From 'Philadelphia' to 'Modern Family'

Matt Grosh recently talked about Cam and Mitchell from Modern Family as a backdrop to the IRS's recent revenue ruling. That ruling recognized same-sex marriages for federal tax purposes even when a couple resides in a state that does not permit same-sex marriages.  The couple must only have been validly married in a state that recognizes same-sex marriage.

After last summer's Supreme Court decision analyzing the Defense of Marriage Act, numerous questions arose regarding legal treatment of same sex couples.  Employers were confused about their obligations regarding benefits such as health insurance and retirement plans.  After consultation with the Department of Justice and the Department of Treasury (Internal Revenue Service), the United States Department of Labor (DOL) issued Guidance to Employee Benefits Plans on the definition of spouse and marriage.

The DOL advised that employers are to recognize "spouses" and "marriages" based on the validity of the marriage in the state where the couple was married rather than the state where they reside.  The DOL concluded that such an interpretation would make it easier for employers to uniformly administer benefits to all employees, in addition to offering more protection to same-sex couples.  In effect, the Department of Labor Regulations, Rulings, Opinions and Exemptions will assume that the term "spouse" refers to any individual who is legally married under any state law. Consistent with the IRS ruling, the terms "spouse" and "marriage" will not include individuals in domestic partnerships or civil unions.  

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Changes to PA Unemployment Compensation, Part 2:

Severance Pay and UC Benefits in Pennsylvania

In PA Unemployment Compensation Law Update, Part 1, we covered changes in Pennsylvania's Unemployment Compensation (UC) Law in regard to active job search requirements for claimants. In Part 2, we will discuss how the amended law impacts UC benefits when former employees also receive severance pay.

As an employer, it is sometimes difficult to terminate an employee's job. It is also difficult for employees who are "let go." In some cases, employees are offered severance packages by their employer. Severance is money or benefits paid to employees when employment ends, also called separation or termination pay. It is not required by law but may be paid in accordance with an employment contract, collective bargaining agreement or an employer's policy.

Severance pay can work as a financial buffer, helping former employees pay their bills as they make difficult transitions. Unemployment compensation benefits serve a similar purpose. Employees who receive both often wonder whether their severance pay can count against their UC benefits. Some have been surprised to find out that in Pennsylvania, an unemployed employee could receive full UC benefits even while the employer had paid or was making severance payments.

At least, that was the case until this year. The law has been amended by Act 6 of 2011 to provide that, in UC benefit years beginning January 1, 2012, employees will be paid their weekly benefit rate less the amount of severance pay that is attributed to that week. In other words, severance pay can offset UC benefits, but only when an employee's total severance pay exceeds and amount equal to 40% of the state average annual wage. Currently, 40% of Pennsylvania's average annual wage is $17,853. If terminated employees receive any amount up to $17,853 in severance, there will be no deduction or effect on their UC rate.

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Changes to PA Unemployment Compensation Law, Part 1

After the holiday season, there is typically a national spike in unemployment claims. This year is no exception. For employers and employees in Pennsylvania, 2012 also brings changes to the state's Unemployment Compensation (UC) laws. In a series of posts, we will discuss aspects of the amended UC laws that will impact both claimants and employers.

Is Your Job Search Meeting the UC Requirements?

Until 2012, Pennsylvania's Unemployment Compensation (UC) laws required claimants to "register" for work, then continue to "report" to an unemployment office to be eligible for benefits. As of January 1, 2012, only claimants who are "making an active search for suitable employment" will be eligible for UC benefits within the meaning of Section 401 of Act 6 of 2011, "Qualifications Required to Secure Compensation."

What does it mean to make an "active search," and what qualifies as "suitable employment"? At a minimum, the new requirements are:

  1. Registering for employment search services through Pennsylvania CareerLink within 30 days of the initial application for benefits.
  2. Posting a resume on CareerLink's database.
  3. Applying for positions that offer employment and wages similar to those that the claimant had prior to unemployment and which are within a 45-minute commuting distance.

The statute provides that an active search for suitable employment has been made "if the claimant's efforts include actions comparable to those traditional actions in their trade or occupation by which jobs have been found by others in the community and labor market in which the claimant is seeking employment."

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COBRA Subsidy Expires Sept 1

Last year, we wrote about how the American Recovery and Reinvestment Act (ARRA) included a COBRA subsidy that reduced the amount certain laid-off workers pay for health benefits by 65%. Without the subsidy, those workers would have been responsible for the entire cost of continuing to receive health benefits from their former employers. 

Because enrollment for the subsidy was closed at the end of May, 2010, and because the subsidy was available for up to fifteen months after termination of employment, September 1 marks the date on which the subsidy expires for the last remaining workers taking advantage of the subsidy. An exception would be where a worker was terminated before May 31, 2010 but did not receive COBRA benefits until a later date. For example, if an individual was involuntarily terminated on  May 31, 2010 and, due to the terms of a severance agreement, their COBRA coverage did not start until November 1, 2010, he or she would still be eligible for the full 15 months of subsidy through January 31, 2012

Because COBRA is typically expensive without the subsidy, it is expected that many unemployed workers will go without health insurance, especially in light of the Commonwealth's termination of the adultBasic program last May. Some unemployed workers may find some relief with the Health Coverage Tax Credit, but availability is limited because of strict eligibility requirements. Also, unemployed workers with children should look into the Pennsylvania CHIP program, which generally covers all uninsured children and teenagers in Pennsylvania.

COBRA Subsidy Extended Through May 31, 2010

The 65% COBRA Federal Premium Assistance has been extended once again. The last extension covered involuntary terminations through March 31, 2010. On April 15 the President signed H.R. 4851 extending several government programs including unemployment benefits. The COBRA subsidy will now cover qualified individuals who are involuntarily terminated on or before May 31, 2010.

The U.S. Department of Labor has updated its Fact Sheet on the COBRA Premium Reduction. There is also additional information regarding eligibility of terminations from March 2, 2010 through May 31, 2010 which followed a reduction in hours: 

  •   March 2, 2010 through May 31, 2010 if:

o        the involuntary termination follows a qualifying event that was a reduction of hours; and

o        the reduction of hours occurred at any time from September 1, 2008 through May 31, 2010 (a reduction of hours is a qualifying event when the employee and his/her family lose coverage because the employee, though still employed, is no longer working enough hours to satisfy the group health plan’s eligibility requirements).  

COBRA premium assistance continues to be limited to 15 months as provided in the first extension and ends upon eligibility for other coverage. For additional information you may want to check out another page on the DOL’s website that includes video messages and other FAQs.

COBRA Subsidy Extended Through March 31, 2010

The COBRA subsidy, originally outlined in the American Recovery and Reinvestment Act (ARRA) and subsequently extended, covered involuntary terminations through February 28, 2010. Without another extension, employees involuntarily terminated beginning March 1 would not have been eligible to receive this COBRA premium assistance. 

Congress had been attempting to push back the extension one more month, but that bill was blocked by Senator Jim Bunning. However, Bunning yielded last Tuesday and the extension has now been officially pushed back until March 31, 2010. This will allow qualified individuals who are involuntarily terminated before that date to reduce their health plan costs by 65% through the subsidy. A bill called the American Workers, State and Business Relief Act of 2010 includes a provision to extend the subsidy through year-end. We will continue to monitor this ever-changing situation, so please be sure to check back.  In the meantime, for additional information, check the recently updated Fact Sheet posted by the United States Department of Labor.

