Glossary: Employee Benefits

Employee benefits are a crucial aspect of any employment arrangement. They encompass a range of offerings from health insurance and retirement benefits to sick leave and beyond. 

The legal terminology used when discussing employer-sponsored benefits can be confusing. Contact a local employment attorney for clear, straightforward guidance in plain language.

Before entering into any employment agreement, it is essential to understand the details of these plans and consider how they align with your needs and expectations. 

Findlaw has assembled a glossary of definitions of common employee benefit plans along with the terms often used in those plans. The legal dictionary below is separated into three categories with terms listed alphabetically in each section:

1. Health insurance plans
2. Retirement plans and pensions
3. Employee benefits in general

Glossary: Employer Health and Medical Plans

Below, you’ll find terms to know concerning health benefits with plain language descriptions.

Affordable Care Act (ACA): Also known as Obamacare, The ACA is a healthcare reform law that expands access to affordable health insurance coverage and reduces healthcare costs for individuals and the government.

Affiliation Period: A period of time that must pass before health insurance coverage provided by an HMO (Health Maintenance Organization) becomes effective. If a group health plan provides coverage to you through an HMO with an affiliation period, the affiliation period cannot be longer than two months (three months for a late enrollee) from your enrollment date.

During the affiliation period, the plan cannot charge you premiums. The HMO is not required to provide benefits.

Certificate of Creditable Coverage: A written certificate issued by a group health plan or health insurance issuer that shows your prior health coverage.

COBRA (Consolidated Omnibus Budget Reconciliation Act of 1985): COBRA provides rights to temporary continuation of group health plan coverage for certain employees, retirees, and family members. It does so at group rates when coverage is lost due to certain qualifying events. Learn more at FindLaw's page How Does COBRA Insurance Work?

COBRA Continuation Coverage: The temporary continuation of group health plan coverage available after a qualifying event to certain employees, retirees, and family members who are qualified beneficiaries. Those who are eligible may be required to pay for COBRA continuation coverage. You are generally entitled to coverage for a limited period (from 18 months to 36 months) depending on certain circumstances.

Coinsurance: A form of cost-sharing in health insurance where the insured pays a percentage of the cost of covered medical services after meeting their deductible. For example, with an 80/20 coinsurance plan, the insurance company covers 80% of the costs, while the insured is responsible for the remaining 20%. This arrangement continues until the insured reaches their out-of-pocket maximum for the policy period.

Copayment: Also called a copay, this is what you pay your healthcare provider upfront for a covered service. Copayment amounts are usually small and don’t count toward your plan’s deductible.

Covered Employee: An individual who is provided coverage under a group health plan subject to COBRA because that individual was employed by one or more persons maintaining the group health plan.

Creditable Coverage: Prior health coverage you have had in the past. This includes coverage under a group health plan, an HMO, an individual health insurance policy, or Medicare or Medicaid. This prior coverage was not interrupted by a significant break in coverage.

Department of Labor (DOL): The DOL enforces and administers laws related to labor and employment in the United States. The DOL oversees and enforces regulations such as the Employee Retirement Income Security Act (ERISA). The DOL ensures that employers follow these laws, protecting employees' rights to fair treatment and their access to employer-provided health benefits.

Drug Formulary: A list of all the medicines and prescription drugs covered by your group health plan.

Elect: When referring to health coverage, this means to choose, generally in writing, to participate in a group health plan.

Election Notice: Written notification that you are eligible for COBRA continuation coverage. This notice should explain how long you have to elect COBRA continuation coverage. The election notice should explain how much you must pay for coverage and when and to whom the payments are due.

Employee Organization: A collective group or union formed by employees to advocate for their interests in the workplace. These organizations may negotiate with employers to secure favorable health benefits packages for their members. An employee organization can also be an employee beneficiary association.

ERISA (Employee Retirement Income Security Act of 1974): ERISA is a federal law that establishes standards for pension retirement benefits and health plans offered by private employers. It sets guidelines for plan administration, disclosure, and fiduciary responsibilities. Learn more at FindLaw's What is ERISA? article.

