AGE AND SERVICE REQUIREMENTS

Although not all plans have age or service conditions for entry, many employers prefer such conditions because they help to avoid the cost of carrying an employee on the records as a plan participant when the employee quits after a short period of service. Generally, a plan cannot require more than one year of service before eligibility, and an employee who has attained the age of 21 must be permitted to participate in the plan if the employee has met the other participation requirements of the plan. Both age and service requirements can be imposed. For example, for an employee hired at age 19, the plan can require that employee to wait until age 21 to participate in the plan. However, an employee hired at age 27 cannot be required to wait more than one year before participating in the plan.

As an alternative to the one-year waiting period, a plan may provide for a waiting period of up to two years if the plan provides immediate 100 percent vesting upon entry. The two-year provision is often used by employers with very few employees and a high turnover rate—for example, a self-employed physician with one or two clerical or technical employees who have high mobility in their labor market. With a two-year provision, few of the employees may ever be covered.

One problem with these age and service requirements is that it is often desirable for a plan to have entry dates—that is, specific dates during the year in which plan participation is deemed to begin—to simplify recordkeeping. The regulations provide that no employee may be required to wait for participation more than six months after the plan's age and service requirements are met. Thus, a plan having entry dates must adjust its eligibility provisions accordingly.

The Blarp, Inc., pension plan wishes to have a one-year, age 21 entry requirement and to use an entry date or dates. Any of the following options will meet the requirement in the regulations:

* Two entry dates in the year, six months apart, with participants entering on the next entry date after they satisfy the one-year, age 21 condition

* One entry date, but a minimum entry age of no more than 20½ and a maximum waiting period of six months

* One entry date, with participants entering the plan on the date nearest (before or after) the date on which the one-year, age 21 requirement is satisfied

All qualified plans are subject to the age 21 requirement, except for a plan maintained exclusively by a tax-exempt educational institution as defined in Code Section 170(b)(1)(a)(ii). To avoid coverage of temporary employees such as graduate teaching assistants, such a plan may provide a minimum age of 26, but the plan must have 100 percent vesting after one year of service.

Definition of Year of Service

The term year of service is used in different ways in the qualified plan rules. It is used to define the age and service rules for eligibility that were just discussed, and is also used in connection with the vesting and benefit accrual rules. Because it plays such an important part in these rules, it has a specific definition under the law.

Generally, a year of service is a 12-month period during which the employee has at least 1,000 hours of service. For purposes of determining eligibility, the initial 12-month period must be measured beginning with the date the employee begins work for the employer. For other purposes, the 12-month accounting period used by the plan (the plan year) can generally be used. For example, suppose the plan uses the calendar year as the plan year. If an employee began work on June 1, 2001, the initial 12-month period for determining whether the 1,000-hour requirement had been met would be June 1, 2001, through May 31, 2002. If the employee did not perform 1,000 hours of service during that period, the plan could begin the next measuring period on January 1, 2002, with subsequent years being determined similarly on the basis of the plan year.

The employer may determine hours of service using payroll records or any other type of records that accurately reflect the hours worked. Alternatively, the regulations allow a plan to use "equivalency" methods for computing hours of service. These equivalencies allow employees to be credited with hours worked based on completion of some other unit of service such as a shift, week, or month of service, without actual counting of hours worked.

Breaks in Service

A larger employer may reduce the cost of a plan somewhat by including a break-in-service provision in the plan's eligibility requirements. Under such a provision, an employee whose continuous service for the same employer is interrupted loses credit (upon returning to work) for service prior to the break and must again meet the plan's waiting period for eligibility. For a smaller employer, breaks in service followed by reemployment are relatively rare and such a provision may have no substantial cost impact other than possibly to complicate plan administration.

The rules under which a plan may interrupt service credits for breaks in service are somewhat complicated. The rules are set out in Code Section 410(a)(5) and regulations thereunder, as well as Labor Regulations Section 2530.200b. A one-year break in service for this purpose is defined as a 12-month period during which the participant has 500 or fewer hours of service. Service prior to a break cannot be disregarded until there is a one-year break in service. If the employee then returns to work, prebreak service may be disregarded (and the participant regarded as a new employee for participation purposes) within the following three limitations:

1. Service prior to the one-year break in service does not have to be counted unless the returned employee completes a year of service. Participation is then effective as of the first day of the plan year in which eligibility was reestablished.

2. If the plan has a two-year, 100 percent vesting eligibility provision, prebreak service need not be counted if the employee did not complete two years of service before the break.

3. If the participant had no vested benefits at the time of the break, prebreak service need not be counted if the number of consecutive one-year breaks in service equals or exceeds the greater of five or the participant's years of service before the break. For example, suppose that participant Arlen works for Maple Corporation for eight months, quits, and then returns seven years later. For purposes of determining eligibility in the Maple Corporation Plan, Arlen's eight months of prebreak service do not have to be counted.

Other Eligibility Criteria Related to Age and Service

Because the age and service limitations must be met by the plan document as drafted, the IRS will scrutinize the plan to ascertain whether there are eligibility criteria that indirectly base eligibility on age and service. For example, the employer may wish to exclude part-time employees. The IRS views an exclusion of part-timers as a service-based eligibility provision. If the plan has a one-year service requirement for entry, it will exclude all employees who never work 1,000 hours or more in any year. However, the plan cannot exclude part-timers who work 1,000 hours or more in a year, but less than a full year, because such a requirement would be seen as a service requirement that violated the one-year, 1,000-hour rule. However, even if some part-timers must be included, the plan is allowed to have a benefit formula that provides smaller benefits for them because of their lesser compensation, or because part-time service is given less credit for benefit purposes than full-time service.

The IRS will also look at how a plan is actually operated to make sure that the age and service limitations are not violated. For example. suppose an employer has a plan for Division B of the business, and employment in Division B requires five years of service in Division A. Division B has a qualified plan and Division A does not. This service requirement, although outside the plan itself, could be seen as an attempt to circumvent the service limitation for the plan maintained by Division B.

