4.2 Benefits Programs

4.2 Mandatory (Legally Required) Benefits

Benefits are indirect compensation. The aPHR divides them into mandatory benefits employers must provide by law and voluntary benefits offered to attract and retain talent. Memorize the four federally mandated programs first — they appear repeatedly on the exam.

FICA: Social Security and Medicare

The Federal Insurance Contributions Act (FICA) funds Social Security and Medicare through matched employee/employer taxes.

• Social Security: 6.2% on wages up to the annual wage base of $184,500 (2026). The employer matches 6.2%. Wages above the base are not subject to the Social Security portion, capping the employee's 2026 Social Security tax at $11,439.
• Medicare: 1.45% on ALL wages (no wage cap), matched by the employer. An Additional Medicare Tax of 0.9% applies to the employee only on wages over $200,000 in a calendar year — the employer does not match this surtax.

Worked example: an employee earns $300,000 in 2026. Social Security tax stops at the $184,500 base ($184,500 × 6.2% = $11,439). Medicare = $300,000 × 1.45% = $4,350, plus the 0.9% surtax on the $100,000 over $200,000 = $900. Note the employer matches the $4,350 Medicare but NOT the $900 surtax.

Workers' comp and unemployment

Workers' compensation is a state-run, no-fault system: injured workers receive medical care and partial wage replacement and, in exchange, generally cannot sue the employer for negligence. Unemployment insurance is funded by the employer-paid FUTA (federal) and SUTA (state) taxes; benefits go to workers who lose jobs through no fault of their own. Employees do not pay into either program federally.

Voluntary Benefits, ERISA, Retirement, COBRA & the ACA

Voluntary benefits are not legally required but are competitive necessities: group health insurance, dental/vision, life and disability insurance, paid time off (PTO), wellness and employee assistance programs (EAPs), tuition reimbursement, and retirement plans.

Health plan types

• HMO (Health Maintenance Organization): lowest cost, requires a primary-care physician and referrals, in-network only.
• PPO (Preferred Provider Organization): more flexibility, out-of-network allowed at higher cost, no referral needed.
• HDHP (High-Deductible Health Plan): lower premiums, higher deductibles; pairs with a tax-advantaged Health Savings Account (HSA) that the employee owns and carries over year to year (unlike a use-it-or-lose-it FSA).

ERISA and retirement plans

The Employee Retirement Income Security Act (ERISA) of 1974 sets minimum standards for voluntary pension and welfare plans. It requires fiduciary responsibility, a Summary Plan Description (SPD) disclosing plan terms to participants, and vesting schedules that protect earned benefits. ERISA created the Pension Benefit Guaranty Corporation (PBGC) to insure defined-benefit pensions.

A 401(k) is the dominant DC plan: employees defer pretax pay, often with an employer match (e.g., 50% of the first 6% contributed). Vesting governs ownership of employer contributions — employee deferrals are always 100% vested immediately.

COBRA continuation coverage

The Consolidated Omnibus Budget Reconciliation Act (COBRA) lets qualified beneficiaries keep group health coverage after a qualifying event. It applies to employers with 20 or more employees. The covered person typically pays up to 102% of the full premium.

• 18 months: termination (not gross misconduct) or reduction in hours.
• 29 months: if disabled (per SSA) within the first 60 days.
• 36 months: events such as divorce, death of the employee, or a dependent aging out.

The Affordable Care Act (ACA)

The Affordable Care Act (ACA) imposes an employer mandate on applicable large employers (ALEs) — those averaging 50 or more full-time employees (including full-time equivalents) in the prior year. ALEs must offer affordable, minimum-value coverage to at least 95% of full-time employees (those averaging 30+ hours/week) and their dependents, or face shared-responsibility penalties. The ACA also bars denials for pre-existing conditions and lets adult children stay on a parent's plan until age 26.

Trap: COBRA's threshold is 20 employees; the ACA employer mandate's threshold is 50 — do not confuse them.

Other benefits laws and tax-advantaged accounts

Several additional statutes shape benefits administration and appear on the aPHR:

• HIPAA (Health Insurance Portability and Accountability Act, 1996): protects the privacy and security of health information and limits pre-existing-condition exclusions when employees change plans.
• FMLA (Family and Medical Leave Act, 1993): provides up to 12 weeks of unpaid, job-protected leave for covered family/medical reasons (employers with 50+ employees within 75 miles; employee must have worked 1,250 hours over 12 months).
• USERRA: protects health and pension benefits for employees on military leave.
• Mental Health Parity Act: requires mental-health/substance-use coverage on par with medical/surgical benefits.

Tax-advantaged accounts are a favorite distractor set:

Trap: only the HSA rolls over and is owned by the employee; the FSA is largely use-it-or-lose-it. Mixing these up is a common test error.

Vesting schedules

ERISA permits two vesting schedules for employer retirement contributions: cliff vesting (0% until a set point, then 100% — capped at 3 years for defined-contribution plans) and graded vesting (gradual ownership, fully vested within 6 years). Employee salary deferrals are always immediately 100% vested. Knowing that cliff = all-at-once and graded = gradual is enough for the aPHR.