Considering the continued increase in healthcare costs

The average American spends a considerable amount of money on healthcare each year, and healthcare costs — premium increases, higher deductibles and copays, and soaring prescription drug prices — continue to rise.

To offset the rising cost of employee benefits, organizations are asking employees to assume a larger portion of the overall benefits tab. For example, in the all-important realm of healthcare costs, the typical employee’s contribution has risen considerably. Companies are now finding innovative ways for employees to “earn” a percentage of their benefits premium with programs such as committing to remain tobacco free or performing a health risk assessment.

Focusing more on mental health

Mental health has become a rapidly growing area of attention when it comes to employee benefits. With the hardships faced throughout the Covid-19 pandemic, employers and employees are recognizing and placing more concern on mental health than in the past. According to a 2022 study by The Conference Board, 88 percent of companies offer some sort of program that supports emotional well-being (including mental health resources and Employee Assistance Programs), up 23 percent from 2021.

Lifestyle Spending Accounts

A Lifestyle Spending Account (LSA) is an employer-funded benefit that provides employees funds for specific categories of goods that are generally outside the scope of what’s covered under a group health plan. LSAs may cover expenditures like fitness memberships, athletic equipment, home office expenses, and much more. Employers control the amount of funds they contribute and what types of expenses the funds can be used toward. In return, employees receive taxable financial support for areas they traditionally had to pay for themselves.

Social Security and Medicare

The Social Security tax is a percentage of gross wages that most employees, employers, and self-employed workers must pay to fund the federal program.

Payroll taxes finance Social Security and Medicare. Your employees typically contribute 7.65 percent of their gross take-home pay to fund both programs. Federal law obligates your company to match that amount. (The Social Security tax rate for those who are self-employed is 12.4 percent.) The first 6.2 percent of the tax that goes to the Social Security fund is assessed only up to a specific income ceiling — $160,200 in 2023. Any income over that limit isn’t subject to Social Security tax. No ceiling exists, at present, on the 1.45 percent Medicare tax. These rules are subject to change.

Check out Social Security For Dummies, by Jonathan Peterson (John Wiley & Sons, Inc.), for much more information on the complex rules surrounding Social Security.

Unemployment insurance

Unemployment insurance provides basic income for eligible workers who become unemployed through no fault of their own.

Individual states run the unemployment insurance program, which was established as part of the 1935 Social Security Act. The federal guidelines are rather loose. Except in a handful of states (Alaska, Pennsylvania, and New Jersey) that expect employees to pay a small percentage of the cost, employers pay for their workers’ unemployment insurance. The cost to employers is generally based on the company’s experience rating (how frequently its former employees receive payments through the program). The more people you lay off, the greater your potential assessment becomes.

The experience-rating method of calculating employer unemployment costs is yet another reason for your company to avoid cycles of new hires in flush times and layoffs whenever demand sags. It’s also a good reason to use contingent workers during times of reduced business or to handle normal workload peaks and valleys. In addition, it’s important for a company to regularly pay unemployment insurance taxes. This fact may seem obvious, but in recent years, a number of companies have behaved illegally.

Workers’ compensation

Workers’ compensation provides protection for workers who suffer injuries or become ill on the job, regardless of whether the employee or the employer was negligent. It pays medical bills, provides disability payments (income replacement) for permanent injuries, and distributes lump-sum death benefits.

Workers’ compensation is an insurance program. Some states permit private insurance — if your company can demonstrate financial capability to state authorities, you may choose to be self-insured. Other states require you to contribute to one state-managed fund; still others permit a mixture of state and private insurance. Generally, however, contributory systems are experience rated: The number of claims that employees file against your company determines your rates. Good workplace health and safety practices, therefore, pay off.

Some employers, especially those with large numbers of remote team members, have integrated workers’ compensation programs into health-insurance programs. Keep in mind, though, that certain laws — federal and state — can make such a combination difficult to manage. As with other areas related to employees who work away from a specific office, thoroughly explore this option with an attorney.

If you include the 50 states, the District of Columbia, Puerto Rico, and the Virgin Islands, at least 53 separate workers’ compensation programs currently exist. You need to consult with your lawyer, insurance carrier, and state officials to determine your own liability. Workers’ compensation, with very limited exceptions, is a no-fault system: No matter who’s to blame for the illness or injury, it still covers the employee. If your company operates in more than one state, you must adjust your workers’ compensation policies according to local rules. If you run into legal problems, you most likely must retain lawyers licensed to practice in the state in which the problem arises.