ELIGIBILITY AND PARTICIPATION | Plan Qualification Requirements

The employer must decide what group is to be covered by the qualified plan. In a closely held business, the employer will often want to provide a large portion of the plan's benefits to controlling and key employees and minimize benefits for rank and file employees. In larger plans, employers will often want to provide a different qualified plan (or no plan) for different groups of employees for various reasons; for example, the existence of collective bargaining units with separate plans, a desire for different benefit structures for hourly and salaried employees or differences in benefit policy for employees at different geographic locations.

In reviewing the many limitations imposed on the plan designer by the qualified plan rules, note that the overriding purpose for most of these rules is to prevent discrimination by the employer in favor of highly compensated employees. A secondary purpose, related to the first, is to provide and maintain some security of benefits for participants, particularly participants who are not highly compensated. Most of the qualified plan rules can be explained by these rationales; most questions about the meaning of particular rules and how they apply in a particular situation can be resolved by referring to these basic purposes of the law.

The Code imposes two types of limitations on the employer's freedom to designate the group of employees to be covered under the plan. The first limitation applies to the plan as it exists on paper—the eligibility provisions written into the plan. The second type of limitation applies to the plan in operation and provides minimum coverage requirements in the form of three alternative coverage tests. Both limitations are contained in Code Section 410 and its accompanying regulations and rulings.

First of all, as to plan coverage in the document itself, the designer has a good deal of freedom. The plan may cover only employees at a certain geographic location, employees in a certain work unit, salaried employees only, hourly employees only, or almost any other variation. However, when eligibility is restricted on the basis of age or service with the employer, there are specific limits.

Eligibility | Contractual Provisions

In contributory plans, most employers use the same eligibility requirements for dental coverage as they use for medical expense coverage. However, some employers have different probationary periods for the two coverages. Probationary periods are used because members of a group who previously had no dental insurance usually have a large number of untreated dental problems. In addition, because many dental care expenditures are postponable, an employee who anticipates coverage under a dental plan in the future is inclined to postpone treatment that is not crucial. Depending on the group's characteristics, the number of first-year claims for a new plan or for new employees and their dependents under an existing dental plan can be expected to run between 20 percent and 50 percent more than long-run annual claims. Therefore, to counter this higher-than-average number of claims, some employers use a longer probationary period for dental benefits than for medical expense benefits. Other employers may have the same probationary period for both types of coverage but will impose waiting periods before certain types of dental expenses will be covered (such as 12 months for orthodontics).

Longer-than-usual probationary periods or waiting periods initially minimize claims, but unless an organization has a high turnover rate, the result may be false economy. Many persons who do not have coverage merely postpone treatment until they do have coverage. This postponement may actually lead to increased claims, because existing dental conditions only become more severe and then require more expensive treatment. For this reason, some benefit consultants feel that dental plans should at most contain relatively short probationary and waiting periods.

Another method of countering high first-year claims is to require evidence of insurability. For example, an insurance company might require any person who desires coverage from the dental plan to undergo a dental examination. If major dental problems are disclosed, the person must have them corrected before insurance coverage becomes effective.

Because dental expenditures are postponable and somewhat predictable, the problem of adverse selection under contributory plans is more severe for dental insurance than for many other types of group insurance. To counter this adverse selection, insurance companies impose more stringent underwriting (including eligibility) requirements on contributory dental plans than they do on other types of group insurance. In addition, most insurance companies insist on a high percentage of participation (such as 80 percent or 85 percent), and a few will not write contributory coverage. Many insurance companies also insist on having other business besides dental coverage from the employer.

The problem of adverse selection is particularly severe when persons desire coverage after the date on which they were initially eligible to participate. These persons most likely want coverage because they or someone in their family needs dental treatment. Dental insurance contracts contain several provisions that try to minimize this problem, including one or a combination of the following:

• Reducing benefits (usually by 50 percent) for a period of time (such as one year) following the late enrollment.

• Reducing the maximum benefit to a low amount (such as $100 or $200) for the year following the late enrollment.

• Excluding some benefits for a certain period (such as one or two years) following the late enrollment period. This exclusion may apply to all dental expenses except those that result from an accident, or it may apply only to a limited array of benefits (such as orthodontics and prosthetics).

ELIGIBILITY | Plan Provisions and Taxation

The eligibility requirements for medical expense coverage are essentially the same as those discussed earlier for group term insurance—an employee must usually be in a covered classification, must satisfy any probationary period, and must be a full-time employee. Coverage is rarely made available to part-time employees. In addition, medical expense contracts often contain an actively-at-work provision. This provision may be waived, particularly for larger employers for whom adverse selection tends to be less of a problem than for smaller groups because any adverse selection for a large group is reflected in future premiums through the experience-rating process.

Eligibility requirements may vary somewhat if an employer changes providers for a plan's benefits. Note that the following discussion refers to the employer's plan with benefits paid by the previous provider as the "old plan" and the employer's plan with benefits paid by the new provider as the "new plan." In actuality, the employer still has the same medical expense plan. It has only been modified with the use of a new provider and, possibly, a different level of benefits. This is a material modification to a group health plan, and ERISA requires that participants be notified of this change by a summary of material modification.

Even though it has been adopted by only a few states, most providers follow the procedures established by the National Association of Insurance Commissioners (NAIC) Group Coverage Discontinuance and Replacement Model Regulation for medical expense coverage (and possibly other group coverages). This regulation stipulates that coverage be provided (but possibly limited) under a new plan to anyone who (1) was covered under the old plan at the date it was discontinued and (2) is in an eligible classification of the new plan. Employees actively at work on the date coverage is transferred are automatically covered under the new plan and are exempt from any probationary periods. If the new plan contains a preexisting-conditions provision, benefits applicable to an individual's preexisting conditions are limited to the lesser of (1) the maximum benefits of the new plan (ignoring the preexisting conditions) or (2) the maximum benefits of the old plan.

Employers often negotiate with the provider of benefits to ensure that for employees who are covered under the old plan but who are not actively at work on the date coverage is discontinued (such as an employee disabled by illness or injury or employees suffering temporary interruptions of employment) are included in the new plan. However, their benefits are frequently limited to the old plan's level until they meet the new plan's actively-at-work requirement.

