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Common Health Plan Compliance Mistakes to Avoid

By March 4, 2025No Comments

Common Health Plan Compliance Mistakes to Avoid

Employers that sponsor group health plans are subject to many different compliance requirements under federal law. Keeping track of these various requirements can be challenging, even for the most attentive employers. Mistakes can easily occur, which may trigger penalties, excise taxes, enforcement action, or lawsuits, depending on the type of mistake. To help avoid these potential consequences, employers should regularly review their compliance with employee benefits laws and implement strategies to address any compliance gaps.

Common Health Plan Compliance Mistakes

  • Not having an official plan document or providing participants with a summary plan description (SPD)
  • Allowing pre-tax contributions without a Section 125 plan document
  • Failing to file a Form 5500
  • Not offering affordable health plan coverage to full-time employees

1. Not Having an Official Plan Document or Providing an SPD

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.

Potential Consequences

  • Employers may be charged up to $110 per day if they do not provide the SPD or other plan documents within 30 days of an individual’s request.
  • Failure to have a plan document may put an employer at a disadvantage in lawsuits regarding benefits.
  • The U.S. Department of Labor (DOL) may request these documents during an audit. If the employer cannot comply, further enforcement actions may follow.

2. Allowing Pre-Tax Contributions Without a Section 125 Plan Document

Internal Revenue Code Section 125 allows employers to establish a tax savings arrangement, called a Section 125 or cafeteria plan. A Section 125 plan enables employees to pay for certain benefits on a pre-tax basis. However, a written plan document must be adopted before the first day of the plan year.

If there is no written plan document in place, employees’ elections between taxable and nontaxable benefits may result in taxable income to the employees.

3. Overlooking Nondiscrimination Testing

The Code imposes nondiscrimination requirements on self-insured health plans and Section 125 plans to ensure employers do not favor highly compensated employees. Employers often overlook nondiscrimination testing when designing benefit plans.

Plan Design Issues That May Cause Problems

  • Only certain groups of employees are eligible to participate
  • Different employment requirements for different employee groups
  • Employer contributions vary by employee group
  • Maintaining separate health plans for different employee groups

Employers should regularly conduct nondiscrimination testing to ensure compliance.

4. Failing to File a Form 5500

Employers that are subject to ERISA must file an annual report (Form 5500) with the DOL for their employee benefit plans. The Form 5500 must be filed by the last day of the seventh month following the end of the plan year unless the employer requests an extension.

Potential Consequences

  • The DOL can assess penalties of up to $2,739 per day for failing to file a complete Form 5500.
  • Employers can use the DOL’s voluntary correction program to reduce penalties.

5. Not Offering Affordable Health Coverage to Full-Time Employees

The Affordable Care Act (ACA) requires applicable large employers (ALEs) to offer affordable, minimum-value health coverage to their full-time employees (and their dependents) or potentially pay a penalty to the IRS.

Common Mistakes

  • Not following the IRS’ rules for identifying full-time employees
  • Offering coverage that is unaffordable

Links and Resources

Provided to you by Hodge, Hart & Schleifer.

This Compliance Overview is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice. © 2025 Zywave, Inc. All rights reserved.