Your Company has been facing financial difficulties and experiencing double digit increases in health care premiums each year. Thus far, the Company has contributed 80 percent of the premiums for employee health care coverage, but has decided that it will only pay 70 percent of premiums for individuals who are not taking care of themselves–those who continue to smoke, are significantly overweight, are not exercising on a regular basis, or are not complying with a disease-management program. You will gain information about employees from the health plan and health risk assessments that employees have completed.Briefly discuss this program and its implementation in light of ERISA and HIPAA provisions.Some applicable info in the attached file
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Contrary to what many people believe, there is no federal statute that requires all employers to provide
fringe benefits–such as health insurance, vacations, holidays, sick leave– to their employees. This is true
whether the employees are full-time or part-time, or regular or temporary employees. In recent years,
some states have required some employers to provide their employees with access to a group healthinsurance plan. The same is true concerning retirement pensions. While there are statutes that provide
for particular groups of employees to receive retirement pensions, there is again no federal law requiring
employers, generally, to provide their employees with pension benefits.
However, while neither fringe benefits nor pensions are ordinarily required by law to be part of an
employee’s compensation, many employers do in fact provide their employees with pension plans and
other significant fringe benefits. The reasons that employers voluntarily provide such benefits include their
desire to remain competitive with other employers to attract and retain quality employees, as well as
simply an expectation by many prospective employees that they will receive at least some such benefits.
In addition, fringe benefits such as health and life insurance provided in full or in part by the employer are
attractive to many employees because such insurance can be purchased far more cheaply for an
employee as part of a group with other employees than if the employee had to purchase the insurance as
an individual. In addition, unlike wages, most fringe benefits received by employees are not subject to
federal income tax.
Unfortunately, fringe benefits and pensions have become increasingly costly for employers to provide in
recent years. It is not unusual for fringe benefits to account for up to one quarter or even one third of the
money that an employer expends to compensate a typical employee. Furthermore, despite these already
heavy costs, the amounts that employers must spend today to provide certain kinds of benefits, like
health insurance, is increasing at an incredible rate. Some employers have faced premium increases of
over 50 percent in a single year, due largely to the increased costs of prescription drugs, health care
technology, medical malpractice, and increase health care staffing costs. Many others have recently
experienced smaller but nevertheless significant annual increases in the cost of health care insurance in
the range of ten to twenty-five percent. This situation shows signs of moderating, however it continues to
create a strong incentive for employers to find ways to reduce benefit costs. Small employers with fewer
than 200 workers, in particular have been eliminating health benefits for their employees. From 2000 to
2005, the percentage of employers offering such benefits decreased from 68 to 59 percent. (Kaiser
Family Foundation Employer Health Benefits 2005 Annual Survey)
The Employee Retirement Income Security Act of 1974 (ERISA) was originally enacted to protect
participants in retirement plans from forfeiture or reduction of benefits due to mismanagement of
retirement funds by their employers. ERISA also governs other types of employee “welfare” plans, and
courts have struggled to define its application to health care plans. ERISA is applicable to most private
sector employee benefit plans and pensions. It generally does not cover benefit and pension plans
established by federal, state or local government employers.
What exactly is an employee benefit plan? For purposes of ERISA, an employee benefit plan is “any
plan, fund, or program established or maintained by an employer for the purpose of providing medical,
surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, death, or
unemployment, or vacation benefits.” Within this larger definition, ERISA covers two types of benefit
plans: welfare plans, which provide benefits for active employees such as are described in the definition;
and pension or retirement plans, which provide post-employment benefits to persons who retire from an
employer’s service. Retirement plans also fall into two classifications: defined-benefit plans, which
define in advance the amount a beneficiary will receive each month or as a lump sum following retirement
(generally based on years of service and final salary); and defined-contribution plans, which define the
amount of money contributed periodically (for example, in each pay period) by or on behalf of the
beneficiary while he or she is an employee, but do not guarantee any particular amount of benefit. The
amount of benefits paid to a beneficiary under a defined-contribution plan will depend on the amount of
principal and interest paid into the employee’s account under the plan.
There are several specific means by which ERISA regulates employee benefit plans. These include (1)
reporting and disclosure requirements; (2) fiduciary duty obligations; (3) establishment of eligibility and
vesting rules for employee benefit plans; (4) establishment of funding requirements for defined-benefit
plans; and (5) rules for modification of benefit plans.
1. ERISA’s reporting and disclosure requirements obligate employers to provide certain information
about employee benefit plans to both employees and to the federal government. Employees must
be provided with summary plan descriptions, which describe in understandable terms the rights
of participants and beneficiaries of the employee benefit plan, exactly what the provided benefits
are, and the specific responsibilities of the employer and the beneficiaries or participants.