Two final points should be made concerning the transfer of coverage. First, the new plan will not pay benefits for expenses covered by the old plan under an extension-of-benefits provision (discussed later); second, when applying any deductibles or probationary periods under the new plan, credit is often given for the satisfaction (or partial satisfaction) of the same or similar provisions during the last three months of the old plan. For example, assume that coverage is transferred in the middle of a calendar year and the new plan contains the same $200-a-year calendar deductible as the old plan. If an employee has already satisfied the deductible under the old plan, no new deductible is required for the remainder of the calendar year, provided that (1) the expenses used to satisfy the deductible under the old plan satisfy the deductible under the new plan and (2) the expenses were incurred during the last three months of the old plan. If only $140 of the $200 was incurred during those last three months, an additional $60 deductible is required under the new plan for the remainder of the calendar year.

Dependent Eligibility
Typically, the same medical expense benefits that are provided for an eligible employee are also available for that employee's dependents. Conversely, however, dependent coverage is rarely available unless the employee also has coverage. As long as any necessary payroll deductions have been authorized, dependent coverage is typically effective on the same date as the employee's coverage. If coverage under a contributory plan is not elected within 31 days after dependents are eligible, future coverage is available only during an open enrollment period or when satisfactory evidence of insurability is provided. However, if an employee was previously without dependents (and therefore had no dependent coverage), any newly acquired dependents (by birth, marriage, or adoption) are eligible for coverage as of the date they gain dependent status.

The term dependents most commonly refers to an employee's spouse who is not legally separated from the employee and any unmarried dependent children (including stepchildren and adopted children) under the age of 19. However, coverage is usually provided for children to age 23 if they are full-time students. In addition, coverage may also continue (and is required to be continued in some states) for children who are incapable of earning their own living because of a physical or mental infirmity. Such children are considered dependents as long as this condition exists, but periodic proof of the condition may be required. If an employee has dependent coverage, all newly acquired dependents (by birth, marriage, or adoption) are automatically covered.

Some persons that meet the definition of a dependent may be ineligible for coverage because they are in the armed forces or they are eligible for coverage under the same plan as the employees themselves. This latter restriction, however, may not apply to a spouse unless the spouse is actually covered under the plan. Some plans also exclude coverage for any dependents residing outside the United States or Canada.

Medical expense plans may contain a "nonconfinement" provision for dependents, which is similar to the actively-at-work provision for employees. Under this provision, a dependent is not covered if he or she is confined for medical care or treatment in a hospital or at home at the time of eligibility. Coverage, however, becomes effective when the dependent is released from such confinement. Until the passage of HIPAA, a nonconfinement provision was commonly found in medical expense plans. However, many legal and benefit experts feel that such a provision violates HIPAA, because it involves the use of health status as a basis for eligibility. In addition, some states do not allow the provision in insured contracts. As a result, many providers no longer include a nonconfinement provision, and an employee's dependents are eligible for coverage at the same time the employee is eligible.

When coverage is transferred, dependents are treated the same as employees, except that any actively-at-work provision may be replaced by a nonconfinement provision.

MEDICAL SAVINGS ACCOUNTS : Overview & Eligibility

The concept of medical savings accounts (MSAs) is a method of reforming the nation's health care system. The use of MSAs has increased as a result of HIPAA. The act provides favorable tax treatment for MSAs established under a pilot project that began on January 1, 1997, as long as prescribed rules are satisfied. The project, which runs through the end of 2000, allows the establishment of up to approximately 750,000 MSAs. However, as of late 1999, fewer than 100,000 had been purchased. At the end of the four-year trial period, no more tax-favored MSAs can be established unless Congress expands the program, but existing MSAs can generally continue in force after that time under the current rules. During this four-year period, the act calls for two studies to assist Congress in making its decision regarding MSAs. First, the Treasury Department will assess MSA participation and its effect on tax revenue. Second, the General Accounting Office will assess the effect of MSAs on the small-group market by looking at such factors as the effect of MSAs on health care costs and the use of preventive care.

The following discussion is limited to MSAs that receive favorable tax treatment. It should be noted that many MSAs, which existed on a non—tax-favored basis prior to 1997, have been revised to meet the act's requirements and receive favorable tax status.

General Nature
An MSA is a personal savings account from which unreimbursed medical expenses, including deductibles and copayments, can be paid. Coverage can be limited to an individual or include dependents. The MSA must be in the form of a tax-exempt trust or custodial account established in conjunction with a high-deductible health (that is, medical expense) plan. An MSA is established with a qualified trustee or custodian in much the same way that an IRA is established. Any insurance company or bank (as well as certain other financial institutions) can be a trustee or custodian, as can any other person or entity already approved by the IRS as a trustee or custodian for IRAs. While there are some similarities between MSAs and IRAs, there are also differences. As a result, an IRA cannot be used as an MSA, and an IRA and MSA cannot be combined into a single account.

Even though employers can sponsor MSAs, these accounts are established for the benefit of individuals and are portable. If an employee changes employers or leaves the workforce, the MSA remains with the individual.

Eligibility for an MSA
Two types of individuals are eligible to establish MSAs:

1. An employee (or spouse) of a small employer that maintains an individual or family high-deductible health plan covering that individual. These persons will establish their MSAs under an employer-sponsored plan.

2. A self-employed person (or spouse) maintaining an individual or family high-deductible health plan covering that individual. These persons will need to seek out a custodian or trustee for their MSAs.

A small employer is defined as an employer who has an average of 50 or fewer employees (including employees of controlled-group members and predecessor employers) on business days during either of the two preceding calendar years. In the case of a new employer, the number of employees is based on an estimate of the reasonably expected employment for the current year. After the initial qualification as a small employer is satisfied, an employer can continue to make contributions to employees' MSAs, and employees can continue to establish MSAs until the first year following the year in which the employer has more than 200 employees. At that time, participating employees may take over contributions to their accounts, but no employer contributions can be made and nonparticipating employees may not start new accounts.

