Employee benefits are an essential part of HR work and can be costly to the company if not handled well. Common forms of HR mistakes regarding employee benefits are extra benefits, complaints, lawsuits, government-assessed fines and penalties, and attorney fees.
There are many common mistakes that can be avoided if HR people use precautions. Being aware of these potential HR risks and taking action to prevent them from happening will be super helpful for the HR department's operation.
Not Timely Enrolling or Administering Employee Benefits
For benefits enrollment and administration, timing matters. It is HR's responsibility to meet all the deadlines regarding employees' benefits programs and ensure benefits security for them. Try to avoid:
- Not timely depositing employee contributions into qualified retirement plans. Employers sometimes wait too long to deposit salary deferrals into a qualified retirement plan. According to the Department of Labor (DOL), such deposits should be made as soon as the contributions can be reasonably segregated from the employer’s general assets, but no later than the 15th business day of the following month. The 15th business day of the following month is an outside guideline, and deposits must be made sooner if possible. If deposits are not in a timely made, the DOL and Internal Revenue Service (IRS) may levy fines, penalties, and retroactive earnings for late contributions. The deposit rule for salary deferrals applies to all types of employee contributions, including special deferrals (such as catch-up contributions), after-tax contributions, and loan repayments.
Solution: Deposit employee contributions as soon as reasonably possible following issuance of the paycheck from which the contribution was withheld. Employers with small plans should try to take advantage of the safe harbor’s protection by depositing employee contributions within seven business days from the issuance of the paycheck.
- Not timely matching and profit-sharing contributions. If your qualified retirement plan provides for matching and profit-sharing contributions, the deadline for making these contributions and depositing them into the plan’s trust is determined first by looking to the plan document. The plan document may contain deadlines for these contributions.
Solution: Read your plan documents and understand when matching and profit-sharing contributions must be made.
- Late enrollment of employees into qualified retirement plans. Employers often fail to timely enroll employees in qualified retirement plans, and sometimes even try to exclude part-time employees from participation. A qualified retirement plan is not required to cover all of an employer’s employees.
Incorrectly Managing Computing Matching Contributions
- Incorrectly computing matching contributions. A typical matching contribution formula provides that an employer will pay 50 cents for each $1 an employee contributes to the plan on a pre-tax or Roth basis up to 6 percent of compensation, which results in a maximum employer matching contribution of 3 percent of compensation. It is most common for plan administrators and payroll systems to calculate matching contributions on a weekly payroll-by-payroll basis.
- Using the wrong definition of compensation when computing retirement plan contributions. Employees are entitled to receive and make contributions based on the definition of compensation set forth in the plan document, up to applicable limits. Employers sometimes fail to compute profit-sharing contributions based on certain types of compensation (e.g., bonus payments, commissions and service awards), contrary to the plan language.
Solution: Confirm with the administrator of your qualified retirement plan that you are computing compensation correctly. If any changes are made to the plan’s definition of compensation, make sure to communicate the changes to plan service providers.
Miscommunications Regarding Employee Benefits Plans
- No plan document or summary plan description. ERISA requires that employee benefit plans be maintained pursuant to a written instrument and that participants receive a summary plan description (SPD) that contains certain information. The DOL has a rule defining what needs to be in an SPD. Many employers rely on their insurance carriers or TPAs to provide booklets to distribute to employees. Often the booklets provided by carriers and TPAs do not contain all of the information that is required in an SPD and/or will not qualify as a plan document. This is often the case with health and welfare plans.
Solution: Have an SPD and plan document prepared for each plan your company sponsors, and keep the documents up to date. In some cases, a simple “wrap document” may suffice to supplement the information provided by the insurance company or TPA. The wrap document fills in the gaps of what you have and what is legally required and can apply to more than one plan.
- Not communicating SPD changes to participants. ERISA requires notice to covered participants anytime there is a material modification in a plan’s terms, or there is a change in the information required to be in the SPD. If there is a legal dispute over benefits, courts will often enforce the terms of an out-of-date or incomplete SPD rather than the terms of the plan document, in favor of the participant.
Solution: ERISA allows plan administrators to communicate material changes through a simplified notice called a summary of material modifications (SMM) that limits itself to describing the modification or change. Since there is no guidance on what is a material change, you should err in favor of preparing and distributing SMMs.
