Understanding Employee Benefits Law: Key Compliance Rules Every Employer Should Know

Employee benefits compliance continues to be one of the most complex, and high-risk, areas for employers to navigate. From Affordable Care Act (ACA) requirements to cafeteria plan rules and emerging litigation around voluntary benefits, even well-intentioned employers can find themselves exposed to unexpected penalties and fiduciary risk.

In our recent webinar, “Understanding Employee Benefits Law: Key Compliance Every Employer Should Know,” with Brydon DeWitt, a nationally recognized employee benefits attorney with Williams Mullen. he walked through critical compliance topics every employer should understand to reduce risk and strengthen their benefits strategy.

Below is a high-level recap of what was discussed: 

Affordable Care Act (ACA): The Employer Mandate Explained

Although the ACA was signed into law in 2010, many employers still struggle with its employer mandate, also known as the Employer Shared Responsibility Payment (ESRP) or “pay or play” rules.

Who is an Applicable Large Employer (ALE)?

An employer’s ALE status is based on its prior calendar year workforce, not its current headcount.

Employers must calculate:

• The number of full-time employees (those averaging 30 hours per week or 130 hours per month), and
• Full-time equivalent employees (based on part-time hours divided by 120).

If the average is 50 or more, the employer is considered an ALE for the following year. Special rules apply for seasonal workers, which can exempt certain employers from ALE status if workforce spikes are temporary.

Controlled and Affiliated Service Groups

One commonly missed compliance issue is controlled group and affiliated service group rules. Related companies may be treated as a single employer under the ACA, meaning employees across entities must be aggregated when determining ALE status. This is especially important for businesses with shared ownership or related service entities.

Offering Coverage vs. Paying the Penalty

ALEs generally have two options:

1. Offer minimum essential coverage that provides minimum value and is affordable
2. Pay an ESRP penalty if coverage is not offered or does not meet ACA standards and at least one full-time employee receives a premium tax credit through the Marketplace.

Affordability is often the most challenging requirement. For 2026, employee contributions must not exceed 9.96% of household income, with employers able to rely on safe harbors such as:

• Federal Poverty Line
• Rate of Pay
• W-2 Wages
  
  

Measuring Full-Time Status: Look-Back vs. Monthly Methods

To avoid penalties, employers must correctly identify which employees are considered full-time and must be offered coverage.

• Look-Back Measurement Method: Uses a prior measurement period to “lock in” employee status for a future stability period, offering predictability and administrative ease.
• Monthly Measurement Method: Determines full-time status month-by-month, requiring ongoing monitoring and frequent eligibility changes.

Many employers prefer the look-back method due to the certainty it provides when planning benefits and budgeting.

Cafeteria Plans: A Common Compliance Gap

Most employers allow employees to pay for benefits like medical, dental, and vision insurance on a pre-tax basis, but many overlook the strict compliance requirements behind these arrangements.

Written Plan Documents Are Required

Under Section 125 of the Internal Revenue Code, pre-tax benefits must be offered through a written cafeteria plan document adopted before the start of the plan year. Retroactive fixes are generally not allowed, making this a frequent compliance failure uncovered during audits and transactions.

Election and Non-Discrimination Rules

Cafeteria plans also:

• Restrict mid-year election changes unless a qualifying life event occurs, and
• Must pass non-discrimination testing to ensure benefits do not disproportionately favor highly compensated or key employees.

Dependent Care FSAs, in particular, can be challenging due to strict testing requirements—so much so that some employers choose to discontinue them entirely.

Voluntary Benefits and Emerging Fiduciary Risk

One of the most timely and eye-opening topics covered was new litigation involving voluntary benefits, such as:

• Critical illness
• Cancer insurance
• Hospital indemnity plans

While often considered “employee-paid” and low risk, these benefits can trigger ERISA fiduciary responsibilities if employers are deemed to have endorsed them. Recent lawsuits filed in late 2025 allege excessive fees and commissions tied to voluntary benefits, drawing comparisons to the wave of 401(k) fiduciary litigation seen in prior years.

The key takeaway: employers should begin applying the same level of oversight and governance to voluntary benefits that they use for retirement plans.

Want to Learn More?

This blog only scratches the surface of the insights shared during the full session. If you want deeper explanations, real-world examples, and practical guidance on how to reduce compliance risk, we encourage you to watch the full webinar recording: 

🎥  Understanding Employee Benefits Law: Key Compliance Rules Every Employer Should Know