A high-deductible health plan, for purposes of MSA participation, is a plan that has the following deductibles and annual out-of-pocket limitations (These amounts are for 2000 and subject to inflation adjustments.):

In the case of individual coverage, the deductible must be at least $1,550 and cannot exceed $2,350. The maximum annual out-of-pocket expenses cannot exceed $3,100.

In the case of family coverage, the deductible must be at least $3,100 and cannot exceed $4,650. The maximum annual out-of-pocket expenses cannot exceed $5,700.

A high-deductible plan can be written by an insurance company or a managed care organization such as an HMO. Currently, the high-deductible plans are being written primarily by insurance companies in the form of traditional major medical products but possibly with the requirement that covered persons use preferred-provider networks. No HMOs have yet established high-deductible plans.

A high-deductible plan can be part of a cafeteria plan, but the MSA must be established outside the cafeteria plan.

With some exceptions, a person who is covered under a high-deductible health plan is denied eligibility for an MSA if he or she is covered under another health plan that does not meet the definition of a high-deductible plan but that provides any benefits that are covered under the high-deductible health plan. The exceptions include coverage for accident, disability, dental care, vision care, and long-term care as well as liability insurance, insurance for a specific disease or illness, and insurance paying a fixed amount per period of hospitalization.

INSURED DISABILITY INCOME PLANS : definition

INSURED DISABILITY INCOME PLANS
As mentioned, insured disability income plans consist of two distinct products: short-term coverage and long-term coverage. In many respects, the contractual provisions of both short-term and long-term disability income contracts are the same or very similar. In other respects—notably, the eligibility requirements, the definition of disability, and the amount and duration of benefits—there are significant differences.

Eligibility
The eligibility requirements in group disability income insurance contracts are similar to those found in group term insurance contracts. In addition to being in a covered classification, an employee must usually work full-time and be actively at work before coverage commences. Any requirements concerning probationary periods, insurability and premium contributions must also be satisfied.

Short-term and long-term disability income insurance plans frequently differ in both the classes of employees who are eligible for coverage and the length of the probationary period. Employers are more likely to provide short-term benefits to a wider range of employees, and it is not unusual for short-term plans to cover all full-time employees. However, these plans may be a result of collective bargaining and apply only to union employees. In this situation, other employees frequently have short-term disability benefits under uninsured sick-leave plans.

Long-term disability plans often limit benefits to salaried employees. Claims experience has traditionally been less favorable for hourly paid employees for a number of reasons. Claims of hourly paid employees tend to be more frequent, particularly in recessionary times when the possibility of temporary layoffs or terminations increases. Such claims also tend to be of longer duration, possibly because of the likelihood that these employees hold repetitive and nonchallenging jobs. Some long-term plans also exclude employees below a certain salary level because this category of employees, like hourly paid employees, is considered to have a reasonable level of benefits under Social Security.

Long-term disability income plans tend to have longer probationary periods than do short-term disability income plans. While the majority of short-term disability plans (as well as group term insurance plans and medical expense plans) either have no probationary period or have a probationary period of three months or less, it is common for long-term disability plans to have probationary periods ranging from three months to one year. While short-term plans only require that an employee be actively at work on the date he or she is otherwise eligible for coverage, long-term plans sometimes require that the employee be on the job for an extended period (such as 30 days) without illness or injury before coverage becomes effective.

Definition of Disability
Benefits are paid under disability income insurance contracts only if the employee meets the definition of disability as specified in the contract. Virtually all short-term disability income insurance contracts define disability as the total and continuous inability of the employee to perform each and every duty of his or her regular occupation. A small minority of contracts use a more restrictive definition, requiring that an employee be unable to engage in any occupation for compensation. Partial disabilities are usually not covered, but a few newer plans do provide benefits. In addition, the majority of short-term contracts limit coverage to nonoccupational disabilities, because employees have workers' compensation benefits for occupational disabilities. This limitation tends to be most common when benefits under the short-term contract are comparable to or lesser in amount than those under the workers' compensation law. In those cases where workers' compensation benefits are relatively low and the employer desires to provide additional benefits, coverage may be written for both occupational and nonoccupational disabilities.

A few long-term disability income contracts use the same liberal definition of disability that is commonly used in short-term contracts. However, the term material duties often replaces the term each and every duty. Some other contracts define disability as the total and continuous inability of the employee to engage in any and every gainful occupation for which he or she is qualified or shall reasonably become qualified by reason of training, education, or experience. However, most of long-term disability contracts use a dual definition that combines these two. Under a dual definition, benefits are paid for some period of time (usually 24 or 36 months) as long as an employee is unable to perform his or her regular occupation. After that time, benefits are paid only if the employee is unable to engage in any occupation for which he or she is qualified by reason of training, education, or experience. The purpose of this combined definition is to require and encourage a disabled employee who becomes able after a period of time to adjust his or her lifestyle and earn a livelihood in another occupation.

A more recent definition of disability found in some long-term contracts contains an occupation test and an earnings test. Under the occupation test, a person is totally disabled if he or she meets the definition of disability as described in the previous paragraph. However, if the occupation test is not satisfied, a person is still considered disabled as long as an earnings test is satisfied. This means that the person's income has dropped by a stated percentage, such as 50 percent, because of injury or sickness. This newer definition makes a group insurance contract similar to an individual disability income policy that provides residual benefits.

The definition of disability in long-term contracts may differ from that found in short-term contracts in several other respects. Long-term contracts are somewhat more likely to provide benefits for partial disabilities. However, the amount and duration of such benefits may be limited when compared with those for total disabilities, and the receipt of benefits is usually contingent upon a prior period of disability. In addition, most long-term contracts provide coverage for both occupational and nonoccupational disabilities. Finally, short-term contracts usually have the same definition of disability for all classes of employees. Some long-term contracts use different definitions for different classes of employees—one for most employees and a more liberal definition for executives or salaried employees.