Insurance Coverage for Adult Children Under Act 4 Optional for Employers

We have had a number of inquiries and comments on our blog post regarding Act 4, the amendment to Pennsylvania's insurance company law relating to health insurance coverage for adult children up through and including age 29. Prior to Act 4, if an employer offered dependent coverage, insurance companies were only required to provide coverage to children on their parents' insurance until the age of 19. The Pennsylvania Insurance Department estimates that almost 40% of those who were uninsured in Pennsylvania are between the ages of 19 and 29. 

A key phrase of Act 4 provides that the insurer's obligation to provide coverage to a child of an insured employee beyond a specified age, up through and including the age of 29, is "at the option of the policyholder", meaning the employer.   Also, coverage would be provided at the insured employee's expense. Employees may wonder why an employer would not choose to provide this coverage and what the value is of legislation mandating insurers to offer coverage while giving employers the ability to opt out. In addition, if an employer is self-insured, Act 4 does not make any change in what coverage must be offered because it applies only to insurers.

While insurers may appreciate the opportunity to provide coverage to the group of young adults who are underserved, employers are not likely to be as supportive. It has been projected that the mandate would increase employees' contributions to their group health insurance, since insurance laws require additional costs to be spread among all employees, and not just those with adult children. This may result in overall health insurance premiums rising for employers and all employees. In addition, this effect could result in more employers becoming self insured to avoid legal mandates such as extended adult child coverage or Pennsylvania mini COBRA application requiring COBRA coverage for employers employing fewer than 20 employees.

You can visit the Pennsylvania Insurance Department's website for additional information regarding Act 4.

Updated COBRA Continuation Links on the Department of Labor Website

The United States Department of Labor's Employee Benefits Security Administration released two new resource links on the COBRA Continuation coverage.

According to the United States Department of Labor (DOL) the FAQ and other information will be updated sometime this week. If you are interested in receiving immediate updates from the DOL, consider subscribing to their COBRA webpage. By subscribing you can receive notification when the site is updated with new information. 

COBRA Subsidy Extended

Legislation enacted by Congress and signed by President Obama on December 21, 2009, extends the ARRA COBRA premium reduction eligibility for two months, from December 31, 2009 to February 28, 2010, and increases the maximum period for receiving the subsidy to a total of 15 months instead of 9 months. 

With the new changes, the law provides that the 65% premium subsidy for COBRA continuation health benefits is available to individuals who are eligible for COBRA as a result of an involuntary termination between September 1, 2008 and February 28, 2010. The law previously required that both the involuntary termination and the eligibility for COBRA coverage occur before the last effective date of the subsidy, but now only the involuntary termination need take place on or before February 28, 2010, not the COBRA eligibility.

Last month, when we posted on the duration of the COBRA ARRA subsidy, we noted that legislation was introduced to extend the deadline for eligibility as well as the duration of the subsidy. The change enacted this month was not a result of passage of the October legislation but rather changes added to the Department of Defense 2010 Appropriations Act.

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Update on the COBRA Subsidy and When it Will End

We have posted on the 65% COBRA subsidy several times since the American Recovery and Reinvestment Act (ARRA) was enacted.  ARRA provided for a premium subsidy for COBRA continuation health benefits to "assistance eligible individuals."  Those individuals are defined as an employee or member of his/her family who is eligible for COBRA continuation coverage:


1)      at any time between September 1, 2008 and December 31, 2009

2)      elects COBRA coverage, and

3)      is eligible for COBRA as a result of an involuntary termination between September 1, 2008 and December 31, 2009. 

Some changes may be effected if the Extended COBRA Continuation Protection Act of 2009, H.R. 3930, introduced in the House of Representatives on October 26, 2009 and referred to Committees on Education and Labor, Energy and Commerce, and Ways and Means, is enacted.   

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PA Mini-COBRA Law Effective July 10, 2009

If you thought that no one in Harrisburg was doing anything but wringing their hands about the Pennsylvania state budget for the last 3 months, think again! The Pennsylvania Senate and House of Representatives got together and signed Act 2 of 2009 on June 10, mandating continuing health insurance for employees of employers with fewer than 20 employees, effective July 10, 2009.

Since 1985, the federal Consolidated Omnibus Budget Reconciliation Act (COBRA) has required employers of 20 or more employees to provide its employees and eligible dependents continuing health insurance if they experience a qualifying event.

Under COBRA, employees or their dependents are required to pay the cost, up to 102% of the employer’s cost, to continue their health insurance. In February 2009, President Obama signed the American Recovery and Reinvestment Act providing for subsidized COBRA premiums for those employees who were involuntarily terminated after September 2008. Instead of 102%, the employees only pay 35%, and the employer fronts the remainder and receives a payroll tax credit for its payment. But this plan was available only to those who were subject to COBRA, not the smallest of employers. 

On July 10, 2009, when the Pennsylvania Mini-COBRA law becomes effective, the ARRA subsidy will apply to almost all employers in Pennsylvania. Currently, employers with fewer than 20 employees are not required to offer COBRA continuation coverage, leaving employees to shop for transitional policies which may not provide coverage for pre-existing conditions, prescriptions or maternity. Now employers who sponsor group medical insurance and have 2-19 employees will be required to offer employees and their dependents the opportunity to purchase up to nine months of continuation coverage on the employers group plan. 

While Pennsylvania’s Mini-COBRA is modeled after the federal COBRA law, there are some differences:


Federal COBRA

Applies to employers with 2-19 employees

Applies to employers with 20 or more employees

Requires continuation coverage for up to nine months

Coverage is generally capped at 18 months, and may extend to 36 months

Applies only to insured group major medical, hospital or surgical policies. Also, Health Savings Accounts and other medical spending accounts are treated differently.

Applies to all ERISA group health plans

Applies only to insured arrangements, not self-insured programs

Covers both insured and self-insured

Permits an employer to charge up to 105% of group rate

Provides for a maximum charge of 102%

Coverage ends when a participant becomes eligible for other coverage, a group health plan or Medicare

Coverage ends when a participant enrolls in another group plan or Medicare

The insurer is given most of the burden of compliance with this Act

The employer is ultimately responsible for compliance, including providing proper notification to eligible individuals

Individuals must have 3 months of preceding coverage to be eligible

Eligible individuals need only one day of coverage before the qualifying event

Act 4 - Amendment to Insurance Company Law

On June 10, 2009 Governor Rendell signed Act 4 which amends the Insurance Company Law. Now insurers who provide coverage to children of employees must offer, at the policyholder's option and at the insured's expense, coverage for children up through and including the age of 29, provided that the child meets all of the following requirements:

    1.  Is not married.

    2.  Has no dependents.

3. Is a resident of Pennsylvania or is enrolled as a full time student at an   institution of higher education.

4.  Is not provided coverage under any other group or individual health insurance policy or entitled to benefits under any government health care benefits program, including under the Social Security Act.

This Act applies to new contracts and contract renewals occurring after December 7, 2009.  

Maintaining Eligibility for the COBRA Subsidy

I recently received a question from a reader that may be of interest to others. Following is a portion of the question and my response:

I read your article on COBRA it was very informative, Could you please tell me where I can get an answer to this question. I was laid off from my job in February. I am getting COBRA under the ARRA where my former employer pays 65% of my health benefits. I also am collecting unemployment.

My former company wants me to work a few weekend for them, will I loose my COBRA benefits if I do this.

