Mutual Benefits

Legal Eagles

Although more small businesses now offer benefits, the cold legal fact is that benefits are not usually required. The only federally mandated benefit is the Family and Medical Leave Act (FMLA), which requires employers to give workers up to 12 weeks off to attend to personal and medical matters ranging from drug treatment to the birth of a baby. That time off is unpaid, however, and FMLA applies only to businesses with 50 or more employees.

Complications quickly arise as soon as a business begins offering benefits. That's because key benefits such as health insurance and retirement plans fall under government scrutiny, and "it is very easy to make mistakes in setting up a benefits plan," says Kathleen Meagher, an attorney specializing in benefits at Landels Ripley & Diamond LLP in San Francisco.

And don't think nobody will notice: "The IRS can discover in an audit that what you are doing does not comply [with regulations]. So can the U.S. Department of Labor, which has been beefing up its audit activities," warns Meagher. Either way, a goof can be very expensive. "You can lose any tax benefits you have enjoyed, retroactively, and penalties can also be imposed," she says.

The biggest mistake? "Leaving employees out of the plan," says Meagher. Examples range from exclusions of part-timers to failing to extend benefits to clerical and custodial staff. A rule of thumb is that if one employee gets a tax-advantaged benefit--meaning one paid for with pretax dollars--the same benefit must be extended to everyone. There are loopholes that may allow you to exclude some workers, but don't even think about trying this without expert advice.

Such complexities mean it's good advice never to go this route alone. You can cut costs by doing preliminary research yourself, but before setting up any benefits plan, consult with a lawyer or benefits consultant. An upfront investment of perhaps $1,000--the amount Meagher says she typically charges for a consultation--could save you far more money down the road by helping you sidestep expensive potholes.

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This article was originally published in the February 1997 print edition of Entrepreneur with the headline: Mutual Benefits.

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