Enrollment Date: The first day of coverage or, if there is a waiting period, the first day of the waiting period. If you enroll when first eligible for coverage, your enrollment date is often the first day of employment. If you enroll as a late enrollee, your enrollment date is the first day of coverage.

Exhausted COBRA Coverage: This means your COBRA continuation coverage has ended. This may be because the period that this coverage was available to you has lapsed. Additional reasons for the exhaustion of COBRA coverage are possible besides the time being up. You may have exhausted your coverage because your employer failed to pay the premiums on time.

Another reason may be that you no longer live or work in an HMO service area and there is no similar COBRA coverage available to you.

Fair Labor Standards Act (FLSA): The FLSA sets minimum wage, overtime pay, record-keeping, and youth employment standards for employees. The FLSA also indirectly impacts employer health benefits by establishing certain standards for employee compensation and working conditions.

Family and Medical Leave Act (FMLA): The FMLA allows eligible employees to take up to 12 weeks of unpaid, job-protected leave for specific family and medical reasons. This includes caring for a newborn, adopted, or foster child. It also applies to one's serious health condition or that of a family member.

Flexible Spending Account (FSA): A special savings account that allows employees to set aside pre-tax dollars (usually through payroll deductions) to pay for eligible medical expenses. These expenses can include costs like copayments, deductibles, prescriptions, out-of-network services, and other healthcare services not covered by insurance.

Group Health Plan: An employee benefit plan established or maintained by an employer, an employee organization (such as a union), or both. The plan provides medical care to employees and their dependents directly or through insurance reimbursement.

Health Savings Account (HSA): Similar to a Flexible Spending Account, an HSA allows employees to save money for medical expenses. HSAs are generally available to individuals with high-deductible health plans and allow contributions that can roll over from year to year. HSAs typically offer more flexibility in terms of account ownership and portability.

HMO (Health Maintenance Organization): A legal entity consisting of participating medical providers that provide or arrange for care to be furnished to a given population group. HMOs are used as alternatives to traditional indemnity plans.

HIPAA (Health Insurance Portability and Accountability Act): The Health Insurance Portability and Accountability Act of 1996 (HIPAA) is a federal law that prompted national standards to protect sensitive patient health information from being disclosed without the patient's consent or knowledge.

Late Enrollee: An individual who enrolls in a group health plan on a date after the earliest date on which coverage can begin under the plan terms or on a special enrollment date.

Newborns' and Mothers' Health Protection Act (Newborns' Act): The Newborns' Act is a federal law that prohibits group health plans, insurance companies, and HMOs from restricting a mother's or newborn's benefits for hospital stays to less than 48 hours following a vaginal delivery or 96 hours following delivery by cesarean section.

The attending doctor, nurse, midwife, or other licensed healthcare provider can discharge earlier after consultation with the mother.

Plan Administrator: The person responsible for managing the plan for the benefit of participants and beneficiaries. The plan administrator is a person designated by the terms of the plan. If the plan does not make such a designation, then the plan sponsor is often the plan administrator.

Plan Sponsor: The plan sponsor is the employer, the employee organization (such as a union), or both, that establishes or maintains a plan, including a group health plan.

Pre-Existing Condition: An illness or condition that was present before an individual's first day of coverage under a group health plan. Health insurers are now prohibited from charging higher rates or refusing coverage based on pre-existing health conditions. As a result, they cannot impose benefit limits for these conditions.

Preferred Provider Organization (PPO): A type of health insurance plan where you have a network of doctors, hospitals, and other healthcare providers. You can visit any provider in the network without a referral from a primary care physician. You may also go out of network, but it will usually cost you more.

Qualified Beneficiary: Qualified beneficiaries include covered employees, their spouses, and their dependent children who are covered under the group health plan on the day before a qualifying event. In certain cases, retired employees, their spouses, and dependent children may be qualified beneficiaries.

