Preview of November Compliance Guide: Voluntary Benefits

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As employers face the challenges of attracting and retaining a more diversified, multi-generational workforce, voluntary benefits offer increasing flexibility to personalize employee benefits to meet the needs of each employee. As employees move through their career cycles, they typically find themselves emphasizing different risk areas – financial, lifestyle, health, or financial – and voluntary benefits may afford employees a means to meet those needs. For employers, providing employees with voluntary benefits may meet employee needs, but can also create compliance obligations. Understanding essential concerns can reduce associated compliance risks. If you are committed to becoming a destination employer, you must keep pace with evolving legislative and regulatory initiatives that may pose risks to meeting cost targets, developing strategic benefits and compensation programs, and attracting and retaining top talent. As a trusted advisor, Arthur J. Gallagher & Co. will help you navigate the ever-changing landscape of employee benefits compliance issues. Check out the critical compliance action steps noted below as you maintain or implement voluntary benefits.

1. Pack the compliance essentials if your voluntary benefits are subject to ERISA. Broadly speaking, the term, “voluntary benefit,” can be used to mean that an employee pays 100% of the cost of the benefit. Such voluntary benefits may be exempt from ERISA if they meet certain requirements under what is called the “voluntary plan safe harbor.” Under ERISA, employer-sponsored benefits shall not include a group or group-type insurance program offered by an insurer to employees…under which (1) no contributions are made by an employer or employee organization; (2) participation in the program is completely voluntary for employees or members; (3) the sole functions of the employer or employee organization with respect to the program are, without endorsing the program, to permit the insurer to publicize the program to employees or members, to collect premiums through payroll deductions or dues checkoffs and remit them to the insurer; and (4) the employer or employee organization receives no consideration in the form of cash or otherwise in connection with the program, other than reasonable compensation, excluding any profit, for administrative services actually rendered in connection with payroll deductions or dues checkoffs. Thus, if a voluntary benefit does not meet the terms of the voluntary plan safe harbor – even if the employee pays 100% of the cost of coverage – the program is subject to ERISA. This should not dissuade an employer from offering the benefit, but it does mean that ERISA compliance requirements, such as having a summary plan description, potentially filing Forms 5500, etc., must be met if the employer is otherwise subject to ERISA. Are your voluntary benefits subject to ERISA?

2. Take steps to exclude identity theft protection from employee gross income. Due to the increased occurrence of identity theft, more employers are allowing employees to purchase identity theft protection by payroll deduction, and some employers are providing employer-paid protections. Such protections may include credit reporting and monitoring, identity theft insurance, identity restoration, and other like benefits. If the employee pays for all of the cost after-tax, the benefit will not result in taxable income for the employee, but if the employer pays for all or part of the cost, then the employer-paid portion should be included in the employee’s taxable income unless the benefit falls within a special exception. Under the special exception, if an employee provided sensitive information to the employer, such as name, Social Security number, or a bank account number, an employer providing identity protection services to its employees is not required to include the value of the identity protection services in the employees’ gross income and wages – even if a breach has not occurred. Further, if the special exception applies, the employer is not required to report such amounts on an information return (such as Form W-2 or Form 1099-MISC) filed with respect to those individuals. Previously, the exclusion only applied if identity theft protection benefits were offered after a data breach had occurred. Are you offering identity theft protection in a way that avoids increasing employee gross income?

3. Check the fees on student loan reimbursements. With the increasing cost of college education, more employees seek employers willing to help them pay off student loan debt. Loan repayment assistance may take different forms, but typically, a program will provide for a periodic payment toward the principal of a student loan (e.g., $1,000 per year or $100 per month). While certain forms of education benefits may be provided on a tax-free basis to employees, student loan reimbursement cannot be provided on a tax-free basis because the program represents payment for expenses incurred prior to the beginning of employment; however, the fact that a loan repayment assistance program cannot be provided on a tax-free basis means that employers have flexibility when designing such a benefit, including determining eligibility and payment amounts, whether the individual will be reimbursed or payment made directly to the lender, and what documentation will be required. How has your organization designed its student loan reimbursement program?

4. Leave employees’ financial stress at the station. Over the past several years, employee stress over financial conditions has grown significantly. Employees are uncertain how to plan for retirement while saving for children’s education expenses and making preparations to provide care for aging parents. Financial education and counseling can assist employees with making informed financial decisions. However, employers should be careful to determine whether such benefits can be provided to employees on a tax-free basis. Under a specific exception, qualified retirement planning services may be provided to employees on a tax-free basis, but broader financial education and counseling services are likely to be fringe benefits that must be included in applicable employees’ taxable income. Has your organization considered whether the benefits of financial education and counseling services outweigh any potential increase in employees’ taxable income?

5. Take off for time off. McDonald’s, arguably, created the first employee sabbatical program in corporate America in 1977, allowing employees to take extended time off from work. At least one survey indicates that almost one-fifth of all corporate employers now allow some form of sabbatical, and the trend is likely to grow. Sabbaticals can benefit both employers and employees. Employers benefit from the ability to take their succession planning and organizational structure on a “test drive” and permitting employees with the desire to advance to take on additional responsibility. Employees on sabbaticals tend to experience reduced stress – even after returning to work. One key in determining whether to offer time off from work is whether it should be paid or unpaid. Typically, that leads to a discussion of whether a paid program would be a payroll practice or an ERISA plan. Fortunately for employers, even if time off for a sabbatical is paid, the program does not create an ERISA plan so long as any compensation is paid out of an employer’s general assets. Has your organization sought out the benefits of offering sabbatical time off as a payroll practice?


Compliance is a journey, not a destination. As a trusted advisor, Arthur J. Gallagher & Co. has developed this Compliance Guide series to help you map a path through employee benefits compliance issues as part of an overall compliance plan. Employers should carefully evaluate their health and welfare plans to determine if they are in compliance with both federal and state law.

This is a preview of the November issue of the Compliance Guide. If you would like the full version of the Compliance Guide 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 Benefit Services representative or click here to Contact Us via


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.