In addition to certain benefits for which an employee is eligible under federal or state law, e.g., leave under FMLA, Social Security, disability insurance, and worker's compensation, employers may consider developing a policy of benefits for their employees. Most employee benefit programs represent a significant commitment by a company to the welfare of its employees. In implementing an employee benefit policy, an employer should set forth in writing the benefits to which an employee is entitled. Always advise employees to speak with the personnel office, or the designated management employee, for further information.
Many employee benefits are subject to the Employee Retirement Income Security Act ("ERISA"), which governs most employer-provided health and welfare plans, as well as retirement plans. Employers should meet with an employee benefit specialist when reviewing existing plans or considering new plans.
Employers should develop a policy with respect to official company holidays, and which employees will be eligible for paid holidays. Holidays such as New Year's Day, Martin Luther King, Jr.'s Birthday, Washington's Birthday Observance (Presidents' Day), Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day are often incorporated as part of an employer's holiday policy.
Holiday pay problems arise when an employer fails to clarify the difference between time worked and paid time off, and how overtime is calculated in a week that included a paid holiday. Overtime pay is determined based on hours actually worked, and holidays not worked should not be considered. Employers should clearly set forth in writing how employees are paid for holiday work to avoid future problems. A model overtime policy is contained in Appendix O.
Regarding religious holidays, employers must reasonably accommodate the religious practices of employees unless it causes some kind of "undue hardship" on the business. It is recommended that an employer make a good faith effort to allow an employee to take off on a holy day or holiday as long as it is not critical the employee be at work that day. In some companies, employees use paid vacation or personal days for religious observance. However, these days need not be paid, but the employer's policy on the matter should be made clear to all employees.
Although paid vacation time is not legally required, it is traditionally given by an employer to give an employee a break from the work regime, which improves productivity and morale. If vacation time is provided, a vacation policy is necessary. It is permissible to grant greater vacation benefits to executive-level or exempt employees. However, an employer must be consistent in its vacation policy so that similarly situated employees are treated in a similar manner.
When developing a vacation policy, be explicit. A short checklist regarding vacation policies follows:
(i) Set out a schedule as to the total amount of vacation granted to each group or class of employees.
(ii) Use a simple formula.
(iii) Detail exactly how and when such vacation time is earned.
(iv) State the amount and method of vacation pay.
(v) State whether vacation carries over to the next year.
State what happens to accumulated vacation time if an employee is on leave of absence or terminated.
Staff should be encouraged to take their vacations each year rather than carrying it over. In addition to the need for rest and recreation, accrued but not taken vacation appears as a liability on the financial statement of the organization and can significantly affect the organization's balance sheet.
Note that New York obligates an employer to pay accrued vacation pay to its departing employees if the applicable policy, agreement, or employee handbook provides for it.172 Any amounts owed must be paid not later than the regular payday for the pay period during which termination occurred.173
Connecticut law provides that if it is the employer's policy to pay accrued fringe benefits, including vacation pay, upon termination of employment, the employer must compensate terminated employees accordingly, in wages.174 If an employer fails to do so, the employee may recover double the amount owed through a private cause of action.175 If regular wages and vacation pay are to be disbursed on the same pay day, the employer must separately compute the federal social security and withholding taxes for each kind of remuneration.176
For most employees, group medical benefits are the most visible benefits offered by the employer. A comprehensive medical plan that encourages employees to seek the most cost-effective medical care consistent with sound medical practice is usually an essential part of an employer's benefit program. Such programs include some or all of the following: hospital and emergency medical, general healthcare, prescription medicine, dental and vision coverage.
Employees may contribute to the cost of the medical care program, or the employer may cover the full expense. Usually, there is a minimum employee contribution, which consists of a set percentage of the total cost of coverage for the employee and his or her dependents.
1. Federal Law
The Equal Employment Opportunity Commission has published a rule allowing employers to coordinate retiree health plans with Medicare (or a comparable state health program) without violating the Age Discrimination in Employment Act of 1967.176a Under this regulation, an employer can design its retiree health plan to provide health benefits for retired participants that are altered, reduced, or even eliminated when the retired participant becomes eligible for Medicare whether or not the retiree actually enrolls in Medicare. The regulation provides that an employer may alter, reduce, or eliminate retiree health benefits for spouses or other dependents of retirees when the dependents are eligible for health benefits under Medicare (or a comparable state health program), whether or not the retirees’ own health benefits are similarly altered, reduced or eliminated. The exemption does not apply to any other aspect of ADEA coverage or employee benefits other than retiree health benefits. The exemption does not apply to health plans covering active employees who are at or over the Medicare eligibility age.