Any child born to, or placed for adoption with, a covered employee during a period of COBRA continuation coverage is a qualified beneficiary.

Qualifying Event: A specific life event that triggers a special enrollment period. This allows individuals to make changes to their health insurance coverage outside of the regular open enrollment period. Examples of qualifying events include:

• Marriage
• Birth or adoption of a child
• Loss of other health coverage
• Change in residence that affects eligibility for coverage

Significant Break in Coverage: A significant break in coverage is 63 consecutive days during which you have no creditable coverage. In some states, the period is longer if your plan coverage is provided through an insurance policy or HMO. Days in a waiting period during which you had no other health coverage cannot be counted toward determining a significant break in coverage.

Similarly Situated Non-COBRA Beneficiaries: The group of covered employees, their spouses, or dependent children who are covered under a group health plan maintained by the employer or employee organization. This group is receiving their benefits under the group plan and not through COBRA continuation coverage. They are situated to the circumstances of the qualified beneficiary immediately before the qualifying event.

Summary Plan Description (SPD): An important document that the plan administrator must provide to participants and beneficiaries. It explains what coverage the plan offers, how the plan operates, and the rights and responsibilities of participants and beneficiaries. Each SPD is different. If you need a copy of the SPD, contact your plan administrator.

Special Enrollment: Special enrollment is the opportunity to enroll in a group health plan when certain work or life events occur, regardless of the plan's regular enrollment dates. If certain conditions are met, special enrollment is available when:

• You, your spouse, or your dependents lose other coverage
• When you marry
• When you have a new child by birth, adoption, or placement for adoption

The plan must give you at least 30 days from the loss of coverage or from the date of the qualifying event to request special enrollment.

Waiting Period: The period that must pass before an employee or dependent is eligible to enroll under the terms of the group health plan. Days in a waiting period are not counted toward creditable coverage unless there is other creditable coverage during that time. Days in a waiting period are also not counted when determining a significant break in coverage.

Women's Health and Cancer Rights Act (WHCRA): WHCRA is a federal law that provides important protections for individuals who have undergone a mastectomy.

Wellness Programs: Wellness programs, within the context of employer health benefits, are designed to promote and support the overall health and well-being of employees. These programs often include activities such as health screenings, fitness challenges, smoking cessation programs, and nutritional education.

Glossary: Retirement Plans and Pensions

Below, you’ll find terms to know concerning retirement plans and pensions with plain language descriptions.

401(k) Plan: This is a retirement plan where an employee defers part of their income into a tax shelter. This means it grows tax-free until the employee withdraws it. The employer can match the employee's contributions.

After-Tax: Contributions made with income that has already been taxed.

Account Balance: The total money or assets in a retirement account. This balance includes contributions made by the participant and the employer. It also includes any investment gains or losses accrued over time.

Annual Contributions: The amount of money a person or employer contributes to the retirement account within a calendar year.

Annuity: A financial product that provides income payments over a specified period. This period is typically during retirement. A person can buy an annuity with a lump sum or through periodic contributions in a retirement plan. It provides a steady income to the person once they retire.

Benefit Accrual: The accumulation of retirement benefits over time. It represents the growth of retirement savings. It is based on factors such as the person's years of service, salary level, and participation in the plan.

Deferral: The act of postponing or delaying a part of one's income to be contributed to a retirement plan.

Defined Benefit Pension Plan: A traditional pension plan that pays workers a specific monthly benefit at retirement. To be eligible, the employee must have worked at the company offering the pension for a set period. These plans either state the promised benefit as an exact dollar amount or specify a formula for calculating the benefit. This can also be referred to as a unit benefit plan.

Defined Contribution Plan: This plan involves the employer making regular contributions of a specified amount of money. In contrast to a defined benefit plan, it does not promise the employees any specific amount of retirement benefits.

The employee's retirement benefit will depend on how much was contributed to their account, and how the plan's investments performed over the years. Examples of this kind of plan include: 

• Profit-sharing plans
• Money-purchase plans
• Target-benefit plans
• Stock bonus plans
• Employee stock ownership plans

Eligible Employee: A person who meets the criteria set forth by the plan to take part in the retirement benefits offered.

