Employee benefits law covers the rights and obligations arising from benefits that employers offer to their employees. The rules are based on a combination of federal and Illinois laws.
Although many employers offer a wide range of employee benefits, very few benefits are actually required by law. In this discussion, we'll look at which laws are required and the rules applicable to a benefit once it is offered.
Required benefits. In Illinois, employers are required by law to provide employees with two hours, with pay, to vote. Under federal law, an employer must give an employee time off to serve on a federal jury. Illinois requires employers to give employees time off to serve on a state jury, although they are not required to pay the employee for the time off. Federal and state laws also require employers to give employees time off to serve in the military. In Illinois, the employee must be reinstated to an equal position upon his or her return to work.
Other than being required to comply with workers' compensation statutes and having to withhold taxes for Medicare, social security, and unemployment benefits, employers generally are not required to provide any further employee benefits.
Health plans. One of the most commonly offered employee benefits is health insurance. Employers commonly offer health insurance even though they're not required to offer it because of competitive pressures in the marketplace. In many instances, an employer would be unable to attract and retain good employees if it didn't offer health insurance coverage. Due to the high costs of providing coverage, some smaller companies don't provide it as a benefit.
Some larger companies hire a company to administer their health benefits and pay claims as an operating expense. Most companies, however, provide health insurance by purchasing insurance coverage from a health insurance provider. In most companies, the employer and the employee share the monthly premium costs. Whereas once the employer often provided the coverage to employees for free, the trend as medical costs have soared has been to shift more of the costs to the employee.
There are three types of health insurance coverage: fee-for-service plans, health maintenance organizations (HMOs), and preferred provider organizations (PPOs). In a fee-for-service plan, the employee has freedom to choose any doctor he or she wants. In an HMO, participants must choose doctors who belong to that HMO. Generally, participants who use an out-of-network doctor are not reimbursed. In a PPO, participants are encouraged to choose doctors who belong to that PPO. Participants who use an out-of-network doctor are reimbursed at lower rates. Fee-for-service plans are the most expensive; HMO plans are the least expensive. Thus, employees are forced to weigh cost against convenience in choosing which plan to use.
COBRA. The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) is a federal law that requires employers to allow employees who change jobs to continue to receive health insurance coverage. The benefits generally last for 18 months, although in certain conditions, they can be extended beyond 18 months. The law applies only to employers with at least 20 employers.
Pension plans. Retirement plans are another popular employee benefit. A retirement plan is generally one of two types. The first is called a defined benefit plan, which provides a set monthly dollar amount for life upon the employee's retirement. The other is called a defined contribution plan, which involves a monthly contribution to an account managed, at least indirectly, by the employee. The payout on a defined contribution plan is determined by how well the investment has performed over time. Most types of retirement plans that have become popular in recent years ? 401(k) plan, profit-sharing plans, employee stock ownership plans, money purchase plans, and simplified employee pensions ? are all defined contribution plans.
ERISA. Another important distinction is between qualified and nonqualified plans. A qualified plan is one that complies with all the provisions of the Employee Retirement Income Security Act (ERISA). ERISA is a federal law that regulates various employee benefits, including pensions, health plans, and disability plans. It contains strict rules that require certain minimum participation levels by employees and prohibits discrimination in favor of highly paid employees. Qualified plans receive significant tax benefits.
Executive compensation. If qualified plans receive significant tax benefits, why are any plans nonqualified? The answer is because some employers want to provide benefits that do discriminate in favor of highly paid employees, in order to attract and retain top executives. Nonqualified plans are set up to reward certain executives by providing them with benefits not available to other employees. Probably the most well know nonqualified plan is the golden parachute, which pay the executives a lump sum if the company is taken over and they are let go. They were popular during the time when hostile takeovers were common.
A more common type of executive compensation today is stock options. Stock options give the executive the right to purchase stock at some future point at a low price. Suppose an executive is given an option to purchase stock at $5 at some future point. Suppose that at that future point, the stock is selling for $50 per share. The executive can make $45 per share by exercising his or her option and selling the stock. The idea is that the executive will be motivated by the chance for huge personal gain to improve the company's stock price.
The problem for stock options is that executives were often too motivated to improve the price, which meant that some were using accounting tricks to inflate the price, and were then selling their stocks for huge profits. The resulting outcry has led employers to look to other means to motivate their executives.
Preemption. Although there are state laws that regulate employee benefits, ERISA preempts all state laws that conflict with it. Thus, if there is a conflict between what ERISA provides and what a state law provides, ERISA will prevail.
Other benefits. Employers typically offer other benefits to employees, the most common of which is paid time-off, such as for vacations, holidays, and sick leave. Contrary to popular belief, employers are not required by law to provide employees with vacation time off. They do it because others in their industry do it. Among the other benefits offered are disability insurance, life insurance, and dental insurance. The larger the employer, the more likely they are to offer it as a benefit.