SICK-LEAVE PLANS : Eligibility, Benefits

SICK-LEAVE PLANS
Employers use two approaches to provide short-term disability benefits to employees: sick-leave plans and short-term disability income insurance plans. Sick-leave plans, often called salary continuation plans, are uninsured and generally fully replace lost income for a limited period of time, starting on the first day of disability. In contrast, short-term disability income insurance plans usually provide benefits that replace only a portion of an employee's lost income and often contain a waiting period before benefits start, particularly for sickness. While it is impossible to obtain precise statistics, surveys indicate that about half the employees with short-term coverage obtain benefits under sick-leave plans, about one-quarter under insured plans, and about one-quarter under plans that combine the two approaches.

Traditionally, many sick-leave plans were informal, with the availability, amount, and duration of benefits for an employee being at the employer's discretion. Although some plans used by small firms or for a limited number of executives still operate this way, informal plans are generally inappropriate. There is a possibility that the Internal Revenue Service (IRS) will consider benefit payments to be either a gift or a dividend and therefore not tax deductible by the employer. In addition, an informal plan increases the likelihood of suits brought by persons who do not receive benefits. As a result, the vast majority of sick-leave plans are now formalized and have specific written rules concerning eligibility and benefits.

Eligibility
Almost all sick-leave plans are limited to permanent full-time employees, but benefits may also be provided for permanent part-time employees. Most plans require that an employee satisfy a short probationary period (commonly one to three months) before being eligible for benefits. Sick-leave plans may also be limited to certain classes of employees, such as top management or nonunion employees. The latter is common when the union employees are covered under a collectively bargained, but insured, plan.

Benefits
Most sick-leave plans are designed to provide benefits equal to 100 percent of an employee's regular pay. Some plans, however, provide a reduced level of benefits after an initial period of full pay.

Several approaches are used in determining the duration of benefits. The most traditional approach credits eligible employees with a certain amount of sick leave each year, such as ten days. The majority of plans using this approach allow employees to accumulate unused sick leave up to some maximum amount, which rarely exceeds six months (sometimes specified as 180 days or 26 weeks). A variation of this approach is to credit employees with an amount of sick leave, such as one day, for each month of service. Table 1 is an example of a benefit schedule that uses this variation.


Table 1: Benefit Schedule Based on Months of Service

Another approach, illustrated in Table 2, bases the duration of benefits on an employee's length of service.


Table 2: Benefit Schedule Based on Length of Service

An alternative to this approach provides benefits for a uniform length of time to all employees, except possibly those with short periods of service. However, benefits are reduced to a level less than full pay after some period of time that is related to an employee's length of service. Table 8-3 is an illustration of this increasingly common approach.


Table 3: Benefit Schedule With Varied Coverage Based on Months of Service

In some instances, an employee is not eligible for sick-leave benefits if he or she is eligible for benefits under social insurance plans, such as workers' compensation. However, most sick-leave plans are coordinated with social insurance programs. For example, if an employee is entitled to 100 percent of pay and receives 60 percent of pay as a workers' compensation benefit, the salary sick-leave will pay the remaining 40 percent.

A problem for the employer is how to verify an employee's disability. In general, the employee's word is accepted for disabilities that last a week or less. Most sick-leave plans have a provision that benefits for longer periods will be paid only if the employee is under the care of a physician, who certifies that the employee is unable to work.

CONTRACT PROVISIONS : Eligibility

Eligibility
Group insurance contracts are very precise in their definition of what constitutes an eligible person for coverage purposes. In general, an employee must be in a covered classification, work full-time, and be actively at work. In addition, any requirements concerning probationary periods, insurability, or premium contributions must be satisfied.

Covered Classifications
All group insurance contracts specify that an employee must fall into one of the classifications contained in the benefit schedule. While these classifications may be broad enough to include all employees of the organization, they may also be so limited as to exclude many employees from coverage. In some cases, these excluded employees may have coverage through a negotiated trusteeship or under other group insurance contracts provided by the employer; in other cases, they may have no coverage because the employer wishes to limit benefits to certain groups of employees. No employee may be in more than one classification, and the responsibility for determining the appropriate classification for each employee falls on the policyholder.

Full-Time Employment
Most group insurance contracts limit eligibility to full-time employees. A full-time employee is generally defined as one who works no fewer than the number of hours in the normal work week established by the employer, which must be at least 30 hours. Subject to insurance company underwriting practices, an employer can provide coverage for part-time employees. When this is done, part-time is generally defined as less than full-time but more than some minimum number of hours per week. Part-time employees may be subject to more stringent eligibility requirements. For example, full-time hourly paid employees may be provided with $20,000 of life insurance immediately on employment, while part-time employees may be provided with only $10,000 of life insurance and may be subject to a probationary period.

Actively-at-Work Provision
Most group insurance contracts contain an actively-at-work provision, whereby an employee is not eligible for coverage if absent from work because of sickness, injury, or other reasons on the otherwise effective date of coverage under the contract. Coverage will commence when the employee returns to work. This provision is often waived for employers with a large number of employees when coverage is transferred from one insurance company to another and the employees involved have been insured under the previous insurance company's contract.

Probationary Periods
Group insurance contracts may contain probationary periods that must be satisfied before an employee is eligible for coverage. When a probationary period exists, it rarely exceeds six months, and an employee is eligible for coverage on either the first day after the probationary period or on the first day of the month following the end of the probationary period.

Insurability
While most group insurance contracts are issued without individual evidence of insurability, in some instances underwriting practices require evidence of insurability. This commonly occurs when an employee fails to elect coverage under a contributory plan and later wants coverage or when an employee is eligible for a large amount of coverage. In these cases, an employee is not eligible for coverage until he or she has submitted the proper evidence of insurability and the insurance company has determined that the evidence is satisfactory.

Premium Contribution
If a group insurance plan is contributory, an employee is not eligible for coverage until the policyholder has been given the proper authorization for payroll deductions. If this is done before the employee otherwise becomes eligible, coverage commences on the eligibility date. During a period of 31 days following the eligibility date, coverage begins when the policyholder receives the employee's authorization. If the authorization is not received within the 31 days, the employee must furnish evidence of insurability at his or her own expense to obtain coverage. Evidence of insurability is also required if an employee drops coverage under a contributory plan and wishes to regain coverage at a future date.