Eligibility Requirements: Requirements may vary depending on the specific retirement plan. They often include:

• Age
• Length of service with the employer
• Employment status

Employee Retirement Income Security Act of 1974 (ERISA): ERISA is a federal law enacted to protect private employers' retirement and health benefit plans.

Employee Stock Ownership Plan (ESOP): A type of retirement plan that enables employees to become partial owners of the company they work for by acquiring shares of company stock. In an ESOP, the company contributes shares of its stock to a trust fund. This fund holds the shares on behalf of the employees. Over time, employees accumulate shares in their accounts as part of their retirement benefits.

Employer Contributions: The contributions made by an employer on behalf of their employees toward their retirement savings.

Employer Plan: A retirement savings plan established by an employer to provide employee retirement benefits.

Enrollment: The process by which employees sign up to take part in the employer-sponsored retirement plan.

Fiduciary: A person or entity legally obligated to act in the best interests of the plan beneficiary. This includes making decisions about investments, administration, and compliance with relevant laws and regulations.

Fixed Benefit Plan: In this kind of plan, the amount of retirement benefits is based on a formula that does not include the number of years the employee worked for the company. It could be a particular dollar amount based on some percentage of the employee's pay.

Keogh Plan: This is a qualified retirement plan for self-employed people. Contributions to this plan are tax-deferred. Employees can contribute 25% of their pretax income. A Keough Plan operates like a traditional pension.

You'll get an annual retirement benefit based on your previous salary. This is typically the average compensation of your three highest-paid consecutive calendar years. The annual benefit — your pension — has a cap that usually increases yearly. You can contribute 100% of your pretax income if it is your only retirement plan.

Lump Sum: A single payment a person gets from their account upon retirement or termination of employment.

Matching Contributions: When the employer agrees to match a certain percentage of the employee's contributions up to a specified limit.

Money Purchase Plan: A plan where the employer contributes on behalf of the employee. The employer makes fixed contributions to each employee's retirement account in a money purchase plan. This is usually based on a percentage of the employee's salary.

Normal Retirement Age: By law, an employer cannot dictate when an employee must retire as that would be age discrimination. The employer may create a pension plan based on the assumption that employees will decide to retire at some age, and the employer can decide what that age will be. Companies often pick age 65, although some pick 62 or 59.

Pension Benefit Guaranty Corporation: A federal agency that protects the retirement incomes of workers and retirees in private-sector defined benefit pension plans. It provides pension insurance for participants in covered plans. It also ensures they get their promised benefits even if their employer's pension plan becomes insolvent.

Plan Administrator: The person or entity responsible for overseeing and managing the day-to-day operations of the retirement plan. The plan document typically designates the plan administrator.

Plan Assets: The funds and investments held within the retirement plan.

Plan Benefits: The financial rewards or payments from participants' retirement accounts upon meeting certain criteria. These criteria are usually met on retirement or termination of employment. Benefits may include contributions made by the employee and employer. It also consists of any investment gains or earnings accumulated over the years.

Plan Participants: People eligible to participate in the employer-sponsored retirement plan. These are typically employees of the company. But, some plans may also allow former employees, beneficiaries, or other eligible people to take part.

Profit-Sharing Plans: A type of retirement savings plan established by an employer to share a portion of the company's profits with its employees. In a profit-sharing plan, the employer makes discretionary contributions to the retirement accounts of eligible employees.

These contributions are based on the company's profitability and performance. They are often given to employees based on salary or years of service.

Plan Sponsor: The employer or organization that establishes and maintains a retirement plan to benefit its employees or members. The plan sponsor handles creating and administering the retirement plan. This includes determining the plan's features, eligibility requirements, contribution limits, and investment options.

Plan Year: The 12-month period during which the plan operates. The plan year is typically defined in the plan document and may or may not coincide with the calendar year.

