Common and costly employee benefit mistakes!

Mistakes in employee benefits and human resources can be quite costly to employers in

the form of extra benefits, complaints, lawsuits, government-assessed fines and penalties, and attorney fees, to name a few. Don’t learn the hard way what these mistakes are.

1. 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 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.

The DOL has established a safe harbor for employers with small plans (fewer than 100

participants at the beginning of the plan year) to timely deposit such employee

contributions. Under the safe harbor, if the employer deposits the withheld amounts

in the plan no later than the seventh business day following the date the employees

would have received the contributions (payday), the employer automatically satisfies

the requirement to timely deposit employee contributions.

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. The DOL’s Voluntary Fiduciary Correction Program (VFCP) offers a method

to correct late deposits of employee contributions.

2. Not making matching and profit-sharing contributions on a timely basis. Many

employers make the mistake of not making these contributions on a timely basis. 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. For example, the plan document may require

matching contributions to be deposited each pay period.

If the plan document is silent on this issue or requires contributions to be made by the

date required by law, then the deadline generally will be determined by IRC 404(a).

IRC 404(a) provides that matching and profit-sharing contributions for a plan year

must be made by the due date of the employer’s tax return for that year, including

extensions. For tax-exempt employers, the IRC deadline is generally the 15th day of

the 10th month following the close of the employer’s tax year. If contributions are not

made on a timely basis, the same penalties as above apply.

Solution: Read your plan documents and understand when matching and profit sharing

contributions must be made.

3. 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. If an employee

earning $60,000 a year makes the 6 percent contribution throughout the year on a

payroll-by-payroll basis, the employee will contribute $3,600 to the plan, and the

employer will provide a matching contribution equal to $1,800. Assume another

employee earning the same base pay contributes 12 percent for 6 months. This

employee has also contributed a total of $3,600 to the plan, but will only receive a

$900 match. This same scenario also often occurs with executives who receive large

bonuses early in the year and request the maximum contribution be withheld from

the bonus.

Solution: Some employers make “make-up” contributions at the end of the year to

ensure that employees making the same annual salary deferrals receive the same

matching contributions. If employers are using a Prototype plan, make-up

contributions may not be a viable option. In this case, educating employees on the

implications of changing deferral elections and limits is important. If matching

contributions are not calculated correctly or in accordance with the plan document,

the IRS’s Employee Plans Compliance Resolution System (EPCRS) may allow the

employer to correct the error by following a correction method approved by the IRS.

4. 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. For example, a plan generally may

limit participation to certain groups of employees, as long as the plan satisfies

minimum coverage and nondiscrimination requirements. In addition, a qualified

retirement plan may exclude an employee based on age (up to 21) or service

(generally up to one year of service in which he or she is credited with at least 1,000

hours of service), but not based on part-time status. Also, former employees who are

rehired who had completed the plan’s eligibility requirements before terminating may

begin participating immediately upon rehire, unless the employee’s original entry

date would have been later, in which case the later entry date applies.

If you wrongfully exclude employees, you can jeopardize the plan’s tax-qualified

status. If the error is discovered in an audit, the DOL and IRS may levy retroactive

employer contributions, elective deferrals and earnings for employees that were

wrongfully excluded. Excluding eligible employees from participation is a mistake that

may be corrected under EPCRS. The IRS-approved correction for failing to allow an

employee to make elective deferrals for part of a plan year is to make an employer

contribution equal to 50 percent of the “average deferral percentage” of the

employee’s group (either highly or non-highly compensated), multiplied by the

employee’s compensation for that part of the year.

Solution: Include in the retirement plan all employees that work at least 1,000 hours

in a 12-month period (unless such employees are excluded based on a “serviceneutral”

classification). Closely monitor employees’ attainment of the plan’s eligibility

criteria and timely provide eligibility information to plan service providers.

5. 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.

Failure to provide a plan participant with an SPD within 30 days of an employee

request carries a maximum $110 per day penalty (measured from the date that is 30

days after the request). There is no specific penalty for failure to maintain a plan

document, but pursuant to ERISA’s general enforcement provisions, any plan

participant can bring a lawsuit to require a plan sponsor to prepare a formal plan

document where none exists. Criminal penalties may be levied upon any individual or

company that willfully violates Title I of ERISA, which could include these disclosure

rules (maximums are $100,000 and ten years in prison or $500,000 for a company).

Moreover, failing to maintain an updated plan document and/or SPD may jeopardize

an employer’s chance of success in a legal dispute with an employee over benefits.

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.

6. 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. At a

minimum your SMM should contain: (1) the name of the health plan and the SPD to

which the SMM relates; (2) a description of the changes or the substituted language;

(3) the effective date of the changes; (4) instruction to keep the SMM with the SPD;

(5) an explanation that the SMM and the SPD must be read together; and (6) the

name and title of the person to contact with questions.

7. 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. Failure to comply with the terms of the plan can result

in disqualification of the plan. To avoid plan disqualification, employers follow EPCRS

correction principles and end up making the extra profit-sharing contributions, plus

lost earnings, to make the employee plan accounts whole.

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


8. 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

Casimere Insurance Services insurance broker who specializes in these policies.

