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Chapter 03 Regulating Employee Benefits
I. Learning Objectives (use PP 3.2)
1. Necessity of government regulation of employee benefits
2. Influence of the National Labor Relations Act of 1935 on discretionary employee
benefit plans
3. Impact of the Internal Revenue Code on employee benefits
4. Fair Labor Standards Act of 1938 and definition of compensable nonwork time
5. Employee Retirement Income Security Act of 1974 and key amendments such as
Pension Protection Act, COBRA, HIPAA
6. Impact of federal equal-opportunity employment laws on discretionary employee
benefit plans
II. Labor Unions and Employee Benefits: National Labor Relations Act of 1935 (use PP 3.4)
A. Overview
1. The industrialization of the U.S. economy and the economic devastation during the
Great Depression placed workers at a disadvantage
2. Workers tried unsuccessfully to band together to negotiate better working conditions,
rights, and better compensation
3. Enacted to restore equality between employees and employers
4. EXAMPLE: How government regulations were thought to begin. Place – Triangle
Shirtwaist factory, New York City; What Happened – in 1911, approximately 150
teenaged girls perished in a work place fire; Reason – Company routinely locked exit
doors and the single fire escape could NOT hold the weight; Results – New York
Factory Investigating Commission was established, leading to national regulations
B. Coverage
1. Applies to private sector companies (except passenger or freight rail or air carriers)
2. Does not apply to agricultural workers, domestic service workers, independent
contractors, or employees of federal, state, or municipal governments.
3. Enforcement overseen by National Labor Relations Board (NLRB)
C. Relevance to employee benefits
1. Section 1 declares the policy of the U.S. to protect commerce
a. By encouraging collective bargaining
b. By protecting employees’ right to unionize
2. Collective bargaining refers to the process in which representatives of
employees and company management negotiate the terms of employment
3. Possible subjects for bargaining fall into one of three categories
a. Mandatory
b. Permissive
c. Illegal
4. Mandatory bargaining subjects (use PP 3.5)
a. Are those issues that unions and employers must negotiate if either
requests them and include:
i. Supplemental disability pay (more in Chapter 6)
ii. Employer-provided health insurance (more in Chapter 5)
iii. Paid time-off (more in Chapter 8)
iv. Pension and retirement plans (more in Chapter 4)
b. The NLRA strictly limits management discretion in unionized
companies, for establishing major elements of benefits programs
c. Under certain circumstances the change in the identity of the plan’s
insurance carrier or third-party administrator is NOT a mandatory
bargaining subject
d. EXAMPLE: A federal appeals court ruled that an employer’s unilateral
change to a new insurance carrier, which was substantively the same as the old
carrier was lawful. It gave two reasons: 1) the coverage was substantially the
same; 2) the wording of the contract did NOT prevent the employer from
switching insurance carriers.
5. Permissive bargaining subjects (use PP 3.6)
a. Are those issues on which neither employer nor union employees are
obligated to bargain, but can if desired
b. Subjects include
i. Administration of funds for employee benefits programs
ii. Retiree benefits like health insurance
iii. Workers' compensation, within the scope of state workers'
compensation laws
6. Illegal bargaining subjects (use PP 3.7)
a. Include proposals for contract revisions that are either illegal under the
NLRA or violate federal or state law
b. Subjects include
i. Particular standards for employee benefits plans set forth by
ERISA
ii. Minimum funding standards
iii. Minimum participation standards
iv. Minimum vesting standards
v. Benefit accrual standards
vi. Joint and survivor and pre-retirement survivor benefit
requirements
7. Union membership also helps employees negotiate for job security and other
non-benefits related issues
8. Worker Adjustment and Retraining Notification (WARN) Act requires
management to give at least a 60 day advance notice of plant closing or mass layoffs
and failure to do so entitles employees to recover pay and benefits for the period for
which notice was not given
9. Companies with labor unions often try to avoid instituting mass layoffs because of
recall features in collective bargaining agreements.
