Benefits Compliance: Five Costly Mistakes HR and Payroll Professionals Should Avoid

Employee benefits can be one of the most valuable parts of an organization’s compensation package.

Health insurance, retirement programs, dependent coverage, and other benefits help employers attract and retain employees.

But administering these programs involves much more than enrolling employees and processing payroll deductions.

A missed deadline, incorrect eligibility determination, or overlooked notice can expose employers to compliance problems and unexpected expenses.

For HR and payroll professionals, understanding the most common benefits mistakes is an important part of managing organizational risk.

Mistake #1: Misunderstanding ACA Employer Requirements

Under the Affordable Care Act (ACA), applicable large employers generally include organizations averaging at least 50 full-time employees, including full-time equivalent employees, during the preceding calendar year.

These employers may be subject to employer shared responsibility and information reporting requirements.

Employers sometimes overlook part-time employee hours when determining applicable large employer status.

Others fail to consider the rules for related companies that must be evaluated together.

Best practice: Review workforce counts annually, maintain accurate employee hours, and coordinate ACA reporting responsibilities between HR, payroll, and benefits administrators.

Mistake #2: Missing COBRA Notices or Deadlines

COBRA generally applies to group health plans sponsored by private-sector employers with 20 or more employees, subject to applicable counting rules.

When employees or covered dependents experience certain qualifying events, employers and plan administrators may have specific notice and continuation coverage responsibilities.

Missed notices or administrative errors can create significant problems.

Smaller employers should also review applicable state continuation coverage laws.

Best practice: Establish written procedures for identifying qualifying events, communicating with plan administrators, and tracking required notices.

Mistake #3: Making Incorrect Payroll Deductions

Employee benefit deductions must be administered consistently with applicable laws, plan documents, and employee elections.

Errors can occur when employees change coverage, experience qualifying life events, or terminate employment.

Pretax deduction arrangements also require compliance with applicable tax rules.

Best practice: Reconcile benefit elections with payroll deductions regularly and investigate discrepancies promptly.

Mistake #4: Mishandling Employee Eligibility

Benefits eligibility may depend on employee status, hours worked, waiting periods, plan provisions, and applicable legal requirements.

An employee’s promotion, reduction in hours, leave of absence, or employment status change can affect eligibility.

However, employers cannot assume every employment change automatically permits an immediate coverage change.

Best practice: Review eligibility provisions in plan documents and coordinate employment changes with benefit administrators before modifying coverage.

Mistake #5: Overlooking Required Notices and Documentation

Benefit plans may involve required disclosures, notices, reporting obligations, and document retention requirements.

Depending on the employer and plans involved, these can include summary plan descriptions, ACA forms, COBRA materials, and other legally required communications.

Failure to maintain accurate records can make resolving employee disputes particularly difficult.

Best practice: Maintain a benefits compliance calendar identifying deadlines, responsible individuals, and documentation requirements.

What Should Employers Do Next?

Schedule an annual benefits administration review.

Include HR, payroll, finance, and benefits advisors to verify employee eligibility, payroll deductions, required notices, plan documentation, and reporting processes.

Investigate discrepancies before they create larger problems.

Employers should also evaluate applicable state requirements and any relevant legal developments affecting the upcoming plan year.

The Bottom Line

Strong benefits administration requires careful coordination between HR, payroll, and outside service providers.

Employers that establish clear procedures, conduct regular reviews, and maintain accurate documentation are better positioned to reduce compliance risks.

Great employee benefits are valuable. Administering them correctly is essential.

Lisa Smith, SPHR, SCP