The small business owner’s guide to employee benefits compliance

Offering an enticing benefits package helps attract the best candidates and motivates staff to stay. But ensuring those benefits are compliant is among the thorniest duties employers must manage, especially small businesses with limited HR resources.

It is an obligation for businesses in every state to follow HR policies that comply with federal employee benefit laws, which are enforced by the U.S. Department of Labor’s Employee Benefits Security Administration agency.

Unfortunately, a lack of awareness often leaves smaller businesses facing significant fines and penalties. And for VC-backed groups, compliance is a topic addressed during the due diligence of potential investors and fundraising rounds, when it catches some founders by surprise.

In 2021, EBSA’s compliance enforcement efforts recovered more than $2.4 billion for employee benefit plan participants, up from $1.6 billion in 2018, according to agency data.

The role of business size

Most compliance requirements vary depending on a business’s number of employees, with 50 full-time employees dubbed “the magic number” in terms of triggering an additional compliance burden. 

That means as your company grows, you need to be mindful of potential employee benefits compliance issues. These are best handled by in-house or outsourced HR professionals who stay abreast of such regulations and file required documents accurately and on time. 

In the meantime, to further protect their businesses, business owners should familiarize themselves with the basics of the federal compliance requirements that regulate employee benefits packages.

Four federal employee benefits laws to know about

Each of these statutes outlines specific requirements with which your employee benefits, if applicable, must meet to comply:

• Affordable Care Act (ACA) 
• Consolidated Omnibus Budget Reconciliation Act (COBRA)
• Employment Retirement Income Security Act (ERISA)
• Family and Medical Leave Act (FMLA)

ACA

In general, the Affordable Care Act’s employer mandate to provide affordable health insurance applies only to businesses with 50 or more full-time equivalent employees (FTES work 30 or more hours per week). 

Businesses with fewer than 50 FTEs are not required to provide health insurance by the ACA. But if you do offer health insurance, it must fulfill the minimum essential coverage as described by the ACA.

Further, businesses with fewer than 50 FTEs that offer health insurance are subject to the following annual reporting requirements under the ACA as of 2022:

• You are required to withhold and report an additional 0.9% on wages or compensation exceeding $200,000.
• You may need to report the value of health insurance coverage on each employee’s W-2.
• Employers that offer self-insured coverage for FTEs must file an annual return reporting specific information.

As your company grows and approaches the 50-FTE threshold, be aware that large businesses have more ACA reporting requirements for large businesses. These include withholding and reporting an additional 0.9% on wages or compensation over $200,000; reporting the value of health insurance coverage on a W-2; and filing a Form 1094-C reporting whether you offer insurance and what coverage was provided.

COBRA

Any employer that had 20 or more employees in the previous calendar year for at least 50% of business days is subject to the Consolidated Omnibus Budget Reconciliation Act. Under COBRA, qualifying employers must give employees who might lose group health care due to a qualifying event the option to keep that health insurance for limited periods of time. 

Examples of qualifying events include voluntary or involuntary job loss, divorce, a reduction in hours worked and other life events. Employees who choose COBRA coverage will make full premium payments at the group plan rate. 

Employers are responsible for notifying employees of their right to elect COBRA continuing health care coverage under the group plan. Employers must notify their health insurance plan administrator of the employee’s COBRA eligibility within 30 days of that employee’s final day at work, and the plan administrator has 14 in which to notify the employee of their right to elect COBRA coverage. 

The Labor Department and the Department of Health and Human Services can assess a $110 fine for each day that a COBRA notice is late. If the IRS determines an employer is out of compliance with COBRA regulations, it can charge a minimum of $2,500 per beneficiary or $100 per day of noncompliance, whichever is a higher cost to the employer.

ERISA

The Employment Retirement Income Security Act of 1974 is a federal law that established rules and procedures aimed at protecting most private employee pension and health plans from fraud or mismanagement. Except for churches and government groups, every private employer that offers employees retirement, health or other employer-sponsored benefits must comply with ERISA requirements.

To comply with ERISA, employers’ responsibilities include:

• A summary plan description must be distributed to plan participants.
• A summary of benefits and coverage must be distributed to plan participants. 
• Reporting through Form 5500 for employers with 100 or more employees, although this can also apply to smaller businesses with funded plans. 

Plans that fall under the ERISA mandate include:

• Defined benefit plans.
• Defined contribution plans including 401(k) plans, 403(b) plans, profit-sharing plans and employee stock ownership plans.
• Most private-sector health care plans.
• Flexible spending accounts.
• Disability insurance.

Penalties for noncompliance with ERISA provisions vary by offense. For example, at the time of publication, failure to provide the summary of benefits and coverage was subject to a penalty of up to $1,264 per failure. These fees are subject to annual review to determine whether they should be increased to keep pace with inflation

FMLA

For specific family and medical reasons, such as serious sickness, childbirth, adoption or the care of a kin with a serious ailment/ health condition, eligible employees at companies with 50 or more employees are granted job-protected leave under the Family and Medical Leave Act. 

Employers are expected to continue offering group health insurance during the leave period as they would have done otherwise. Private employers with fewer than 50 employees are not covered by the FMLA, but they may be covered by state family and medical leave laws.

In accordance with the FMLA, employers must have a written policy and an employee rights poster, give notices to them within five days of a request for leave, and refrain from taking adverse action against employees who exercise their right to take time off.

Benefits compliance solutions for your business

Adhering to the federal mandates we covered is complicated, not to mention additional state and local regulations that may also apply. In the absence of in-house HR expertise, consider an outsourced provider. Look for one like Escalon, which uses a third-party administrator for all compliance pieces, shifting liability from your business to the TPA.

Want more? In addition to HR, benefits, recruiting and payroll through its PeopleOps, Escalon’s Essential Business Services include FinOps (CFO services, bookkeeping and accounting) and Risk (business insurance). Talk to an expert today.