a. However, since the deep recession in late 2007, companies have been trying to
make permanent cuts to their workforce for labor cost savings
III. Internal Revenue Code (IRC) (use PP 3.8)
A. Taxation Regulations
1. Sets standards for taxes such as
a. Sales taxes
b. Employer income taxes
c. Individual income taxes
d. Property taxes
2. Taxes are the main source of funding for government programs
a. Local
b. State
c. Federal
3. Internal Revenue Service (IRS)
a. Develops and implements the IRC
b. Levies penalties for violations of IRC
4. Since 1916 federal government encouraged employers to provide retirement benefits
to employees with tax breaks or deductions
5. IRC contains multiple regulations for legally required and discretionary benefits
B. Main Benefits Taxes
1. Federal Insurance Contributions Act (FICA)
a. Taxes employees and employers
b. Finances the Social Security OASDI
2. Federal Unemployment Tax Act (FUTA)
a. Tax on employers
b. Funds unemployment benefits
c. Some states also tax employers to finance unemployment benefits
C. Incentives for Offering Benefits
1. Employees can deduct the annual cost of benefits from annual income
2. Employers can deduct the cost of benefits as a business or trade expense
a. When the cost is an ordinary and necessary expense
b. The costs can only be deducted in the year they are spent
3. Additional requirements (use PP 3.9)
a. Benefits must meet the nondiscrimination rules of ERISA
b. Nondiscrimination rules prohibit employers from giving preferential treatment to key employees and highly compensated employees
D. Key Employees (use PP 3.9)
1. Defined as any employee who at any time during the year is either of the following:
a. An officer having annual pay of more than $165,000
b. An employee who for 2012 is either of the following:
i. A 5% owner of the business
ii. A 1% owner of the business whose annual pay was more than $150,000
2. Definition of an officer
a. Set by the U.S. Treasury Department
b. Is an administrative executive who is in regular and continued service
c. Implies continuity of service and excludes those employed for a special and single
transaction
d. An employee who merely has the title of an officer, but NOT the authority of an officer is NOT considered an officer
e. In the case of one or more employers treated as a single employer under sections 414 (b), (c), or (m), whether or NOT an individual is an officer shall be determined based upon his or her responsibilities with respect to the employer or employers for which he or she is directly employed, and NOT with respect to the controlled group of corporations, employers under common control or affiliated service group
3. A partner in a partnership will NOT be treated as an officer merely because
a. He or she owns a capital or profits interest in the partnership
b. Exercises his or her voting rights as a partner
c. May, or may NOT, be authorized and does in fact act as an agent of the
partnership
E. Highly Compensated Employee (use PP 3.10)
1. Defined by the IRS as
a. An officer
b. A shareholder who owns more than 5% of the voting owner or value of all classes
of the employer’s stock
c. An employee who is highly compensated based on the facts and circumstances
d. A spouse or dependent of a person described in (a), (b), or (c)
IV. Fair Labor Standards Act of 1938 (FLSA) (use PP 3.11 & 3.12)
A. Overview
1. Contains provisions for
a. Minimum wage
b. Overtime pay
c. Child labor
B. Coverage
1. Rules apply to almost all employees working for private sector employers and the federal, state, or local government agencies
2. The U.S. Department of Labor enforces this act
3. Does NOT apply to all employees of covered employers
a. Overtime pay provision applies to employees whose jobs are classified as
nonexempt by the act and excludes jobs that are classified as exempt
b. Generally, executive, administrative, learned professional, creative professional,
computer workers, and outside sales employees are exempt
c. Exempt categories are decided under the US Department of Labor’s revised
guidelines known as the FairPay Rules as of August, 2004
d. Previously an employee was considered exempt if earning more than minimum
wage and exercising independent judgment when working
e. Under new FairPay rules, workers earning less than $23,660 per year (or $455 per
week) are guaranteed overtime protection
f. Extensive information about the FairPay rule is available at www.dol.gov
C. Relevance to Employee Benefits Practices
1. Under the overtime pay provision, employees who are covered by the FLSA are
entitled to pay at a rate of 1 1/2 times their normally hourly rate for hours worked over
40 hours during a work week
2. Employee benefits linked to pay, increase correspondingly during those overtime
hours
3. EXAMPLE: An employee’s annual contributions to a 401(k) plan equal to 5% of
annual pay. Her hourly pay equals $14.42 without overtime pay. Her contribution to
the 401(k) plan equals $1500 ($14.2 per hour X 40 hours per week X 52 weeks per
year X 5 percent). If she works 300 hours on an overtime basis, a five percent
contribution would be greater. Her overtime hourly pay would equal one and one-half
of her normal hourly pay rate: $21.63 ( $14.42 X 1.5). Her additional contribution to
the 401(k) plan equals $324.45 ($21.63 X 300 overtime work hours X 5 percent)
4. FLSA specifies certain paid time-off practices
5. Portal-to-Portal Act of 1947 defines hours worked as the compensable activities that precede and follow the primary work activities, including (use PP 3.13)
a. The time on the activity was for the employer’s benefit
b. The employer controlled the amount of time spent
c. The time involved is categorized as suffered and permitted, meaning that the employer knew the employee was working on incidental tasks either before or after the scheduled tour of duty
d. The time spent was requested by the employer
e. The time spent is an integral part of the employee’s principal duties
f. The employer has a union contract with employees providing such compensation, or as a matter of custom or practice, the employer has compensated the activities in the past
6. Examples of compensable nonwork times include (use PP 3.14)
a. Non-production time
b. Clean-up time
c. Preparation time
d. Travel time between job locations (within the scope of the regular work shift)
e. Rest periods (shorter than 20 minutes)
f. Meal periods (at least 30 minutes during which time employees are required to take their meal period)
g. EXAMPLE: State correctional officers caring for their police dogs at home is compensable since feeding, grooming and walking the dogs are indispensable to maintaining the dogs as critical law enforcement tools, although transporting the dogs between home and office is NOT
V. Employee Retirement Income Security Act of 1974 (ERISA)
A. Overview (use PP 3.15)
1. Regulates the establishment and implementation of discretionary benefits practices
including
a. Medical insurance
b. Life insurance
c. Disability programs
d. Pension programs
2. ERISA established minimum standards for employer-sponsored pension plans.
3. Prior to ERISA, employers could arbitrarily determine when employees could begin
participation. Employers set the minimum age or minimum years of service for
participation quite high because older workers would have fewer years in employment
than younger workers.
4. ERISA is a far-reaching law. ERISA preempts most state laws and is a very detailed
and complex law.
