Avoid These Common Legal Pitfalls with Employee Benefits

Date: October 02, 2012

By Karen Harned

Karen Harned
Karen R. Harned is
executive director of the
NFIB Small Business Legal Center.

Many small businesses provide some sort of benefits package to their employees. Health insurance and retirement savings accounts, for example, make excellent recruitment and retention tools. The downside, though, in addition to cost, is an alphabet-soup regulatory landscape that causes many employer headaches.

To avoid penalties and litigation associated with employee benefit plans, it is important to understand the legal risks and responsibilities associated with common employee benefits. Here is some information about two key employee benefits: health insurance and 401(k)s.


The Consolidated Omnibus Budget Reconciliation Act, or COBRA, provides employees with the right to a temporary continuation of health insurance that would otherwise be lost due to certain events, including death or termination of employment. Only “qualified beneficiaries” are eligible for COBRA coverage under a group health plan and only after a “qualifying event” has occurred.

In general, a “qualified beneficiary” is someone who is:

  1. Covered by a group health plan the day before a qualifying event occurred, and
  2. An employee, the employee’s spouse, former spouse or dependent child.

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Each person eligible to receive COBRA continuation coverage can elect it even if others don’t. For example, the employee could elect COBRA coverage but his spouse could decline the coverage.

Qualifying events cause an individual to lose group health coverage, and the type of event determines the amount of time that a plan must provide COBRA continuation coverage. Qualifying events include termination of a covered employee (unless for “gross misconduct”), reduction of a covered employee’s work time, divorce/legal separation from a covered employee, a covered employee becomes entitled to Medicare, death of a covered employee and loss of “dependent child” status under the plan.

For example, Joe is fired on September 6 for failing to do his job. Joe and his family are on a health plan offered by your business as of September 5. Joe and any other immediate family member on his employee plan are eligible for COBRA continuation coverage beginning September 6.

Remember, COBRA protects employees to the extent that they can continue healthcare coverage, but you no longer need to pay the employer portion of their premium—under COBRA it is their responsibility to pay the entire premium. Your job is merely to continue coverage and facilitate their payment.

401(k) Plans

Investment PlanningThese retirement savings plans can be advantageous for both employers and employees. They help attract and retain good workers, allow tax deductions for employer contributions and offer significant retirement-savings incentives for employees. If your business decides to offer a 401(k) plan to your employees, keep the following rules in mind:


  • Employees cannot be ineligible merely because they are older. However, you may legally exclude employees who are under 21 years of age, have worked for less than a year, or through collective bargaining.
  • To preserve tax benefits, a 401(k) plan must offer substantive benefits to all employees.
  • Many of the actions required to operate a 401(k) plan involve fiduciary duties. This includes acting solely in the interest of plan beneficiaries, and following the written plan documents.
  • In addition to disclosures to plan participants, certain information must also be reported to government agencies.

More information on 401(k) plans is available from the Dept. of Labor.

This article is intended to provide general information for reference only and should not be considered legal counsel.


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