The American Recovery and Reinvestment Act (ARRA) premium assistance subsidy ends not when you become employed but only when you become eligible for Medicare or another group health plan (such as a plan sponsored by a new employer or a spouse's employer). In fact the law imposes a duty on the recipient to notify the plan if they become eligible for coverage under another group health plan or Medicare, and failure to do so can result in a tax penalty. The subsidy will also end 9 months after the first day of the first month to which the subsidy applies or when COBRA benefits are no longer available to you. 

Generally, COBRA coverage is available for 18 months after termination of employment and may end earlier if: 

  • Premiums are not paid on a timely basis
  • The employer ceases to maintain any group health plan
  • After the COBRA election, coverage is obtained with another employer group health plan that does not contain any exclusion or limitation with respect to any pre-existing condition of such beneficiary. However, if other group health coverage is obtained prior to the COBRA election, COBRA coverage may not be discontinued, even if the other coverage continues after the COBRA election.
  • After the COBRA election, a beneficiary becomes entitled to Medicare benefits. However, if Medicare is obtained prior to COBRA election, COBRA coverage may not be discontinued, even if the other coverage continues after the COBRA election.

The COBRA statute provides that eligibility for coverage ends on the date that the individual first becomes covered under any other group health plan (as an employee or otherwise) which does not contain any exclusion or limitation with respect to any preexisting condition of such beneficiary. However, this year's ARRA provides that eligibility for subsidy ends the first date that the individual is eligible for coverage under any other group plan, coverage under a flexible spending arrangement or coverage of treatment furnished by the employer, without mention of any exclusion or limitation with respect to any pre-existing condition.

I hope this answers your question, which we thought was an interesting one.


Is Your Small Business Affected By the New COBRA Subsidy?

The American Recovery and Reinvestment Act (ARRA) provides a COBRA subsidy for Employees who lost or will lose health insurance coverage under an employer-sponsored plan due to an involuntary termination of employment between September 1, 2008 and December 31, 2009. Many employers have no doubt that they are subject to these changes and are currently in the process of implementing updates. However, with the recent news about changes to COBRA, some small employers are asking themselves, do my employees qualify and am I required to provide COBRA continuation coverage? The good news is that the ARRA has not expanded the type of employer-provided plans subject to the Act, so if employers were not required to provide COBRA continuation coverage prior to the ARRA, they would not be required to do so now. 

COBRA continuation coverage applies to all private sector group health plans which are maintained by employers that have at least 20 employees on more than 50% of its typical business days in the previous calendar year. In determining the total number of employees, full and part-time employees are counted. However, each part-time employee counts as a fraction of a full-time employee. The fraction for a part-time employee equals the number of hours the part-time employee worked, divided by the hours an employee must work to be considered full-time. Therefore, if a private sector employer is offering a group health plan with at least 20 employees as calculated above, the employer must provide COBRA continuation coverage and will be required to abide by the new provisions in ARRA. COBRA continuation coverage also applies to state and local government-sponsored plans, but does not apply to plans sponsored by the federal government or by churches and church-related organizations. 

If you are not currently providing COBRA coverage but you think you may be nearing the threshold described above, it is imperative that you carefully review your 2008 employee census to determine if you are required to provide continuation coverage under COBRA.

Updated Resources for COBRA Continuation Assistance under ARRA

Many employers and third party administrators have been waiting for guidance from the DOL before issuing the new COBRA notices required under the American Recovery and Reinvestment Act (ARRA). The wait is over. The Department of Labor has finally updated its FAQs For Employers About COBRA Premium Reduction Under ARRA.  It now includes the much anticipated  model notices. The DOL website gives the following guidance for notice requirements and deadlines:

  • A general notice to all qualified beneficiaries, whether they are currently enrolled in COBRA coverage or not, who have a qualifying event during the period from September 1, 2008 through December 31, 2009. This notice may be provided separately or with the COBRA election notice following a COBRA qualifying event.
  • A notice of the extended COBRA election period to any Assistance Eligible Individual (or any individual who would be an Assistance Eligible Individual if a COBRA continuation coverage election were in effect); who had a qualifying event at any time from September 1, 2008 through February 16, 2009; and who either did not elect COBRA continuation coverage or who elected but subsequently discontinued COBRA. This notice must be provided within 60 days following February 17, 2009.

The DOL’s COBRA Continuation Coverage Assistance Under The American Recovery And Reinvestment Act Of 2009 page continues to be updated with additional resources. You can download Job Loss Posters and Flyers and review Frequently Asked Questions for employers and employees.

In addition the DOL site also provides a link to the page the IRS has dedicated to COBRA Health Insurance Continuation Premium Subsidy. This page includes the updated Form 941 and Instructions and information on the phase out of the subsidy:


  • This subsidy phases out for individuals whose modified adjusted gross income exceeds $125,000, or $250,000 for those filing joint returns. Taxpayers with modified adjusted gross income exceeding $145,000, or $290,000 for those filing joint returns, do not qualify for the subsidy.

COBRA Changes under the American Recovery and Reinvestment Act (ARRA)

Everyone's trying to get up to speed on the changes prescribed under Title III of the American Recovery and Reinvestment Act signed into law by President Obama on February 17, 2009. Unlike most legislation which allows for a lengthy lead time for implementation, this Act will affect those who were involuntarily terminated even before the enactment of ARRA, and new COBRA notices are required by April 18. The new notices will need to be sent to employees who were involuntarily terminated from employment after September 1, 2008, whether the employees elected COBRA coverage or not.


Employees (and employers of employees) who lost or will lose health insurance coverage under an employer-sponsored plan due to a involuntary termination of employment between September 1, 2008 and December 31, 2009 (but not if individual's modified gross income exceeds $290,000 for joint return filers and $145,00 for all others. Those with joint adjusted gross income of $250,000/$125,000 are entitled to a reduced subsidy.)


"Assistance eligible individuals" will be able to secure COBRA health insurance continuation coverage for 35% of the cost as opposed to 102%.


Now.   The subsidy is available for a maximum of 9 months, and ends upon eligibility for coverage under any other group health plan, or the expiration of the maximum allowable period of continuation coverage.


Every workplace subject to COBRA, generally those employing more than 20 employees.


With so many losing work, and health insurance premiums so high, a 65% reduction in premium will allow more unemployed persons to continue coverage.


The employer pays the 65% balance which is then reimbursed to the employer by a credit on payroll taxes.   Employees who were involuntarily terminated after September 1, 2008 and before February 17, 2009 (the effective date of ARRA) who did not elect COBRA coverage will now be given another opportunity to do so. Employees who were involuntarily terminated after September 1, 2008. and did elect COBRA coverage prior to February 17, 2009 can receive the subsidy from the effective date of ARRA either by reimbursement from the employer or through a credit against future COBRA premium payments.

Although COBRA continuation coverage is available to individuals who lose their employment for any reason (except gross misconduct which generally is criminal conduct), this subsidy is available only to those whose employment was involuntarily terminated. It does not apply to those who voluntarily terminated employment, or to those who became eligible for COBRA coverage by reason other than a separation from employment. The existing prohibition from COBRA eligibility for gross misconduct continues to apply.

The Secretary of Labor or the Secretary of Health and Human Services, in consultation with the Secretary of the Treasury, shall implement an appeal process for those who are denied the COBRA subsidy in which a determination regarding eligibility shall be issued within 15 business days. This is the process in which questions such as whether termination was voluntary or involuntary will be decided. (If you think that's not something that would often be contentious, think again, or ask an Unemployment Compensation referee.)

