Question of the Month

Question: What requirements must be met for a payroll practice to fall under the Department of Labor (DOL)’s safe harbor exemption from ERISA?

Answer:  Certain welfare benefit plans that would otherwise fall under ERISA and are characterized as “payroll practices” are exempted by DOL regulations. To fall under the DOL’s safe harbor exemption, a payroll practice must: (1) be unfunded; (2) not pay more than an employee’s normal compensation; and (3) cover current employees only (e.g., cannot cover former employees, retirees, or other nonemployees). If the payroll practice meets these requirements, it will not be considered an ERISA plan.

Examples of practices that may fall under this exemption include the following:

• The payment of wages for work performed by an employee, including overtime pay, shift premiums, and holiday or weekend premiums.
• Income replacement, short-term disability, salary continuation, or paid medical leave programs (including sick pay), paid out of an employer’s general assets. These are self-insured programs and generally all are self-administered.
• Vacation or holiday pay.
• Pay during active military duty, jury duty, or testifying in official proceedings.
• Pay received during periods engaged in training in which the employee is performing little or no productive work (even if paid through government subsidies).

Pay received during sabbatical leaves or time off while pursuing further education.

More Information

For questions regarding this Legislative Update or any other related compliance issues, please contact your Burnham Benefits Consultant or Burnham Benefits at 949‐833‐2983 or inquiries@burnhambenefits.com.

This Legislative Update was prepared by the Baldwin Regulatory Compliance Collaborative (the “BRCC”), a partnership of compliance professionals offering client support and compliance solutions for the benefit of the Baldwin Risk Partners organization, which includes: Jason Sheffield, BRP National Director of Compliance; Richard Asensio, Burnham Benefits Insurance Services; Nicole L. Fender, the Capital Group; Bill Freeman, AHT Insurance; Stephanie Hall, RBA/TBA; Caitlin Hillenbrand, AHT Insurance; Paul Van Brunt, Baldwin Krystyn Sherman Partners (BKS); and Natashia Wright, Insgroup.

Burnham Benefits and the BRCC do not engage in the practice of law and this publication should not be construed as the providing of legal advice or a legal opinion of any kind. The consulting advice we provide is intended solely to assist in assessing its compliance with applicable federal and state law requirements, and is based on our interpretation of federal guidance in effect as of the date of this publication. To the best of our knowledge, the information provided herein, and assumptions relied on, are reasonable and accurate as of the date of this publication. Furthermore, to ensure compliance with IRS Circular 230, any tax advice contained in this publication is not intended to be used, and cannot be used, for purposes of (i) avoiding penalties imposed under the United States Internal Revenue Code or (ii) promoting, marketing or recommending to another person any tax-related matter.