3.4 Benefit Law Compliance: ACA, COBRA, HIPAA, FMLA, ERISA & Workers' Compensation

Benefit Law Compliance: ACA, COBRA, HIPAA, FMLA, ERISA & Workers' Compensation

The CPP examination tests benefit statutes from the payroll seat: who is counted, what is withheld, what is taxable, what is reported, and what the penalty is when the employer gets it wrong. Benefits and HR own plan design; payroll owns the measurement data, the deduction, the premium remittance, and the information return.

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1. The Affordable Care Act Employer Shared Responsibility Rules

Applicable Large Employer (ALE) Determination

An employer is an Applicable Large Employer for a calendar year if it averaged 50 or more full-time employees, including full-time equivalents (FTEs), during the preceding calendar year. The counting rules are mechanical and belong to payroll:

1. A full-time employee is one credited with an average of 30 hours of service per week or 130 hours of service per month.
2. Full-time equivalents are computed by totaling the monthly hours of all non-full-time employees, capping each individual at 120 hours, and dividing the total by 120.
3. Add the full-time count and the FTE count for each of the 12 months, sum the 12 monthly totals, and divide by 12.
4. All entities in a controlled group under IRC § 414(b), (c), (m), or (o) are aggregated for the ALE test, but penalties are assessed separately against each Applicable Large Employer member by EIN.

The Two Penalties

+-----------------------------------------------------------------------------+
|            IRC SECTION 4980H EMPLOYER SHARED RESPONSIBILITY (2026)          |
|                                                                             |
|  4980H(a) -- "SLEDGEHAMMER"                                                 |
|  Trigger: ALE fails to offer minimum essential coverage to at least 95%     |
|           of full-time employees (and dependents) AND at least one          |
|           full-time employee receives a premium tax credit.                 |
|  Amount:  $3,340 per year ($278.33 per month) x (ALL full-time employees    |
|           MINUS the first 30).                                              |
|                                                                             |
|  4980H(b) -- "TACK HAMMER"                                                  |
|  Trigger: Coverage IS offered to 95%+, but for a given employee it is       |
|           unaffordable or fails minimum value, and that employee receives   |
|           a premium tax credit.                                             |
|  Amount:  $5,010 per year ($417.50 per month) x ONLY the subsidized         |
|           employees. No 30-employee reduction.                              |
|                                                                             |
|  The 4980H(b) total can never exceed what 4980H(a) would have been.         |
+-----------------------------------------------------------------------------+

Affordability and Minimum Value

For plan years beginning in 2026, coverage is affordable if the employee's required contribution for the lowest-cost, self-only, minimum-value option does not exceed 9.96% of one of three safe harbor measures:

Minimum value means the plan pays at least 60% of the total allowed cost of benefits and provides substantial coverage of inpatient hospitalization and physician services.

ACA Information Returns

ALEs file Form 1094-C (transmittal) with Form 1095-C (per full-time employee). Self-insured non-ALEs use Forms 1094-B/1095-B.

• Employee statements are due March 2 each year -- a permanent statutory date, no longer an annually granted extension.
• Paper filing is due February 28; electronic filing is due March 31. The 10-return aggregate electronic filing threshold sweeps in the 1094/1095 series.
• Under the Paperwork Burden Reduction Act (December 2024), an employer may satisfy the furnishing requirement by posting a clear, conspicuous, and accessible notice that a statement is available on request, then delivering it within 30 days of a request or by January 31, whichever is later.
• Failures are penalized under IRC §§ 6721 and 6722 at the same tiered rates as a Form W-2 failure, so a missing 1095-C is a double exposure.

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2. COBRA Continuation Coverage

COBRA (Consolidated Omnibus Budget Reconciliation Act) applies to group health plans of employers with 20 or more employees on more than 50% of typical business days in the prior calendar year. Church plans and the federal government are excluded; state and local government plans are covered by parallel Public Health Service Act rules.

The administrative clock is heavily tested:

1. The employer must notify the plan administrator within 30 days of a termination, reduction in hours, death, Medicare entitlement, or employer bankruptcy.
2. The qualified beneficiary must notify the plan within 60 days of a divorce, legal separation, or a child's loss of dependent status.
3. The plan administrator must furnish the election notice within 14 days of receiving notice (44 days total when the employer is also the administrator).
4. The beneficiary has 60 days to elect and 45 days from the election to make the first premium payment, then a 30-day grace period for each later payment.

The plan may charge 102% of the applicable premium (100% plus a 2% administrative load). During months 19 through 29 of a disability extension the charge may rise to 150%.

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3. HIPAA, FMLA, ERISA and Workers' Compensation

HIPAA

The Health Insurance Portability and Accountability Act gives payroll two distinct duties. The Privacy and Security Rules restrict use and disclosure of protected health information and require administrative, physical, and technical safeguards -- which is why enrollment and claims data must not sit in an open payroll shared drive. The special enrollment rights provision requires the plan to allow mid-year enrollment within 30 days of marriage, birth, adoption, or loss of other coverage, and within 60 days of losing Medicaid/CHIP eligibility or becoming eligible for a state premium assistance subsidy. Those windows drive the Section 125 election-change processing deadlines payroll must honor.

FMLA

The Family and Medical Leave Act covers employers with 50 or more employees in 20 or more workweeks in the current or preceding year, and applies to employees at a worksite where the employer has 50 or more employees within 75 miles. The employee must have 12 months of service (not necessarily consecutive) and 1,250 hours of service in the preceding 12 months.

• Entitlement is 12 workweeks in a 12-month period, or 26 workweeks in a single 12-month period for military caregiver leave.
• Leave is unpaid under federal law, but the employer may require -- or the employee may elect -- substitution of accrued paid leave, which is what payroll actually processes.
• The employer must maintain group health coverage on the same terms during the leave; payroll must arrange collection of the employee share and may recover the employer share if the employee fails to return for reasons within their control.
• Records must be retained three years under 29 CFR § 825.500, and medical certifications must be kept in a file separate from the personnel file.

ERISA

The Employee Retirement Income Security Act governs plan documents, the Summary Plan Description, Form 5500 annual reporting, and fiduciary conduct. The payroll-critical fiduciary rule is the deposit deadline for participant contributions: elective deferrals and after-tax contributions withheld from pay become plan assets and must be remitted as of the earliest date they can reasonably be segregated from the employer's general assets, and in no event later than the 15th business day of the month following withholding. That outer limit is a ceiling, not a safe harbor. Plans with fewer than 100 participants have a genuine safe harbor if deposits are made within 7 business days. Late deposits are a prohibited transaction requiring correction, lost-earnings restoration, and reporting on Form 5500.

Workers' Compensation

Workers' compensation is a state-law, no-fault system funded entirely by the employer; employee contributions are prohibited in nearly every state. Benefits paid under a workers' compensation act for an occupational injury or illness are excluded from gross income under IRC § 104(a)(1) and are therefore not wages for FITW, FICA, or FUTA. Two distinctions matter:

• Wage continuation paid by the employer beyond statutory workers' compensation benefits is ordinary taxable wages.
• Third-party disability payments that are not workers' compensation follow the third-party sick pay rules, where taxability depends on who paid the premium and whether it was paid pre-tax.

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4. Benefit Nondiscrimination Testing

A pre-tax election is only pre-tax if the underlying plan passes its statutory nondiscrimination tests. When a test fails, the highly compensated or key employees -- never the rank and file -- lose the exclusion, and payroll must add the benefit back to taxable wages, usually in the fourth quarter.

A DCAP that fails the 55% average benefits test is the most common real-world failure, because highly compensated employees elect the maximum and lower-paid employees frequently elect nothing.