ERISA Compliance for Health and Welfare Benefit Plans
A landmark Health and Welfare benefits law was passed with wide-ranging applicability and the result is that the overwhelming majority of employers are not compliant and subject to significant penalties. We have even been warned of increased audit activity in the coming years to help offset the costs of implementing the Patient Protection and Affordable Care Act. How can this be sprung on employers and enforced so quickly? They’ve only had 41 years to prepare, since the Employee Retirement Income Security Act (ERISA) was passed in 1974.
Joking aside, this long-ignored law is becoming more important daily. The Department of Labor has grown its enforcement staff over the past few years and justifies their budget request on the basis of allowing them to:
“(a) work more aggressively in support of the outcome goal of improving health benefits and retirement security for all workers; (b) sustain effective implementation of the ACA.”
In the same budget request, they project that the enforcement activities will achieve over $1.72 billion in “total monetary results”. This is over a 1000 percent return on investment, according to their budget proposal.
As if the premise of a Department of Labor audit wasn’t enough to strike fear in even the most well-intentioned plan sponsor, there has been a surge in activity of medical service providers leveraging ERISA to attempt to overturn unpaid claims. Intimidating letters are sent to plan sponsors requesting all ERISA documents and warning of the penalties for non-compliance. This is a relatively new technique in the market, and the end-state is far from certain.
ERISA is a large body of law designed to protect pensions and benefits for participants of employer or employee-organization sponsored plans. It can broadly be broken down into “Pension” and “Health and Welfare Benefits.” Our purpose is to discuss the Health and Welfare Benefits portion of the law.
Before diving into how to comply with ERISA, it’s important to note who is subject to the law in the first place. From Title 1 of ERISA, ERISA applies to “any benefit plan if it is established or maintained – (1) by any employer engaged in commerce or in any industry or activity affecting commerce; or (2) by any employee organization or organizations representing employees engaged in commerce or in any industry affecting commerce; or (3) by both.” Put in light of Roscoe Filburn’s wheat growing, this is a very broad description.
There are some very important exemptions from ERISA, among them: government plans, church plans, and plans maintained solely for the benefit of employees outside of the United States. Additionally, a benefit must be specifically identified in ERISA to be subject to the law, and the law specifically cites:
“(a) medical, surgical, or hospital care benefits or benefits in the event of sickness, accident, disability, death or unemployment, or vacation benefits, apprenticeship or other training programs, or daycare centers, scholarship funds, or prepaid legal services, or
(b) any benefit described in section 302(C) of the Labor Management Relations Act, 1947 other than pension on retirement or death, and insurance to provide such pensions.”
With such a broad criteria for applicable sponsors and benefits, one quickly comes to realize that nearly all benefit programs are subject to ERISA, and must comply or face proscribed penalties. How does a plan sponsor comply with ERISA? Along with strict adherence to fiduciary standards, the main requirements of ERISA are:
Every plan needs a document. The document is the written instrument that the plan sponsor (typically the employer) uses to describe the operation of the plan. While there is no set format, important provisions such as eligibility, funding, claims, appeals procedures, as well as specific identifying information and rights notices must be included. In addition to the Plan Document, a Summary Plan Description (SPD) must also be created. This is a plain-language description of the benefit plan and is considered the main vehicle for communicating rights of the participants and their beneficiaries. Additional documentation comes in the form of Summary of Material Modifications (SMM) when amending the plan, and Summary Annual Reports (SAR) to describe the plan’s assets.
All of the effort that goes into creating those documents is meaningless unless they are provided to the plan participants. Plan Documents should be available for viewing at specified locations, and SPDs, SMMs, and SARs must be distributed in a timely manner to participants. In addition, all documents must be made available upon request. Sponsors commonly misunderstand their insurance policy documents (policies/contracts/booklets/certificates) to be ERISA documents, but they typically do not contain the provisions required under the law. Additionally, as seen in Firestone Tire & Rubber Co. v. Bruch, the plan documents afford the plan sponsor a deferential standard of review, but the documents must exist.
The ERISA function that most sponsors are familiar with is the Form 5500 reporting. Unfortunately, most sponsors misconstrue an exemption from filing as an exemption from ERISA. According to the law, every plan subject to ERISA is required to file a form 5500. There is a large exception to this, in that fully-unfunded plans with less than 100 participants at the beginning of the plan year are not required to report. There are additional reporting requirements for specific plan types, but they exceed the scope of this article.
So we have an old law that applies to the lion’s share of employee benefit programs, plan sponsors who are unaware of their obligations and risks, and an agency actively enforcing the law – what to do? Get compliant!
- Create a plan document, either by using a Wrap Document and incorporating your policies or writing the entire document from scratch.
- Create and distribute SPDs, SMMs, and SARs where applicable.
- Ensure that the people running the day-to-day operations of the plan understand every letter of every word in the aforementioned documents.
Summarizing 40 years of code and case law in 1,000 words is an impossible task, but if you take only one message from this – get compliant!
About the Author
Chris Vanderwolk, CEBS, CFC, GBDS
Chris Vanderwolk is the Vice President of Strategy and Business Development. After leaving the military, Chris worked for two Fortune 500 insurance carriers in a business development role prior to finding his home with Benefit Tax Link. Chris focuses on helping brokers solve complex problems, and provide clarity to their clients.
Chris is fluent in Spanish, and is a Certified Employee Benefits Specialist through the International Federation of Benefit Plans and the Wharton School of Business. In addition, he has been Certified in Flexible Compensation by the ECFC, and is a credentialed Group Disability Benefits Specialist.