Family and Medical Leave Act (FMLA) Protection

The Family and Medical Leave Act (FMLA) entitles eligible employees of covered employers to take unpaid, job-protected leave for specified family and medical reasons. Covered employers are private-sector employers with 50 or more employees, and all public employers. The FMLA provides eligible employees with up to 12 weeks of job-protected, unpaid leave during a 12-month period for qualifying family and medical reasons, and to handle qualifying exigencies; as well as up to 26 workweeks of unpaid, job-protected leave in a single 12-month period under the Military Caregiver Leave. Qualifying reasons would include the birth of a child, dealing with a serious or chronic personal illness, or caring for an immediate family member with a serious or chronic illness.

Note: In addition to benefits under the FMLA, some states and local jurisdictions require paid/unpaid family leave and/or paid/unpaid sick and safe leave. Employers must review their obligations under applicable state and local laws.

Looking at the flavors of health insurance

The number of healthcare plans available today is enough to fill a book — a book that, given the changing world of healthcare, would no doubt be out of date quite quickly. Following is a bit of information on the three most prevalent healthcare plan options. Bear in mind that these options (in fact, the entire structure of employer-provided healthcare) may change rapidly, given the pressure on companies to control healthcare costs.

Weighing the options

In recent years, many companies have altered the options they offer. The traditional fee-for-service plans are still available, but most companies today make it most advantageous for employees to choose HMOs and PPOs, which are also known as managed-care programs. HMOs and PPOs provide the same benefits as the traditional fee-for-service plans but set limits on which practitioners and which facilities employees on the plan can use to receive maximum benefits. Some managed-care programs provide no benefits at all if employees go outside the approved networks.

When deciding which type of plan to carry for your employees, you need to consider the following factors:

• Extent of coverage: The procedures that health insurance plans cover can vary widely, but most plans are required to provide coverage for essential health benefits. Plans offered by employers with 50 or more full-time employees need to provide affordable minimum essential coverage at minimum value in order to avoid the employer shared responsibility penalty under the ACA.
• Quality of care: The quality of medical services that members of managed-care programs receive has become an issue today for an obvious reason. Employees covered by these plans are obliged to use only those physicians or facilities designated by the plan’s administrators. Therefore, you must make sure that any managed-care program you choose has high standards and a quality reputation. In addition, check to see whether the National Committee for Quality Assurance (www.ncqa.org) certifies that program.
• Cost: In shopping for your company’s health insurance, keep in mind that you always get exactly what you pay for, regardless of the particular option you choose. Insurers generally base their pricing on three factors:
  • The number of people the plan covers
  • The demographics of your workforce (average age, number of children, and so on)
  • The amount of deductibles and co-payments
• Ease of administration: A key factor in your choice of insurance carriers is the ease with which you can administer the program. The best plans, for example, offer an easy-to-use website.

Although you can save some money by using in-house resources to handle administration, servicing your benefits can require a major commitment of staff time and financial resources. If you decide to assume this responsibility, make sure that you have the administrative ability.

Rising costs: Staying ahead of the game

The good news about contemporary healthcare is that society takes its well-being very seriously. People of all ages are leading healthier and longer lives. But a major part of taking better care of themselves means more trips to doctors for examinations, more preventative procedures, and when necessary, surgery. All these factors point to a pragmatic financial reality: Healthcare costs will continue to rise. The numbers bear this out. The average costs that U.S. employers pay for their employees’ healthcare will increase 6.5 percent to more than $13,800 per employee in 2023, up from $13,020 per employee in 2022, according to professional services firm Aon.

The message here appears to be this: Don’t expect the cost of keeping employees healthy to level off any time soon.

In many ways, issues related to healthcare strike right to the core of a company’s responsibility to its employees. And there’s no question that, depending on culture, history, and financial resources, different companies approach the matter of healthcare in different ways. Some see increased government involvement as an answer to rising costs. Others point to a benefit realignment in which employees bear more of the responsibility for healthcare costs and provider choices. You need to keep up with all these developments but also understand what companies are currently doing to contain healthcare costs.

One key step is to encourage employees to stay healthy. Conducting regularly scheduled wellness seminars; distributing literature; and offering a wealth of information on topics such as stress management, nutrition, sleep, and other health-related subjects can go a long way toward decreasing healthcare costs. Some large companies go further, building on-site facilities that offer exercise equipment and even spa services. Some even provide financial incentives for employees who quit smoking, lose weight, or maintain a regular exercise schedule. Smaller firms can take many of these actions, perhaps including discounts on memberships at local health clubs. Be aware, though, that wellness programs are heavily regulated, and there are separate rules under ERISA, HIPAA, the ACA, the ADA, GINA, the Internal Revenue Code, and state law that may come into play in designing a workplace wellness program. Work with a knowledgeable benefits lawyer to confirm that your program complies and that proper notices are issued to your employees.