5. ERISA has been amended several times by specific legislation in an attempt to
balance the interests of employees and employers.
a. Consolidated Omnibus Budget Reconciliation Act (1985)
b. Pension Protection Act (2006)
B. Coverage (use PP 3.16)
1. Covers private sector employee benefits plans
2. Does NOT cover
a. Federal state, local government plans
b. Church plans
c. Workers' compensation plans
d. Plans maintained outside the US for nonresident aliens
e. Top hat plans
3. Top hat plans are unfunded, deferred compensation plans for a select group of
managers or highly compensated employees
4. ERISA excludes plans covering only partners or sole proprietors
5. The U.S. Department of Labor enforces ERISA.
C. Relevance to Employee Benefits Practices
1. Prior to ERISA, limited regulations were applied to employer-sponsored pension
plans by
a. The IRC
b. Taft-Hartley Act of 1947
c. Federal Welfare and Pension Plans Disclosure Act of 1958
2. Major objectives (use PP 3.17)
a. To ensure that workers and beneficiaries receive adequate information about their
benefits plans
b. To set standards of conduct for those managing employee benefits plans and plan
funds
c. To determine that adequate funds are being set aside to pay promised pension
benefits
d. To ensure that workers receive pension benefits after they have satisfied certain
minimum requirements
e. To safeguard pension benefits for workers whose pension plans are terminated
3. 4 broad titles (use PP 3.18)
a. Title 1 specifies a variety of protections for participants and beneficiaries
b. Title II has the IRC pertains to the taxation of employee benefits and pension plans
c. Title III addresses the administration and enforcement of ERISA, including the jurisdiction of relevant federal agencies
d. Title IV contains terms for pension insurance programs, including the
establishment of the Pension Benefit Guarantee Corporation (PBGC)
4. Some of Title I & II provisions (along with US Treasury rules) contribute several
minimum standards necessary to qualify pension plans for favorable tax treatment
5. Qualified plans meet the standards
6. Nonqualified plans fail to meet at least one of the standards
D. Defining Pension Plans and Welfare Plans (use PP 3.19)
1. Definitions of pension plans
a. Pension plans provide retirement income to employees
b. Pension plans also result in a deferral of income to employees for periods
extending to the termination of covered employment or beyond, regardless of
i. The method of calculating the contributions made in the plan
ii. The method of calculating benefits under the plan
iii. The method of distributing benefits from the plan
c. Two most commonly used plans are (more in chapter 4)
i. Defined benefit plan
ii. Defined contribution plan
d. Defined benefit plan
i. Guarantees the retirement benefits specified in the plan document
ii. Usually expressed in terms of a monthly sum equal to a percentage of a
participant’s preretirement pay multiplied by the number of years he or she has
worked for the employer.
iii. The level of required employer contributions fluctuates from year to year.
e. Defined contribution plans
i. Employers and employees make annual contributions to separate accounts
established for each participating employee, based on a formula contained in
the plan document.
ii. Amount each participant receives in retirement depends on the performance of
the selected investment vehicle such as company stock, government bonds,
and etc.
f. Another important pension term under ERISA is multiemployer plans
i. Multiemployer plans are pension plans for workers in industries where it is
common to move from employer to employer, such as skilled trade, trucking,
grocery stores
ii. Cover workers from more than one employer compared to most pension plans
that apply to workers at a single employer
iii. Employees continue to earn credit toward qualifying for retirement benefits
no matter whether they remain with a single employer or move from
employer to employer
iv. Traditionally established through collective bargaining process
v. IRC uses a broader definition of a multiemployer plan by relaxing the
stipulation that the plan is a part of the collective bargaining agreement
2. Definitions of a welfare plan
a. Any plan, fund, or program which was established or maintained by an employer or by an employee organization, to the extent that such plan, fund or program was established or is maintained for the purpose of providing for its participants or their beneficiaries through the purchase of insurance
b. Medical, surgical, or hospital care or benefits, or benefits in the event of sickness accident, disability, death, or unemployment, or vacation benefits, apprenticeship, or other training programs, or day care centers, scholarship funds, or prepaid legal services
c. Any benefit described in section 302 (c) of the Labor Management Relations Act of 1947 (other than pensions or retirement or death; and insurance to provide such pensions)
3. Scope of coverage of pension plans and welfare plans
a. Most of ERISA pertains to pension plans
b. Protection of employee rights (Title I) addresses 7 issues
c. Only issues 1 & 4 of Title I pertain to welfare plans
d. Issues 6 & 7 pertain to group health plans exclusively
E. ERISA Title I
1. Provisions that provide employees protections for benefits rights (use PP 3.20)
a. Reporting and disclosure
b. Minimum standards for participation and vesting
c. Funding
d. Fiduciary responsibilities
e. Administration and enforcement
f. Continuation coverage and additional standards for group health plans
g. Group health plan portability, access and renewability requirements
2. Congress endorsed Title I based on four major considerations
a. Companies terminated pension plans after employees had accumulated several years of service
b. Many companies were forced to terminate pension plans due to insufficient funding to pay retirement benefits
c. Many companies did NOT provide employees information about their pension plans
d. The absence of federal regulations setting minimum standards for funding pension programs resulted in the financial failure of many pension plans, leaving beneficiaries without any retirement benefits
3. Part 1: Reporting and Disclosure (use PP 3.21)
a. 3 requirements on employers
i. Employers must provide employees understandable and comprehensive summaries, information about changes, and advance notification of planned termination
ii. Employees are entitled to receive reports on their status in the plans, including service credits and accumulated benefits
iii. Employers are required to report detailed financial and actuarial data about the plans to the US Treasure Department
b. Companies may satisfy this reporting requirement by completing Form 5500 from the IRS
4. Part 2: Participation
a. Employees must be allowed to participate in pension plans after they have
i. Reached age 21
ii. Have completed one year of service (based on 1,000 work hours)
iii. Work hours include all paid time for performing work and paid time-off
b. The one-year requirement may be extended to two years if the company grants full vesting after two years participation in the pension plan
c. Companies may NOT exclude employees from participating in pension plans because they are too old
5. Part 2: Vesting (use PP 3.22 & 3.23)