Harrisburg City Council Proposes "Life Partnership Registry"

Typically  a full time employee is afforded the benefit of health insurance by an employer.  A full time employee is usually able to cover a spouse and children at an additional cost.  However more and more companies have been extending health insurance to also include a domestic partner of a full time employee.

Just two weeks ago Harrisburg City Council Vice President, Dan Miller proposed an ordinance that would create a "life partnership registry" for the City of Harrisburg. The proposed legislation would create a registry where individuals could voluntarily register their life partners. The registry would be used as a base business record for businesses who choose to offer health insurance to an employee's unmarried partner. The registry would cover individuals who live or work in Harrisburg. 

The concept of a domestic registry is not new. States like Maryland, Vermont,  California, Hawaii, New Jersey, Maine and the District of Columbia have established registries.  Similarly Philadelphia and Pittsburgh have also established registries.  Several states already have statutes on civil unions and domestic partnerships.

The Harrisburg City bill's proponent advised that the Harrisburg City government already offers benefits to employees' domestic partners as a matter of policy. The proposed legislation would not mandate city employers provide life partners health benefits, but would assist employers and registered life partners should the employer choose to offer the coverage. The life partner designation would also grant domestic partners, committed to each other's maintenance and well being, visitation rights in health care facilities located within Harrisburg City limits. Eligible couples need to be over 18 years old and living in the same home. They also need to meet three of five financial criteria, such as sharing a mortgage, bank account or being designated as a beneficiary on their partners' life insurance policy. The bill is expected to be voted on in the Fall of 2008, and has the backing of two other City Council Members.

Advocate groups were quick to point out that the bill benefits the unmarried heterosexual community as well as the homosexual community. "We think this is an important step toward assuring that those citizens who share a committed life partnership are granted the same rights as any other citizen in the same situation." Council Vice President Miller said. "This includes health care and visitation rights." 

Employee Vacation Time Could Cost Employers

 In a weakening economy, employers should pay attention to their vacation policy.   If you need to cut costs with lay offs, you could end up losing your shirt on pay outs for vacation pay. Employers need to decide and articulate whether vacation is paid if accrued and not taken. Limits should be placed on how much vacation can be accrued, that is, rolled over from year to year. There aren't requirements to pay accrued, but unused vacation pay unless that is your policy. Employers are free to specify that vacation is a benefit to be taken or used, and if not used, will not be paid. Please consider the following when determining how to handle unused vacation time:

  • Considerations When Paying Accrued but Unused Vacation Pay

If you pay accrued but unused vacation, will you pay it in all circumstances? To the person you just fired for stealing? To the person who quit without notice and is setting up a competing business and taking a few of your key employees to work for him? 

 Your policy can provide that vacation pay will be paid to employees who are laid off but not those who are fired for willful misconduct or who voluntarily quit. This does make your job more complicated, however. Suddenly, at the termination of employment, you are acting as an unemployment compensation referee in making a determination as to the nature of the termination in order to decide whether to pay vacation benefits. 

  • How not Paying Vacation Benefits Can Effect You

A decision against paying vacation benefits can come back to haunt you in a wage payment and collection claim. Vacation pay is considered wages if the employer's policy is to pay earned but unused vacation. Add the headaches and penalties and attorney fee liability, and that is no vacation. 

  •  Managing Employee Expectations

Is your vacation policy clear? As prices rise, are you prepared to deal with employees who are coping by staying home and continuing to work expecting to be paid for their unused vacation? Also, if you are willing to pay have you considered your budget to pay employees 56 weeks in a year? If you are not planning to pay existing employees, even if they are working 52 weeks a year and take no vacation, be sure to communicate your policy to avoid a misunderstanding.

Also consider the sad situation where an employee hasn't taken a vacation in years, and you have no policy regarding rollover? If the employee's entitlement is four weeks a year, at year 13, they may be thinking that they are going to get a year off with pay. Crazy as it seems, you should be sure they understand that is not happening.

ESOPs and Company Stock Matches to 401(k): The Bear Stearns Lesson

Charley Blaine hit the nail on the head with his observation about the Bear Stearns' fallout appearing  in his posting MSN moneyblog:

My guess is that Bear Stearns' 14,000 employees will be the biggest losers. The company's employee-stock-ownership plan owned 23% of the shares as of Feb. 14. The shares that day had a market value of $2.18 billion. It's almost gone now. Needless to say, Bear Stearns employees aren't happy. Check here for a sampling of their anger.

ESOPs and matches in company stock have long been touted as aligning incentives, but this selling point can lead to litigation when the company stock takes a dive or the employer files for bankruptcy protection. It's even more disastrous for employees who have been “incentivized” to put so many of their retirement eggs in one basket. If the company tanks, an employee loses a job and a big chunk of retirement savings.

A statistical profile of Employee Ownership as published by the National Center for Employee Ownership estimates the number of plans, participant employees and asset value for ESOPs and 401(k) plans with significant company stock matches. For early 2008, the estimates are as follows:

Type of Plan

Number of Plans
(as of early 2008)

Number of Participants
(as of early 2008)

Value of Plan Assets
(as of early 2008)

ESOPs, stock bonus plans, & profit sharing plans primarily invested in employer stock


11.2 million

$928 billion+

401(k) plans primarily invested in employer stock


1.5 million

$133 billion

The prevalence of company stock based incentives may make employees nervous in light of the high profile failures. Human Resources may need to manage expectations in its recruiting and retention activities.

Will the Supreme Court's Decision in LaRue Result in a "Slew of Meritless Litigation?"

The United State Supreme Court ruled that ERISA allows individual claims by plan participants for breach of fiduciary duty that result in losses to an individual account rather than only to the entire plan. In LaRue v. DeWolff, Boberg, & Assoc., Inc., an employee brought an ERISA claim against his employer who was the plan administrator of a 401k plan. The employee claimed $150,000 in losses to his 401k account caused by his the failure to make the changes the employee directed in the investments held in his account. The employee claimed that the failure to make the changes was a breach of fiduciary duty under ERISA. The Court noted the change in the retirement plan landscape from defined benefit plans to defined contribution plans necessitates the recovery of fiduciary breaches in a participant’s individual account. The Court did not decide whether the employer breached its fiduciary duty.

The effect of allowing breach of fiduciary duty claims by individual participants is yet unknown. John Phillips at The Word on Employment Law observes that “Many are predicting that the Court’s ruling will result in a slew of meritless litigation from employees whose 401(k) plans aren’t doing as well in a shaky economy.” Some additional observations about ERISA plan administration may help evaluate this premise:

  • Defined Contribution Plans typically identify the employer as the Plan Administrator but very few employers actually administer their plans.
  • The Employer acting as Plan Administrator will contract out investment and other day-to- day “administrative” activities to other providers such as banks, mutual funds, consultants, etc.
  • These other providers may or may not be “fiduciaries” within the meaning of ERISA. So ERISA-type claims by participants may not lie against them.
  • An ERISA fiduciary breaches its duty if it fails to discharge his duties with respect to a plan with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.
  • An employer may limit its fiduciary liability by selecting competent expert advisors and then monitoring their performance. The Boston ERISA & Insurance Litigation Blog’s post on The Benefits of Relying On Investment Managers is a great summary of this concept. The DOL also has tips for selecting and monitoring service providers including consultants and auditors.
  • If other providers fail to perform there responsibilities their liability may be limited to contractual damages and subject to limitations of contractual indemnity. Employers should carefully review contacts with providers that limit liability of a provider with terms like “gross negligence.”
  • The result may be that the employer faces the ERISA claims alone and is left with contract claims against the providers for resulting damages.
  • ERISA provides for attorney’s fees for successful employee claims.

