Minnesota Law
Minnesota Employee Benefits Law
Employee Benefits Law
Employee Benefit Packages
The growth in popularity of employee benefits packages has led to a concomitant growth in legislation regulating benefits packages. Familiarity with these regulations can be an important business tool because employee benefits laws frequently influence how businesses are run, and intelligently crafted benefits packages often give a business a competitive edge in attracting the most promising workers.
ERISA
The Employment Retirement Income Security Act (ERISA) is a federal law that attempts to standardize pension plans and medical, surgical, sickness, disability, and death benefits plans and to ensure that the plans are financially sound and equitable. To comply with ERISA, plans must provide for broad employee participation. ERISA further requires that businesses provide employees with detailed information regarding benefits plans and sets minimum standards governing eligibility for participation, benefits rights and accrual, vesting, employer and employee contributions, payment of benefits, plan termination, mergers, and survivors' benefits.
A number of benefits plans are specifically exempt from ERISA requirements, including:
- Government plans
- Church plans
- Plans administered outside the United States for non-resident aliens
- Many severance pay plans
COBRA
Under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), employers who sponsor group health plans must give covered employees the option to continue group coverage after they leave employment under a number of circumstances. Under COBRA, employers who offer group health plans must provide an employee and that employee's spouse or dependents (if covered) with notice of their right to continue coverage if the employee's job is terminated, the marriage is terminated, or a dependent child ceases to be a dependent under the terms of the plan. A covered employee terminated for gross misconduct cannot elect COBRA continuation coverage, although the terminated employees' spouse and dependents may still elect to continue coverage. The covered individual can elect to continue, for a limited period, the coverage that he or she had before the termination. The employer can require that the covered individual pay up to 102 percent of the cost of coverage.
Generally, an employer with 20 or more employees on a typical business day during the preceding calendar year must comply with COBRA's requirements. All employees of employers under common control (such as subsidiaries of a common parent) are added together to reach this number. Full-time and part-time employees are counted, as are independent contractors, if they are eligible for the group health plan. Churches and government agencies are exempt from COBRA, although government agencies must comply with similar rules under the Public Health Services Act.
As with other employee benefits discussed in this chapter, COBRA requirements are quite technical. Even the definition of what constitutes gross misconduct sufficient to deny a terminated employee continuation coverage is murky. A terminated employee improperly denied COBRA rights can seek substantial penalties from the employer. An attorney experienced in this area can advise an employer on how to comply with COBRA's notice requirements.
Minnesota Laws Regulating Group Health Plans
Minnesota employers who want to offer group health insurance, health maintenance coverage, or group life insurance must comply with a number of state statutes and regulations. This area is a complex thicket of regulations because often the employer is covered both by Minnesota laws and federal ERISA laws. The two sources of law can overlap, even contradict each other, although in some cases the federal law preempts state regulation. Nonetheless, the state regulation is still on the law books. The Minnesota laws regulating group health plans are similar to ERISA in that they establish minimum standards for coverage, limitations on cancellation and conversion, and procedures to follow upon termination of employment.
Any Minnesota employer with two or more employees can participate in a group health insurance purchasing program by the state. Under the program, employers can offer a wide variety of plans for lower cost than if they were to negotiate their plans alone because the state is able to negotiate on behalf of a large pool of employers. Employers are required to pay at least 50 percent and not more than 100 percent of the lowest cost plan available.
Under Minnesota law employers who provide group life insurance coverage issued within the state must permit a covered employee to elect to continue coverage for himself or herself and any dependents if the employee is voluntarily or involuntarily terminated, has his or her hours reduced to the point that he or she is no longer eligible for coverage, or is laid off.
401(k) Plan
A 401(k) plan is a salary-reduction plan that is often used alone or to complement other profit-sharing or stock bonus plans. This type of plan takes its name from a section of the Internal Revenue Code and is often referred to as a CODA, which stands for "cash or deferred arrangement." Workers are allowed to choose whether to receive their entire pay in cash or to have a portion of their pay set aside for retirement and taxed only when they retire or withdraw the money. Employers may, but are not required to, match a percentage of the employee contribution. Deferred amounts are invested in a plan and can grow tax free until distribution. A worker can access the funds in a 401(k) account before retiring but must pay taxes upon distribution at his or her current tax rate.
In order to take advantage of Section 401(k) treatment, a plan must meet specific nondiscrimination tests which compare the treatment of "highly compensated employees" and "non-highly compensated employees." Employers may not discriminate in favor of highly compensated employees.
Employee Stock Ownership Plan
An Employee Stock Ownership Plan (ESOP) is a stock-bonus plan designed to provide employees with benefits that invest in the stock of the employer. There are advantages to the employer, such as the ability to conserve cash for other uses, and for the employee, who can take advantage of tax breaks. ESOPs allow employees to share in the ownership and growth of the companies they work for, while giving the company tax deductions for the value of the stock it contributes.
An important advantage to ESOPs is that the shares are voted by the ESOP's trustee. Because the company picks the trustee, management retains control, with two exceptions. Corporate decisions requiring a super-majority vote must be voted on directly by the participants in the ESOP, and participants who choose to take shares at distribution (rather than money) can then vote their own shares. ESOPs are not available to subchapter S corporations.
Individual Retirement Account
An individual retirement account (IRA) is a retirement plan that permits employees to pay a specified amount of their compensation into an account, which is not taxed until the individual withdraws the money. There is generally a penalty of 10 percent of the account in addition to the tax if the funds are withdrawn from the account before the individual is age 60.
Keogh Plan
A Keogh plan is a retirement plan established for the use of unincorporated small business owners, or professionals such as writers, lawyers, doctors, and other self-employed persons. A Keogh offers a tax shelter, up to a ceiling, for amounts contributed toward retirement. An employee covered by another retirement plan at work can set up a Keogh if he or she earns income from a sideline business. If retirement plans are set up correctly by an employer they may allow the employer to use the money as a tax deduction. Qualified pension plans allow the employer to pay into a trust fund a set amount or percentage each pay period.
Qualified versus Non-Qualified Plans
Qualified plans enjoy several advantages. Subject to limited exceptions, employers contributing to qualified plans are entitled to a tax deduction when the contribution is made. In contrast, employer contributions to non-qualified plans are non-deductible until the employer is taxed on the benefit. Contributions made to qualified plans can accumulate earnings on a tax-deferred basis while amounts contributed to a non-qualified plan are taxed along with the employer's other income for the year. A qualified plan can protect assets from creditors. Finally, employees who participate in a qualified plan are not taxed on their employer's contribution until they actually receive their benefits from the plan. Participants in a non-qualified plan generally pay tax on employer contributions unless the employee can show that the non-qualified plan includes a substantial risk of forfeiture.
The primary advantage of non-qualified plans is that they need not comply with many of the government regulations governing qualified plans. "Discrimination rules" that require qualified plans to provide benefits to all employees on a generally equivalent basis do not apply to non-qualified plans. A small business owner can concentrate benefits on himself or herself or on key employees.
When to See an Employee Benefits Attorney
Resources
Minnesota Department of Revenue, Taxpayer Information Division, Mail Station 4453, St. Paul, MN 55146-4453, (612) 296-6181 or 1-800-657-3777.