Vacation, health insurance, long-term disability coverage, tuition reimbursement, and retirement savings plans are just a few of the many benefits employers may offer employees. But which benefits required by law must a company provide its full-time workers? Understanding mandatory benefits laws will help you evaluate the most appropriate policy that satisfies both employees and your bottom line.
This article addresses benefits legally required under federal law, as well as select state-mandated benefits. Employers should review their obligations under state and local laws, which may provide additional mandated benefits.
What Are Mandatory Employee Benefits?
Employee benefits fall into two categories: those required by law and those an employer chooses to offer voluntarily. The U.S. Bureau of Labor Statistics states that "[l]egally required benefits provide workers and their families with retirement income and medical care, mitigate economic hardship resulting from the loss of work and disability, and cover liabilities resulting from workplace injuries and illnesses." Federal mandatory employee benefits include:
- Social Security and Medicare
- Unemployment insurance
- Workers' compensation insurance
- Family and Medical Leave Act [FMLA] protections
Social Security, Medicare, and FICA
Social Security and Medicare are considered statutory benefits. The Federal Insurance Contributions Act [FICA] is a federal payroll [employment] tax used to fund Social Security and Medicare programs, both of which provide benefits for retirees, disabled individuals, and children. The law states that both employees and employers are required to contribute to these funds. Employers are required to withhold Social Security tax at 6.2% of gross compensation, up to the Social Security wage base.
Employers must withhold Medicare tax at 1.45% of gross compensation, and an additional 0.9% of compensation in excess of a threshold amount based on the employee's filing status if an employee's compensation exceeds $200,000 [there is no wage base for Medicare]. Employers must also match 6.2% for Social Security up to the wage base and 1.45% for Medicare. Employers do not have to match the additional 0.9%.
Unemployment Insurance
Employers are required to contribute to unemployment insurance through payroll taxes at both the state and the federal level, to assist workers who lose their jobs. Unemployment insurance protects both part-time and full-time employees who meet certain criteria and are separated from a company by providing some income for a limited period of time. Employees who are let go due to mergers, layoffs, or without substantial proof of cause may file an unemployment claim with the state workforce agency to receive benefits temporarily while they are looking for a new job.
Since unemployment insurance is administered by individual states, the cost of this insurance and amount required for each employer varies from state to state. However, all states in the U.S. have some minimum requirements for unemployment insurance, and all employers must participate in their state's program and carry at least the minimum required amount of coverage.
Workers' Compensation Insurance
Workers' compensation insurance provides financial support to people unable to work as a result of a workplace injury or illness. If an employee experiences an injury or illness as the result of their regular on-the-job duties, states mandate that the employer should be responsible for covering medical bills and a limited amount of income for the employee during the recovery period. While there are limitations, waiting periods, and varying amounts and types of coverage based for employers in different states, most U.S. states agree that employers should protect the health and well-being of their employees while on the job. Employers looking to obtain workers' compensation insurance can typically meet the state requirements in one of two ways:
- Self-insurance: The employer opts to pay directly for any medical bills and ongoing income for any employees who incur extended injuries or illnesses on the job, and the employer can demonstrate the financial resources to do so if a workplace injury or illness occurs.
- State-run insurance: the employer purchases an insurance policy from the state-run program that covers all of their employees in the event of a work-related illness or injury.
Health Insurance
Under the Affordable Care Act, applicable large employers [ALEs] risk a potential assessment if they do not offer adequate and affordable coverage to their full-time employees and their dependents and at least one full-time employee receives a premium tax credit. ALEs are companies with an average of 50 or more full-time employees, including full-time equivalents, during the prior calendar year. The threshold for "affordable" coverage is adjusted annually for inflation, but the employee's portion of premiums for individual health coverage should not exceed 9.83% of their income for 2021. To meet the "adequate" standard of coverage, also known as the minimum value standard, the policy should provide access to a reasonable network of providers and specialists, and should be designed to pay at least 60% of the total cost of medical services that a plan will cover. The coverage should also meet minimum essential coverage requirements and minimum value.
Family and Medical Leave Act Protections
The Family and Medical Leave Act [FMLA] entitles eligible employees of covered employers to take unpaid, job-protected leave for specified family and medical reasons. A covered employer is a private-sector employer with 50 or more employees, and all public employers. The FMLA provides eligible employees with up to 12 weeks of job-protected, unpaid leave during a 12-month period for qualifying family and medical reasons, and to handle qualifying exigencies, as well as up to 26 workweeks of unpaid, job-protected leave in a single 12-month period under the Military Caregiver Leave. Qualifying reasons would include the birth of a child, dealing with a serious or chronic personal illness, or caring for an immediate family member with a serious or chronic illness.
Note: In addition to benefits under the FMLA, some states and local jurisdictions require paid/unpaid family leave and/or paid/unpaid sick and safe leave. Employers must review their obligations under applicable state and local laws.
Disability insurance
Disability insurance provides partial wage replacement for employees experiencing an illness or injury that requires them to miss more than one week of work. While disability insurance is not a mandatory federal benefit, it is one of the legally required benefits for employers in the following states, as well as Puerto Rico:
- California
- Hawaii
- Rhode Island
- New Jersey
- New York
Disability insurance is structured similarly to medical coverage. Employers can choose to cover some or all of the cost of the policy for their employees, or they can choose to pass the entire cost of the coverage along to the employee through payroll deduction. Once the coverage is in force, employees who experience a qualifying illness or injury must fulfill a mandatory waiting period before they start to receive benefits from the policy. Employers with employees in a state that requires disability coverage should review their obligations under existing state law.
Employee benefits not required by law
Non-mandated employee benefits are at the discretion of the employer. These can include benefits such as paid vacation time, contributions to retirement savings plans, education assistance, wellness programs, and childcare assistance. Since today's employees increasingly report that company-provided benefits are a major consideration when evaluating job offers, many employers are including these as a part of their basic benefits package to gain a competitive edge in recruiting and retaining a high-caliber workforce.
Are you required to offer part-time employee benefits?
There is some federal labor legislation that outlines benefits requirements for part-time employees:
- Affordable Care Act [ACA]: While most employers don't consider an employee "full-time" for benefits qualification unless they work at least 40 hours per week, under the ACA, applicable large employers must offer affordable and adequate health insurance to any employees who average at least 30 hours per week, or at least 130 hours per month to avoid a potential assessment if at least one full-time employee receives a premium tax credit.
- Employee Retirement Income Security Act [ERISA] — "1,000 Hour Rule:" Even if part-time employees are not eligible for other benefits offerings, this provision of ERISA requires employers to allow any employees who complete 1,000 hours of service within a 12-month period to participate in any retirement plan offered to other employees.
- Executive Order 13706, Establishing Paid Sick Leave for Federal Contractors: If an employer accepts work as a federal contractor, that employer must provide paid sick leave to all employees, even those who are considered part-time.
When state and local laws enact higher minimum requirements than federal labor statutes, the higher state and local standards take precedence, so it is important to always check your state and local jurisdictions for any additional requirements that may apply to part-time employees.
Conclusion
While benefits such as paid time off, health insurance, and 401[k] plans are highly sought-after, basic benefits can also be invaluable for employees. Ensure that your business its meeting its obligations to provide assistance and compensation by way of Social Security, Medicare, unemployment, and workers' compensation insurance.