Under ERISA, the federal law which regulates only self-insured medical expense reimbursement plans, such plans must meet minimum participation requirements in order for the plan to qualify for tax favored status. A self-insured plan must benefit 70% or more of all employees or 80% or more of all eligible employees if 70% or more of all employees are eligible to benefit.177 Alternatively, such a plan may satisfy the participation requirements if it benefits "such employees as qualify under a classification set up by the employer" and such classification does not discriminate in favor of highly compensated individuals.178 A plan discriminates in favor of highly compensated individuals if it takes such status into account as to eligibility to participate and the benefits provided under the plan favor participants who are highly compensated.179
Insured medical expense reimbursement plans under which benefits are provided by a licensed insurance company are not subject to governance by ERISA. However, such plans are subject to New York State law that permits an employer-policyholder to insure all employees or "all of any class or classes of [employees] determined by conditions pertaining to employment or ... pertaining to the family status of the employee."180 The insurance coverage under the policy must be based upon some plan precluding individual selection of coverage. However, the plan may permit a limited number of selections by employees if the selections offered utilize consistent plans of coverage for individual group members so that the resulting plans of coverage are reasonable.181
The premiums can be paid by the employer, the employee, or jointly. If the employee contributes to the payment of the premium, then the policy must cover at least 50% of all eligible employees. If this majority cannot be achieved, the plan must cover at least 50 employees to be issued.182
In Connecticut, employers with 25 or more employees must, at the request of a health care center, include membership in that center as part of its health benefits plan, provided that the center serves an area in which at least 25 employees of the employer reside.183
A retirement plan is a program set up by an employer that is intended provide retirement income to employees, or results in a deferral of income by employees for periods extending to the termination of covered employment or beyond. There are two major types of plans that employers could consider: "defined benefit" and "defined contribution" plans. Defined benefit plans, which have lost popularity in recent years, are plans that guarantee eligible employees a defined amount of benefits upon retirement. Defined contribution plans permit employees to place pre-tax contributions into profit sharing 403(b) plans or 401(k) tax deferred savings plans. These voluntary plans permit employees to contribute a certain percentage of their earnings on a pre-tax basis to one of several investment choices. The employer may choose to match on a dollar for dollar basis a certain percentage of an employee's contributions. Retirement plans are complex programs that involve tax consequences and require expertise in accounting, ERISA, and employee benefits.
Note that with regard to retirement plans, there are certain provisions in ERISA that prohibit discrimination based on income. While differentiating between employees in different job categories with regard to benefits is permissible, favoring "highly compensated employees" violates the law. Consultation with an employee benefits expert is essential in structuring a plan so that it does not become "top heavy" and compensate highly-paid employees disproportionately to lower paid employees.
Employee retention and satisfaction may be improved by having a tax deferred retirement plan authorized by Internal Revenue Code Section 403(b). These plans may be provided by 501(c)(3) non-profit organizations and public schools. Both employer and employee contributions may be made, and earnings are accrued and taxes deferred until the employee begins to withdraw from the account. These plans, which are jointly regulated by the U.S. Department of Labor and the Internal Revenue Service, should be set up by employee benefits and tax specialists.
Organizations exempt from taxes under IRC Sections 501(c)(3), 501(c)(4), and 501(c)(6) may adopt 401(k) plans. All accounts are individual accounts and the employer is not involved unless the employer wishes to provide for employer-provided matching contributions. Because they are trust plans, when the employee wishes to borrow from a 401(k) plan, the sponsor or trustee signs the loan document and takes responsibility for sending the loan payment checks. These plans are similarly jointly regulated by the U.S. Department of Labor and the Internal Revenue Service and employee benefits and tax experts must establish these plans.