STATE REGULATION : Eligible Groups

Even though the U.S. Supreme Court has declared insurance to be commerce and thus subject to federal regulation when conducted on an interstate basis, Congress gave the states substantial regulatory authority by the passage of the McCarran-Ferguson Act (Public Law 15) in 1945. This act exempts insurance from certain federal regulations to the extent that individual states actually regulate insurance. In addition, it provides that most other federal laws are not applicable to insurance unless they are specifically directed at the business of insurance.

As a result of the McCarran-Ferguson Act, a substantial body of laws and regulations has been enacted in every state. While no two states have identical laws and regulations, there have been attempts to encourage uniformity among the states. The most significant influence in this regard has been the National Association of Insurance Commissioners (NAIC), which is composed of state regulatory officials. Because the NAIC has as one of its goals the promotion of uniformity in legislation and administrative rules affecting insurance, it has developed numerous model laws. Although states are not bound to adopt these model laws, many states have enacted them.

Some of the more significant state laws and regulations affecting group insurance include those pertaining to the types of groups eligible for coverage, contractual provisions, benefit limitations, and taxation. Moreover, because many employers have employees in several states, the extent of the regulatory jurisdiction of each state is a question of some concern.

Eligible Groups
Most states do not allow group insurance contracts to be written unless a minimum number of persons are insured under the contract. This requirement, which may vary by type of coverage and type of group, is most common in group life insurance, where the minimum number required for plans established by individual employers is generally ten persons. A few states have either a lower minimum or no such requirement. A higher minimum, often 100 persons, may be imposed on other plans, such as those established by trusts, labor unions, or creditors. Only about half the states impose any minimum number requirement on group health insurance contracts. Where one exists, it usually is either five or ten persons.

Most states also have insurance laws concerning the types of groups for which insurance companies may write group insurance. Most of these laws specify that a group insurance contract cannot be delivered to a policyholder in the state unless the group meets certain statutory eligibility requirements for its type of group. In some states these eligibility requirements even vary by type of coverage. While the categories of eligible groups may vary, at least four types of groups involving employees are acceptable in virtually all states:

- Individual employer groups

- Negotiated trusteeships

- Trade associations

- Labor union groups

Other types of groups, including multiple-employer trusts, are also acceptable in some states. Some states have no insurance laws regarding the types or sizes of groups for which insurance companies may write group insurance. Rather, eligibility is determined on a contract-by-contract basis by the underwriting standards of the insurance company.

WORKERS' COMPENSATION LAWS : Type & Eligibility

WORKERS' COMPENSATION LAWS
Prior to the passage of workers' compensation laws, it was difficult for employees to receive compensation for their work-related injuries or diseases. Group benefits were meager, and the Social Security program had not yet been enacted. The only recourse for employees was to sue their employer for damages. In addition to the time and expense of such actions (as well as the possibility of being fired), the probability of a worker's winning such a suit was small because of the three common-law defenses available to employers. Under the contributory negligence doctrine, a worker could not collect if his or her negligence had contributed in any way to the injury. Under the fellow-servant doctrine, the worker could not collect if the injury had resulted from the negligence of a fellow worker. And finally, under the assumption-of-risk doctrine, a worker could not recover damages if he or she had knowingly assumed the risks inherent in the trade.

To help solve the problem of uncompensated injuries, workers' compensation laws were enacted to require that employers provide employee benefits for losses resulting from work-related accidents or diseases. These laws are based on the principle of liability without fault. Essentially, an employer is absolutely liable for providing the benefits prescribed by the workers' compensation laws, regardless of whether the employer would be considered legally liable in the absence of these laws. However, benefits, with the possible exception of medical expense benefits, are subject to statutory maximums.

All states have workers' compensation laws. In addition, the federal government has enacted several similar laws. The Federal Employees Compensation Act provides benefits for the employees of the federal government and the District of Columbia. Railroad employees and seamen aboard ships are covered under the Federal Employer's Liability Act, and stevedores, longshoremen, and workers who repair ships are covered under the U.S. Longshore and Harbor Workers' Act.

Type of Law
Most workers' compensation laws are compulsory for all employers covered under the law. A few states have elective laws, but the majority of employers do elect coverage. If they do not, their employees are not entitled to workers' compensation benefits and must sue for damages resulting from occupational accidents or diseases. However, the employers lose their right to the three common-law defenses previously described.

Financing of Benefits
Most states allow employers to comply with the workers' compensation law by purchasing coverage from insurance companies. Several of these states also have competitive state funds from which coverage may be obtained, but these funds usually provide benefits for fewer employers than insurance companies do. Six states have monopolistic state funds that are the only source for obtaining coverage under the law.

Almost all states, including some with monopolistic state funds, allow employers to self-insure their workers' compensation exposure. These employers must generally post a bond or other security and receive the approval of the agency administering the law. While the number of firms using self-insurance for workers' compensation is small, these firms account for approximately one-half the employees covered under such laws.

In virtually all cases, the full cost of providing workers' compensation benefits must be borne by the employer. Obviously, if an employer self-insures benefits, the ultimate cost will include the benefits paid plus any administrative expenses.

Employers who purchase coverage pay a premium that is calculated as a rate per $100 of payroll and that is based on the occupations of their workers. For example, rates for office workers may be as low as $.10, and rates for workers in a few hazardous occupations may exceed $50. Most states also require that, when their total workers' compensation premiums exceed a specified amount, employers be subject to experience rating; that is, employers' premiums become a function of benefits paid for past injuries to their workers. To the extent that safety costs are offset or eliminated by savings in workers' compensation premiums, experience-rating laws encourage employers to take an active role in correcting conditions that may cause injuries.

Covered Occupations
Although it is estimated that about 90 percent of workers in the United States are covered by workers' compensation laws, the percentage varies among the states from less than 70 percent to more than 95 percent. Many laws exclude certain agricultural, domestic, and casual employees. Some laws also exclude employers with a small number of employees. Furthermore, coverage for employees of state and local governments is not universal.

