Best Practices for Documenting Employee Benefit Plans

Links and Resources

• The DOL’s Reporting and Disclosure Guide for Employee Benefit Plans

• Code Section 125

• Final rule on ICHRAs

• IRS Publication 503, Child and Dependent Care Expenses

Use a “Wrap Document” to Comply with ERISA’s Requirements for Plan Documents/SPDs

ERISA Requirements

ERISA sets minimum standards for employee benefit plans maintained by private-sector employers. Among other requirements, ERISA requires employers to maintain an official plan document for their employee benefit plans and provide plan participants with an SPD. Employers often overlook these requirements or mistakenly think documents provided by an insurance carrier or third-party administrator (TPA) will satisfy ERISA’s requirements on their own. There are no specific penalties under ERISA for failing to adopt an official plan document or provide participants with an SPD. However, not having these documents can have serious consequences for an employer, including the following:

• An employer may be charged up to $110 per day if it does not provide the SPD or other plan documents within 30 days after an individual’s request. These penalties may apply even where a plan document or SPD does not exist;

• Failure to have a plan document (or failing to distribute an SPD) may put an employer at a disadvantage if a participant brings a lawsuit for benefits under the plan. Without these documents, it may be difficult for an employer to prove that the plan’s terms support benefit decisions; and

• The U.S. Department of Labor (DOL) will almost always ask to see a copy of the plan document and SPD, in addition to other plan-related documents, if it selects an employer’s health plan for audit. If an employer cannot respond to the DOL’s document requests, then additional document requests, interviews, on-site visits or even DOL enforcement actions may be triggered. Also, the DOL may charge a plan administrator up to $195 per day (up to a maximum of $1,956 per request) if it does not provide plan documentation to the DOL upon request.

Wrap Documents

Often, the detailed benefit descriptions provided by an insurance carrier or TPA for a welfare benefit do not contain all the information required by ERISA for a plan document or SPD. A wrap document is a relatively simple document that supplements existing documentation for a welfare benefit plan and fills in the missing ERISA-required provisions. Because the wrap document incorporates the carrier’s or TPA’s benefit description by reference, the plan’s benefit provisions continue to be governed by the terms of those documents. When wrap documents are used, the ERISA plan document and SPD are comprised of two pieces:

1. The carrier’s or TPA’s benefit description, providing detailed information on the plan’s benefits and procedures; and

2. The wrap document, which fills in the ERISA-required information that is missing from the benefit description or booklet.

Adopt a Section 125 Plan Document Before Allowing Pre-tax Contributions

Code Section 125 allows employers to establish a type of tax savings arrangement, called a Section 125 plan or cafeteria plan, for their employees. A Section 125 plan provides employees with an opportunity to pay for certain benefits on a pre-tax basis, such as medical, dental and vision coverage, allowing them to increase their take-home pay. This type of plan is commonly referred to as a premium-only plan (or POP) or premium conversion plan (or PCP). To avoid taxation, the Section 125 plan must meet the specific requirements of Code Section 125 and underlying IRS regulations. One of these requirements is that a Section 125 plan must be maintained pursuant to a written plan document that is adopted by the employer on or before the first day of the plan year.

According to the IRS’ 2007 proposed regulations, if there is no written plan document in place (or if the written plan document does not comply with the IRS’ content or timing requirements), employees’ elections between taxable and nontaxable benefits will result in taxable income to the employees.

Include Any Medical Opt-out Payments Under the Section 125 Plan Document

Some employers offer their eligible employees a cash incentive to waive coverage under the employer’s group health plan. These arrangements, known as “opt-out payments” or “cash in lieu of benefits,” are a cost-saving tool for employers that provide employees with a taxable cash benefit. While medical opt-out payments are generally permissible, there are various legal issues that impact the design of these arrangements. Also, because opt-out payments give employees a choice between health coverage and taxable compensation, they must be offered through a Section 125 plan to avoid taxation of participants who elect health care benefits. Employers offering opt-out incentives should ensure that they update their Section 125 plan document to include the medical opt-out payment as a covered benefit.

Adopt an ICHRA to Reimburse Individual Insurance Premiums

In general, employers cannot reimburse employees’ individual health insurance premiums without violating the Affordable Care Act (ACA) and risking excise tax penalties. An exception to this prohibition allows employers to adopt an increasingly popular type of health reimbursement arrangement (HRA), an individual coverage HRA (ICHRA), to reimburse employees’ premiums for individual health insurance policies and Medicare coverage on a tax-free basis.

Employers can decide which classes of employees are eligible for the ICHRA and how much is contributed for each employee class. Employers may also continue to offer a traditional group health plan if the ICHRA and the traditional group health plan are offered to different classes of employees. However, employers cannot offer any employee a choice between an ICHRA and a traditional group health plan.

ICHRAs are group health plans subject to ERISA, which means they must have an official plan document and be described to participants through an SPD.

Remember: Dependent Care FSAs Require a Plan Document and Employee Notification

Code Section 129 allows employers to provide dependent care assistance benefits for their employees on a tax-free basis. These benefit plans are referred to as dependent care FSAs or dependent care reimbursement accounts (DCRAs).

Reviewing and Updating Plan Documents Each Year for Changes

Employers should review their welfare plan documents each year to see if they should be updated for any changes to plan design or administration.