The answer may be that LaRue opens another avenue for lawsuits against employers, but an employer that carefully selects and monitors its relationships with pension plan providers will be in a better place to defend claims that it breached its fiduciary duty.

President signs Family Leave Provisions for Military Families

The White House announced that President Bush signed of the National Defense Authorization Act (H.R. 4986) which includes additional FMLA leave for military families.  Section 585 (full text set forth below) of the bill (similar to the one vetoed in December) adds two new FMLA-qualifying events, expanding FMLA to include employees caring for an injured service member as well as family members who have a family member called to active duty.

The DOL has summarized the provisions and indicated that the caregiver provisions of the law are effective immediately while the other provisions aren’t effective until DOL issued final regulations. The DOL is “working quickly” to prepare comprehensive guidance, and will require employers to act in good faith until guidance is issued. Employers should immediately adopt FMLA-type procedures for substitution of paid leave and notice as it applies to the new legislation.

Under the new law, FMLA-eligible employees will now be entitled to the following:

Caregiver Leave for an Injured Servicemember:  This benefit permits a “spouse, son, daughter, parent, or next of kin” to take up to 26 workweeks of leave to care for a “member of the Armed Forces, including a member of the National Guard or Reserves, who is undergoing medical treatment, recuperation, or therapy, is otherwise in outpatient status, or is otherwise on the temporary disability retired list, for a serious injury or illness.”

Family Leave Due to a Call to Active Duty:   This benefit provides 12 weeks of FMLA leave for “any qualifying exigency (as the Secretary [of Labor] shall, by regulation, determine) arising out of the fact that the spouse, or a son, daughter, or parent of the employee is on active duty (or has been notified of an impending call or order to active duty) in the Armed Forces in support of a contingency operation.”

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EEOC allows Employers to Coordinate Retiree Plans with Medicare

The EEOC issued final regulations that create a specific exemption from the Age discrimination laws (ADEA) allowing employers to coordinate (meaning alter, reduce or eliminate) health benefits for retirees who become eligible for Medicare. The EEOC regulations describe the exemption as follows:

Some employee benefit plans provide health benefits for retired participants that are altered, reduced or eliminated when the participant is eligible for Medicare health benefits or for health benefits under a comparable State health benefit plan, whether or not the participant actually enrolls in the other benefit program. Pursuant to the authority contained in section 9 of the Act and in accordance with the procedures provided therein and in Sec. 1625.30(b) of this part, it is hereby found necessary and proper in the public interest to exempt from all prohibitions of the Act such coordination of retiree health benefits with Medicare or a comparable State health benefit plan.

According to the NY Times, 10 million retirees rely on employer-sponsored health plans as their primary source of coverage or as a supplement to Medicare. With the rising cost of healthcare, many employers were considering the elimination of retiree benefits. The motivation for employers to eliminate retiree health coverage was greatly increased following a ruling by the Third Circuit Court of Appeals in 2000. In its decision in Erie County Retirees Association v. County of Erie, the Court held that the ADEA required that health benefits offered to Medicare-eligible retirees must be the same, or have the same cost to the employer, as benefits offered to employees under age 65. The ruling prohibited an employer from taking into account Medicare coverage in providing health benefits to retirees. Employers scrambled to justify plan designs that almost universally coordinated with Medicare.

In 2004, the EEOC issued proposed regulations that created an exemption in response to the Erie County decision. The American Association of Retired Persons (AARP) filed suit and won an injunction barring the EEOC from implementing the exemption. On appeal, the same Third Circuit Court of Appeals that decided Erie County ruled that the EEOC had properly issued the exemption under its authority in the ADEA. AARP has sought an appeal to the US Supreme Court.

The EEOC exemption gives employers an important cost control option in designing retiree health benefit programs. Barring an unexpected ruling by the U.S. Supreme Court, the uncertainty created in this area should subside.

Health Insurance Reforms: First Dominos are Set to Fall

BusinessWeek reports that the California State Assembly passed a major health care reform plan that would expand coverage to almost 70% of the state’s uninsured at a cost of $14.4 billion. Under the Governor’s proposal, everyone would be require to buy minimum health insurance coverage. Insurers could not deny coverage based on age or medical condition and would be required to spend 85% of premium dollars on actual patient care. Revenue to fund the reform would come from taxes on hospitals, cigarettes and employers who do not provide a minimum level of health insurance.

Pennsylvania’s Governor has a similar Health Care Reform Act, the highlights of which are as follows:

  • Establishes a basic health insurance program for employees of small low-wage employers and uninsured adult individuals, without waiting periods and pre-existing condition exclusions
  • Creates a “Fair Share Tax” on all employers equal to 3% of payroll through 2010 and increasing to 3.5% thereafter.
  • Provides for a small employer tax credit for first 5 years
  • Provides a tax credit for all employers that offer a minimum level of coverage to all employees who work 30 or more hours per week based on the out of pocket cost to the employee and level of employee participation
  • Requires insurers offering small group plans to:
    • use modified community rating in setting rates taking into account only age, geographic region, and family composition
    • vary rates by a factor no greater than 33%
    • maintain a medical loss ratio of no less than 85%

These reforms are coming and they will impact employers by mandating a level of minimum coverage for employees and by taxes those employers who don’t offer coverage. Keep tabs on Pennsylvania’s Health Care Reform at the Governor’s website dedicated to this project.

Options for Bridging the Funding Gap in a High Deductible Health Plan

Rising costs have motivated many employers to adopt High Deductible Health Plans (HDHP) increasing the amount paid by employees for health care coverage. The Towers Perrin 2008 Health Care Cost Survey notes that employees are responsible for 22% of the cost of coverage or about $2000 per employee plus the cost of deductibles and co-pays. The average out of pocket expense for an employee is has doubled in the last 5 years.

Employers face employee relations challenges when attempting to pass along the out of pocket increases to employees without offering some funding assistance on either a transitional or ongoing basis. There is a significant learning curve for many of the accounts both in terms of evaluating the amount of employee/employer contributions and navigating the claims/reimbursement process.

Several options exist for employers to bridge the funding gap created by migrating to a HDHP from a more traditional indemnity arrangement including the following:

Health Savings Accounts (HSA) HSAs can be funded by both voluntary tax deductible employee contributions and/or tax exempt employer contributions allowing the combination of employer employee contributions to fully fund the deductible (up to the IRS limit). The contributions remain in the HSA and accumulate interest on a tax free basis. Distributions are tax free as long as the funds are used for Qualified Medical Expenses. An HSA may be moved to successive employers or used in retirement. The advantages or an HSA are portability; tax-free contributions, accumulations, and distributions; ownership of the account by the employee. The disadvantages of HSAs are that they can only be used with a HDHP; must be uniformly funded by employers; may discourage employees from seeking medical treatment; and are limited in their use with other types of accounts like FSAs and HRAs. Other problems have been identified in a previous post.

Medical Savings Accounts (MSA) MSAs may be established by self-employed individuals or employees of small employers (less than 50). The MSA is a tax exempt trust held by a financial institution and operates like an HSA.  Employers may contribute to an Archer MSA, but if they do, the employee may not contribute for that year. Contributions are limited to 75% of the annual HDHP deductible. Employers must make uniform contributions to their employees if they choose to contribute. The additional advantage of an MSA is that it may be established by an employee without employer sponsorship.