Eligibility
Before an employee can be eligible for benefits under a workers' compensation law, he or she must work in an occupation covered by that law and be disabled or killed by a covered injury or illness. The typical workers' compensation law provides coverage for accidental occupational injuries (including death) arising out of and in the course of employment. In all states, this includes injuries arising out of accidents, which are generally defined as sudden and unexpected events that are definite in time and place. Most workers' compensation laws exclude self-inflicted injuries and accidents resulting from an employee's intoxication or willful disregard of safety rules.

Every state has some coverage for illnesses resulting from occupational diseases. While the trend is toward full coverage for occupational diseases, some states cover only those diseases that are specifically listed in the law.

TEMPORARY DISABILITY LAWS : Eligibility & Benefits

TEMPORARY DISABILITY LAWS
At their inception, state unemployment insurance programs were usually designed to cover only unemployed persons who were both willing and able to work. Benefits were denied to anyone who was unable to work for any reason, including disability. Some states amended their unemployment insurance laws to provide coverage to the unemployed who subsequently became disabled. However, five states—California, Hawaii, New Jersey, New York, and Rhode Island—and Puerto Rico went one step farther by enacting temporary disability laws under which employees can collect disability income benefits regardless of whether their disability begins while they are employed or unemployed. While variations exist among the states, these laws (often referred to as nonoccupational disability laws because benefits are not provided for disabilities covered under workers' compensation laws) are generally patterned after the state unemployment insurance law and provide similar benefits.

In the six jurisdictions with temporary disability laws, most employers are required to provide coverage for their employees. In most jurisdictions, except Rhode Island, which has a monopolistic state fund, coverage may be obtained from either a competitive state fund or private insurance companies. Self-insurance is also generally permitted. Private coverage must provide at least the benefits prescribed under the law, but it may be more comprehensive. Depending on the jurisdiction, the cost of an employer's program may be borne entirely by employee contributions, entirely by employer contributions or by contributions from both parties.

Eligibility
Before an employee is eligible for benefits under a temporary disability law, the employee must satisfy (1) an earnings or employment requirement, (2) the definition of disability, and (3) a waiting period.

Earnings or Employment Requirement
Every jurisdiction requires that an employee must have worked for a specified time and/or have received a minimum amount of wages within some specific period prior to disability to qualify for benefits.

Definition of Disability
Most laws define disability as the inability of the worker to perform his or her regular or customary work because of a nonoccupational injury or illness including maternity. As with workers' compensation laws, certain types of disabilities are not covered. In most jurisdictions, these include disabilities caused by self-inflicted injuries or by illegal acts.

Waiting Period
The usual waiting period for benefits is seven days. However, in some jurisdictions the waiting period is waived if the employee is hospitalized.

Benefits
Benefits are a percentage, usually ranging from 50 percent to 66⅔ percent, of the employee's average weekly wage for some period prior to disability, subject to maximum and minimum amounts. Benefits are generally paid for at least 26 weeks if the employee remains disabled that long.

UNEMPLOYMENT INSURANCE : Eligibility for Benefits

Eligibility for Benefits
In order to receive unemployment benefits, a worker must meet the following eligibility requirements:

- Have a prior attachment to the labor force

- Be able to work and be available for work

- Be actively seeking work

- Have satisfied any prescribed waiting period

- Be free of disqualification

Prior Attachment to the Labor Force
The right to benefits depends on the worker's attachment to the labor force within a prior base period. In most states, this base period is the 52 weeks or four quarters prior to the time of unemployment. During this base period, the worker must have earned a minimum amount of wages or worked a minimum period of time or both.

Able to Work and Available for Work
The right to benefits is also contingent on an unemployed worker's being both physically and mentally capable of working. The worker must also be available for work. Benefits may be denied if suitable work is refused or if substantial restrictions are placed on the type of work that will be accepted.

Actively Seeking Work
In addition to registering with a local unemployment office, most states require that a worker make a reasonable effort to seek work.

Waiting Period
Most unemployment programs have a one-week waiting period before benefits commence. Benefits are not paid retroactively for that time of unemployment.

Free of Disqualification
All states have provisions in their laws under which a worker may be disqualified from receiving benefits. This disqualification may take the form of (1) a total cancellation of benefit rights, (2) the postponement of benefits, or (3) a reduction in benefits. Common reasons for disqualification include the following:

- Voluntarily leaving a job without good cause.

- Discharge for misconduct.

- Refusal to accept suitable work.

- Involvement in a labor dispute.

- Receipt of disqualifying income. This includes dismissal wages, workers' compensation benefits, benefits from an employer's pension plan, or primary insurance benefits under the Social Security program.

MEDICARE: ELIGIBILITY

Part A, the hospital portion of Medicare, is available to any person aged 65 or older as long as the person is entitled to monthly retirement benefits under Social Security or the railroad retirement program. Civilian employees of the federal government aged 65 or older are also eligible. It is not necessary for these workers to actually be receiving retirement benefits, but they must be fully insured for purposes of retirement benefits. The following persons are also eligible for Part A of Medicare at no monthly cost:

Persons aged 65 or older who are dependents of fully insured workers aged 62 or older.

Survivors aged 65 or older who are eligible for Social Security survivors benefits.

Disabled persons at any age who have been eligible to receive Social Security benefits for two years because of their disability. This includes workers under age 65, disabled widows and widowers aged 50 or over, and children 18 or older who were disabled prior to age 22.

Workers who are either fully or currently insured and their spouses and dependent children with end-stage renal (kidney) disease who require renal dialysis or kidney transplants. Coverage begins either the first day of the third month after dialysis begins or earlier for admission to a hospital for kidney-transplant surgery.

Most persons aged 65 or over who do not meet the previously discussed eligibility requirements may voluntarily enroll in Medicare. However, they must pay a monthly Part A premium and also enroll in Part B. The monthly Part A premium may be as high as $300 in 2001, depending on the quarters of coverage a person earned under Social Security. The premium is adjusted annually to reflect the full cost of the benefits provided.

Any person eligible for Part A of Medicare is also eligible for Part B. A monthly premium must be paid for Part B. This premium, $50.00 in 2001, is adjusted annually and represents only about 25 percent of the cost of the benefits provided. The remaining cost of the program is financed from the general revenues of the federal government.

