Of all health insurance regulations, ERISA plan documentation rules can be the trickiest to navigate and the most catastrophically costly for those who take a wrong turn — even one that’s unintentional.
While last month’s column highlighted ways to steer clear of COBRA compliance pitfalls, this one focuses on what brokers and their small business clients must do to avoid ERISA violations.
The impact of ERISA and its compliance risks cannot be overstated. In fact, the latest industry estimates are that more than three-out-of-four employers are likely out of compliance. This means that more than 75% of today’s businesses could potentially face crippling financial and legal penalties for non-compliance.
As a quick refresher, ERISA sets minimum standards for most employee benefit plans and voluntarily-established pension programs. The federal law was enacted to protect benefit plan participants and beneficiaries by requiring plans to provide important, timely disclosures and information. Most private-sector organizations must comply with ERISA regardless of their number of employees.
ERISA can be a tricky regulation to navigate, and companies can be and are punished for even unintentional slip-ups. Here are seven common pitfalls to watch for:
1) SPD vs. SBC. A summary plan description informs participants about the terms and conditions of a plan, including benefits, rights and obligations. SPDs must be automatically sent to participants within specific time frames (more on these shortly). A summary of benefits and coverage, on the other hand, provides individuals with standard information and a uniform glossary so participants can compare health plans and then choose one. Failing to provide both documents (which can sometimes be integrated) to plan participants and beneficiaries is an ERISA rule violation.
2) Plan administrator responsibility. Compliance with ERISA falls upon the “plan administrator.” This is a designated person or, if no one is chosen, the plan sponsor (employer). The plan administrator must be identified in the SPD, and this designee cannot avoid liability for SPDs by delegating the responsibility to someone else. Importantly, most TPAs are not responsible under ERISA for the SPD. TPAs rarely agree to be the plan administrator, although they may assist (while under contract) in SPD drafting and distribution. Insurers are not responsible under ERISA for SPDs, either. They may help with certificates of coverage and benefit descriptions, but these are not SPDs. There is much to navigate here, so be crystal clear on responsibilities — and the legal and financial liabilities.
3) Plans subject to ERISA. Almost all ERISA group health plans (GHPs) must have an SPD. This includes plans with major medical benefits plus health FSAs, HRAs, dental, vision and many other wellness programs. It does not include HSAs and certain voluntary programs, plans from government or church employers or (technically) cafeteria plans. The point here is to remember that ERISA rules apply to much more than just core health benefits, so be sure to account for them.
4) Automatic SPD requirements. Be cautious here, as this can be a rule where an unintentional oversight can easily happen. All covered participants — i.e. an eligible employee or former employee including COBRA — must automatically receive SPDs. This is regardless of a formal participant request. Remember, an employee becomes “covered” on the date the plan states participation begins or the date a contribution is made, whichever is earlier. Also, be extra attentive when a participant dies or becomes incapacitated. Then automatic SPDs must go to spouse/dependents or another designated representative/guardian.
5) Style and format requirements. When it comes to SPDs, there is no magic formula and one size does not fit all. An SPD must be understandable to a company’s average employee. So a consulting firm whose workers mainly have advanced degrees may be quite different from an SPD prepared for a landscaping business that employs mostly individuals who did not finish high school. If plan benefits, limits, exceptions and restrictions are not plainly understood, employers can be cited and fined.
6) Compliant distribution methods. Here is another rule that can trip up some businesses. SPDs must be sent using a “reasonable” distribution method that ensures participants receive them. The most popular methods are first class mail and electronic delivery. However, employers must know their workers. For instance, if employee access to email is limited, a company must send the SPD by mail or hand deliver it within the workplace. While an employer does not need to prove actual receipt of an SPD, it must demonstrate reasonable effort.
7) Distribution timelines and translations. SPDs must be provided within 90 days for new participants and within 120 days for new plans. They then need to be furnished at least every five years in any material changes, or every 10 if there are none. An SPD does not need to be written in non-English language. However, translation assistance services must be made available by the employer. So while it does not need to be translated, there must be a translation assistance pathway contained within the document.
ERISA regulations can be complex and confusing to follow, and quite costly for those cited for non-compliance. Brokers and small business are wise to check with their compliance experts and resources to ensure they avoid a mistake that could cost tens of thousands of dollars, or even more.
In the next column, the spotlight will be on avoiding pitfalls related to employee handbooks.
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