September 4, 2018Client Alert

Common Benefit Pitfalls for Closely-Held Businesses – Part 1: Health Insurance

The old saying goes “no good deed goes unpunished”. This couldn’t be truer in many closely-held and family-owned businesses when it comes to employee benefits and compensation. This is the first in a series of five alerts that will explore a few of the common pitfalls – or shall we say “opportunities” – for closely-held companies when it comes to their benefits and compensation arrangements (and administration of the same).

This first alert will tackle some big ticket items surrounding health insurance. Often, even small or emerging organizations (i.e., those not subject to the federal health care law mandate to offer coverage) decide to offer health insurance to their workforces. This is true even in situations where no other benefits are offered, for example where a comprehensive benefit scheme is too costly or complicated to roll-out/administer.

In our experience, a few issues consistently arise with closely-held business and health insurance, including the following:

  • Offering coverage to ineligible employees/individuals. It isn’t uncommon to hear that someone –related to the family (either a family member or employee of the family in an unrelated capacity (e.g., the nanny)) is on the employer plan despite the fact that he/she does not perform much or any services for the company.

Here, let’s say Uncle Joe was a founder and worked 50 hours a week setting up the company, but hasn’t performed any real services for the company in a decade. His office is still there and he still collects a paycheck (an issue for a different alert). Bottom line, he likely is not eligible for coverage under the company benefit plan.

  • It is of paramount importance to carefully consider who is offered coverage – and when.
  • The starting place - read the contract/policy/certificate of coverage.
    • Often times, coverage will be limited to “Employees” – most often full-time employees. If someone is not truly an employee (e.g., is a contractor or an employee of a non-covered business) or is not working/performing services for the requisite amount of time (e.g. is not a full-time employee), then they cannot be offered coverage.
  • Continuing to keep someone on coverage (or simply not removing their name from the file transmitted to the insurance carrier to keep them on coverage) may seem “nice” and may go undetected for a period of time – however, that is not legally permissible.
    • In the event of an insurance audit (either random or following a catastrophic event triggering high coverage utilization), the carrier will identify when an ineligible employee/individual has been covered and may rescind coverage (even retroactively). This may leave the employer to essentially “self-insure” (from $1) the coverage provided to that ineligible individual from the date of ineligibility.


  • Providing “family office” benefits v. rank and file benefits. Under the current legal landscape, employers are generally not allowed to “distinguish” benefits – e.g., provide “better” benefits to family office or management employees than provided to the rank and file workforce. Note that the law in this area is complicated – and somewhat in flux – so guidance should be sought on this matter if different benefits are desired for different classes of employees.


  • Appropriately continuing coverage. The federal health insurance continuation law (COBRA) generally applies when an organization has 20 or more employees. State laws (referred to as “mini-COBRA laws”) often kick in at an even lower employee threshold.
    • As noted above, once someone fails to qualify as an eligible employee, their active coverage should be terminated (pursuant to the terms of the governing insurance contract). Where necessary, continuing coverage under COBRA or mini-COBRA laws should be offered to qualified beneficiaries (i.e., those eligible for coverage continuation). There are risks for continuing coverage post-employment without appropriate grounds under contract/COBRA.
    • Careful consideration should also be given to providing COBRA elections at the right time to avoid penalties.


  • Accessing or accepting health insurance information or information regarding employee coverage.
    • Employers should remember that the Health Insurance Portability and Accountability Act (HIPAA) comes into play with group health plan coverage and should be at the forefront of the minds of those who do or may interface with group health plan information. A few tips:
      • Employee enrollment information maintained by/for the plan sponsor is generally not covered by HIPAA, BUT other information (and privacy and security of same)  may be covered and highly regulated;
      • Training individuals who will/may access protected health information (PHI) is imperative;
      • Security assessment and safeguards also mandated; and
      • Additional state privacy laws exist, which may be more stringent than the HIPAA, and may apply in addition to HIPAA.

Offering health insurance in a closely-held and/or family-owned business may seem like – and may be – the “right thing” to do. However, this offer of coverage should not be undertaken lightly. Careful consideration should be given to structuring eligibility, administering active coverage (and continuation coverage) and managing processes for keeping information secure.

While it’s true that an insurance broker/consultant and/or PEO might handle some of this work, employers ultimately need to remain actively engaged to ensure the appropriate result for the employee population and the company.

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