Persons receiving Social Security or railroad retirement benefits are automatically enrolled in Medicare if they are eligible. If they do not want Part B, they must reject it in writing. Other persons eligible for Medicare must apply for benefits. As a general rule, anyone who rejects Part B or who does not enroll when initially eligible may later apply for benefits during a general enrollment period that occurs between January 1 and March 31 of each year. However, the monthly premium is increased by 10 percent for each 12-month period during which the person was eligible but failed to enroll.

Medicare secondary rules make employer-provided medical expense coverage primary to Medicare for certain classes of individuals who are over 65, who are disabled, or who are suffering end-stage renal disease. These persons (and any other Medicare-eligible persons still covered as active employees under their employer's plans) may not wish to elect Medicare because it largely constitutes duplicate coverage. When their employer-provided coverage ends, these persons have a seven-month special enrollment period to elect Part B coverage, and the late enrollment penalty is waived.

Medicare is also secondary to benefits received by persons (1) entitled to veterans' or black-lung benefits, (2) covered by workers' compensation laws, or (3) whose medical expenses are paid under no-fault or liability insurance.

SOCIAL SECURITY: ELIGIBILITY

To be eligible for benefits under Social Security, an individual must have credit for a minimum amount of work under the program. This credit is based on quarters of coverage. For 2001, a worker receives credit for one quarter of coverage for each $830 in annual earnings on which Social Security taxes are paid, up to a maximum of four quarters in any one calendar year, even if all wages are earned within one calendar quarter. Consequently, a worker paying Social Security taxes on as little as $3,320 (that is, $830 × 4) during the year will receive credit for the maximum four quarters. As in the case of the wage base, the amount of earnings necessary for a quarter of coverage is adjusted annually for changes in the national level of wages.

Quarters of coverage are the basis for establishing an insured status under Social Security. The three types of insured status are fully insured, currently insured, and disability insured.

Fully Insured
A person is fully insured under Social Security if either of two tests is met. The first test requires credit for 40 quarters of coverage. Once a person acquires such credit, he or she is fully insured for life even if employment covered under Social Security ceases.

Under the second test, a person who has credit for a minimum of six quarters of coverage is fully insured if he or she has credit for at least as many quarters of coverage as there are years elapsing after 1950 (or after the year in which age 21 is reached, if later) and before the year in which he or she dies, becomes disabled, or reaches age 62, whichever occurs first. Therefore, a worker who reached age 21 in 1988 and who died in 2000 would need credit for only 11 quarters of coverage for his or her family to be eligible for survivors' benefits.

Currently Insured
If a worker is fully insured under Social Security, there is no additional significance to being currently insured. However, if a worker is not fully insured, certain survivors benefits are still available if a currently insured status exists. To be currently insured, it is only necessary that a worker have credit for at least 6 quarters of coverage out of the 13-quarter period ending with the quarter in which death occurs.

Disability Insured
To receive disability benefits under Social Security, it is necessary to be disability insured. At a minimum, a disability insured status requires that a worker (1) be fully insured and (2) have a minimum amount of work under Social Security within a recent time period. In connection with the latter requirement, workers aged 31 or older must have credit for at least 20 of the past 40 quarters ending with the quarter in which disability occurs; workers between the ages of 24 and 30, inclusively, must have credit for at least half the quarters of coverage from the time they turned 21 to the quarter in which disability begins; and workers under age 24 must have credit for 6 out of the past 12 quarters, ending with the quarter in which disability begins.

A special rule for the blind states that they are exempt from the recent-work rules and are considered disability insured as long as they are fully insured.

SOCIAL SECURITY: ELIGIBILITY

To be eligible for benefits under Social Security, an individual must have credit for a minimum amount of work under the program. This credit is based on quarters of coverage. For 2001, a worker receives credit for one quarter of coverage for each $830 in annual earnings on which Social Security taxes are paid, up to a maximum of four quarters in any one calendar year, even if all wages are earned within one calendar quarter. Consequently, a worker paying Social Security taxes on as little as $3,320 (that is, $830 × 4) during the year will receive credit for the maximum four quarters. As in the case of the wage base, the amount of earnings necessary for a quarter of coverage is adjusted annually for changes in the national level of wages.

Quarters of coverage are the basis for establishing an insured status under Social Security. The three types of insured status are fully insured, currently insured, and disability insured.

Fully Insured
A person is fully insured under Social Security if either of two tests is met. The first test requires credit for 40 quarters of coverage. Once a person acquires such credit, he or she is fully insured for life even if employment covered under Social Security ceases.

Under the second test, a person who has credit for a minimum of six quarters of coverage is fully insured if he or she has credit for at least as many quarters of coverage as there are years elapsing after 1950 (or after the year in which age 21 is reached, if later) and before the year in which he or she dies, becomes disabled, or reaches age 62, whichever occurs first. Therefore, a worker who reached age 21 in 1988 and who died in 2000 would need credit for only 11 quarters of coverage for his or her family to be eligible for survivors' benefits.

Currently Insured
If a worker is fully insured under Social Security, there is no additional significance to being currently insured. However, if a worker is not fully insured, certain survivors benefits are still available if a currently insured status exists. To be currently insured, it is only necessary that a worker have credit for at least 6 quarters of coverage out of the 13-quarter period ending with the quarter in which death occurs.

Disability Insured
To receive disability benefits under Social Security, it is necessary to be disability insured. At a minimum, a disability insured status requires that a worker (1) be fully insured and (2) have a minimum amount of work under Social Security within a recent time period. In connection with the latter requirement, workers aged 31 or older must have credit for at least 20 of the past 40 quarters ending with the quarter in which disability occurs; workers between the ages of 24 and 30, inclusively, must have credit for at least half the quarters of coverage from the time they turned 21 to the quarter in which disability begins; and workers under age 24 must have credit for 6 out of the past 12 quarters, ending with the quarter in which disability begins.

A special rule for the blind states that they are exempt from the recent-work rules and are considered disability insured as long as they are fully insured.