Marc McGinnis, Vice President of National Sales at Word & Brown General Agency, recently presented a broker workshop on ERISA compliance and common pitfalls. What follows is a summary of Marc’s ERISA presentation.
Passed by Congress in 1974, the Employee Retirement Income Security Act (ERISA) is a federal law requiring employers to follow specific regulations regarding Health & Welfare (H&W) benefit plans.
Businesses must submit detailed and time-sensitive documents to the government – and to H&W plan participants. Failure to comply with ERISA rules can result in significant financial penalties and employer lawsuits by current and former employees.
ERISA sets minimum standards for most voluntarily established pension and health plans in private industry. It requires such plans to:
- Provide plan participants with plan information, including plan features and funding;
- Provide fiduciary responsibilities for those who manage and control plan assets;
- Establish a grievance and appeals process for participants to get benefits from their plans; and give participants the right to sue for benefits and breaches of fiduciary duty.
ERISA amendments through the years include the Consolidated Omnibus Budget Reconciliation Act (COBRA), which provides employees and their families with the right to continue health coverage for a limited time after certain events. These include the loss a job or loss of benefits due to death, divorce, or separation. (A separate post regarding COBRA can be found in the Word & Brown Newsroom.)
In general, ERISA does not apply to group health plans established or maintained by: government entities; churches (for their employees); or plans maintained solely to comply with workers’ compensation, unemployment, or disability laws. Nor does ERISA cover plans maintained outside of the U.S. primarily for the benefit of non-resident aliens or unfunded excess benefit plans.
The impact of ERISA on employers cannot be overemphasized. For that reason, it’s important for brokers – and clients – to be aware of ERISA compliance pitfalls, which are summarized below.
Pitfall #1: SPD vs. SBC
It’s important to know the difference between a Summary Plan Description (SPD) and a Summary of Benefits and Coverage (SBC). According to the U.S. Department of Labor Employee Benefits Administration’s Reporting and Disclosure Guide for Employee Benefit Plans, each is described as follows:
SPD: An SPD is the primary vehicle for informing participants and beneficiaries about their plan and how it operates. It must be written for the average participant and be sufficiently comprehensive to explain their benefits, rights, and obligations.
It must be sent automatically to participants within 90 days of becoming covered by a plan and to pension plan beneficiaries within 90 days after receiving benefits. A plan has 120 days after becoming subject to ERISA to distribute an SPD. An updated document must be furnished every five years if changes are made to the SPD or the plan is amended. Otherwise, it must be furnished every 10 years.
SBC: An SBC describes the benefits and coverage under the plan, and includes a uniform glossary defining terms as outlined by the National Association of Insurance Commissioners (NAIC). It must be provided to participants and beneficiaries with enrollment materials and upon the renewal or reissuance of coverage. The SBC and a copy of the Uniform Glossary must also be provided within seven days following receipt of a request.
Failing to provide both documents to plan participants and beneficiaries is a violation of ERISA rules, although sometimes the two documents can be integrated.
Pitfall #2: Plan Administrator Responsibility
Compliance with ERISA falls upon the “plan administrator,” which is the person designated in the plan documents. If no one is designated, the administrator is deemed to be the plan sponsor – i.e., the employer.
The plan administrator must be identified in the Summary Plan Description. Generally, the plan administrator cannot avoid liability for SPDs by delegating the responsibility to someone else.
Most Third Party Administrators (TPAs) are not responsible under ERISA for the SPD. TPAs rarely agree to be the plan administrator, although they often agree contractually to assist in the drafting and distribution of SPDs.
An employer’s recourse for TPA mistakes is legal action under the TPA contract or state law.
Insurers are not responsible under ERISA for SPDs, although they will often furnish benefit descriptions and certificates of coverage to plan participants.
Pitfall #3: ERISA GHPs and SPDs
Virtually all ERISA Group Health Plans (GHPs) must have an SPD. This includes employer-sponsored plans providing any of a wide range of medical benefits: major medical plans, health Flexible Spending Accounts (FSAs), Health Reimbursement Arrangements (HRAs), Dental and Vision plans, and many wellness programs.
ERISA does not cover Health Savings Accounts (HSAs) and certain voluntary programs, nor does it affect group health plans for government entities and most church employers.
Cafeteria plans are not technically required to have an SPD; however, SPD requirements do apply to health FSAs and salary redirection ERISA benefit plans, such as health FSAs and Premium Only Plans (POPs). Status as an excepted benefit does not exempt it from an SPD.
Pitfall #4: SPDs for Others
Certain other individuals should also receive automatic SPDs; these include:
- COBRA-qualified beneficiaries
- Spouse and/or dependents of a deceased retiree-participant
- Representative/guardian of an incapacitated person
Again, always be sure to furnish SPDs in accordance with the previously discussed timelines.
Pitfall #5: ERISA Style and Format Requirements
There is no “magic formula”; one size does not fit all when it comes to SPDs. What is important is the SPD be developed in a way that reflects each employer’s practical needs.
It is essential the SPD not mislead. It must be understandable to the average plan participant. An SPD prepared for a consulting firm – whose employees mainly have advanced degrees – may be quite different from an SPD prepared for a landscaping company that employs workers who may not have finished high school. Use of “readability” tools (such as the one found in Microsoft Word®) may be advisable.
Plan limits, exceptions, and restrictions must be obvious and detailed.
Pitfall #6: Interested Parties, Non-Discrimination Testing
There are specific limitations and exclusions for owners, shareholders, and partnerships. Be sure to review the guidelines for S-Corporations, LLCs, LLPs, and Sole Proprietorships.
Non-discrimination testing is required:
- Key employee population
- Highly compensated employee population
- Maximum allowable benefit threshold
- Key and highly compensated employee population cannot account for more than 25% of total allowable benefit
- Applicable to Sections 125, 129, and 105
Pitfall #7: Non-English Language Assistance
There’s no requirement that SPDs be written in non-English languages, although it is recommended that a translation assistance pathway be provided in the SPD if more than 25% of participants are non-English-speaking employees.
Final note: When it comes to compliance, it’s important to be consistent, persistent, flexible, and relevant. Be sure to take steps to safeguard confidentiality if the disclosure includes personal information.
- Make sure your SPD adheres to general distribution rules.
- Provide notice of significance of electronic document whenever document is furnished.
- Make a paper version of the SPD available upon request.
- Monitor the effectiveness of your systems and processes.
These are some of the common pitfalls faced by employers when it comes to ERISA compliance. Watch our website in the weeks and months to come for more useful tips to helping your clients stay up to date and in compliance on ERISA and other topics of importance.
Note: Although we go to great lengths to ensure information we share is accurate and useful, we recommend you and your clients consult a labor or benefits attorney for legal advice if you have specific questions about ERISA and compliance with federal guidelines.
