Preview of February Compliance Checkpoints: Nondiscrimination and Employee Benefits

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Tracking various laws and regulations impacting employee benefits can divert time and resources from your core functions such as recruiting top talent, developing strategic benefits and compensation programs, and meeting cost targets. After all, it takes a lot of work to sustain a destination workplace that attracts, retains, and engages the right people to increase your organization’s productivity and growth. How can you keep pace with evolving legislative and regulatory initiatives and still have the time, resources, and drive to sustain a destination workplace?

As a trusted advisor, Gallagher will help you navigate the ever-changing landscape of employee benefits compliance issues. This edition of Compliance Checkpoints is designed to help guide you as you work to decrease the risks associated with human capital management while maximizing your investment in your workforce, especially when confronted with potential discrimination issues associated with offering employee benefits that can potentially lead to penalties and expensive litigation. Check out the action steps below.

1. Identify. Count. Assess. Laws regulating employer-sponsored benefits arise from various federal, state, and local laws, regulations, and ordinances, creating confusion regarding which rules apply. Ultimately, factors such as where your organization is located, how many total individuals you employ, and the employee threshold requirement specified in the particular law, regulation, or ordinance determine which rules apply. Because each law contains its own coverage requirements, it is important to take the time to work through the applicability threshold for each and familiarize yourself with the applicable rules. For example, the Americans with Disabilities Act (“ADA”), the Genetic Information Nondiscrimination Act (“GINA”), and Title VII of the Civil Rights Act of 1964 apply to all private employers, state and local governments, and educational institutions with 15 or more employees. Other federal laws, like the Age Discrimination in Employment Act (“ADEA”), apply to all private employers with 20 or more employees, state and local governments (including school districts), employment agencies, and labor organizations. Still other laws depend upon the type of benefits offered rather than the number of employees employed, such as Sections 79, 105(h), 125, and 129 of the Tax Code (the “Tax Code provisions”). In addition, state or local nondiscrimination rules may also apply— for example, rules related to sex discrimination or discrimination based on marital status. Which nondiscrimination rules must you follow based upon the laws, regulations, or ordinances that apply to your organization?

2. Group. Test. Protect. Each nondiscrimination rule seeks to protect a specific group of individuals. Tax Code provisions generally seek to protect non-highly compensated employees, but who is considered to be a highly compensated employee varies from law to law. Other laws seek to protect specific groups such as individuals with disabilities or individuals who have certain genetic or health conditions. Thus, it is important to understand which group each rule intends to protect. Once you determine which group is protected, it is then necessary to conduct any applicable testing. For example, the Tax Code provisions have numerical tests which must be conducted at least once a year. Under the Tax Code and other laws, benefits must be nondiscriminatory in operation. For example, an employer may not exclude all benefits that would be related to a particular disability (e.g., a hearing impairment). If testing or an analysis of the coverage indicates that a plan design or operation is discriminatory, it is important to make adjustments to protect the applicable individuals. Which protected groups are impacted by your employee benefits offering?

3. Classify. Evaluate. Revisit. Eligibility is one of the primary considerations for any nondiscrimination rule. As a starting point, eligibility can be thought of as a classification issue: Which classes of individuals have access to a specific type of benefit plan or program? Certain nondiscrimination rules, such as cafeteria plan nondiscrimination rules, have numerical tests to determine whether eligibility for benefits favors highly compensated employees. But eligibility can also be an access issue: When can an individual access coverage for a particular benefit? For example, an organization may cover salaried employees on their dates of hire and hourly employees on the 90th day of employment. This difference in waiting periods may trigger a discrimination issue. Organizations should avoid both types of discrimination and revisit requirements at least annually. What eligibility aspects has your organization evaluated for its current employee benefits offerings?

4. Focus. Standardize. Update. Several nondiscrimination requirements focus on the benefits being offered. For example, cafeteria plans, self-insured health plans, health flexible spending accounts (“health FSAs”), dependent care assistance program (“DCAPs”), and group term life insurance all have benefits nondiscrimination testing requirements. The core concept for benefits nondiscrimination is a determination as to whether participants are eligible for the same benefits. For example, if a plan covers cosmetic surgery for only a two-week period during which a highly compensated employee had covered surgery, then that would result in a discrimination issue. Likewise, if a plan provides smoking cessation benefits, but only for individuals who are not obese, then the plan would likely have a discrimination issue under the ADA. Generally, when an employer has a standardized set of benefits available to all employees, regardless of job classification or health status, then the employer will avoid discrimination issues. What standardization to your benefits offerings will help avoid discrimination issues?

And, there are six more action items this month. This is just a preview of the February issue of Compliance Checkpoints. If you would like the full version of Compliance Checkpoints or would like additional information on how Gallagher constantly monitors laws and regulations impacting employee benefits and supports employers in their compliance efforts, please contact your Gallagher representative or click here to Contact Us via
Compliance is a series of checkpoints, not a final destination. As a trusted advisor, Gallagher has developed this Compliance Checkpoints series to help you pursue a path through employee benefits compliance issues as part of an overall compliance plan.


The intent of this analysis is to provide you with general information. It does not necessarily fully address all your organization’s specific issues. It should not be construed as, nor is it intended to provide, legal advice. Questions regarding specific issues should be addressed by your organization’s general counsel or an attorney who specializes in this practice area.