a. Vesting refers to an employee’s rights to pension benefits
i. Employees are always vested in their contributions to pension plans
ii. Companies must grant full vesting rights to employer contributions on a cliff vesting schedule or a gradual vesting schedule
b. Cliff vesting schedules
i. Must grant employees 100% vesting after no more than 3 years of service
ii. Employees lose all contributions if they leave before 3 years
c. Gradual vesting
i. The six-year graduated schedule allows workers to become 20% vested after two years and to vest at a rate of 20% each year thereafter until they are 100% vested after six years of service
ii. EXAMPLE: An employee has worked for 2 years. Company has contributed $15,000 to that employee’s retirement. Employee has earned 20% nonforfeitable right to the employer’s contribution or $3000 (20% X $15,000)
d. Breaks in service by employee
i. An employee is off work for a while, returns to work with the same employer for at least a year
ii. Can be factored into vesting schedule
iii. Are based on 1 year increments, which means they did NOT work more than 500 hours during a 12 month period
iv. Companies are NOT required to take breaks in service into account if the number of consecutive one-year breaks equals or exceeds the greater of five or the aggregate number of years of service before such period
e. Once employees attain full vesting rights, they CANNOT lose their pension benefits if they terminate employment prior to reaching retirement age
6. Part 3: Funding
a. Employers must contribute sufficient annual funding for all pension benefits earned by employees
b. In the event of under funding, companies must notify plan participants or face excise tax penalties
c. These penalties are expressed as a percentage of the amount in question, and the percentage may vary based on the length of time an employer remains in violation
d. Failure to correct the under funding entitles the federal government to place liens against the employer’s assets
7. Fiduciary Responsibilities (use PP 3.24)
a. Fiduciaries are individuals who manage employee benefits plans and pension plan funds and can include
i. Employers
ii. Insurance companies
iii. Attorneys
iv. Corporate directors, officers, or principal stockholders
b. Responsibilities include
i. Using prudence in the exercise of their duties as they ensure the welfare of participants and beneficiaries while defraying reasonable plan expenses
ii. Using care, skill, and diligence that a prudent person would under similar circumstances
iii. Diversifying plan investments to minimize the risk of large losses
iv. Acting according to the plan document, as long as it is consistent with ERISA
c. ERISA indicates that plan assets generally are held in trust
i. Are managed by trustees who are either named in the trust instrument or appointed by the plan’s named fiduciary
ii. Trustees have exclusive authority to manage and control plan assets unless otherwise specified in the plan document
8. Part 5: Administration and Enforcement
a. 3 federal agencies share responsibility
i. U.S. Department of Labor
ii. IRS
iii. PBGC
b. Title III empowers the U.S. Department of Labor and the IRS to administer and enforce specific sections of this Act and Title IV established the PBGC
9. Part 6: Continuation Coverage and Additional Standards for Group Health Plans
a. ERISA was amended by the Consolidated Omnibus Reconciliation Act of 1985 (COBRA)
b. COBRA provides employees and beneficiaries the right to elect continuation coverage under group health plans if they lose coverage due to a qualifying event (more on this later in chapter)
10. PART 7: Group Health Plan Portability, Access, and Renewability Requirements
a. ERISA was amended by the Health Insurance Portability and Accountability Act of 1996 (HIPPA)
b. HIPPA imposes requirements on group health and health insurance issues relating to
i. Portability
ii. Increased access to limited preexisting limitation rules
iii. Renewability, and
iv. Health care privacy (more on this later in chapter)
F. ERISA Title II: Amendments to the IRC Relating to Retirement Plans
1. Amends the IRC relating to the tax treatment of pension and employee benefits plans
a. The IRC provides incentives for employees to establish employee benefits plans through favorable tax treatment
b. ERISA serves as a deterrent to possible illegal employer treatment of benefits and pension plans by providing legal remedies to employees and beneficiaries
c. Some of the amendments mirror the following Title I provisions
i. Participation
ii. Vesting
iii. Minimum funding standards
2. Additional amendments pertain to
a. Nondiscrimination of coverage requirements
b. Contribution and benefits limits to company-sponsored retirement plans
c. Individual Retirement Accounts (IRAs) and Keogh Plans for self-employed persons
G. Title III: Jurisdiction, Administration, Enforcement, Joint Pension Task Force, and
Other Issues
1. Grants power to the U.S. Department of Labor for administering and enforcing Title I of ERISA
a. Reporting and disclosure requirements
b. Fiduciary responsibilities
2. U.S. Department of Labor’s Pension and Welfare Benefits Administration (PWBA) possesses responsibility for enforcing Title I by conducting investigations through its 10 regional offices and 5 district offices o gather information and evaluate compliance with ERISA’s civil law
a. Requirements
b. Provisions relating to employee benefits plans
H. Title IV: Termination Insurance (use PP 3.25 & 3.26)
1. Established the Pension Benefit Guarantee Corporation (PBGC) which
a. Is a tax exempt, self-financed corporation
b. Pays monthly retirement benefits, up to a guaranteed maximum, currently to more
than 1 million retirees in 4,200 pension plans that were terminated
c. Insures about 27,500 private defined benefit pension plans covering more than 44
million American workers and retirees
d. Requires pension administrators to
i. Pay annual pension insurance premiums
ii. Report significant events affecting their plans
2. PBGC recognizes 3 types of plan terminations
a. Distress
b. Involuntary
c. Standard
3. Defined contribution plans are NOT eligible to participate because they do NOT guarantee a particular benefit at retirement
4. Termination insurance protects against the loss of vested pension benefits when plans fail
a. Employers with eligible defined benefit pension plans must have it
b. Insurance premiums set by Congress and are based on
i. The number of covered employees and
ii. Whether a pension plan covers employees of one company (single employer plans) or multiple companies (multiemployer plans)
5. PBGC ensures a basic level of annual benefits to participants in the event that a plan terminates with insufficient assets to pay its obligations
a. The amount is set by law and adjusted annually
b. For plans ending in 2012, the maximum annual benefit for those who retire at age
65 was $56,000
c. The guarantee is lower for those who retire early or there is a benefit for a survivor
6. Trend toward increasing defined benefit plan termination
a. Many companies going into bankruptcy protection
b. Struggling due to slow economic times
c. EXAMPLE: In 2011, PBGC assumed responsibility for the pensions of more than
57,000 additional workers and retirees in 134 failed plans.
