How employers can ensure employee benefit plan compliance

What are some common employee benefits?

Employers offer benefits to attract top talent and support current workers. Some common benefits include:

1. Health insurance. Health insurance coverage may be the most crucial aspect of an employee benefits package — and is often the most expensive. Employers can offer either a fully insured or self-funded plan.
2. Retirement plans. Retirement funds are a form of deferred compensation. These plans may be contingent on a future fact or condition and most commonly include profit-sharing plans and pensions. Retirement plans are becoming increasingly important to today’s workforce. 
   Practical Law provides a helpful overview of the requirements for different types of qualified retirement plans available to employers.
3. Paid time off (PTO) and sick leave. PTO applies to a variety of circumstances, like vacation or personal days. Sick leave only applies to illness-based absences. The notice requirements for these benefits will vary, as will the payout provisions. 
4. Life insurance. Group life insurance is a low- or no-cost employee benefit. While employees often supplement group life insurance with private policies, employer-sponsored life insurance remains a useful benefit. 
5. Remote work options. Prior to the COVID-19 pandemic, remote work options were relatively uncommon. While some industries still allow remote work, many are returning to a more traditional office-based work arrangement. That said, many individuals continue to seek out this alternative plan.
6. Miscellaneous benefits. These benefits include wellness programs, childcare, education assistance, casual dress, and flexible schedules. Inexpensive perks are often endlessly appreciated. Even a small gesture of goodwill goes a long way to improve staff morale and increase productivity and job satisfaction. 

The importance of offering employee benefits 

Companies struggle to attract and retain talented employees without a robust benefit plan — this is particularly true for companies in competitive industries. A 2022 Global Benefits Attitudes Survey showed over 60% of employees said the benefits they receive are vital to their overall satisfaction at work. A comprehensive benefits package helps a business succeed by:

• Attracting talented individuals. Due to workforce aging, declining birth rates, and talent shortages, the potential U.S. workforce pool is shrinking. Qualified applicants know they are in the driver’s seat. Often, the availability of benefits — like childcare, remote or flexible work arrangements, and health care plans — dictates an individual’s decision to accept or reject a job offer.
• Increasing productivity and decreasing absenteeism. Employees who can afford preventative care and medical treatment are typically healthier, more productive workers. They may also use fewer sick days.
• Decreasing worry and stress. The dramatic rise in medical expenses is on everyone’s mind. Worrying about the cost of healthcare distracts workers from their work assignments.
• Improving morale. Employees who are confident in their healthcare coverage view their company in a more positive light. Reciprocal relationships between employees and employers create higher levels of job satisfaction and company loyalty.
• Impacting mental health. The provision of perks like mental health programs and paid vacation days offers many health benefits — namely, allowing employees to recharge and return to the office rested and focused.
• Enhancing company reputation. Consumers who know a company supports its staffers are more likely to give that company their business. The opposite is also true; reputational harm causes irreparable damage.

Employee benefits are a highly regulated aspect of employment law. Federal, state, and local regulations must be understood and followed to avoid lawsuits and other costly consequences.

What employee benefits are required by law?

While some employee benefits are offered at the employer’s discretion — such as life insurance, retirement savings funds, remote work, dental and vision insurance, wellness programs, childcare, and other perks — others are legally mandated. Legally required benefits include: 

1. Health insurance. Per the Affordable Care Act (ACA), any business with 50 or more full-time equivalent employees must offer acceptable health insurance. Failure to follow this regulation results in significant federal penalties. 
2. Family and Medical Leave (FMLA). FLMA affects how employers must treat employees on an FMLA-protected leave of absence. 
3. Social Security and Medicare taxes. According to the Federal Insurance Contributions Act (FICA), every U.S. employer must match their employees’ Social Security and Medicare tax contributions. 
4. Workers’ compensation. Administered by the U.S. Department of Labor’s Office of Workers’ Compensation Programs (OWCP), the Workers’ Compensation Program requires that an employee who suffers a work-related injury or illness is entitled to pursue wage replacement and medical benefits. 
5. Unemployment insurance. The U.S. Department of Labor ensures the receipt of temporary financial assistance to qualifying unemployed workers while they seek work. It applies to part-time and full-time employees who have left a company involuntarily but at no fault of their own. 

Federal regulations governing employee benefits

The regulation of employee benefits is subject to extensive federal mandates via the Employee Income Retirement Security Act (ERISA) and the Public Health Service Act (PHSA). Practical Law’s Group Health Plans and Health Insurance Toolkit provides a collection of compliance resources addressing requirements for employer-sponsored group health plans under ERISA, the Internal Revenue Code, and PHSA.

• ERISA institutes rules for employee benefit provisions and sets forth employees’ rights by:
• Establishing requirements necessary for the amendment or adoption of an employee benefit plan
• Authorizing the Department of Labor (DOL) to regulate the administration of employee benefit plans
• Providing that plan administrators owe both specific and general fiduciary duties to plan participants and beneficiaries
• Specifying which information must be provided to the federal government
• Establishing an insurance mechanism for defined benefit pension plans
• Creating minimum standards for funding defined benefit plans
• Imposing minimum standards for claims procedures to allow employees to apply for benefits and to enforce those claims if benefits were wrongfully denied
• Establishing duties for employers

Under federal law, benefits may not be withheld for illegal reasons. For instance, under Title VII of the Civil Rights Act (Title VII), it is unlawful to deny benefits due to an individual’s race, color, religion, or national origin. The Pregnancy Discrimination Act (PDA) states that discrimination based on pregnancy or a pregnancy-related condition is discrimination based on sex. The Age Discrimination in Employment Act (ADA) prohibits employers from discriminating against individuals over age 40 because of their age, with reference to various allowances, one being employee benefits.

