The regular rate exclusions: employee benefit plans

I sat here and thought about how to make employee benefits entertaining. Or funny. Anything to make people actually read a post about how to structure employee benefits plans so they are excludable from the regular rate under the Fair Labor Standards Act. Unfortunately, I’m a lawyer, not a comedian, so you are just going to have to bear with me on this one.

Most employers provide some kind of benefit program to their employees – as the statute puts it, to “[c]ontributions irrevocably made by an employer to a trustee or third person pursuant to a bona fide plan for providing old-age, retirement, life, accident, or health insurance or similar benefits for employees” 29 CFR §778.200(a)(4). The regulations specify that it does not matter how the plan is financed and whether employees contribute to the plan, but if the plan is combined with a profit sharing program, it must also meet the requirements for employer contributions to profit sharing programs to be excluded from the regular rate. 29 CFR § 778.214.

As you might have expected, there are some rather specific requirements for whether payments to employee benefit plans may be excluded from the regular rate, just like there were for profit sharing plans and stock options grants. Again, if these are all just too much for you, you don’t have to go it alone here. Just call one of the many skilled employee benefits attorneys here at good old WNJ and they (we) can help.

Number one, contributions to the benefits plan must be “made pursuant to a specific plan or program adopted by the employer, or by contract as a result of collective bargaining, and communicated to the employees.” 29 CFR § 778.251(a)(1). That sounds easy enough – create a plan or program, and don’t keep it a secret.

Number two, the purpose of the plan must be “to provide systematically for the payment of benefits to employees on account of death, disability, advanced age, (something Steve is rapidly approaching), retirement, illness, medical expenses, hospitalization, and the like.” 29 CFR § 778.215(a)(2). The way the regs put it sounds a little doom and gloom to me, but it’s the standard stuff of employee benefits: life insurance, disability insurance, health insurance, and retirement planning.

Number three, the regs give you several options on how to determine the contributions and benefits to the plan. We are just going to cover the basics here. The first option is for the plan’s benefits to be “specified or definitely determinable on an actuarial basis.” 29 CFR § 778.215(a)(3)(i). This would be a more traditional defined benefit plan, similar to a pension.

The second option is for the plan to have “a definite formula for determining employer contributions and a definite formula for determining benefits paid under the plan.” This would be a hybrid of a defined benefit and defined contribution plan.

The third option is to provide for a formula for determining employer contributions and “a provision for determining the individual benefits by a method which is consistent with the purposes of the plan or trust under section 7(e)(4) of the act.” 29 CFR § 778.215(a)(3)(i)-(iii). This is a defined contribution plan. The regulations provide that whenever there is a defined contribution from the employer, as in options 2 and 3 above, the requirement for the formula “may be met by a formula which requires a specific and substantial minimum contribution and which provides that the employer may add somewhat to that amount within specified limits . . .” The variation allowed by the employer must not be so great that “the formula becomes meaningless.” 29 CFR § 778.215(a)(3)(iv).

If you’re still with me (and I forgive you if you aren’t) the employer’s contribution to the plan must be irrevocable and the employee must not be able to assign benefits or receive cash, except under certain circumstances such as termination of employment. 29 CFR § 778.215(4)-(5).