Chapter 03 – Regulating Employee Benefits
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Chapter 03 Regulating Employee Benefits
I. Learning Objectives (use PP 3.2)
2. Influence of the National Labor Relations Act of 1935 on discretionary employee
benefit plans
4. Fair Labor Standards Act of 1938 and definition of compensable nonwork time
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
2. Workers tried unsuccessfully to band together to negotiate better working conditions,
rights, and better compensation
4. EXAMPLE: How government regulations were thought to begin. Place – Triangle
Shirtwaist factory, New York City; What Happened – in 1911, approximately 150
B. Coverage
1. Applies to private sector companies (except passenger or freight rail or air carriers)
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
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
4. Mandatory bargaining subjects (use PP 3.5)
a. Are those issues that unions and employers must negotiate if either
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iii. Paid time-off (more in Chapter 8)
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
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
7. Union membership also helps employees negotiate for job security and other
8. Worker Adjustment and Retraining Notification (WARN) Act requires
9. Companies with labor unions often try to avoid instituting mass layoffs because of
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III. Internal Revenue Code (IRC) (use PP 3.8)
A. Taxation Regulations
1. Sets standards for taxes such as
a. Sales taxes
2. Taxes are the main source of funding for government programs
3. Internal Revenue Service (IRS)
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)
2. Federal Unemployment Tax Act (FUTA)
a. Tax on employers
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
3. Additional requirements (use PP 3.9)
a. Benefits must meet the nondiscrimination rules of ERISA
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
2. Definition of an officer
a. Set by the U.S. Treasury Department
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d. An employee who merely has the title of an officer, but NOT the authority of an
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
E. Highly Compensated Employee (use PP 3.10)
1. Defined by the IRS as
a. An officer
IV. Fair Labor Standards Act of 1938 (FLSA) (use PP 3.11 & 3.12)
A. Overview
1. Contains provisions for
a. Minimum wage
B. Coverage
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
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C. Relevance to Employee Benefits Practices
1. Under the overtime pay provision, employees who are covered by the FLSA are
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
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
6. Examples of compensable nonwork times include (use PP 3.14)
a. Non-production time
b. Clean-up time
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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
3. Prior to ERISA, employers could arbitrarily determine when employees could begin
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)
2. Does NOT cover
a. Federal state, local government plans
3. Top hat plans are unfunded, deferred compensation plans for a select group of
managers or highly compensated employees
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
2. Major objectives (use PP 3.17)
a. To ensure that workers and beneficiaries receive adequate information about their
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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
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
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.
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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
3. Scope of coverage of pension plans and welfare plans
a. Most of ERISA pertains to pension plans
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
2. Congress endorsed Title I based on four major considerations
a. Companies terminated pension plans after employees had accumulated several
years of service
3. Part 1: Reporting and Disclosure (use PP 3.21)
a. 3 requirements on employers
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i. Employers must provide employees understandable and comprehensive
4. Part 2: Participation
a. Employees must be allowed to participate in pension plans after they have
i. Reached age 21
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
c. Gradual vesting
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
e. Once employees attain full vesting rights, they CANNOT lose their pension
benefits if they terminate employment prior to reaching retirement age
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6. Part 3: Funding
a. Employers must contribute sufficient annual funding for all pension benefits
earned by employees
7. Fiduciary Responsibilities (use PP 3.24)
a. Fiduciaries are individuals who manage employee benefits plans and pension plan
funds and can include
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
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
8. Part 5: Administration and Enforcement
a. 3 federal agencies share responsibility
9. Part 6: Continuation Coverage and Additional Standards for Group Health Plans
a. ERISA was amended by the Consolidated Omnibus Reconciliation Act of 1985
10. PART 7: Group Health Plan Portability, Access, and Renewability Requirements
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b. HIPPA imposes requirements on group health and health insurance issues relating
to
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
2. Additional amendments pertain to
a. Nondiscrimination of coverage requirements
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
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
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
2. PBGC recognizes 3 types of plan terminations
a. Distress
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© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
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
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
6. Trend toward increasing defined benefit plan termination
a. Many companies going into bankruptcy protection
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
2. Coverage
3. The following are exempt
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
2. A qualified beneficiary generally is an individual covered by a group health plan on
4. Qualifying events include (use PP 3.28)