State-specific laws govern various employee benefits

Benefits vary by state. Some of the more common benefits and protections subject to state-specific laws include workers’ compensation, time off for jury duty, voting leave, paid sick leave, disability insurance, minimum salary thresholds, tip-pooling restrictions, tip classifications, meal period and rest break regulations, vacation pay, unemployment benefits, unemployment insurance, housing help, food assistance, and business expense reimbursement.

Employers, their legal departments, and human resources (HR) teams must understand the intricacies of state-specific employee benefit laws. State employment laws frequently exceed federal law requirements.

Practical Law resources help companies and their counsel quickly grasp key federal and state workplace laws. Specifically, the Multi-State Charts Toolkit provides resources — a 50-state survey and at-a-glance charts — on topics like employment verifiability, illness and injury prevention, minimum salary, sick leave, vacation pay, sexual harassment claims, minimum wage, and more.

Employers who offer competitive employee benefit packages are rewarded in myriad ways, but failure to comply with applicable federal, state, and local employee benefit laws is very costly. They must take steps to mitigate these risks.

What are some of the most common benefit law regulatory violations?

Regulatory violations of benefit law occur when companies don't comply with laws governing employee benefits. Employers face serious legal, financial, and reputational harm when these violations occur. These failures also disrupt business operations and damage employee morale and customer trust. 

HR employees must dig into the minutia of employee benefit regulations. Some frequent regulatory violations include:

• Employee misclassification. The Fair Labor Standards Act (FLSA) governs overtime pay. The FLSA holds that non-exempt employees are entitled to overtime pay, while exempt employees are not. Businesses that improperly classify their employees are at risk of violating this act. Willful violation or repeated misclassification can lead to criminal prosecution.
• Incomplete documentation. Proper benefit recordkeeping is crucial. Employers should include these documents in the employee handbook and regularly review and update them.
• Inaccurate vesting period calculations. The IRS leaves zero wiggle room. A 401(k) or other qualified defined contribution plan must meet minimum vesting standards, as described in section 411 of the Internal Revenue Code. This section requires the maintenance of employee service records; incorrect recordkeeping can result in a plan losing its qualified status.
• Fiduciary duty violations. Failure to act in an employee’s best interests regarding a health insurance or retirement plan is a legal breach. Assets cannot be mismanaged or used for an administrator’s personal gain, claims cannot be improperly denied, and conflicts of interest cannot exist.
• Incomplete provision of plan-related information. ERISA requires businesses to provide specific plan information. Failure to provide this information results in hefty fines.
• Administrative errors. Improper claim processing, enrolling employees in inapplicable plans, or miscalculating deductions creates an administrative mess.
• Data breaches. Employers must take the utmost care when securing plan-related documents. These documents contain highly sensitive information and must remain confidential.

Steps to mitigate the risk of non-compliance

If there is one department businesses should fill with Type-A employees, it’s HR. Attention to detail helps these employees mitigate risks associated with benefit plan non-compliance. To do so, companies should:

1. Implement proper procedures. Employers can avoid pitfalls by instituting a thorough benefit enrollment and communication process. All available employee benefits must be presented during the new employee onboarding process.
2. Take fiduciary responsibilities seriously. Fiduciary responsibilities are owed to any plan an employer maintains for the benefit of its employees. Ensuring plan diversification and tempering the selection of overly risky investments reduces the odds of plan members suffering substantial financial losses.
3. Check and recheck plan requirements. Even the smallest regulatory adjustment can have a big impact. Employers must fastidiously monitor all federal, state, and local regulatory updates.
4. Create a strategy for compliance with employee benefits plans. Creating a policy to monitor and address potential compliance issues allows employers to fend off financial penalties proactively.
5. Hold regular training sessions. Risk assessment training and compliance education help prevent accidental violations.
6. Perform regular audits. Employee benefit plan audits include regular eligibility reviews, disclosures, and notices.
7. Open channels of communication. Encourage employee feedback! A benefit package that does not meet employees’ needs is a waste of money.

How can you protect your company from risks associated with non-compliance?

When it comes to a topic as financially and legally consequential as employee benefit plan management, some companies opt for the added protection offered by third-party compliance teams. HR employees juggle myriad functions, and despite their best efforts, things occasionally slip between the cracks. An external group independently reviews and monitors the employee benefit plan to ensure adherence to all relevant legal and regulatory compliance standards.

However, while third-party compliance services do come in handy, this convenience comes with a heavy price tag — and is often tied to long-term contracts with challenging termination clauses. Remember, third-party fees tend to get more expensive as your company grows. Another downside to hiring a third-party compliance team is that they can usurp the control of business owners, resulting in a loss of control over crucial HR processes and decisions.

Companies generally find it more valuable to internally manage benefit plans. This method facilitates direct interaction between company leadership and the workforce. In-house benefit management also bolsters the benefit customization process, thereby increasing employee loyalty. More importantly, mismanaging these highly regulated perks is risky and can cause extensive financial, legal, and reputational harm. This is one area to double and triple-check for compliance — and Practical Law can help.

Practical Law offers unparalleled legal resources to help legal professionals confidently navigate these complexities. With more than 90,000 resources written and updated by over 650 attorneys, the software helps legal professionals from small businesses to multinational corporations. You can stay on top of legal changes and regulations, make informed decisions, meet compliance standards, and avoid making expensive mistakes. If you are not a subscriber, try it for free today.