Thursday, September 15, 2005

Different Benefits for Different Categories of Employees

Different Benefits for Different Categories of Employees

Q: Do we have to offer the same benefits to all employees? For example, can we give more vacation to our management employees than our nonexempt employees, or is that discrimination?

A: As a general rule, you have the discretion to determine which employees are eligible for benefits, as long as you offer them on a nondiscriminatory basis and abide by federal and state regulations. The phrase "on a nondiscriminatory basis" refers both to discrimination under equal employment opportunity and tax laws.

Equal employment opportunity laws, such as Title VII of the Civil Rights Act, the Americans with Disabilities Act, and the Age Discrimination in Employment Act, do not require employers to offer the same benefits to all employees. Rather, these laws mandate that employers may not discriminate against protected-class employees by excluding those groups from benefits offered to other similarly situated employees. Thus, as an obvious example, if an employer offered paid vacation only to male employees, that policy would illegally discriminate against female employees. On the other hand, if the benefits offered are based on the category of employment as opposed to the personal characteristics of the employees, this distinction generally will not be considered discriminatory. For example, if you provide an additional week of vacation to management employees that nonexempt employees do not receive, that policy is allowed because it distinguishes employees based on job duties and status.

Nondiscrimination has a different meaning under tax law. Benefits such as health insurance and welfare and pension plans generally are governed by the Internal Revenue Code (IRC) and must be offered on a "nondiscriminatory" basis in order for the benefits to be treated as nontaxable income to the participants. Certain welfare plans (including self-insured medical and group term life insurance plans) will create taxable income to highly compensated or key personnel if those employees receive a disproportionate amount of tax-advantaged benefits. In other words, plans that "discriminate" in favor of highly compensated employees may result in all or a portion of the benefits being treated as taxable income to those employees. Therefore, the IRC, as a condition for favorable tax treatment of benefits, requires certain plans to contain minimum eligibility provisions allowing for broad employee participation.

Finally, although management has discretion over eligibility for most types of benefits, federal or state law may govern the participation of workers in certain types of benefits, such as workers' compensation, Social Security, and certain pension plans.

If you are a subscriber to the Personnel Policy Manual or the HR Policy Answers on CD, you can find more information about benefits eligibility in Chapter 501, Disclosure of Benefits.

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