Flexible Spending Accounts (FSA)  Employees may contribute to an FSA on a pre-tax basis as part of an employer sponsored cafeteria plan. Both employers and employees can contribute to an FSA.      FSAs fund Qualified Medical Expenses, except health insurance premiums and long term care expenses. The big disadvantage of an FSA is that any money remaining in the account that is not used to reimburse expenses is forfeited. There is no accumulation of money in the account from one year to the next.

Health Reimbursement Arrangements (HRAHRAs may only be funded by employers on a uniform basis for all participating employees. Employees may not contribute. There are no limits on the amount of employer contributions, but HRA funds may only be used for Qualified Medical Expenses which include health insurance premiums. HRA contributions are tax free and unused amounts may be carried over to subsequent years. HRAs are not portable and do not accumulate earnings on account balances. They compare favorably with FSA because there is no use it or lose it. An employer may offer both an HRA and FSA, but there are complex ordering rules coordinating the interaction of FSA and HRA payments and prohibitions on funding the HRA with FSA contributions.

Combined Accounts (MSA, HRA and FSA)   It is possible, but complex, to offer multiple arrangements in an attempt to bridge the funding gap. There is IRS guidance on the interaction of HSAs and other Health Arrangements.

Obviously, legal advise is paramount in plan design and drafting.

Health Plan Renewal Time: 2008 Employee Health Care Costs Expected To Exceed $9,300 Per Employee

The average corporate health benefit expenditure in 2008 will be $9,312 per employee—an increase of 7 percent over 2007—with annual per-employee contributions exceeding $2,000, according to Towers Perrin's 2008 Health Care Cost Survey. Some highlights of the survey are as follows:

  • Employers are expecting to subsidize 78 percent of next year's premium costs, and employees will have to cover the remaining 22 percent, plus usage-based co-pays, deductibles and co-insurance.
  • Employee contributions, on average, will jump by $156 per employee per year to $2,040, an 8 percent increase that is roughly twice that of annual employee merit increases.
  • Analyzing the data by coverage level, the average reported 2008 cost of annual medical coverage will be:
    • Employee-only coverage:              $4,704
    • Employee-plus-one coverage:       $9,660
    • Family coverage:                         $13,704

The Towers Perrin Survey also tracks the cost variations across “High-Performing” and “Low-Performing” Companies noting a cost disparity per employee per year of $8,844 and $10,320 which is explained as follows:

According to the Towers Perrin data, these [high-performing] companies have clear strategies in place to drive improvements in employees’ overall health and wellness, engagement in health care decisions and health-related behaviors, as well as to identify problems early and take advantage of opportunities for improvement by understanding the current state of their benefit program and the health care system overall.

To the extent that high performance is enhanced by plan design, I am seeing a strong trend to High Deductible Health Plans coupled with either Health Savings Accounts, Medical Savings Accounts or Health Reimbursement Arrangements. The pros and cons of some of these arrangements have been discussed previously in Problems with Health Savings Accounts (HSA)

There is also a clear trend among employers to adopt wellness programs with financial incentives for behavior changes.  Some of the issue surrounding wellness programs have been discussed in Wellness Programs Must Comply with HIPAA Restriction;Successful Wellness Programs Implemented by D&E Communications Sizing Up Obesity: Can Wellness Programs Curb BMI?

First Baby Boomer applies for Social Security: Employers Beware

On October 16, 2007, Kathleen Casey-Kirschling, a former teacher from New Jersey, applied for benefits over the Internet becoming the nation’s first baby boomer to make a claim for Social Security. The Chicago Sun-Times reports that Casey-Kirschling was born one second after midnight on January 1, 1946, making her the first baby boomer -- a generation of nearly 80 million born from 1946 to 1964.

The social, economic, and political implications of this “demographic tsunami” will have dramatic impact on employers through worker shortages and increased government spending. Tony Allison has a great summary of these issues in his article The Boomer are Coming, The Boomers are Coming- Demographic Tsunami is at the Gate, where he comments on impact of government spending and Medicare costs.

From a legal perspective, the greatest impact on employers of baby boomer retirements may be on employee benefit plans. I would expect that government efforts to cover the sky rocketing expenses of the Medicare Program and Social Security will result in increased cost shifting to already strained employer health and retirement plans.

Cost shifting mechanisms already exist from Medicare to employer sponsored health plans in the form of Medicare’s Secondary Payer Rules (MSP). MSP rules act as coordination of benefit provisions shift first payer status to medical plans, auto insurance policies and worker’s compensation insurance coverage. It is likely that these types of coordination of benefit approaches may increase. For example, H.R. 2549 would extend Medicare Secondary Payer to recover Medicare payments from workers' compensation settlements.

The Medicare Secondary Payer Rules apply when an employee or an employee’s spouse is covered by or entitled to Medicare and the group health plans of employers with 20 or more employees as more fully described in extensive regulations. However, there is an excellent booklet entitled Medicare and Other Health Benefits: Your Guide to Who Pays First which describes the various scenarios that can arise. The biggest issues for employers arise from two areas. First, an employer/insurer may not discriminate in terms of coverage or charge more for individuals who are covered or entitled to coverage under Medicare. Second, Employers and insurers are prohibited from offering a financial incentive not to enroll or to terminate enrollment in a group health plan so as to make Medicare a primary payer.

Employers will need to be increasingly cautious in plan design to anticipate the impact of future government efforts to shift the cost of medical and retirement benefits to private employers.

Employment Implications of Obesity based on BMI

What is Body Mass Index (BMI)? BMI has become the unofficial scientific measure for assessing obesity. BMI is a function of height and weight (BMI calculator).   The Center for Disease Control classifies a person who has a BMI of less than 18.5 as underweight; normal is 18.5-24.9; overweight is 25-29.9; obese is over 30; and extremely obese is over 40.

What is the BMI analysis telling us about our weight?   A Report by the Trust for America's Health recently disclosed statistics about obesity trends.  In the Report, Pennsylvania had the 23rd highest rate of adult obesity with 24.5 percent of its population having a BMI over 30.   The Report correlated obesity figures with other factors like Diabetes and Hypertension rates. It also noted levels of admitted physical activity (or inactivity). Twenty-Four percent of Pennsylvanians admit no physical activity.

How good is BMI as a measure of obesity?   Martica Heaner points out the limitations of BMI in her posts BMI Blues and Is Body Mass Index a Bad Measure?:

The BMI works well for research purposes, but doesn’t necessarily translate precisely to the individual. Unfortunately, it tends to convey that people that exercise regularly, for example, are overweight, when they are not actually overfat.  A fit person tends to have more muscle, so their body weight is a reflection of body fat as well as muscle and other lean tissue. 

Since the problem with being overfat is that health risks are increased, a BMI in the overweight range is probably not a negative indicator for a fit person. Regular exercise, low body fat and increased muscle mass are all factors that tend to outweigh any health risks suggested by a higher BMI.

Is there correlation between high BMI and bad health? According to the CDC, the BMI ranges were established based on the health consequences associated with obesity as determined by different BMIs. Some challenge this conclusion saying  that the obesity/health correlation is a myth. However, this the correlation between high BMI and bad health is quickly becoming an assumption.   Others have even gone as far as implying that there is a "conspiracy" perpetuated by those who are making fortunes in weight loss products.

