Texas Law
Texas Employee Benefits Law
Employee Benefits Law
In addition to wages, many employers choose to provide a variety of employee benefits to their workers. Although employers are not required to provide most employee benefits, once an employer decides to do so, he or she must comply with numerous state and federal laws regulating employee benefits programs. This chapter will consider some of the most basic areas of state and federal laws regulating voluntary employee benefits plans. Topics such as wage and hour regulations, Social Security, and termination rights are discussed in the Employment Law: Management Chapter. Unemployment compensation taxes are discussed in the Corporate Tax Law Chapter. Issues of concern to employers of labor union members are discussed in the Labor Law Chapter.
Employee Benefits Packages
Employee benefits packages vary according to the size and nature of the business. Some benefits packages are more attractive for small businesses than large corporations. A business with mostly younger employees might offer a benefits package attractive to families with young children, whereas a business with mostly older employees will emphasize retirement benefits. An employer concerned with high employee turnover may structure a benefits package one way to minimize his or her contributions or another way to encourage employees to stay longer. Fortunately, employee benefits is an area of law in which business owners enjoy a great deal of flexibility to structure packages that meet the needs of employers and employees and comply with the law.
The growth in popularity of employee benefits packages has led to a concomitant growth in legislation regulating them. Familiarity with these regulations is an important business tool. Employee benefits laws influence how businesses are run, and intelligently crafted benefits packages often give a business a competitive edge in attracting good workers.
ERISA
The Employee Retirement Income Security Act (ERISA) is a federal law that seeks to standardize pension plans as well as medical, surgical, sickness, disability, and death benefits plans. Its provisions attempt to ensure that such plans are financially sound and equitable. To comply with ERISA, plans must provide for broad employee participation. ERISA requires that businesses provide employees with detailed information regarding benefits plans. It 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 exempt from ERISA requirements, including:
- Government plans
- Plans administered by religious employers
- Plans administered outside the United States for non-resident aliens
- Many severance pay plans
Several federal agencies play a role in enforcing ERISA's provisions. Regulations are expansive and complex. For instance, ERISA imposes strict fiduciary duties on employers to oversee their plans. Failure to follow regulations can expose an employer to civil liability. Additionally, compliance with ERISA is usually a prerequisite to an employer's claiming a tax deduction for amounts contributed to a benefits plan. Therefore, employers who wish to establish benefits plans should consult an attorney who is experienced in ERISA compliance issues.
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 certain circumstances. Under COBRA, these employers must provide an employee and the employee's spouse or dependents (if covered) with notice of the 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. 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. All employees who are eligible for the group health plan are counted, including full-time employees, part-time employees, and independent contractors. 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. For example, a covered employee terminated for gross misconduct cannot elect COBRA continuation coverage (although the terminated employee's spouse and dependents may elect to continue coverage). But the definition of what constitutes gross misconduct in this context is murky. A former employee improperly denied COBRA rights may be entitled to substantial penalties from the employer. An attorney experienced in this area can advise an employer on how to comply with COBRA's notice requirements.
Texas Laws Regulating Multiple Employer Welfare Plans
Texas employers who want to offer health insurance, accident or disability insurance, death benefits, or prepaid legal services through a multiple employer welfare arrangement must comply with a number of state statutes and regulations. This area is a complex thicket of regulations because employers' plans are covered by both Texas laws and ERISA. The two sources of law can overlap, and even contradict each other, although in many cases the federal law preempts state regulation. Generally, plans that are regulated by state insurance laws are exempt from preemption by ERISA.
The Texas laws regulating multiple employer welfare 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. For example, multiple employer welfare arrangements in Texas must be fully insured or must comply with specific procedures to obtain a certificate of authority from the Commissioner of Insurance.
401(k) Plan
A 401(k) plan is a salary-reduction plan that is 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 sometimes is referred to as a CODA, which stands for "cash or deferred arrangement." Workers of employers who offer such plans choose whether to receive their entire pay in cash or to have a portion 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 may 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 that 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 investment 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 an ESOP 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) vote their own shares. ESOPs are not available to subchapter S corporations.
Individual Retirement Account
An individual retirement account--also referred to as an IRA--is a retirement plan that permits an employee to pay a specified amount of his or her compensation into an account that is not taxed until the individual withdraws the money. Generally, if the funds are withdrawn from the account before the individual reaches age 60, there is a penalty of ten percent of the amount in the account in addition to the tax.
Keogh Plan
A Keogh plan is a retirement plan established for the use of unincorporated small business owners or self-employed persons such as writers, lawyers, or doctors. 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.
Qualified versus Non-Qualified Plans
There are two categories of employee benefits plans that permit employees to defer taxation of income until retirement or termination of employment. These two categories are referred to as "qualified plans" and "non-qualified plans." A qualified plan is one that meets several requirements of the Internal Revenue Code and ERISA, described above. A non-qualified plan is one that does not meet these requirements and usually refers to a deferred compensation plan for key executives.
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 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 protects assets from creditors. Finally, employees who participate in a qualified plan are not taxed on their employers' contributions until they actually receive their benefits from the plan. 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 a set amount or percentage into a trust fund each pay period.
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. Anti-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
Lawyers who practice employee benefits law usually operate in a proactive mode, helping businesses avoid problems rather than responding after they arise. Experienced employee benefits attorneys can provide a business with an employee benefits review that can help spot problems before they become significant workplace and financial strains. Such a review will help ensure that a business maintains up-to-date required files, complies with current IRS rules, communicates effectively with employees about their benefits, and does not illegally discriminate in any of its plans or practices.
Resources
The Employee Benefits Committee of the American Bar Association's Section of Labor and Employment Law offers a publication entitled Employee Benefits Law (Steven J. Sacher et al. eds., Supp. 1994).
Robert J. Nobile has written the Guide to Employee Handbooks: A Model for Management_With Commentary (Warren, Gorham & Lamont, Boston, MA 1996).
Several national organizations offer information about particular types of employee benefits, including:
- Association of Private Pension and Welfare Plans, 1212 New York Avenue N.W. #1250, Washington, DC 20005, (202) 289-6700.
- Employee Stock Ownership Association, 1726 N Street N.W. #501, Washington, DC 20036, (202) 293-2971.
- Employers Council on Flexible Compensation, 927 15th Street N.W. #1000, Washington, DC 20005, (202) 659-4300.
- ERISA Industry Committee, 1400 L Street N.W. #350, Washington, DC 20005, (202) 789-1400.
- National Center for Employee Ownership, 1201 Martin Luther King, Jr. Way, Oakland, CA 94612, (510) 272-9461.
Employers with questions about tax liability with regard to employees should contact the Internal Revenue Service (IRS), Employee Plans Technical and Actuarial Division, 1111 Constitution Avenue N.W. #6550, Washington, DC 20224, (202) 622-6074 or (800) 829-3676. The IRS also provides free publications, including Individual Retirement Arrangements (pub. no. 590) and Retirement Plans for Self-Employed Persons (pub. no. 560).
The United States Department of Labor, Pension and Welfare Benefits Administration, Division of Technical Assistance and Inquiries can be contacted at 200 Constitution Avenue N.W. #N-5619, Washington, DC 20210, (202) 219-8921, (800) 326-2577 (TDD); 525 Griffin Street #707, Dallas, TX 75202, (214) 767-6831.