Up until a few months ago, I worked as a director of compliance for a health and welfare benefits consultancy where I would have frequent conversations with external counsel, especially regarding the "always-so-easy-to-understand" worlds of ERISA and Section 125. Whenever I spoke to one attorney in particular, Marilyn Monahan of Monahan Law Office, we always wondered why so many employers were not compliant in critical areas, especially when many already worked with attorneys and consultants who could assist with the necessary corrective action.
Many employers don't realize that ERISA has two separate plan documentation requirements: the plan document and the summary plan description. The plan document is the legal document that establishes and governs the plan. The SPD - which is distributed to plan participants - summarizes the legal terms in the plan document using language that can be understood by the average plan participant. While the SPD is distributed to plan participants, the plan document does not have to be, but must be provided if a participant asks for it.
Plan document vs. SPD
The plan document must, among other terms, name the plan's fiduciaries, provide a procedure for establishing and carrying out a funding policy, describe any procedure under the plan for allocation of responsibilities for the operation and administration of the plan, provide a procedure for amending the plan and identifying the persons who have the authority to amend the plan (this reserves the right to alter, reduce or eliminate benefits in the future) and specify the basis on which payments are made to and from the plan. These mandatory terms are almost never addressed in full in the documents provided by the insurer or HMO.
Many employers believe that the certificate booklets or evidences of coverage provided by the insurer or HMO include all the terms required by ERISA. But the obligation to comply with ERISA falls on the employer, not on the insurer. While the documentation provided by the insurer includes many essential plan terms, the documentation rarely includes all the terms required by ERISA.
The Department of Labor has issued detailed regulations describing all the terms that must be included in the SPD. Without all of these terms, the SPD is not compliant with ERISA and participants are not receiving all of the information they are entitled to under the law.
In order to satisfy ERISA's SPD requirements, the employer can draft a "wrap" SPD. The wrap document incorporates the insurer/HMO's certificate booklet or evidence of coverage, and then adds any terms required by ERISA that are not included in the insurer's documentation.
The entire package - the wrap SPD along with the certificate booklets and evidence of coverage - is then distributed to eligible plan participants.
Cafeteria plan documents
Whenever an employer offers an employee a choice between a taxable and a nontaxable benefit, the employer has created a cafeteria plan. For example, if an employer offers employees a choice between either cash (such as salary, a taxable benefit) or paying pretax the employee's share of the premium for health insurance (a nontaxable benefit), the employer has created a cafeteria plan. Cafeteria plans must be adopted and maintained pursuant to the requirements of Section 125 of the Internal Revenue Code and related regulations issued by the IRS.
A cafeteria plan must be in writing and it must be operated in accordance with the written plan document. Under the governing rules, the cafeteria plan document must set forth the rules for eligibility to participate, describe the procedure for making elections, provide that all elections are irrevocable (subject to the permissible status change rules that may be included in the plan document), state how employer contributions may be made under the plan, specify the maximum amount of elective contributions, identify the plan year, and specify that only employees may participate in the cafeteria plan. The terms of the cafeteria plan must apply uniformly to all participants.
If the cafeteria plan includes a health or dependent care flexible spending arrangement, the written plan must include additional terms required by the regulations, such as explaining the application of the uniform coverage rule and the use-it-or-lose-it rule.
The cafeteria plan document must be adopted and effective on or before the first day of the cafeteria plan year to which it relates. Amendments to the cafeteria plan also must be in writing and adopted prospectively.
What happens if the employer doesn't have a written document for its cafeteria plan or the document doesn't contain all the terms required by the IRS? The tax benefits of having a cafeteria plan are lost. The employee's election between taxable and nontaxable benefits results in gross income to the employee, regardless of what benefit is elected and when the election is made.
Reasons to comply
There are four main reasons why it's in an employer's best interests to have fully compliant health and welfare plan documentation:
1. The law requires it.
2. Complete plan documentation can include terms and conditions that could be advantageous to the employer in the event of litigation or when administering the plan - terms and conditions which may not be included in the health insurer's documentation.
3. Failure to comply with IRS regulations for a cafeteria plan document could result in a loss of the tax benefits the plan was set up to achieve.
4. Under ERISA, plan fiduciaries must administer the plan in accordance with plan terms. If the plan terms are not in writing or are incomplete, it becomes more difficult to administer the plan. The plan documents outline the rights and the obligations of both the plan and the plan participants. When questions arise - such as who is eligible, what benefits are covered and when elections may be changed mid-year - the plan documents are the resource both the plan and the participants consult to find answers. Lack of documentation creates ambiguities, and ambiguities in plan terms could result in litigation.
In the spirit of looking at all of the employee benefits areas that require compliance, these three documents could be easily be labeled as the low-hanging fruit of the bunch. I would recommend you pick them as soon as possible.
Contributing Editor Ed Bray, J.D., is director of employee benefits for a major transportation company in Hawaii.
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