VI. Consolidated Omnibus Reconciliation Act of 1985 (COBRA)
A. Overview (use PP 3.27)
1. Amended ERISA, Title 1 (Part 6: Continuation Coverage and Additional Standards
for Group Health Plans)
2. Coverage
a. Private sector companies with at least 20 employees
b. State and local government agencies
3. The following are exempt
a. Churches
b. Federal government employees
4. The U.S. Department of Labor enforces COBRA.
B. Relevance to Group Health Plans
1. Companies must let qualified beneficiaries elect continuation coverage under group
health plans if they lose coverage due to a qualifying event
2. A qualified beneficiary generally is an individual covered by a group health plan on
the day before a qualifying event who is either an employee, the employee’s spouse,
or an employee’s dependent child
3. Qualifying events are certain events that would cause an individual to lose health
coverage
4. Qualifying events include (use PP 3.28)
a. Death of the covered employee
b. Termination or reduction in hours of employment (other than by reason of misconduct)
c. Divorced or legal separation
d. Dependent child ceasing to meet the health plan’s definition of a dependent child
e. Covered employee becomes eligible for Medicare benefits under the Social Security Act
5. The election period generally refers to
a. The period that begins on or before the occurrence of the qualifying event, and
b. Extends for at least 60 days
6. Continuation coverage (use PP 3.29)
a. Beneficiaries are responsible for paying the insurance premiums
b. Companies can charge up to 102% of the cost, 2% is to cover administering
COBRA
VII. Health Insurance Portability and Accountability Act of 1996 (HIPPA) (use PP 3.30)
A. Overview
1. An amendment to ERISA, Title I (Part 7: Group Health Plan Portability, Access, and Requirements)
2. Contains 4 main provisions
a. The first provision guarantees that employees and their dependents who leave their employer’s group health plan
i. Will have ready access to coverage under a subsequent employer’s health plan
ii. Regardless of their health or claims experience
b. The second provision sets limits on the length of time that health plans and health insurance issuers
i. May impose preexisting conditions, and
ii. Identify conditions to which no preexisting condition may apply
c. The third provision counts periods of continuous coverage under another form of comprehensive health coverage toward a preexisting condition limit
d. The fourth provision protects the transfer, disclosure, and use of health care information
3. HIPPA covers all employers offering group health plans
4. The U.S. Department of Health and Human Services enforces HIPAA
B. Availability and Portability (use PP 3.31)
1. Prohibits discrimination against individuals and beneficiaries based on health status
and related factors
2. Health plans may not create rules that would limit
a. Eligibility for initial enrollment
b. Continued eligibility for currently covered employees or beneficiaries
c. Require higher premiums based on any of the reasons listed in Exhibit 3.5
C. Limits to Preexisting Condition Rule (use PP 3.32)
1. Prior to HIPAA, group insurance plans excluded coverage of preexisting conditions
for up to 12 months
2. Preexisting condition refers to a mental or physical disability for which medical
advice, diagnosis, care, or treatment was received during a designated period
preceding the beginning of disability or health insurance coverage
3. This law states that a preexisting condition exclusion can be imposed on a health
condition only if medical advice, diagnosis, care, or treatment was recommended or
received during the 6 months prior to an employee’s enrollment date in the
employer’s health insurance plan
D. Renewability
1. Group health insurance issuers are NOT required to renew coverage under certain conditions, including
a. Nonpayment of contributions
b. Fraud or other intentional misrepresentation of material fact by the employer
c. Noncompliance with plan provisions
d. Ceasing to offer coverage to all individuals in a geographic area
e. Failure to meet the terms of an applicable collective bargaining agreement
E. Health Care Privacy
1. Effective 2003, covered health care entities must receive a patient’s consent for use
and disclosure of health records
2. Covered health care entities include
a. Health plans
b. Health care clearinghouses
c. Health care providers who conduct certain financial and administrative
transactions
3. Employers may NOT make employment decisions based on health status unless
they receive written employee consent
4. Prior to obtaining written consent, the use of health information requires full
disclosure of how and for what purpose it will be used
VIII. Pension Protection Act of 2006 (use PP 3.33)
1. Designed to protect employees’ company-sponsored retirement plans in two ways:
a. For defined benefits plans, this law should strengthen the financial condition of
the PBGC by requiring that private sector companies that under-fund their plans
pay substantially higher premiums to insure retirement benefits
b. For defined contribution plans, the law makes it easier for employees to
participate in plans such as 401(k) plans.
1. Increase in underfunded plans poses a great risk to the financial solvency of the
PBGC.
2. The act aims to shore up the PBGC’s financial condition by making it more difficult
for companies to skip making premium payments.
3. Raises the amount that employers can contribute to pension funding with tax
advantages, creating an additional incentive to adequately fund pension plans.
1. Many individuals do not participate in defined contribution plans because they don’t
have sufficient knowledge about how to choose investment options that will help
them earn sufficient money for retirement.