Other than being incorrectly labeled "overweight" or "obese", why should we care whether BMI is a accurate health status predictor? BMI is fast becoming the legal standard for determining whether someone is "obese" and therefore a "health risk". With this label comes a whole host of employment and benefit consequences:

  • Cost of and Eligibility for Certain Employee Benefits

Individual insurance policies for life, disability and medical insurance almost universally use underwriting procedures that take into account BMI as a basis for determining insurability and premium.  A survey by the Texas Office of Public Insurance Counsel found that insurance company individual health plan underwriting guidelines used BMI as a basis to deny coverage, charge a higher premium, and offer less coverage. The California Insurance Commission has made comments alerting consumers about BMI as a basis for insurance denial.

Some group health plans are community rated and not subject to medical underwriting. These plans calculate premium based on the expected claims of the community not the individual employer group.  Other group health insurance programs can be subject to medical underwriting in which BMI analysis and other factors will be used to price the coverage for the group.  An employer with  a compliment of employees with potential for high claims (including high BMI) will face higher premiums or denial. Likewise, self-insured medical plans that utilize stop loss coverage may undergo medical underwriting where BMI will be factored into the rate for reinsurance..

Group health plan wellness program incentives may be keyed to BMI targets for premium discounts and other incentives.  The availability of incentives to those with high BMI is subject to limitations including situations when it is "unreasonably difficult" or "medically inadvisable" for a participant to attempt to achieve the BMI standard.

  • Employment Discrimination

Under the rationale in EEOC v. Watkins Motor Lines, Inc., being overweight and even obese is not generally considered a "disability".    On the other hand, severe obesity, which has been defined as BMI greater than 40, is clearly an impairment.   In addition, a person with obesity may have an underlying or resultant physiological disorder, such as hypertension or a thyroid disorder. A physiological disorder is an impairment. See 29 C.F.R. § 1630.2(h). Employee who are regarded as disabled due to obesity are also protected under the ADA.

The ADA prohibits disability based distinctions in health plans. So far the EEOC's Guidance in this area has not classified obesity as prohibited basis for making distinctions. However, if the presumption of health risks continues to be tied to BMI, this area may be reevaluated.

Pennsylvania's First ever BMI Bowl

Since I know nothing about science, I took an unscientific approach to the question of whether BMI is a good measure of health. I made an assumption that professional athletes are in good shape. So I calculated the BMIs for various Pennsylvania and other sports rosters and compared them with the Body Mass Index Table.  Results: Philadelphia Eagles edge Pittsburgh Steelers with the highest average BMI and Roster Percentage of BMI over 30. MVP of the BMI Bowl is Nick Cole (BMI 47.46).

 Here are how the teams finished in the BMI Bowl:

TEAM Average  BMI % Roster with BMI  >   30 
    Philadelphia Eagles    32.77    62.96%
    Pittsburgh Steelers    31.84    56.7%
    Pittsburgh Pirates    27.30    9.67%
    Philadelphia Phillies    27.16    3.1%
    Philadelphia Flyers    26.82    0%
    Pittsburgh Penguins    26.58    4.5%
    Philadelphia 76ers    24.51    0%
    Detroit Shock (WNBA)    23.26    0%
1996 U.S. Olympic Women's Gymnastics    18.79    0%

Sizing Up Obesity: Can Wellness Programs Curb BMI?

News outlets have offered up a smorgasbord of statistics highlighting America's weight problem based on the upward trend of the average Body Mass Index (BMI).  The annual cost to employers of obesity is estimated to exceed $13 billion leading some large employers to announced plans to fight obesity among employees.  The primary vehicles for employers to proactively combat employee health issues take the form of education or premium discounts offered in connection with wellness programs.  I have posted on wellness programs before by highlighting successful programs and providing commentary on the process for adopting one.

Typical stand alone wellness program focuses on education as a means of changing employee lifestyles from unhealthy to healthy. The typical incentive plans tie health premium discounts to participation in wellness initiatives. Such actions by insurers have been applauded in the Health Care Policy and Marketplace Review which noted new program announced by United Health, in which health plan participants who take tests and other evaluations to prove they are meeting goals for blood pressure, cholesterol, height/weight ratio, and smoking status would be eligible to receive $500 reductions in their health plan deductible ($1,000 family) for every goal met.  However, many others refer to such actions as fining employees for poor health screening scores.

Nonetheless, legal restrictions curb an employer's flexibility in utilizing healthy living incentives.  Under HIPAA regulations that became effective on July 1, 2007, wellness programs that give rewards for healthy conduct or that penalize unhealthy activities must meet all of the five following standards:

  • Limited Reward:       All rewards offered under the program must not exceed 20% of the cost of coverage (total amount of employee and employer contribution). The reward can be in the form of a discount or rebate of premium or contribution; waiver of deductible, co-payment or coinsurance; or the value of a benefit provided under the plan.
  • Reasonably Designed to Promote Health or Prevent Disease:    The plan must have a reasonable chance of improving health or preventing disease in a way that is not overly burdensome.
  • No More that Annual Qualification for Award:    Individuals eligible to participate must be given the opportunity to qualify at least once a year.
  • Uniform Reward Availability for "Similarly Situated" Individuals: The reward must be available to all similarly situated individuals and there must be a reasonable alternative for receiving the reward for any individual for whom it is unreasonably difficult due to a medical condition or for whom it is medically inadvisable to attempt to obtain the applicable standard. Physician verification may be required.
  • Plan Material must Describe all Terms:     The plan must describe all terms of the program and the availability of a reasonable alternative. The following language may be used to satisfy the alternative:

"If it is unreasonably difficult due to a medical condition for you to achieve the standards for the reward under this program, or if it is medically inadvisable for you to attempt to achieve the standards for the reward under this program, call us at           and we will work with you to develop another way to qualify for the reward."

Converting to a Paid Time Off System: Practical and Legal Pointers

Merrill Lynch tried to prevent abuses in sick time by clamping down on the reasons for sickness related absences and disciplining employees for excessive absenteeism. Many employers have decided to get away from policing the circumstances of an employee's absence by just creating a bank of paid time off that can be used for any reason. Once PTO is exhausted, time is unpaid and subject to the attendance discipline policy. This certainly sounds like a great idea, but here are some practical and legal considerations in converting from a traditional sick pay program to a PTO plan:

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Abuse of Sick Days: Analyzing the Merrill Lynch Response


Merrill Lynch is reportedly cracking down on time off abuses through new attendance guidelines that provide for a verbal warning and possible loss of pay after use of four sick days and termination after use of nine sick days without valid excuse. The new corporate policy is purportedly designed to reign in workers who misuse sick days by playing hooky on nice summer days, extending weekends, etc. The new policy replaces a program that providing up to 40 sick days per year.

Sick day programs are one of the most fretted over of all employment policies because they involve so many management and legal issues. Sick time is disruptive to the workplace because it is almost always unscheduled. Misuse of sick time has a dramatic impact on employee morale because of work inequity perceptions. Employers must manage abuses within the legal parameters imposed by the wage & hour laws, disability discrimination protections, Family and Medical Leave Act compliance, and wage payment regulations.