This commitment to ensuring a healthy employee base fits in with much of what I cover in this chapter. HR can play an important role in creating and nurturing a culture where employees are urged to take good care of themselves. Be on the lookout, for example, for managers and employees who work themselves to the brink of exhaustion and end up getting sick. Although dedication is valued, rarely is a short-term productivity gain worth the long-term expense.

Retirement plans

The business environment has changed radically in a single generation. Rarely do you see cases of one employee working at a single company for an entire career. In response, retirement plans have become much more flexible and portable. And because many companies no longer offer defined benefit (for example, corporate pension) plans, employees are seeking ways to personally remain in control of this important aspect of their careers and financial security.

Retirement plans that companies offer their employees generally fall into two categories:

• Defined benefit plans: In a defined benefit plan, employees know the amount they’ll get out of it (the benefit). The company chooses how to invest its employees’ money and guarantees the amount the employee will receive at retirement. The most common type of defined benefit plan is a traditional pension plan.
• Defined contribution plans: In a defined contribution plan, employees know how much they put in (the contribution) but don’t know how much they’ll eventually be able to take out. Typically, employees choose from a list of available investment vehicles and direct the investment of their retirement account. The payout depends on how those vehicles have performed when the time comes to make withdrawals. The most common type of defined contribution plan is a 401(k) plan.

Companies can offer a hybrid of defined benefit and defined contribution plans. An example is a cash balance plan, which combines some of the elements of a 401(k) plan and a defined benefit plan, such as a pension. According to the U.S. Bureau of Labor Statistics, the individual account feature of a cash balance plan makes it resemble a defined contribution plan. From an employer perspective, however, these plans are defined benefit plans because the employer doesn’t actually fund the individual accounts but rather keeps a common fund sufficient to pay all future benefits.

Defined benefit plans

Generally limited to large, established companies, defined benefit plans provide a fixed benefit after retirement, usually calculated by a formula that considers salary level and length of service. The employer can fully fund these plans (noncontributory) or require employee contributions (contributory).

Advantages: Employees can count on a fixed, set amount of retirement income. The plan encourages employee loyalty and retention.

Disadvantages: These plans aren’t generally portable — employees can lose some or all benefits by changing jobs. The funding obligations for these plans vary depending on numerous factors and can fluctuate significantly over time. Administrative costs can be high, too, and pension liabilities can significantly affect a company’s balance sheet.

Overall, defined benefit plans are becoming much less common than they used to be. According to consultant Towers Watson, defined contribution plans (see the next section) are becoming nearly universal among employers. In a 2012 report, Towers Watson cited reasons why companies have shifted away from defined benefit plans, including competition, cost reduction, and an intent to improve employee satisfaction. (See “Employer contributions to retirement plans,” later in this chapter.)

Defined contribution plans

Defined contribution plans are the primary alternative to defined benefit plans and basically involve individual accounts for each participant. The 401(k) plan is the classic defined contribution plan, but others are profit-sharing plans and employee stock ownership plans (ESOPs).

Employees can contribute their income to a 401(k) fund, deferring taxes until they withdraw the income (when, presumably, they’ll be in a lower tax bracket). There is an annual limit on the amount employees may contribute, with a higher limit for older employees to “catch up” on their retirement savings. For example, for 2023, employees may contribute up to $22,500 into a 401(k) plan, and employees who are age 50 and older can contribute another $7,500. The plan may be designed with additional limits as well. If the plan document permits plan loans, employees may borrow within certain limits against their investment accounts. The plan may permit certain other withdrawals while the employee is still employed, for example, starting at age 59½. Some companies augment or match what their employees set aside in defined contribution plans. (See “Employer contributions to retirement plans,” later in this chapter.)

Advantages: These plans are highly popular with employees. They also offer favorable tax treatment, lower administrative costs than traditional pension plans (usually), and portability — employees can take most or all funds with them when they change jobs.

Disadvantages: These plans offer no guaranteed payouts. Investment risks fall on employees. Employees face heavy tax penalties (10 percent) for early withdrawals unless for limited reasons, such as disability.

