As promised in my previous post, the following is a primer-like summary of employee benefits for the communicator who seeks the basics, or needs simply to brush up on the nuts and bolts of this topic. I believe that the Q&A approach is a good fit for these types of summaries, so here goes:
Q: What laws apply to employee benefits?
A: Â Three major laws pertain and apply to employee benefits: ERISA (29 USCÂ Â§ 1001 et seq.), Internal Revenue Code (IRC) (26 USCÂ Â§ 1 et seq.), and the Age Discrimination in Employment Act, otherwise known as ADEA (29 USCÂ Â§ 621 et seq.).
The IRC determines how and when workers are taxed on employer-provided benefits. It also decides how and when employers can take deductions for benefits provided to employees. Also, this law is the source of the non-discrimination rules that apply to many employee plans.
ERISA is perhaps the most well-known law as employee benefits go. Part labor law, part tax law, ERISA sets a floor for standards governing plan participation and benefit requirements. As discussed in the previous post, ERISA also imposes fiduciary responsibilities on plan officials, and establishes rules for the enforcement of employee rights (gives employees a right to sue the employer for various causes of action). Â In addition, it is indeed a tax law, containing several provisions actually incorporated into the IRC. ERISA includes special provisions for an insurance program for defined benefit (DB) plans, standards for continuation of healthcare coverage after detaching from employment (COBRA) and health-plan portability and access rules (HIPPA).
Finally, the ADEA applies to employee benefit plans, but primarily in theory. The impact of the ADEA on plans is currently being hashed out in courtrooms across the country. It’s worth noting that all three of these laws share duplicate provisions.
Q: Â What plans are not subject to (exempt from) ERISA?
A: Â Under ERISA Â§ 4(b) and other sections, the following plans are generally exempt:
â€¢ plans sponsored by federal, state or local governments
â€¢ plans sponsored by churches
â€¢ workersâ€™ compensation, unemployment compensation or disability insurance laws
â€¢ plans maintained outside the U.S. primarily for nonresident aliens
â€¢ unfunded executive compensation plans that provide additional benefits to
executives and other high-paid employees.
Note: Even though these governmental, church and executive compensation plans are not
subject to ERISA, IRC requirements continue to apply to these plans, and must be observed in order to preserve theÂ tax-exempt treatment, where available, for plan participants.
Q: Â Exactly what are “employee benefits?”
A: Â At the risk of moving a few steps backward here, a clarification is probably important. Employers typically provide their workers with a variety of benefits in addition to wages and salaries. These are commonly called â€œfringe benefits.â€ Fringe benefits include all types perks, such as reduced fares on public transportation to club memberships and tuition reimbursement. They also include access to and contributions to pension and healthcare plans. Thus, pension and healthcare plans are a form of “fringe benefits” many employers choose to offer.
In general, when we hear the term “employee benefits,” we think only of the organized, managed and employer sponsored plans such as pension plans, 401(k) retirement savings plans and healthcare plans. Typically, the term refers to employer-sponsored plans subject to ERISA, and which have special rules as pertains to taxation.
Q: Â When is a “plan” really “a plan” according toÂ ERISA?
A: Â Keeping in mind that ERISA generally only applies to employer-sponsored plans in the private sector, in order for a plan to be considered a “plan” under ERISA, an employer must a) intend to create a plan and b) be involved in the plan administration, among other factors. See Donovan v. Dillingham, 688 F2d 1367 (1982). An employer who simply allows access to a plan and somehow facilitates or assists in taking deductions from employees’ pay so they can participate has not actually established a plan under ERISA. The key point to take away from this is (and particularly from a legal perspective) is that some plans, while they appear to be a “plan” under ERISA, may not even be subject to ERISA after a thorough analysis of the facts.
Fact is, ERISA requires the employer (ER) to establish an ongoing administrative scheme for it to be a plan recognized/subject to ERISA. Further, the term “Plan” is not interchangeable with the plan documents, which enumerate and inform about the components of the plan itself. While this distinction may seem picky, most employee-benefit lawyers would heartily agree that this is indeed an important, basic difference.
Q: Â What are the primary types of plans?
A: Â Under ERISA, a plan is either a “welfare plan” or a “pension plan” that covers at least one employee.
Q: Â What is a “welfare plan?”
A: Â No, it’s not free money handed out because someone demonstrated need. Under ERISA, a welfare plan is a plan that provides benefits for:
â€¢ medical, surgical or hospital care
â€¢ sickness, accident, disability or death
â€¢ unemployment benefits
â€¢ vacation benefits
â€¢ apprenticeship or training programs
â€¢ day care centers
â€¢ scholarship funds (if funded)
â€¢ prepaid legal services
â€¢ holiday and severance pay plans.
Q: Â What is a â€œpension plan?â€
A: Â Under ERISA Â§ 3(2)(A), a pension plan is a plan that:
â€¢ provides retirement income to employees, or
â€¢ results in the deferral of income until retirement or thereafter.
(ERISA excludesÂ severance pay and supplemental pay plans from this category.)
If you have not dozed off or overdosed on caffeine while trying to read this, I’ll do my best to present related topics and answer Qs on this as they come in. Thanks for reading; hope this helps you in your own writing/drafting travels.