Almost every employer offers some form of sick time benefit.   Statistics show that the average business offers 8.1 sick days per year, but employees use only 5.2. However, the growing trend is away from traditional sick days to creating a paid time off bank (PTO). PTO programs combine into one pot all categories of time off, like vacation, sick days, personal days, and floating holidays. Some of the advantages and disadvantages of PTO are as follows:

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Did You Know? Pennsylvania Law Highlights Section

The Pennsylvania Employment Law Blog has added a new section which highlights and/or discusses legal situations which commonly confront human resource professionals. Click on the link titled "Did You Know? PA Employment Law Highlights" on the upper right side of the page. The short informational postings address Pennsylvania law's impact on specific HR activities to promote compliance, proactive risk management, and issue identification.   The postings will be made on a regular basis and archived in this special section of the blog for our reader's reference and review. 

Wellness Programs Must Comply with HIPAA Restrictions

Design of an effective wellness program requires collaboration between insurance brokers, benefit providers and legal advisors in light of limitations placed on certain aspects of their design by HIPAA's Nondiscrimination Requirements.    Under the final regulations that take effect for plan years beginning after July 1, 2007, HIPAA impacts the design of wellness programs that take into account "health factors" when providing incentives under the program. Programs such as the following that do not take into account a participant's health factors when a reward is given or withheld for participation by an employee or beneficiary:

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Successful Wellness Programs Implemented by D&E Communications

As Steve Buterbaugh noted in the previous post, successful Wellness Programs need specific goals and top level support. These two factors play out in the design and implementation of the programs.

Wellness Programs have been successfully implemented by many central Pennsylvania companies.  One successful program was highlighted by David Wenner in a recent article about D&E Communications.  D&E's Wellness Program likely succeeded because it had a specific goal (90% employee participation in a health assessment) and it had a commitment from the top of the organization(CEO personal appeals).  These aspects are outlined in Mr. Wenner's article as follows:

D&E had been looking for a way to hold down health insurance premiums, which had risen 12 percent in 2005 and 20 percent in 2004, said Judy Naylor, vice president of human resources.

Highmark Blue Shield recommended its wellness program, Lifestyle Returns. The insurer offered D&E a 2 percent premium reduction this year if 90 percent of employees participated in the first two steps of Lifestyle Returns, Naylor said. Employees had to pledge to become more health conscious and complete an online health risk assessment.

D&E qualified for the premium reduction, which amounted to about $100,000. It divided the money among participating employees, giving each a $200 reward.

 Participation reached 65 percent after about six months, then stalled.  CEO James Morozzi begin visiting each work site and making personal appeals. In the end, 96 percent of employees completed the health risk assessment, which asks about their health-related habits.

Benefits of a Company Sponsored Wellness Program

Design of an effective wellness program requires collaboration between insurance brokers, benefit providers and legal advisers. There are particular considerations relating to HIPAA's Nondiscrimination Requirements which I will discuss in my next post. Before we get to that, I am pleased to share the following contribution from Steven P. Buterbaugh, CPCU, AAI of E.K. McConkey & Co. Insurance. Thank you to Steven for being our first guest blogger. 

Wellness Programs Have Positive Impact on Group Health Insurance and Overall Company Productivity

Businesses are under constant and increasing pressure to find ways to manage and reduce health benefit expenses while maintaining or improving employee morale and productivity.

Benefit redesign and changing employee contributions are often the first options to consider, but these can strain the important relationship between employer and employees. Significant long term savings will only occur when member health is actually improved, and this is where a wellness initiative can make an impact.

There is a wide disparity between the average claims and cost/person for someone who has a chronic illness and the average claims and cost/person for someone with non-chronic illness.  (See Chart) 

As we often are reminded through the media, there has been an increasing prevalence of chronic illness in our society including Obesity, Diabetes, and Heart Disease. Following are some compelling statistics:

  • Obesity- The CDC’s Health-E Stats for 1999-2002 show that 64% of adults in America age 20 and over are overweight or obese.
  • Diabetes- the National Diabetes Information Clearinghouse states that:
    • Each year, approximately 798,000 people are diagnosed with diabetes
    • Diabetes is a leading cause of death and disability and costs $92 billion per year in direct medical costs.
  • Heart Disease- in 2002, there were 23 million adults diagnosed with heart disease according to the Centers for Disease Control Summary Statistics for U.S. adults. The CDC also reports heart disease as the number one cause of death in the United States.

While these “big three” chronic health conditions are to some extent preventable and/or treatable, current health protocols can only do so much to address these problems.

Long term, the most effective way to control claims costs and keep insurance premiums down is to prevent claims from being incurred through health improvement.

The positive effects of a wellness initiative are cumulative. The longer the company participates, the greater the impact you should see. Taking action now could help stave off the development of future chronic conditions that will inevitably affect your bottom line and productivity in the future.

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PA Income Tax and Withholding Summary for Employment Related Programs and Benefits

In many significant ways, Pennsylvania Income Tax and Withholding laws differ from federal tax regulations. The most notable difference involves Pennsylvania's taxation of elective employee contributions to 401k and other retirement plans. Having completed the mind numbing task of researching this area, I decided that it might be helpful to others to have a resource for some of their Pennsylvania tax questions.  Or, you may consider using this post as an excellent cure for insomnia. 

In any case, the following is a general summary of Pennsylvania's tax treatment of various employee benefits and includes links to additional information. The summary is not intended as a substitute for professional tax advise as individual tax situations vary widely.




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Harley Davidson Strike Ends with Healthcare Compromise

Harley Davidson workers have approved a new contract, ending the three week strike that included disputes over wages and healthcare premiums. According to WHTM, ABC News of Harrisburg, the new contract provides that "Workers will not pay health insurance premiums, but deductibles and co-pays will increase." This resolution stops short of the trend toward consumer driven healthcare plans. However, increasing out of pocket healthcare expenses for consumers is a step towards making them more aware of the increased cost of healthcare. Insurance analysts hope this will result in consumers taking a more vested interest in their healthcare costs. 


Is this an effective approach or will it result in consumers foregoing needed healthcare? There is a fairly comprehensive analysis of consumer driven healthcare at Guide to Options in Consumer Driven Health Care. In the coming years, employers will be faced with many difficult decisions as they attempt to slow the rapidly rising cost of healthcare coverage for employees.  A recent report by the Centers for Medicare and Medicaid Services predicts that health care is expected to account for $1 of every $5 spent in the United States in another decade.  Decision makers will need to become educated on the options available and the consequences of the plans they choose.

Problems with Health Savings Accounts (HSA)

 HSAs have been touted as the latest and greatest vehicle for consumer directed health care savings, but upon closer examination, HSAs may not live up to their billing because people are laboring under false assumptions. First, health coverage with HSAs isn't necessarily "cheaper". Cost savings may be achieved through the use of a high deductible health plan but the savings are not always used to fund HSA contributions. Second, HSAs are not retirement savings devises. It is difficult to for most employees to accumulate money in an HSA because the account is depleted annually to cover current health care expenses. Third, HSAs are not designed to be medical cost containment mechanisms; although, they can result in postponing or foregoing medical treatment when they are marketed as retirement savings vehicles rather than tax advantaged medical expense payment mechanisms.


The U.S. Treasury Department's publication on HSAs contains a laundry list of advantages including affordability, savings, portability and "triple tax savings." While all are true in theory, some are difficult to obtain in reality. HSAs can be more affordable because the high deductible health plan to which it is attached has a lower premium. HSAs create a portable account in which an employee can save money and accumulate earnings in a tax advantaged manner. However, an employee's ability to achieve any savings in an HSA depends upon how much of the medical expenses are covered by the plan versus paid out of pocket by the employee.

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