That's a Wrap

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While most employers make sure they comply with the Employee Retirement Income Security Act’s plan documentation and disclosure requirements with respect to their retirement plans—such as their pension, 401(k) and profit sharing plans—few devote the same attention to their health and welfare benefit plans. The U.S. Department of Labor’s plans to conduct more ERISA compliance audits should spur employers to make sure that they are in compliance with the law’s plan documentation, disclosure and annual reporting requirements for all applicable plans. A wrap document can help small employers in particular meet their obligations.

ERISA was designed to protect individuals enrolled in pension and health plans provided by private industry. The law does not require employers to establish benefits plans, but it does require plans to meet certain minimum standards.

For example, ERISA mandates that every employee welfare benefit plan, such as group health plans, dental plans and health flexible spending accounts, be in writing. Every employee welfare benefit plan also must be described in an accurate and comprehensive summary plan description that is provided to all employees eligible to participate in the plan.

Employers often misunderstand how to properly document and disclose the health and welfare benefit plans they sponsor. The confusion arises, in part, because three federal government agencies share the responsibility of interpreting and enforcing ERISA: the Department of Labor, the Department of the Treasury (particularly the Internal Revenue Service) and the Pension Benefit Guaranty Corp.

It is obvious that the IRS will be interested in how a company manages its 401(k) plans, but what about its wellness plans? Does a wellness plan provide a taxable benefit that needs to be reported? What about other health and welfare benefit plans?

To answer such questions and ensure compliance with the law, an employer must know:

• The types of health and welfare benefits subject to ERISA.
• The documentation required for compliance.
• The information that must be provided to employees and dependents.

Does ERISA Apply?

ERISA applies to “employee welfare benefit plans,” which it defines as plans, funds or programs established or maintained by an employer for the purpose of providing specifically listed benefits through the purchase of insurance or otherwise to participants and their beneficiaries.

In applying this definition, it is necessary to understand what types of benefits are considered “specifically listed benefits.” These include medical, surgical or hospital care benefits; benefits in the event of sickness, accident, disability, death or unemployment; vacation benefits; apprenticeship or other training benefits; day care centers; scholarship funds; and prepaid legal services.

Accordingly, all of the following health and welfare benefits are subject to ERISA:

• Fully insured group health plans (subject to ERISA and state insurance laws).
• Self-funded group health plans (subject only to ERISA).
• Dental plans.
• Vision plans.
• Group term life insurance plans.
• Accidental death and dismemberment insurance.
• Insured disability benefits.
• Prescription drug plans.
• Health flexible spending accounts.
• Medical expense reimbursement plans.
• Health reimbursement arrangements.
• Executive medical reimbursement plans.

Although they may appear to meet the criteria listed above, health savings accounts and Archer medical savings accounts are not subject to ERISA because it is the employee who funds the benefit. Disability benefits funded as a payroll practice, dependent care assistance plans and adoption assistance plans are not subject to ERISA, either.

ERISA coverage for certain benefits depends on what’s offered. Here are some examples:

Wellness plans. Wellness plans that offer only informational brochures and educational seminars are probably not subject to ERISA, but wellness plans that offer preventive care such as flu shots and cholesterol screenings probably are covered.

Wellness plans that provide incentives or rewards for healthy behaviors present many compliance issues under the Health Insurance Portability and Accountability Act, COBRA, the Genetic Information Nondiscrimination Act, the Americans with Disabilities Act and the Age Discrimination in Employment Act. These plans require the sponsoring employer to carefully consider the income tax treatment of the incentives and rewards.

Employee assistance programs. EAPs are intended to help employees deal with personal problems that might adversely affect their work performance, health and well-being. Frequently, these programs consist of counseling or referral services. Whether ERISA applies to an EAP is determined by analyzing the type of benefits or counseling available under the program. If mental health counseling is available under the EAP, it is likely subject to ERISA. On the other hand, if the EAP provides only financial and retirement counseling, it is probably not covered.

Cafeteria plans. While component benefits of a cafeteria plan may be subject to ERISA—for example, a health flexible spending account—cafeteria plans themselves are not subject to it. Note, however, that Section 125(d)(1) of the Internal Revenue Code requires that cafeteria plans be in writing.

Plan Document Requirement

Once you’ve determined whether ERISA applies to your company’s health and welfare benefit plans, you need to understand what must be done to comply with the law.

Section 402 of ERISA mandates that every employee welfare benefit plan be established and maintained according to a written plan document. The written plan document must clearly identify certain basic information about the plan, including:

• The named fiduciary who will have the authority and responsibility to administer the plan.
• Procedures for amending and terminating the plan.
• The source of plan contributions.
• The allocation of responsibilities for the operation of the plan between the employer and the insurance carrier or third-party administrator.

Some employers assume incorrectly that the insurance policy, coverage certificate or plan booklet they receive from their insurance carrier or third-party administrator satisfies the plan document requirement. While these documents often include detailed descriptions of the benefits available under the plan, they rarely identify a named fiduciary or include the procedures for amending the plan. Typically, these documents also fail to allocate responsibilities for the operation and administration of the plan.

Summary Plan Description

Beyond the plan document requirement, ERISA requires that every employee welfare benefit plan be described in a document that provides participants with an accurate and comprehensive summary of the plan. The importance of preparing summaries that comply with ERISA cannot be overstated.

The Labor Department describes the summary plan description as “the primary vehicle for informing participants and beneficiaries about their rights and benefits.” Employers are legally obligated to provide each plan participant with a free copy. Failure to provide a participant with a copy within 30 days of the date the participant requests one may result in a $110 per day penalty.

The summary plan description must describe all of the important plan rules and the benefits available under the plan, as well as key information about the plan, including:

• The plan name.
• The employer’s name, address and employer identification number (also known as a federal tax identification number).
• The name, address and telephone number of the plan administrator.
• A name and address of the plan’s agent for service of legal process.
• The plan number for annual reporting purposes.
• The plan year.
• The source of plan contributions.
• Information about plan trustees.
• A claims procedure.
• Information about eligibility for plan participation.
• A statement of ERISA rights.

ERISA requires that additional information be provided to participants in group health plans, including information about COBRA continuation coverage and HIPAA pre-existing condition exclusions.

Filling the Gaps

How can a small company meet ERISA requirements?

While large employers may have the resources to prepare custom plan documents and summary plan descriptions for each employee welfare benefit plan they sponsor, most small employers lack the time, money and expertise to prepare these documents and keep them up-to-date in an ever-changing regulatory landscape. One simple and cost-effective solution is the wrap document.

A wrap document is a relatively simple document that “wraps” around the insurance policy, coverage certificate or plan booklet. The benefits available under the plan continue to be governed by the insurance policy, coverage certificate or plan booklet, while the wrap document supplements with the information necessary to comply with ERISA. In effect, the wrap document fills the gaps left by insurance carriers and third-party administrators.

In addition to easing compliance with ERISA’s plan document and summary plan description requirements, wrap documents may be used by employers to consolidate employee welfare benefit plans into a single plan, commonly referred to as an “umbrella” or “mega-wrap” plan. Consolidating employee welfare benefit plans into a single plan could reduce the costs associated with filing multiple annual reports, distributing multiple summary annual reports, and amending multiple plans in response to legislative or regulatory changes.

The author is an attorney with Lewis and Roca in Phoenix.