Avoid Costly Benefits Mistakes During Leave

Employers often lose lawsuits over denied-benefits claims

Allen Smith, J.D. By Allen Smith, J.D. May 16, 2018
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​PHOENIX—Employers can make costly missteps during employees' leaves of absence if they aren't familiar with common benefits errors made during workers' time off. These mistakes include straying from plan documents, failing to follow regulations on leave-donation programs and miscommunicating short-term disability benefits that will be available.

Don't Stray from Plan Documents

Often, plan documents provide that benefits will be discontinued when leave extends beyond Family and Medical Leave Act (FMLA) time off, but employers don't realize this, or they allow benefits to continue anyway to "try to be the good guy," Aimee Dreiss, an attorney with Ogletree Deakins in Houston, said at the firm's Workplace Strategies conference on May 11.

Then the insurers, as claims administrators, deny benefits claims, and the employees sue the employers and insurers, noted Tina Bengs, an attorney with Ogletree Deakins in Chicago. Insurers typically win these cases, as they're following the terms of the plan documents, and employers are held liable for paying the claims, she said.

Leave-Donation Programs

Leave-donation programs can be a great way to help employees without costing a lot of money, Dreiss said. But often, major disaster leave-donation programs are not formally drafted and are set up after an event such as 2017's Hurricane Harvey, she noted.

When it comes to major disaster leave-donation programs, the IRS requires that they be written and that:

  • The amount of leave an employee may donate in any given year may not exceed the maximum amount of leave that he or she normally accrues during the year.
  • The plan does not permit the donor to designate a specific leave recipient.
  • The plan allows donor employees to deposit accrued leave into an employer-sponsored leave bank to be used by other employees who are adversely affected by a major disaster.
  • The plan places a reasonable limit on the period after the disaster occurs when leave may be determined and when it may be used.
  • Employers must make a need-based determination regarding how much leave each recipient may receive under the plan. 
  • The leave recipient will take paid leave at his or her normal rate of pay.
  • The leave recipient may not receive cash in lieu of using the paid leave. The recipient may use the leave to offset an accrued negative leave balance. 

Dreiss emphasized that paid-time-off programs for major disasters are on a disaster-by-disaster basis. So, for example, there would have been one major-disaster leave program for Harvey, and leave that was donated but unused would have been returned to donors.

There are separate IRS requirements for employer-sponsored medical-leave sharing arrangements.

[SHRM members-only HR topic: How to Create a Leave Donation Program]

Miscommunicating Benefits

Employers should be sure not to miscommunicate the benefits available to employees during leave, Bengs cautioned.

HR or a supervisor might mistakenly tell an employee, for example, that the monthly short-term disability benefit will be two-thirds of the worker's overall pay. But the plan may provide only two-thirds of the employee's base pay, which would exclude bonuses.

When the claims administrator pays less than the employee expected, the employee may sue both the insurer and the employer. In such cases, insurers typically win and employers lose, Bengs said.

Employers often hear about the challenge of coordinating compliance among the FMLA, Americans with Disabilities Act and workers' compensation laws, but if they ignore the benefits implications during leave, they do so at their peril, Jonathan Harris, an attorney with Ogletree Deakins in Nashville, Tenn., concluded.

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