Employee Benefits Law: An Overview for Startups
As a growing startup, there are many legal issues to grapple with. One area of law that startups often do not devote enough attention to is employee benefits law. Employees are one of the most valuable components to growing a successful startup, particularly at the earlier stages.
Broadly speaking, there are two categories of employee benefits — deferred compensation and goods and services other than deferred compensation.
Deferred compensation refers to the payment of wages and benefits beyond the date on which the employee renders services giving rise to the benefit . The employer often postpones compensation to a later taxable year, rather than the taxable year in which the employee rendered the services. The payment may be contingent on a condition restin on a future determination. For example, such dates might be when the employee turns 65 or when the employee actually retires.
Stock bonus plans, also known as Employee Stock Ownership Plans (ESOPs) are another example of deferred compensation. The employer funds them with its stock. Special retirement plans for executives, sometimes known as Supplemental Executive Retirement Plans (SERPs), also fall into the deferred compensation category.
Employee Benefits Other Than Deferred Compensation
Goods and services other than deferred compensation includes insurance coverage, health plans, and coverage for unpredictable life events. When crafting an employer-sponsored health plan, it is important to keep in mind the various federal regulations under the Internal Revenue Code and the Employee Retirement Income Security Act of 1974 (ERISA). Coverage for unpredictable life events includes categories such as workers’ compensation and unemployment benefits.
Major Laws Affecting Employee Benefits
The two primary laws affecting employee benefits that startups should be aware of are the Internal Revenue Code and ERISA. Other useful laws to know that impact employee matters include the Age Discrimination in Employment Act (ADEA), Title VII of the Civil Rights Act of 1964, the Family and Medical Leave Act (FMLA), and the Uniformed Services Employment and Reemployment Act (USERRA). These laws have implications for the structuring of employee benefit plans and how companies must treat employees.
The Internal Revenue Code, which is the federal statutory tax law in the United States, has a sizable impact on employee benefits. In particular, startups should pay attention to Section 409A, which regulates non-qualified deferred compensation. The IRS can impose a 20% excise tax if the taxpayer violates the rules in Section 409A.
The Employee Retirement Income Security Act of 1974, more commonly known as ERISA, is one of the main federal labor and tax laws. It details the rules for administering employee benefits and the rights employees have to those benefits. The Department of Labor (DOL) and federal courts enforce ERISA provisions.
Employee retirement plans that provide future retirement income to employees are ERISA plans. Retirement plans that allow employees to defer earnings for retirement purposes are also ERISA plans. Employers that provide ERISA benefit plans can become liable for violations of ERISA standards. In recent years, the Department of Labor has been more vigilant in cracking down on situations of employer non-compliance. Thus, startups should be mindful of the ERISA guidelines they need to follow in administering employee retirement plans.
Anti-Discrimination Laws and Employee Benefits
Employers are prevented from imposing discriminatory practices against any individual age 40 or older as a result of the individual’s age through the Age Discrimination in Employment Act (ADEA). For example, the ADEA prohibits increases in employee contributions correlated with age increases and limits on plan eligibility based on increasing age.
Title VII of the Civil Rights Act of 1964 prevents discrimination on the basis of race, color, religion, sex, and national origin. Covered employers’ benefit plans that are designed or intentionally operated to discriminate based on any of these categories will be deemed a violation of Title VII. Startups needs to be careful in crafting their benefit plans and other employment terms to prevent Title VII violations.
Sex discrimination based on pregnancy is prohibited through the Pregnancy Discrimination Act of 1978 (PDA), which amended Title VII. This applies to all aspects of employment, including hiring, firing, pay, promotions, health insurance benefits, and more.
Startups should also take into account various federal leave statutes. The Family and Medical Leave Act (FMLA) of 1993 is a labor law requiring employers to provide employees up to 12 weeks of unpaid leave if they meet certain criteria such as following the birth of a newborn child. It also affords employees job protection if they opt to take unpaid leave. Another federal leave statute that comes up with some frequency is the Uniformed Services Employment and Reemployment Act (USERRA).