Portability: This term refers to an employee's ability to transfer vested benefits to an IRA or some other pension plan after they leave the company. Without portability, the employee could be subject to large tax bills.

Portability may also refer to an employee's ability to transfer eligibility for medical insurance coverage without facing coverage denials based on a pre-existing medical condition.

Qualified Retirement Plan: A business establishes a qualified retirement plan. The most common types of plans are:

• Defined benefit plans
• Defined contribution plans

Your contributions to a qualified plan do not get taxed until you withdraw the money. Any contributions made to the plan on your behalf by your employer are tax deductible.

Rollover: Transferring funds from one retirement account to another without triggering taxes or penalties.

Roth Individual Retirement Account: This is like a traditional IRA. But contributions to a Roth IRA are nondeductible. When you withdraw money from a Roth IRA in retirement, it will be tax-free. You can withdraw them tax-free and penalty-free after age 59 1/2. The account must also be open for five years.

Safe Harbor: A provision that allows employers to meet certain requirements set by the IRS for their retirement plans.

Salary Reduction: When an employee's salary gets redirected or withheld from their paycheck. This amount is then contributed directly to their retirement account. This contribution is often made on a pretax basis.

SIMPLE Plan: SIMPLE is an acronym for "savings incentive match plans for employees." It describes a plan in which employees can make tax-deferred investments and the employer makes matching contributions. The plan can take the form of an IRA or a 401(k) plan.

Simplified Employee Pension (SEP): In a SEP, the employer directly funds IRAs or annuities established by or on behalf of the employees.

Target-Benefit Plan: In this kind of plan, the employer has some idea of what participants should receive for retirement benefits and uses an actuarial formula to ensure that the target amount will be met by the time the employee is ready to retire. But, it does not promise a particular amount of benefits.

Thrift or Savings Plan: This kind of plan requires the participating employees to make contributions. The employer may make matching contributions but isn't required to do so.

Top-Hat Plan: A top-hat plan offers unfunded deferred compensation plans for upper management or highly compensated employees and is not subject to some provisions of ERISA. See the next term, Top-Heavy Plan, for more information.

Top-Heavy Plan: This plan provides benefits for key employees, such as officers or owners of the company, that are worth an additional 60% or more than the benefits offered to regular employees. A top-heavy plan may require shorter vesting periods for regular employees to balance things out. See Vesting.

Traditional Individual Retirement Account (IRA): A person, not a company, establishes an IRA. Under this plan, a person can contribute the following

• If you're under 50, the total that you can contribute is $7,000.
• If you're over 50, the total that you can contribute is $8,000.

Contributions to the IRA are deductible irrespective of the person's income. If the person has a company retirement plan, their rights to the IRA deduction may be limited. Traditional IRA earnings get taxed when the person withdraws them.

Vesting: The process by which contributions to a pension plan for a particular employee may no longer be forfeited. It usually requires that the employee be with the company for a specified period before they will be eligible for the benefits after retirement. Until then the employee is not vested.

If the employee quits or is fired, or if the company has layoffs, the employee may lose those benefits. The contributions are paid out in a lump sum and are subject to portability. 

Some plans provide for graded vesting. This means that an employee is vested over time so that each year a higher percentage of contributions are nonforfeitable until 100% are nonforfeitable. With graded vesting, the vesting period may be up to seven years.

Cliff vesting is a plan providing that an employee is not vested at all until the specified amount of time elapses. With cliff vesting, the vesting period cannot exceed five years.

Withdrawal Liability: If an employee takes money out of a retirement plan too early, they may be liable for income taxes and a tax penalty. The idea is to make early withdrawals unattractive so that funds will stay invested for retirement.

Glossary: Other Employee Benefits

The list below covers other terms used when discussing various employer-sponsored benefits.

Beneficiary: A beneficiary is usually a member of an employee's family who is covered by the employee-benefits plan, and who may receive benefits under the plan.