Although not a common issue, non-profit employers must be aware that executive compensation must be reasonable and necessary, based upon the compensation commonly provided to others in similar positions. Excessive compensation and benefits can result in the board of directors or trustees being personally liable.184
To retain qualified employees, non-profit employers are considering a host of other benefits, such as flexible spending accounts or "cafeteria plans" (dependent care and/or health care and/or premium payment), death benefits, disability insurance, life insurance, tuition reimbursement benefits, training programs, child care provisions, flexible work hours and telecommuting, liberal leave of absence provisions, bereavement leave, and employee discounts. More organizations are adopting policies giving domestic partners some of the benefits of legal spouses. Some factors to be considered before adopting these plans are discussed below.185
Flexible spending accounts or "Cafeteria Plans" permit employees to use pre-tax income to pay for group health insurance, child and dependent care, and uninsured medical expenses. No FICA or Medicare taxes are paid on the amounts included in these accounts, and employees can select the coverage most appropriate for their individual and family needs. Amounts not used in a calendar year are lost and cannot be carried over to subsequent years. These plans should only be adopted with the advice of legal counsel.
Deferred compensation plans are intended to retain key employees. The tax and other considerations related to such plans are complex and legal counsel is required.
Nonprofit employers should note that the requirements of Internal Revenue Code Section 409A may apply to certain deferred compensation plans of nonprofits. Section 409A was enacted in 2004 to address Internal Revenue Service concerns related to nonqualified deferred compensation plans.187
Since the passage of Section 409A, the IRS has issued interpretative guidance, including several notices189 and a set of lengthy proposed regulations,188 and extended the good faith compliance period and the deadline for documentation compliance three times from December 31, 2005 to December 31, 2006, to December 31, 2007 and finally to December 31, 2008. On April 10, 2007, the IRS published comprehensive final regulations (the “Final Regulations”) that provide detailed guidance on Section 409A requirements.190
Section 409A increases the complexity and opportunity for error with respect to deferred compensation plans of nonprofit employers. Deferred compensation plans of nonprofit employers are potentially subject to as many as three separate tax regimes, each with specific rules. Briefly stated, these three regimes are as follows:
The increased complexity of the tax rules governing deferred compensation plans of nonprofit employers underscores the need for these plans to be reviewed by counsel.
The law permits tax-free reimbursement of up to $5,250 per year for educational expenses of employees (not spouses or dependents). A written plan defining eligibility requirements and the plan may not discriminate in favor of highly paid employees.
Caution is advised when non-profit organizations extend loans to employees. Market rate of interest must be charged, and the arrangement should be on commercial terms and conditions. Any special financial benefit to the employee will subject the employee, the non-profit, and the board and staff who approved the loan may be subject to IRS sanctions for private benefit or inurement.
If an organization pays for life insurance, a policy with a death benefit in excess of $50,000 must be included in an employee's income and is subject to FICA and Medicare taxes. For this reason, most employers offer a policy of $50,000 or less. Another option is for the employer to negotiate with an insurance provider to make a group policy available to all employees at their own cost, but at more competitive rates than might be otherwise available.
Requiring an employee to live on the employer's premises, sleeping and eating on site as part of the duties of the job, may be a tax-free benefit. The tax benefit applies only if lodging and meals on the employer's premises are a condition employment and primarily for the benefit of the employer.
Severance pay is often used as an incentive for employee termination. It should never be offered as an inducement to an employee to resign or retire without a "Severance and Release Agreement" drafted in compliance with the Older Worker's Benefits Protection Act. See Section XVIII.F.
Increasingly, domestic partners are receiving the same benefits as legal spouses. In some cases, employers are be required to provide domestic partner benefits by law. For example, a New York City law extends employment benefits to all registered domestic partners of City and State public employees, retirees and eligible family members.191 However, in February 2006, a New York City law prohibiting city agencies from contracting with firms that did not provide equal benefits to employees’ domestic partners was struck down—the court finding New York City’s “Equal Benefits Law”192 was preempted by state and federal law.
Nevertheless, a number of New York localities establish a mechanism for couples, both opposite-sex and same-sex, to register their relationships as domestic partnerships, including the city of Albany, town of Ithaca, town of East Hampton, town of Southampton, town of Southold, town of Huntington, city of New York, city of Rochester, county of Suffolk and county of Westchester. Some of these registries have concrete rights attached to them. New York City, for example, treats domestic partners as spouses for all city purposes (vendors licenses, visitation in NYC's prisons, etc.).192a When it was created, Westchester was significant as the only registry in the state and perhaps the nation to afford rights against private actors by requiring all hospitals and nursing homes in the county to give visitation to domestic partners on the same basis as spouses. (This right has since been extended to domestic partners statewide under state law. Other registries have little to no legal value other than their symbolism and their ability to serve as some objective evidence (though not necessarily binding evidence) of the intent to form a legal relationship between two partners.