9. 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 Casimere Insurance Services insurance broker, regarding

the design of your HRA, health FSA, and other health plans, to ensure they are HSA compatible.

10. 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.

11. 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. For example, employers often allow

employees on leave to keep their health insurance beyond the period of time

required by the FMLA. If the employee incurs significant medical expense and the

insurance/stop loss carrier investigates, the carrier may decline to provide coverage,

leaving the employer to “self-insure” the entire cost.

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.

12. 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.

13. 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.

14. Misclassifying an individual as an independent contractor. Many employers

misclassify individuals as independent contractors when they do not qualify under the

law as an independent contractor for 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


Solution: Review your independent contractor relationships to ensure consistency

with state and federal standards. Make sure your independent contractors have an

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.

15. Update your restrictive covenants. Employers spend a lot of time and resources

drafting enforceable restrictive covenants. Because the law changes from time to time

due to various court decisions, covenants can become outdated and unenforceable. In

some states, the law states that if any portion of a restrictive covenant is overbroad,

then the entire agreement is unenforceable. For example, a no-hire clause in your

agreement could invalidate your entire non-compete as overbroad. If your restrictive

covenants are unenforceable, you may not be able to protect your customer base,

continuing revenues and/or confidential information if a key employee leaves.

Solution: Have your restrictive covenant agreements reviewed annually to make sure

that they are consistent with the ever-changing law. Legal counsel experienced in this

area should be able to review your restrictive covenants in a cost-efficient manner to

determine their enforceability.

16. Misuse of performance evaluations. Some managers and supervisors make the

mistake of not being honest and straightforward when evaluating employees. This

mistake often makes it difficult to defend against claims of discrimination and

wrongful discharge when managers are less than honest and direct on performance


Solution: Do not “sugarcoat” criticisms of employee performance. Not only will you

not give the troubled employee an opportunity to correct his or her performance

problems and become more productive, but you will also not have an appropriate

record of performance deficiencies in the event it becomes necessary to defend a

termination or disciplinary action.

17. Contesting unemployment compensation for performance reasons. State laws may

differ, but generally employees who are terminated for performance reasons are

entitled to unemployment compensation. Employers often waste resources by

contesting the unemployment compensation claim. (If an employee has filed a series

of claims against the employer and is not represented by an attorney, it may make

sense to contest the UC claim, so you can “nail down” the employee’s version of the

facts.) Generally, an employee is not entitled to unemployment compensation only if

he or she quits or is terminated for misconduct. State laws may differ; check with your

legal counsel.

Solution: Understand the standards for misconduct under unemployment

compensation law and how they differ from performance-related terminations.

Update your employee manuals, making sure the policies are accurate and that you

can prove the employee received a copy of the manual. Be sure to carefully and

thoroughly document any misconduct and disciplinary issues that have led to an

employee’s termination.

18. Recalculating overtime when paying performance-based bonuses. Employers often

forget to recalculate overtime previously paid and make additional overtime

payments when paying performance-based bonuses over multiple pay periods. State

wage and hour laws differ, but generally if a wage claim is brought, an employer could

owe not only back pay, but interest, penalties and attorney fees.

Solution: Check with your legal counsel to make sure you know whether the bonuses

you pay qualify for recalculation of overtime. If so, you need to go back and apply the

bonus over the relevant pay periods and determine the appropriate overtime rate and

whether additional overtime payments are required.

19. Failing to clearly define when commissions are payable. Many employers make the

mistake of not having a written policy defining when commissions are due to

employees. State laws differ, but if an employer does not have an appropriate policy,

an employee can leave or be fired and still be due thousands of dollars in commission


Solution: Make sure that your commission policy is in writing and clearly defines when

employees have earned commissions and how they are handled upon termination.

20. Other common HR mistakes. Paying severance without a release. By doing so, you are allowing employees to make future claims.

Failing to conduct exit interviews. Not only will you gain valuable information

the design of your HRA, health FSA, and other health plans, to ensure they are HSA compatible.

potential claims.

Solution: Read your plan documents and understand when matching and profit sharing

Using outdated employment applications. Make sure your applications are

20. Other common HR mistakes.

Paying severance without a release. By doing so, you are allowing employees to

make future claims.

Failing to conduct exit interviews. Not only will you gain valuable information

to make the workplace more productive, but you may also be alerted to any

potential claims.

Using outdated employment applications. Make sure your applications are

consistent with the nuances of your state and local laws (such as ban-the-box)

as well as general anti-discrimination laws.

Failing to comply with the requirements of the Fair Credit Reporting Act (FCRA)

when utilizing a third-party to conduct background checks, including various

disclosures and notices. Many employers fail to provide the written release and

disclosure form as a separate, stand-alone document as is required by the

FCRA. Class action lawsuits under the FCRA have risen dramatically in recent


 Failing to inform an employee who has complained of harassment of the

results of your investigation and remedies and discipline. When an employee

complains of harassment, the surest way to invite a complaint with the state or

federal government is to not inform the employee about the results of your

investigation and any discipline handed out to the alleged harasser. State laws

may differ, so it is important to check with your legal counsel.

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