Many employees are now offering a Roth 401(k) in additional to the traditional 401(k) plans. Traditional 401(k) contributions grow on a tax-deferred basis, while Roth 401(k) dollars grow completely tax-free. That’s good news for your team members who are contributing to a Roth 401(k) — once they put money into their account, they’re done paying taxes on it.

Employer contributions to retirement plans

As employers replace their defined benefit plans with defined contribution plans at only a portion of the cost — and potentially only part of the benefit — many employers make contributions to a profit-sharing or 401(k) plan. According to the Society for Human Resource Management, a company has a number of options in the way it goes about this: no contribution, nonelective contributions, or matching contributions. A nonelective contribution is one an employer makes regardless of whether the employee contributes to the plan.

See the online tools for a 401(k)-plan summary called “A Look at 401(k) Plan Fees,” one of many publications addressing retirement planning that is available from the U.S. Department of Labor’s Employee Benefits Security Administration

ERISA and other legal issues

Your company is under no legal obligation to provide a retirement plan for your employees. If you do offer a plan, however, you’re subject to the regulations of ERISA — the Employee Retirement Income Security Act of 1974.

Since its passage, ERISA has created significant administrative requirements that small businesses often feel the most. Subsequent laws have modified some of ERISA’s provisions. In addition, the Internal Revenue Code imposes detailed requirements on all retirement plans, both plans that qualify for favorable tax treatment and retirement plans that provide deferred compensation for executives and other highly-paid employees. For example, qualified pension or profit-sharing plans you offer need to meet the following requirements, among many others:

• The plan can’t exclude most employees who are older than 21 or require an employee to complete more than one year of service in order to participate in the plan.
• Employee contributions must be 100 percent vested at all times.
• Vesting for employer contributions must fall into one of the following two categories:
  • Cliff vesting: Under this vesting approach, the employer’s contributions aren’t vested at all until a stated number of years. At that time, the employer’s matching and other contributions become the complete (100 percent) property of the employee.
  • Graded vesting: Under this vesting approach, the employer’s matching and other contributions become the property of the employee in increments until the employee is fully vested. After a stated number of years, employees are permitted to own a certain percentage until full vesting occurs.
• You must fund qualified retirement plans at least annually, with defined benefit pension plans’ funding requirements calculated on the basis of future obligations.
• Also, in the case of a defined benefit pension plan, your company must be part of and pay for ERISA’s government insurance fund to help protect employees from the possibility of the pension plan dissolving.
• Special rules apply when your retirement plan is invested in your company stock.
• You must meet ERISA standards for the people who administer the program. As noted earlier, ERISA’s fiduciary duties apply to anyone who exercises discretionary control over the plan or its assets. That means that all decision-makers are subject to ERISA’s exacting requirements. Individuals who breach their duties or engage in certain prohibited transactions with benefit plans can be held personally liable.
• Employers must report pension operations to the government and inform employees of their pension rights and the status of their pension plan. All plans are required to file an annual report on the Form 5500, filed through the Department of Labor’s eFast system.

Dental insurance

Dental insurance has become an increasingly popular employee benefit and is expected by most employees. In 2018, 79 percent of the U.S. population had dental benefits, the majority of which were sponsored by employers, according to the National Association of Dental Plans’ (NADP’s) 2019 “Dental Benefits Report: Enrollment.” The 2018 NADP “Survey of Employers” indicates employers also recognize the desirability of dental benefits, as 87 percent of those surveyed felt dental benefits are essential or a differentiator.

Companies sometimes offer dental care as part of a health-insurance package and occasionally as a separate policy or an add-on. Costs and deductibles vary widely by region and by extent of coverage.

Generally, these plans cover all or part of the cost of routine checkups, fillings, and other regular dental procedures. They also may cover orthodontics or extensive restorative dentistry (usually with stated limits). Most dental plans have deductibles and typically require the employee to pay at least part of the cost of each visit or procedure.

Vision care

Most benefit plans restrict vision coverage to routine eye exams, with some discounts provided for glasses and contact lenses. Most also impose a ceiling on how much is covered toward the purchase of lenses, frames, and contact lenses. These plans, moreover, don’t cover serious eye diseases and other conditions that, in most cases, the employee’s regular health-insurance policy covers.

