocation of coverage except for fraud/intentional misrepresentation of a material fact.

    Coverage for adult children up to age 26 is required.

    There can be no pre-existing condition exclusion for any participant.

    Coverage of certain preventive health services and immunizations without cost to covered individuals is required.

    Insured plans are now subject to nondiscrimination rules currently applicable to self-insured plans.

    Participants may choose any available primary care provider.

    Access to emergency services in and out of network without prior authorization must be provided.

    Internal and external claim appeal procedures and notification requirements of those procedures are required.

    For more information on healthcare reform, including a number of FAQs, please visit www.dol.gov/agencies/ebsa/laws-and-regulations/laws/affordable-care-act/for-employers-and-advisers, and www.hhs.gov/healthcare/about-the-law/read-the-law/index.html.

Tax Provisions of the ACA

The Affordable Care Act includes requirements for employers regarding heathcare coverage. The size and structure of your workforce determines your responsibility. For example, employers with fewer than 25 full-time equivalent employees may be eligible for a certain tax credit and those with fewer than 50 employees may be eligible to buy coverage through the Small Business Options Shop. Employers with 50 or more employees are required to file an annual information return, reporting whether and what health insurance they offered employees.

    For more information on the tax provisions, please visit www.irs.gov/affordable-care-act/employers.

Revenue Act of 1978

The Revenue Act of 1978 added two sections to the Tax Code that resulted in the favorable treatment of certain employee benefits discussed in Chapter 21 (Employee Benefits).

Tax Reform Act

The Tax Reform Act simplified many sections of the Tax Code and limited salary deferral contributions and compensation and restricted retirement savings for family-owned businesses.

The Omnibus Budget Reconciliation Act, 1986

The Omnibus Budget Reconciliation Act reduced compensation limits in qualified retirement programs.

Securities and Exchange Act, 1934

The Securities and Exchange Act affects company stock option and purchase plans. It requires the registration of all securities sold, and disclosure and restriction of “insider” trading.

Sarbanes-Oxley Act (SOX), 2002

The Sarbanes-Oxley Act applies to publicly-held companies. Section 306 of the Act requires plan administrators to notify plan participants of blackout periods for 401(k) or defined contribution plans. During a blackout period, a temporary suspension on stock trading, executive officers, and directors are prohibited from trading stock they acquired as a result of their employment, such as through a 401(k) savings plan or profit-sharing plan that offers stock. Advance notice of the blackout period must be provided to executives and the SEC. Contents should include reasons for the blackout, expected dates for the blackout, and a statement that participants and beneficiaries should evaluate their current investment decisions in light of their inability to change investments during the blackout.

A second SOX notification requirement in Section 306, geared at protecting workers, requires companies to notify employees at least 30 days prior to a blackout. Notice may be sent electronically.²

Discussion Questions

1.    Employees do not always make a direct request such as “I need FMLA leave,” yet the employer is responsible for providing an employee the job-protected leave if they have sufficient information that a leave is necessary. What steps can an employer take to assure that leaves are appropriately designated?

2.    What are some of the ways that employers comply with their reporting requirements under ERISA?

3.    What are the advantages and disadvantages of outsourcing the administration of FMLA, COBRA, and other benefit requirements?