2. The act enables companies to automatically enroll their employees in defined
contribution plans and provides greater access to professional advice about
investments.
3. The act requires that companies give multiple investment options to employees to
select how much risk they are willing to bear.
IX. Patient Protection and Affordable Care Act of 2010 (use PP 3.34)
1. In 2010, President Barack Obama signed into law PPACA
2. PPACA was amended by the passage of the Health Care and Education
Reconciliation Act of 2010
3. These laws provide the basis for health care reform in the U.S.
4. The goal of health care reform is to reduce the number of uninsured U.S. residents by
32 million in 2016
5. The Health Care and Education Reconciliation Act adds requirements:
a. Multitude of revisions to PPACA such as limiting the penalty to companies that
choose not to offer health insurance
b. Adds provisions that will enable more students and families to qualify for
financial aid
X. Federal Equal Employment Opportunity Laws
A. Overview
1. Several federal equal employment opportunity laws prohibit illegal discrimination against various classes of individuals regarding all employment practices, including employee benefits
2. The Equal Employment Opportunity Commission (EEOC)
a. Oversees enforcement of these laws
b. Employees can file claims with the EEOC if they have reason to believe they have
been discrimination against on the basis of
i. Race
ii. Color
iii. Gender
iv. Religion
v. National origin
vi. Age
vii. Disability
viii. Or because of opposition to a prohibited practice or participation in an equal employment opportunity matter
c. Provides a number of services to employers, including
i. Training manuals
ii. Policy manuals
B. Laws include (use PP 3.35)
1. Equal Pay Act of 1963
2. Title VII of the Civil Rights Act of 1964
3. Age Discrimination in Employment Act of 1967 (ADEA)
4. Pregnancy Discrimination Act of 1978
5. Americans with Disabilities Act of 1990 (ADA)
6. Civil Rights Act of 1991
7. Genetic Information Nondiscrimination Act of 2008 (GINA)
XI. Equal Pay Act of 1963 (use PP 3.36)
A. Overview
a. Is an amendment to the minimum wage provision of the FLSA
b. Enacted to remedy a serious problem of employment discrimination in private industry
c. Applies to the same organization as does FLSA
d. The U.S. Department of Labor enforces the FLSA
B. Relevance to employee benefits practices
a. Based on the principle that men and women should receive equal pay for performing equal work, except where the pay is based on
i. Seniority
ii. Merit
iii. Quantity or quality of production
iv. A differential based on something other than gender
b. Pay includes income (wages/salary) and benefits
c. Employers must provide equal employee benefits to male and female employees who perform equal work and their beneficiaries, regardless of cost differences
d. Compensable factors include
i. Skill
ii. Effort
iii. Responsibility
iv. Working conditions
XII. Title VII of the Civil Rights Act of 1964 (use PP 3.37)
A. Overview
1. Enacted to prohibit illegal discrimination against protected class individuals in employment
2. Grew out of broader social unrest among underrepresented minorities
3. Prior to Title VII, employers could legally refuse to hire highly qualified individuals simply on the basis of race, color, religion, sex, or national origin
B. Coverage
1. Protects workers in
a. All private sector employers
b. Local, state, & federal governments
c. Educational institutions that have 15 or more employees
d. Private and public employment agencies
e. Labor organizations
f. Joint labor management committees controlling apprenticeship and training
2. The equal employment opportunity Commission enforces Title VII
C. Relevance to Employee Benefits Practices
1. It makes it unlawful for employers to
a. Fail or refuse to hire or to discharge any individual, or otherwise to discriminate against any individual with respect to his compensation including employee benefits
i. Terms
ii. Conditions
iii. Privileges
b. To limit, segregate or classify employees or applicants for employment that might
adversely affect the employee’s status as an employee
XIII. Age Discrimination in Employment Act of 1967 (ADEA) (use PP 3.38)
A. Overview
1. Enacted to prohibit illegal discrimination in employment on the basis of age
2. Made it UNLAWFUL to
a. Fail or refuse to hire or to discharge anyone with respect to the employee’s compensation
i. Terms
ii. Conditions
iii. Privileges of employment
b. Limit, segregate, or classify employees because of age
c. Reduce a wage rate to comply with this Act
B. Coverage
1. Applies to
a. All private sector employers with 20 or more employees
b. State and local government employees
c. Employment agencies serving covered employers
d. Labor unions with at least 25 members
2. The Equal Employment Opportunity Commission enforces the ADEA
C. Relevance to Employee Benefits Practices
1. ADEA sets limits on the development and implementation of early retirement practices
2. Early retirement practices
a. Usually offered to employees 55 and older
b. Must be voluntary
c. If forced, it represents age discrimination
XIV. Older Workers Benefit Protection Act (OWBPA)
A. Overview
1. 1990 amendment to ADEA
2. When employers require employee contributions toward their benefits, under particular circumstances, employers can require older employees to pay more for health care insurance, disability insurance, or life insurance than younger employees because these benefits generally become more costly with age.
B. Relevance to Employee Benefits Practices
1. Employers can reduce life insurance coverage of older workers if the costs are significantly greater than the costs for younger workers.
2. Equal benefit or equal cost principle: When costs differ significantly, the employer may reduce the benefit for older workers only to the point where it is paying just as much older worker (with lower coverage) as it is for younger workers (with higher coverage).
