(USA) Administering Benefits for the U.S.
After a company has determined which standard, government-mandated, and supplemental benefits it will incorporate into its benefit package, benefit professionals must administer the plans. This task can be time-consuming and require paperwork. It generally involves close interaction with health insurance companies, state unemployment insurance offices, and pension plan administrators. Therefore, many companies hire a third-party administrator to assist them in administering the plans, maintaining plan compliance, and submitting regulatory reports to the appropriate administrators.
In addition to maintaining the benefit plans, benefit administrators must enroll employees in these plans. Many factors affect how employee enrollment is administered, such as eligibility requirements and enrollment periods. Most benefit plans have eligibility criteria—such as age, length of service, and employment status—that employees must meet before they are allowed to participate. For example, a pension plan might stipulate that for an employee to participate in the plan, the employee must be at least 21 years old, work a minimum of 20 hours per week, and have been employed by the company for at least one year. Sometimes the company decides these eligibility requirements, and sometimes the company works with the plan administrator to decide the requirements.
Regardless of how benefit eligibility requirements are determined, these criteria must be applied indiscriminately to the workforce to avoid top-heaviness and discrimination in the plan. The term top-heaviness refers to a plan (generally a pension plan) in which more than 60 percent of the assets are contributed by or on behalf of key employees, such as owners or executives, or those who earn more than a specified amount of compensation. Plans that are top-heavy are subject to financial remedies that redistribute plan assets more proportionately.
Another eligibility-related term that generally applies to pension plans is vesting. The term vesting refers to the point when employees take ownership of the contributions that the company makes to the pension plan on their behalf. This table illustrates three types of vesting:
Type of Vesting |
Description |
|---|---|
Graded vesting |
With this type of vesting, for each year that employees remain with the company, they gain a larger percentage of ownership of the employer-contributed account balance. The Employee Retirement Income Security Act (ERISA) provides minimum requirements for graded vesting that are based on at least 20 percent vesting not later than the third year of employment. An additional 20 percent vests each year thereafter. Full vesting is required by the seventh year of employment. |
Cliff vesting |
With this type of vesting, full vesting occurs no later than the fifth year of employment. However, no vesting is required prior to year five. |
Other vesting schedules |
A vesting schedule can be more generous than cliff or graded vesting but, in order to comply with ERISA standards, it cannot be more restrictive. |
By instituting a vesting schedule, a company creates an incentive for employees to remain with the company. If employees leave the company before they are fully-vested in the plan, they forfeit a portion of the contributions made by the employer on their behalf and any earnings associated with those contributions. These forfeited funds must be redistributed within the plan.
Some benefit plans contain open enrollment or re-enrollment periods. Open enrollment refers to a time during which employees can change their benefit coverage or begin enrollment in a plan in which they were not previously enrolled. If an employee makes such changes outside the open enrollment period, waiting periods might be required before the changes take effect, or the employee might be prohibited entirely from making changes outside the open enrollment period. Re-enrollment occurs when a plan is based on a specific time period—generally, one year. Employees must re-enroll in the plan annually. During the re-enrollment period, employees can sign up for different coverage than they had previously.
Frequently, annual re-enrollment periods are associated with cafeteria plans or flexible spending account plans. Cafeteria plans—often referred to as flexible benefit plans—are an effective way of enabling employees to select benefits that are useful to them. Employees pick from a group of benefit options and pay for only those options that they choose. This method of selecting benefits represents a cost savings to both employee and employer because they both pay only for benefits that the employee uses. Generally, employers grant employees a specified number of flex credits that they employees use to pay for the benefits that they choose. Each benefit option has a flex cost, and that cost is deducted from the total number of flex credits granted to the employee.
When an employee does not have enough flex credits to pay for the benefits that the employee chooses, the excess amount can be deducted from the employee's payment through payroll deductions.
When an employee has more than enough flex credits to pay for the benefits that the employee chooses, some employers allow the employee to use the excess credits in one of these ways:
Receive the excess amount in the form of a taxable addition to the employee's pay.
Use the excess amount for other life needs, such as tuition expenses, weight-loss programs, smoking cessation programs, or financial planning expenses.
Some employers do not permit employees to use excess flex credits.
Flexible spending accounts (FSAs) are offered to employees under section 125 of the Internal Revenue Code. These benefits enable employees to elect a specified amount to be deducted from their payments on a pretax basis for future use in paying medical-related or dependent-care expenses. The Internal Revenue Service (IRS) strictly regulates the expenses that are eligible for reimbursement and the amount of money that employees can contribute annually to these FSAs. Additionally, as required by the IRS, the employee must forfeit any amount that remains in the employee's account after the end of the plan year and reimbursement period.