In Connecticut, on October 1, 2005, Public Act No. 05-10, concerning civil unions, became effective, permitting same-sex couples to enter into civil unions as an alternative to marriage. Under section 14 of this act, parties to a civil union have all the same benefits, protections, and responsibilities under law as those granted to married couples, including those derived from general statutes, administrative regulations and court rules.193 As a result, the Connecticut civil union law requires employers to treat parties to a civil union the same as married couples for purposes of benefit policies and plans created by law or regulation. Accordingly, this law may be particularly relevant for public employers. Connecticut’s civil union law does not require private employers to provide benefits to civil union partners of employees, where the benefits are derived from non-statutory or regulatory sources, like employer policies. However, generally applicable Connecticut laws like the mini-COBRA law must be applied evenly to civil unions.
Even where not required, many employers choose voluntarily to provide domestic partner benefits to their employees. If domestic partners are to receive benefits, the employer's manual needs to provide the appropriate application forms and address issues such as what benefits are covered, leaves of absences, the legal and tax consequences, termination of the domestic partnership, and COBRA benefits.
A model domestic partners policy is contained in Appendix P.
Wellness Programs are intended to provide employees (and, in some cases, employees' covered dependents) with discounts, rebates or prizes as a reward for participating in programs designed to promote health or prevent disease. On December 10, 2006, the U.S. Department of Labor, the U.S. Department of the Treasury and the U.S. Department of Health and Human Services issued final Health Insurance Portability and Accountability Act (HIPAA) regulations relating to employee wellness programs.[i] The regulations apply for plan years beginning on or after July 1, 2007.
While HIPAA prohibits health plans from discriminating against employees by charging similarly situated individuals different premiums or contributions based on a health factor, the regulations clarify that wellness programs are exempt from the nondiscrimination provisions of HIPAA. However, wellness programs must comply with HIPAA regulations that address program implementation guidance and prohibitions against discrimination based on health practices.194
The regulations list examples of employee wellness programs that would not be considered discriminatory. These examples include a program that reimburses all or part of the cost for memberships in a fitness center, and a program that provides a reward to employees for attending a monthly health education seminar. The foregoing programs are not considered to be providing rewards based on health factors. The regulations provide that an employee wellness program can base rewards on health factors and still be considered nondiscriminatory, but the program must meet five additional requirements:
174 Conn. Gen. Stat. § 31-76k.
176 Conn. Gen. Stat. § 31-74a.
176a See http://www.eeoc.gov/policy/docs/benefits-rescind.html and http://www.eeoc.gov/policy/docs/qanda_retireehealthrule.html.
177 See I.R.C. § 105(h)(3)(A).
179 I.R.C. § 105(h)(2)(A) & (B).
180 See N.Y. Ins. Law § 4235(3)(c)(1)(A).
183 Conn. Gen. Stat. § 31-51p.
184 Adelphi University v. Board of Regents, 652 NYS2d 837 (1997). The case was settled, with the former trustees of Adelphi University paying about $1.5 million for neglecting their fiduciary duties by approving extravagant salaries and spending for the University's former president. There were also several lawsuits, including one by the New York Attorney General, seeking to hold the trustee's personally liable, which was also settled with payment by the trustees.
185 See IRS Publication 15b, Employer's Tax Guide to Fringe Benefits, http://www.irs.ustreas.gov/prod/forms_pubs/pubs/p15btoc.htm., and IRS Publication 525, Taxable and Nontaxable Income; Employee Compensation, http://www.irs.ustreas.gov/prod/forms_pubs/pubs/p52501.htm.
187 Section 885 of the American Jobs Creation Act of 2004, Pub. Law No. 108-357, 118 Stat. 1418, added Section 409A to the Internal Revenue Code
191 N.Y.C. Admin. Code § 3-244(f); §12-307(c).
192 N.Y.C. Admin. Code § 6-126.
192a N.Y.C. Admin. Code § 6-126
193 186 Conn. Gen. Stat. § 46b-38nn
194 DOL Field Assistance Bulletin 2008-02, http://www.dol.gov/ebsa/regs/fab2008-2.html