XV. Pregnancy Discrimination Act of 1978 (use PP 3.39)
A. Overview
1. An amendment to Title VII of the Civil Rights Act of 1964
2. Enacted because courts found that employment discrimination against pregnant
women did NOT violate the sex provision of Title VII
3. Example: In Nashville Gas Co. v. Satty, court held that excluding benefits for
pregnant women from the company’s disability plan did not violate Title VII – both men and nonpregnant women benefited from the company’s disability plan and there was no reason to believe that men received more benefits than women
B. Coverage
1. Applies to same organizations as Title VII of the Civil Rights Act
2. The Equal Employment Opportunity Commission enforces this act
C. Relevance to Employee Benefits Practices
1. Employers must NOT treat pregnancy less favorably than other conditions covered
under employee benefit plans, including health insurance and disability insurance
2. EXAMPLE: An employer that allows temporarily disabled employees to take
disability leave or leave without pay must allow an employee who is temporarily
disabled due to pregnancy to do the same
3. Protects the rights of women who take leave for pregnancy-related reasons, including
a. Credit for previous service
b. Accrued retirement benefits
c. Accumulated seniority
XVI. Americans with Disabilities Act of 1990 (ADA) (use PP 3.40)
A. Overview
1. The EEOC ruled that employers must offer benefits to disabled workers on the same basis as other employees, like
a. Health insurance
b. Retirement
2. Employers may NOT fire or fail to hire disabled individuals because
a. The health insurance policy does NOT cover the disability, or
b. Because the cost of the insurance coverage would increase
3. Retirement plans cannot impose different requirements on employees with disabilities
4. Sometimes employers offer disability insurance to retirees
5. ADA does not prohibit employers from offering less generous disability retirement benefits to the disabled than to those without disabilities
6. ADA Amendments Act of 2008
a. Important change to the definition of the term “disability”
b. This change makes it easier for an individual seeking protection under the ADA
to establish that he or she has a disability within the meaning of the ADA.
7. Congress found that persons with many types of impairments (including epilepsy,
diabetes, multiple sclerosis, major depression, and bipolar disorder) had been unable
to bring ADA claims because they were found not to meet the ADA’s definition of
“disability”
8. However, Congress thought that individuals with these and other impairments should
be covered
B. Coverage
1. Applies to same organizations as Title VII of the Civil Rights Act
2. EEOC enforces the ADA
C. Relevance to Employee Benefits Practices
1. Lawsuits alleging violations of ADA are complex
2. An employee can claim that he/she is a qualified individual with a disability and simultaneously apply for disability benefits.
3. EXAMPLE: Giles, machinist at GE, injured, had surgery, allowed to return to work
with a lifting restriction of 50 pounds, was terminated, received and exhausted long-
term disability benefits, asked GE to make reasonable accommodations so he could
return to work, they refused, he filed for disability benefit sunder Social Security,
Giles sued GE and won
XVII. Civil Rights Act of 1991 (use PP 3.41)
A. Overview
1. Enacted to overturn several Supreme Court rulings that limited employee rights
a. Supreme Court ruled that employees must prove that employment practices were discriminatory and demonstrate how - reversal of Atonio v. Wards Cove Packing Company
b. Now, employers must prove that the challenged employment practice was a
business necessity
i. A legally acceptable defense against charges of alleged discriminatory employer practices under Title VII of the Civil Rights Act of 1964
ii. Employers must prove that the suspect practice prevented irreparable financial damage to the company
B. Coverage
1. Applies to same groups protected under the Civil Rights Act of 1964
2. EEOC enforces this act
C. Relevance to Employee Benefits Practices
1. Waiting periods based on seniority influence eligibility for receiving benefits
2. Employers increase the level of benefits based on seniority
3. This Act overturned the Supreme Court decision in Lorance v. AT&T Technologies
a. Which allowed employees to challenge the use of seniority systems only within 180 days from the implementation date
b. This Act allows employees to file suits either when the system is implemented or whenever the system negatively affects them
XVIII. Genetic Information Nondiscrimination Act of 2008 (use PP 3.42)
A. Overview
1. On May 21, 2008, Congress enacted the GINA to protect job applicants, current and
former employees, labor union members, and apprentices and trainees from
discrimination based on genetic information by making unlawful the misuse of genetic
information to discriminate in health insurance and employment.
2. Title I of GINA applies to employer-sponsored group health plans.
3. Title II prohibits the use of genetic information by employers and others and limits
them from disclosing genetic information.
B. Coverage
1. GINA covers both private and public sectors
2. EEOC enforces GINA
C. Relevance to Employee Benefits Practices
1. Recent developments in the field of genetics, human genome decoding, and genetic
tests can inform individuals whether they may be at risk for developing a specific
disease or disorder.
2. As a result, individuals possess concerns about whether they may be at risk of losing
access to health coverage or employment if insurers or employers have their genetic
information.
Summary
NLRA, IRC, FLSA, ERISA, COBRA, HIPPA EEO laws, PPACA, ADEA, PDA, ADA, both Civil Rights Act, and GINA all affect the employee benefits plans in some way. This chapter explains the impact each one has had on employees and employers concerning employee compensation.
Discussion Questions
1. Describe the differences between pension plans and welfare plans.
Main Points
· ERISA distinguishes between pension benefits and non-pension benefits.
· Welfare practices under ERISA refer to non-pension benefits.
· Pension plans are any plan, fund, or program that provides retirement income to employees.
· ERISA defines a welfare plan as “any plan, fund, or program which was heretofore or is hereafter established or maintained by an employer or by an employee organization, or by both, to the extent that such plan, fund, or program was established or is maintained for the purpose of providing for its participants or their beneficiaries through the purchase of insurance or otherwise, (A) medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, death, or unemployment, or vacation benefits, apprenticeship, or other training programs, or day care centers, scholarship funds, or prepaid legal services, or (B) any benefit described in section 302(c) of the Labor Management Relations Act, 1947 (other than pensions on retirement or death; and insurance to provide such pensions)”
2. Some people argue that there is too much government intervention, while others say there is not enough. Given the presentation of laws and regulations in this chapter, do you think there is too little or too much government intervention? Explain your answer.