Misunderstanding of the State / Federal Regulations
- State/Federal FMLA coordination. Many employers assume that state and federal FMLA laws are congruent and need not be accounted for separately. This sometimes provides employees with more (or less) leave than is required by law. If employees are offered more FMLA leave than they are entitled to, then the same risk as described in 11 above can occur. Conversely, if employees are not allowed to take as much leave as they are entitled to, employers can find themselves facing a lawsuit or a complaint.
Solution: Set forth the state and federal entitlements separately in your FMLA Policy and understand how they work together.
- Failure to recognize deferred compensation. Many employers do not understand IRC 409A, which generally applies after Dec. 31, 2004, to any arrangement that defers compensation more than 2½ months beyond the end of the year in which the individual first had a vested (legally enforceable) right to the compensation. A violation of 409A is very costly because it results in taxation of the deferred compensation prematurely (when it is vested, not when it is later paid), along with a 20 percent penalty and interest.
Solution: Have your deferred compensation plans, employment contracts, and severance-pay arrangements reviewed by an attorney or financial advisor specializing in 409A.
- Maintaining a health plan that is inconsistent with an HSA. Contributions can be made to an HSA only when the employee is not covered by a general-purpose health reimbursement arrangement or health flexible spending account (FSA), or other impermissible coverage. An employer that provides impermissible other health plan coverage can unintentionally disqualify its employees from making HSA contributions.
Solution: Consult with your Paytime insurance broker, regarding the design of your HRA, health FSA, and other health plans, to ensure they are HSA-compatible.
- Failure to compare group disability insurance policies. Many employers purchase group disability insurance policies without understanding them. They receive complaints from employees because their disability claims are denied because they are not considered “disabled” per the terms of the policy. Purchasing group disability insurance policies that do not provide worthwhile benefits when needed by employees is throwing money away on a useless benefit.
Solution: Choose group disability insurance policies with the assistance of your Paytime insurance broker who specializes in these policies.
- Allowing employees to stay on group health coverage beyond the required time period. Many employers allow employees to stay on group health insurance plans after eligibility would otherwise end under the plan’s terms, without first getting approval from the insurance/stop-loss carrier.
Solution: Offer COBRA coverage to employees that need extended leave but have exhausted or are not eligible for FMLA leave. In this way, employers shield themselves from liability. The employer can continue to pay the employee portion if they desire. Also, make sure that insurance/stop-loss carriers are aware of collective bargaining agreements that may apply to coverage issues and have signed off on these agreements in writing.
Issues Regarding Employee Status
- Independent contractor/temporary employee issues. Some employers make the mistake of including independent contractors in health plan coverage and/or excluding temporary employees from benefit plan coverage. If an employer allows independent contractors to participate in its health plan, its health plan is technically a “multiple employer” plan, and an IRS Form M-1 needs to be filed annually. Failure to do so can cause the DOL to levy penalties. If the employer has wrongfully excluded “common law employees” from its benefit plans, those “employees” can seek retroactive reinstatement to the employer’s benefit plans, potentially causing large damages to the employer.
Solution: Do not allow independent contractors to participate in your health plan, or file an annual Form M-1. Ask your attorney or financial advisor to assist you if you have never filed a Form M-1 before. To preclude unintentional inclusion of “common law” employees, craft your benefit plan language to specifically exclude individuals, not on your payroll.
- Misclassifying an individual as an independent contractor. Many employers misclassify individuals as independent contractors when they do not qualify under the law as independent contractors, in regard to unemployment and worker’s compensation purposes. By making such a mistake, employers could owe thousands of dollars in back premiums for worker’s compensation insurance, as well as premiums for unemployment insurance. Worse yet, the employer could be responsible for actual medical costs for an individual not properly covered under your worker’s compensation policy. The employer may also owe income taxes and social security taxes.
Solution: Review your independent contractor relationships to ensure consistency with state and federal standards. Make sure your independent contractors have a FEIN and are incorporated. Ask them to form an LLC if they are not. Ask yourself whether they are doing similar work for other companies in the same industry. If the answer is “no,” they may not be treated as an independent contractor in the eyes of the law.
Start Avoiding Costly Employee Benefits and HR Mistakes
Handling employee benefits in the right way is extremely important to a company and its financial status. Mistakes regarding employee benefits can cause a lot of financial damage to the company and can become a burden to achieve business goals and optimized outcomes.
If you ever encounter difficulties resolving an HR wrongdoing situation regarding employee benefits on your own, it's always wise to seek out professional guidance from an HR service provider to facilitate a productive conversation and get to the bottom of an issue.