Sick Policy/STD-ERISA Plan?

BB · August 2001

Our company has a sick policy for full-time employees which allows the employee to earn 18 sick days per year with a cap of 90 days. The sick time accrued is rolled from year to year. Sick hours are NOT paid out when the employee leaves the company. It is our policy that the employee can use these accrued hours for STD, FMLA or for days when they are ill.

We recently started purchasing STD/LTD/Life and Accidental Death policies for all of our full-time employees. The STD policy pays 60% of the employees wage should they be injured. Because we have purchased these new policies, the company now wants to change the current sick policy to ten days per year with no rollover into the next year.

I am wanting to know if there are any ERISA rules (or any other legislation) we need to worry about if we make this change. I have read the "Top Ten Employee Benefit Mistakes" special report but I am still confused by definitions given.

According to the report, sick pay would be considered an "Unfunded payroll practice" yet the Supreme Courts 1987 decision regarding the definition of a plan also seems to describe our sick policy. The reason I say this is there are ongoing administrative obligations and in my opinion financial obligations as well since the hours can be cashed in for days missed.

Is there anyone out there that can help me with this?

Thanks in advance for you help,
BB in Oregon

Scott Ruth · August 2001

Yes, generally the Supreme Court has said that it is irrelevant how benefits are paid (through insurance, from the general assets of the employer, etc.) when determining whether an ERISA plan exists. However, these cases generally deal with situations not clearly addressed by a DOL rule. The DOL has a rule specifically addressing payroll practices which says that payment of an employee's normal compensation out of the general assets of the employer (i.e., "unfunded") for periods of sickness or other medical reasons is not a "plan" within the meaning of ERISA. The regulation is 29 CFR 2510.3-1(b). To the extent your sick day program pays normal compensation through regular payroll, it is a "payroll practice" not subject to ERISA.

That being said, I think there are many states that restrict the ability of an employer to "cut back" an employee's accrued sick leave. I do not know if Oregon is one (you should check out [url]www.boli.state.or.us[/url] for employer assistance or contact an Oregon employment attorney), but if it is then depending on the law you may be able to reduce the amount the employees will get in the future so long as you do not take away any that the employees have already earned under the old system. I think even many employers in states that do not have such laws do it this way because it looks fairer to employees.

On a final note, once you purchase insurance to provide benefits, you generally will have created an ERISA plan. Thus, your STD/LTD/Life/AD&D plan(s) is/are likely to be ERISA plan(s) and you should make sure you comply with SPD distribution, annual Form 5500 filings, etc. as outlined in the Top Ten Employee Benefits Mistakes.

BB · August 2001

Scott,
Thank you for taking the time to answer my questions. I have used the Oregon Bureau of Labor link you supplied in the body of your response to put the question to them regarding Oregon law.

Thank you again for your help,
BB in Oregon

Sick Policy/STD-ERISA Plan?

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