Main Points
· Student answers will vary.
· One possible response for too little government intervention: Government intervention help protecting rights of both employees and employers by certain regulations. Also, by providing certain incentives, government help employees and employers receive less costly benefits.
3. Use your familiarity with employee-benefits practices to identify an area of practice that would benefit from government regulation. Describe the rationale for your answer.
Main Points
· Student answers will vary.
· One possible answer: Many countries provide extended maternity leave with salary. There can be a government regulation for providing extended paid maternity leave benefits for employees.
4. Explain the differences between COBRA and HIPAA.
Main Points
· COBRA is an amendment to ERISA, Title 1 (Part 6: Continuation Coverage and Additional Standards for Group Health Plans).
· HIPAA is an amendment to ERISA, Title 1 (Part 7: Group Health Plan Portability, Access, and Renewability Requirements).
· COBRA applies to private sector companies with at least 20 employees, and state and local government agencies. Companies must let qualified beneficiaries to elect continuation coverage under health plans if they lose coverage due to a qualifying event (certain events that would cause an individual to lose health coverage).
· HIPAA applies to all employers offering group health plans. HIPAA contains four provisions regarding availability and portability of health plans, limits to preexisting condition rules, renewability of coverage, and health care privacy.
5. What is the main gist of the Pension Protection Act of 2006, and why has it been necessary?
Main Points
· Pension Protection Act is designed to protect employees’ company sponsored retirement plan in two ways:
o For defined benefit plans, this law should strengthen the financial condition of PBGC by requiring that private sector companies that underfund their plans pay substantially higher premiums to insure retirement benefits,
o For defined contribution plans this law makes it easier for employees to participate in plans such as 401 (k) plans.
· The act aims to shore up the PBGC’s financial condition by making it more difficult for companies to skip making premium payment.
· The act enables companies to automatically enroll their employees in defined contribution plans and provides greater access to professional advice about investments.
Cases
Understanding Your Benefits
Continuing Healthcare Insurance
1. Should you plan to elect the COBRA coverage?
2. If you do want to elect COBRA coverage, what are some important considerations to make sure your health insurance coverage is not interrupted?
Instructor Notes
When an employee terminates from a company for reasons other than gross misconduct, the employee may continue their health insurance coverage for 18-36 months under COBRA. While employees may appreciate the opportunity to continue coverage, they are often surprised at the cost of doing so. The monthly premium the employee must pay to maintain their health insurance coverage under COBRA is the total monthly premium which includes the premium paid by the employer and also the contribution that the employee paid. Employers may also add a 2% mark-up to cover the administrative expenses of offering the continued coverage. Employers are required to notify the employee of their rights under COBRA and employees must decide on whether or not to elect the coverage during the 60 day election period.
Student Responses
1. Should you plan to elect the COBRA coverage?
When you leave a company and have secured a new position you face a challenging dilemma in deciding whether or not to elect COBRA coverage. Most employers have a waiting period before a new employee can enroll in their health insurance plan. If you know that you will be covered under the new health insurance plan soon, there is a temptation to forgo the coverage in order to spare the expense. However, if an accident or other health problem occurs unexpectedly, you could end up in significant debt. If you are covering yourself and your family, there is an increased risk that someone may need coverage. These concerns should be weighed against the high cost of the continued insurance as you make your decision.
2. If you do want to elect COBRA coverage, what are some important considerations to make sure your health insurance coverage is not interrupted?
It is important to make your decision during the election period which extends for 60 days after the termination date. By doing so, you can ensure continued coverage for you and your family. Further, the employer may terminate your coverage if you fail to pay the plan premium in a timely manner. You should make sure you have a clear understanding on how and when to make your payments. It is important that you review COBRA materials carefully and follow the directions specifically in order to ensure continued health insurance coverage.
A Discriminatory Time-off Policy?
1. Do you think that women are underrepresented in Staffon’s workforce?
2. Do you think Staffon’s time-off policy is discriminatory?
Instructor Notes
Under Title VII of the Civil Rights Act, an employer may not classify employees in a way that would deprive them of a benefit based on their membership in a protected class. In this case, the workforce at Staffon is somewhat segregated with Exempt employees being primarily male, and Non-exempt employees being primarily female. Because the time-off benefits at the company are awarded based on Exempt or Non-exempt status, this practice has the potential to cause adverse impact against women.
Student Responses
1. Do you think that women are underrepresented in Staffon’s workforce?
Based on the data provided, women seem to be underrepresented in managerial and consulting positions at Staffon. While nearly half of the entire workforce at the company is female, the women hold less than 30% of the higher paying Exempt positions within the company. This data suggests that women do not have the same opportunity as men to obtain higher level positions within the company.
2. Do you think Staffon’s time-off policy is discriminatory?
The company policy has the potential to be considered discriminatory. While the benefit designation of the time-off policy is based on the legitimate business distinction of providing the benefit based on membership in a particular work-group, the distinction results in women not receiving the enhanced time-off benefits at the same level as the men in the company. Staffon may want to consider changing their time-off policy. However, they need to examine the bigger concern of the lack of women in the higher paying positions. If the company is successful in addressing the lack of women in the higher paying managerial and consultant positions in the company, they could keep their time-off policy as it is currently.
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