Family assistance

The much-documented increase in the number of two-income families, single working mothers, domestic partners, and employees who care for both children and aging parents has led to an accelerating demand for childcare and eldercare assistance from employers. You can expect the need to intensify in the years ahead. The following list describes some ways in which companies provide this benefit:

• Childcare: Beyond offering flexible schedules for employees with young children, some companies provide on-site childcare (daycare). This is a great idea in theory — the convenience to the working parent is obvious — but only a handful of companies provide a daycare facility at the work location itself. The big problem is cost — liability insurance, in particular. Another obstacle is that state and county authorities extensively regulate on-site childcare centers, including the amount of play area required and the ratio of childcare workers to children.
• Eldercare: As people live longer, many employees must care for their aging parents or other relatives. As a result, some businesses are providing eldercare benefits to help employees meet these obligations. Support ranges from partial reimbursement for eldercare specialists and emergency in-home care to allowing employees to enroll adult family members in their healthcare plans.
• Contracted daycare for children and seniors: The company contracts with one or more outside providers to provide services for the children and parents of employees. This approach is becoming more prevalent, but it also mandates a good deal of responsibility. When your company selects a particular provider, you vouch for that provider’s quality of care and services.
• Vouchers: Vouchers are simply subsidies that you pay to employees to cover all or part of the cost of outside childcare. Voucher systems are the simplest form of childcare assistance to administer.
• Dependent care reimbursement accounts: These accounts enable an employee to use pretax dollars to pay for dependent care.
• Accessible fertility benefits: These are typically part of the group health plan. Sixty percent of employees said that family-forming and fertility issues have impacted their work performance, according to the National Infertility Association, and 77 percent said they’d stay with their employer at their company longer if fertility benefits were offered.
• Adoption assistance: Many companies offer adoption assistance (which can be nontaxable to some degree) and surrogacy benefits (which are taxable). Both are non-ERISA benefits and outside of the group health plan.

Time off

Although many employees take the practice for granted, paying employees for days they don’t work — whether for holidays, vacation, sick days, or personal days (now often lumped together as paid time off (PTO) — is an important benefit that your employee handbook needs to spell out. Each company has its own philosophy, but the following list offers general observations about paid days off:

• Most companies provide employees with a fixed number of paid holidays per year, such as New Year’s Day, Independence Day, Thanksgiving, Christmas, and so on.
• The number of vacation days granted each year may vary by length of service. According to the Bureau of Labor Statistics in 2021, more than one-third of private industry workers received 10 to 14 days of paid vacation after one year of service. After ten years of service, 33 percent of private industry workers received between 15 and 19 days of paid vacation. In both cases, the remaining workers received fewer vacation days.
• Vacation accrual policies differ widely from one company to the next. Some companies enable their employees to bank vacation time. Others require employees to take all vacation time during the year in which they earn it. The more popular option is to enable employees to accrue vacation time, but be careful — this policy can leave you with huge liabilities for unused vacation time that you may need to pay in cash if the employee retires or leaves your company. Where lawful, hedge your bets by capping the maximum amount that can accrue.
• Some companies combine sick time, personal time, and vacation time into a single paid-time-off program.

The most important point here is that state authorities heavily regulate employee time off. In some states, for example, the law requires companies to allow employees who don’t use accrued vacation time in a single calendar year to carry it over to the next year. In such states, vested vacation benefits are treated as a form of wages, so that a policy of “use it or (eventually) lose it” amounts to the failure to pay wages in violation of wage and hour mandates. In other states, this type of policy is permissible. Make sure to consult legal counsel regarding the lawfulness of your policy in the state(s) in which you operate, as well as potential tax issues that may arise when employees are provided a choice as to whether to roll over unused PTO.

Leaves of absence

A leave of absence is an arrangement whereby employees take an extended period of time off (usually without pay) but still maintain their employment status. They resume their normal duties when the leave is over. Employees either request or are granted leaves of absence for a variety of reasons: maternity, illness, education, travel, military obligations, and so on.

When a particular law doesn’t apply to a leave of absence, the specific policies you adopt regarding such leaves of absence are within your discretion. In such cases, it’s up to you to determine how long employees can stay away from the job without jeopardizing their employment status. You decide what benefits will be maintained and what job, if any, will be guaranteed them when the leave is over. For benefits subject to ERISA, such as all retirement plans and welfare (medical, dental, vision, life, disability, and so on) benefits plans, the continuation of benefits during a leave of absence is governed by the terms of the written benefit plan documents. In addition, specific laws, such as the Affordable Care Act (ACA), the Consolidated Omnibus Reconciliation Act (COBRA), and the Family and Medical Leave Act (FMLA) can apply and impose requirements on continued eligibility for certain benefit plan coverage during a leave of absence.