Cafeteria Plan: This is also called a Flexible Benefit Plan. A plan in which the employer offers a variety of different benefits and the employees choose those benefits that fit their individual needs. Examples of benefits offered in the cafeteria include:

• Group-term life insurance
• Dental insurance
• Disability and accident insurance
• Reimbursement of healthcare expenses

Disability Insurance: A type of coverage that provides financial protection to individuals by replacing a portion of their income in the event of a disabling illness or injury that prevents them from working.

Eligibility: Different plans have different requirements about who is entitled to participate in a plan. These eligibility requirements can include the employee's age or how long they have been employed by the company.

Fringe Benefits: Fringe benefits refer to additional non-wage compensation provided to employees as part of their compensation package. These benefits can include health insurance, retirement plans, paid time off, disability insurance, and company cars.

Full-Time Employment: This refers to a work arrangement in which an individual is regularly scheduled to work the standard or customary number of hours established by the employer for a full workweek, often 40 hours per week.

Hourly Wage: The amount of money a worker is paid for each hour of work performed, established through an agreement between the employer and the employee.

Insurance Carrier: A company that provides insurance coverage for employees as part of their benefits package. The carrier underwrites and manages the policies, which can include health, dental, vision, life, and disability insurance. Employers collaborate with insurance carriers to offer a range of benefits that meet the needs of their employees.

IRC: This is an acronym for the Internal Revenue Code.

Life Insurance: A contract where an insurer pays a beneficiary a sum upon the insured's death in exchange for premiums. It's often included in employer benefits to provide financial protection to employees' families in case of their death.

Minimum Wage: The legally mandated lowest amount of compensation that employers must pay to their workers for a specified period of labor. States can set minimum wages that are higher than the federal minimum wage.

Multi-Employer Plan: In this kind of plan, two or more employers pool their contributions for the benefit of their employees. The plan may be established and maintained according to the terms of a collective bargaining agreement between the employers and a labor union, but this kind of plan may also be set up for the employers' non-union employees.

Participant: Another way of saying employee, participant refers to an employee who is covered by or opts to participate in any employee-benefits arrangement.

Plan Sponsor: The entity that establishes and maintains a benefits plan. The plan sponsor is usually an employer, but may also be an employee organization created to offer benefits. If the plan is a multi-employer plan, the committee or other entity that established the plan is considered the plan sponsor.

Retirement Plan: A retirement plan provides retirement income or is a savings device in which contributions appreciate over time, with income taxes deferred until withdrawals are made when an employee reaches a certain age or takes money out before reaching that age.

Sick Leave: A workplace policy that allows employees to take time off from work with continued pay or benefits when they are ill or experiencing health-related issues.

Social Security: A government program that provides financial assistance, including retirement, disability, and survivor benefits, to eligible individuals based on their work history and contributions through payroll taxes.

Stock Bonus Plan: Shares of the company's stock fund this plan.

Summary Plan Description: This document summarizes the major features of an employee benefit plan:

• What kind it is
• How it's funded
• Who's eligible to participate
• Necessary steps to participate
• How to pay benefits
• And other details

Welfare Benefit Plan: A welfare benefit plan provides medical benefits and other non-pension benefits to employees and their families. The kinds of benefits offered are those provided to individual employees as money or services. These benefits can include:

• Various kinds of insurance
• Special arrangements for pre-paid legal services
• Scholarships
• Training program
• Education
• Daycare

In some cases, the employees can choose which benefits they would like to participate in, according to their individual needs. These are also known as cafeteria plans.

Workers' Compensation: Workers' compensation is a form of insurance that provides wage replacement and medical benefits to employees who are injured or become ill due to their jobs. Employers pay into a workers' compensation fund.

Maximize Your Benefits: Speak to a Lawyer

Consulting with an employment law attorney can be helpful when navigating the complexities of employee benefits packages. An attorney can help you negotiate and enforce benefits such as health insurance and retirement plans. They play a vital role in ensuring you're well-informed and can offer representation in case of disputes or issues related to employee benefits.