Employers are also obligated to file an annual report with the government concerning the financial
operation of the plan. ERISA was amended in 2006 by the Pension Protection Act as a result of
the various abuses by WorldCom and Enron. Employees who worked for these companies had
heavily invested their retirement funds in the company’s stocks. Under the amendment,
employees/participants have certain rights and must be notified in advance of the blackout
periods in which they will be prohibited from trading in their plan accounts, and
employees/participants with defined contribution plans that invest in publicaly traded stock of their
employer must be allowed to diversify their accounts into at least three other investment options
and must be notified of such rights in a timely fashion.
2. ERISA next establishes standards that must be adhered to by persons who manage, administer,
or coordinate an employer’s employee benefits plans. These persons may be employer
management officials, if the employer administers its own plans, or they may be outside
consultants or officials of insurance companies or other entities that the employer contracts with
to administer its plans. Under ERISA, all persons who are authorized to make decisions about the
placement and investment of plan funds or who offer investment advice concerning a plan are
considered to be fiduciaries. Fiduciaries may be generally defined as persons who hold funds in
trust for others or who hold positions in which trust and confidence are placed by others. ERISA
requires that fiduciaries act solely in the best interest of participants and beneficiaries of the
employee benefit plan, and prohibits them from acting in their personal best interest or for the
interest of the employer offering the employee benefit plan. Fiduciaries are also required to
manage funds with the care and skill that a prudent person would employ in such duties and to
meet specific ERISA requirements for diversification of investments and avoidance of conflicts of
interest. For example, it would be a prohibited conflict of interest for an ERISA plan administrator
who was an employer management official to loan plan funds to the employer to be used for nonplan purposes of the employer. Finally, as part of their fiduciary duties under ERISA, plan
administrators and advisors are required to provide plan participants and beneficiaries with
information concerning the plan’s operations, changes in the plan, and what benefits particular
employees are entitled to at any given time under terms of the plan.
Effective 2006, public companies that allow an employee to invest into an employer stock fund
must be notified of his/her right to diversify into other non-employer stock investment. This
amendment was also in response to the Enron, WorldCom and other companies’ fiasco and lack
of diversification by fiduciaries of retirement plans.
3. A third aspect of ERISA’s regulatory scheme is that it establishes eligibility and vesting rules
related to employee pension plans. In terms of eligibility, ERISA provides that any employee age
21 or older who has completed one year of service with a company must be permitted to
participate in a pension plan, if the employer offers one. Vesting is a term meaning that a person
acquires an irrevocable right or interest in a benefit provided by a pension plan. ERISA provides
that an employee’s rights to receive pension benefits under an employer’s pension plan must
become 100 percent vested, or nonforfeitable, after the employee has completed five years of
employment, or the vesting period may be extended to as long as seven years if an employee is
vested in portions of his or her pension rights each year. For example, such gradual vesting may
provide that an employee is 15 percent vested in his or her pension for each completed year of
employment. Please note that becoming 100 percent vested in a pension plan does not mean
that an employee who has completed five or seven years of service will be entitled to the
same amount of pension as an employee who has completed 30 years of service with the
employer. It also does not mean that after an employee completes five or seven years of service,
he or she may immediately start collecting a retirement pension. Full vesting simply means that,
based on the standards set in the particular pension plan, the employee will receive at least some
retirement pension from the employer when he or she reaches retirement age, even if the
employee later leaves the employer and goes to work for another company prior to reaching
4. A fourth aspect of ERISA regulation is its establishment of funding requirements for pension and
employee benefits plans. In general terms, ERISA requires that employers must adequately fund
pension and other employee benefit plans so as to pay the benefits provided by the plans. The
statute also requires that employers that have established defined-benefit plans, which guarantee
payments of specified amounts of money once an employee becomes entitled to a pension, must
purchase insurance from the Pension Benefit Guarantee Corporation, a federal insurer
established by ERISA, so that employees will receive promised benefits even if the plan suffers
losses or is terminated.
5. A fifth aspect of ERISA regulation is its requirement that employee participants and beneficiaries
in employee benefits plans be provided information about plan modifications or even possible
modifications that are being “seriously considered” by the employer, that is, specific proposals for
changes that are being discussed by top management, which has the authority to actually make
the changes if it so wishes. The purpose of this requirement is to keep employees abreast of
where they stand in relation to benefits plans so that they can make intelligent decisions involving
their benefits. For example, if an employee is informed that her employer is seriously considering
lowering pension benefits in the future, and she is already of retirement age, she might choose to
retire immediately rather than choose to work an additional one or two years.
Modification of Benefits
Employers may reduce or modify employee benefits as long as similarly situated plan participants are
treated the same. However, companies may contractually obligate themselves to maintain certain
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