However, very often, the law governs a leave of absence. For example, many leaves of absence related to certain military circumstances and family and health situations are covered by the federal Family and Medical Leave Act (FMLA) and, often, analogous state leave laws. The FMLA, passed in 1993 and amended in 2008, applies to companies with 50 or more employees. Eligible employees are entitled to take up to 12 weeks unpaid leave per year for any of the following reasons:

• To care for newly born or newly adopted children (note that this right extends to both parents)
• To care for a child, parent, or spouse with a serious health condition
• To attend to a serious health condition that makes the worker unable to perform their job
• Because of any qualifying exigency arising out of the fact that the spouse, son, daughter, or parent of the employee is on covered active duty (or has been notified of an impending call or order to covered active duty) in the armed forces

Also, the FMLA requires covered employers to grant an eligible employee who is a spouse, son, daughter, parent, or next of kin of a current member of the armed forces (including National Guard or Reserve) with a serious injury or illness up to 26 workweeks of unpaid leave during a single 12-month period to care for the service member.

Under FMLA regulations, you must maintain the employee’s health coverage, at the same level, under any group health plan for the duration of the unpaid leave, and you must restore the employee to the same or equivalent job when they return. The law also requires you to post and deliver notices advising workers of their rights under the law. Note that various states may have similar family and medical leave and/or pregnancy and/or baby-bonding leave requirements, while other states (California and Connecticut, for example) provide greater leave rights or benefits to eligible employees. The FMLA imposes requirements on the administration of other benefits as well that may require continuing to give the employee credit for service while on an FMLA leave of absence, and continuing benefit eligibility to the same extent as the employer does for other types of leaves.

A leave of absence, with job restoration at the end of the leave, may be required as a form of reasonable accommodation to disabled employees under the Americans with Disabilities Act (ADA) and/or under equivalent state laws. Also, if an employee requests leave time in connection with a disability, and your company is covered by the ADA, you have a legal duty to engage, in good faith, in an interactive process (discussions and so on) with the employee. This process is aimed at identifying whether your company can provide a reasonable accommodation to enable the employee to perform their essential job functions — and that one accommodation may end up being a leave of absence. A lawyer can help you in this area, including the related question of what, if any, benefits must be continued during the period of a leave that is provided as a reasonable accommodation. Also consult an experienced lawyer if you are unclear, in any given situation, whether a particular leave of absence may implicate legal leave of absence protections.

See the online tools for the following federal FMLA forms:

• Employee Rights and Responsibilities Under the Federal Family and Medical Leave Act
• Certification of Health Care Provider for Employee’s Serious Health Condition (Federal Family and Medical Leave Act)
• Certification of Health Care Provider for Family Member’s Serious Health Condition (Federal Family and Medical Leave Act)
• Certification of Qualifying Exigency for Military Family Leave (Federal Family and Medical Leave Act)
• Certification for Serious Injury or Illness of Covered Servicemember — for Military Family Leave (Federal Family and Medical Leave Act)
• Notice of Eligibility and Rights & Responsibilities (Federal Family and Medical Leave Act)
• Designation Notice (Federal Family and Medical Leave Act)

Sick days

Formal sick leave policies generally limit how many sick days the company is willing to pay for (anywhere from 6 to 12 days per year). In addition, companies usually impose a limit on the number of sick days that employees can take in succession (after which employees may be entitled to nonpaid leave of absences). Most companies have short-term disability plans that kick in either immediately following an accident or on the eighth calendar day after the onset of an illness. Short-term disability ends after a predefined interval (typically either three or six months after it has started), at which point long-term disability may begin.

Sometimes companies offer a reward for employees who don’t use their allotment of sick days — for example, a cash payment for a percentage (usually half) of an employee’s unused sick leave at the end of the year or if they leave the company. Many companies have choice-time-off (CTO) or personal-time-off (PTO) plans that combine vacation and sick days.

Failure to formulate and communicate to all employees a formal sick-day policy can be dangerous to the health of your company. If you have a loosely defined policy that sets no limits on paid sick days, for example, you may run into legal problems if you ever decide to discipline or fire an employee who’s clearly abusing your guidelines. The employee may argue that you treated them more harshly because of a protected status (like their religion or nationality) than you treated other employees who did not have that same protected status. Without a record of consistently administering a sick-day policy, you may have a more difficult time defending against such a discrimination claim.

Both the federal FMLA and the federal ADA (and/or similar state laws) may be implicated if employees who used paid sick days in connection with FMLA absences or for reasons related to disabilities are disqualified from a cash reward due to such absences. Also, some states require employers to allow employees to take a portion of their sick days to care for ill family members. An attorney can help you analyze these issues.