Most employers know how important it is to comply with the Employee Retirement Income Security Act (ERISA) plan document and disclosure requirements for 401(k) and other types of retirement plans. However, few devote the same attention to their health and other welfare benefit plans.
Many employers, particularly smaller companies, mistakenly assume that booklets and other benefit summaries provided by insurance carriers for insured benefits satisfy the ERISA rules. The reality is that under ERISA, employers are required to give employees specific information not contained in documents provided by insurance carriers.
A “Wrap Plan” is a simple and cost-effective solution for an employer to comply with these ERISA rules.
Q. What documentation does ERISA require for welfare benefit plans?
ERISA mandates that the terms of welfare benefit plans be in writing. There are numerous required plan document provisions, such as the type of funding, eligibility requirements, procedures for amending or terminating the plan, and identification of the named fiduciary with authority and responsibility to administer the plan.
Plan sponsors must also provide an accurate, easy to understand and comprehensive summary plan description (SPD) to all employees eligible to participate in the plan. There are specific content requirements for SPDs that differ from the plan document requirements.
These ERISA requirements apply regardless of employer size, number of employees, or whether the benefits are paid for by the employer or its employees.
Q. What is a “Wrap Plan”?
A “Wrap Plan” consolidates the various welfare benefit plans a company sponsors into a single plan document that includes all of the ERISA required provisions. It is called a “wrap” because it “wraps” around the insurance policies, coverage certificates, and plan booklets by supplementing these documents with the information needed to comply with ERISA.
The Wrap Plan document is accompanied by a Wrap Plan SPD that includes all of the ERISA required content, such as:
- Eligibility and participation requirements
- ERISA claims procedures (different procedures apply depending on the type of benefit)
- Employer identification information
- Plan number for annual Department of Labor and IRS reporting purposes
- Name and address for service of legal process
- A statement of ERISA rights
- Information about applicable laws, such as COBRA and HIPAA
- The Department of labor describes the SPD 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 copy, free of charge.
Q. What types of benefits are included in a Wrap Plan?
The following benefit plans and programs are subject to ERISA and can be included in a Wrap Plan:
- Group health plans
- Dental plans
- Vision plans
- Prescription drug plans
- Group term life insurance
- Accidental death & dismemberment insurance
- Insured disability benefits
- Health flexible spending account plans
- Health reimbursement arrangements
- Wellness plans that offer preventive care (e.g., flu shots)
Q. What if there is no plan document or SPD for an ERISA covered welfare benefit?
If an employee submits a claim for benefits, the terms of a written plan will determine the outcome of the claim. If a claim proceeds to litigation, courts rely on the written terms of the plan documents to resolve the claim. Without a plan document and SPD, it will be difficult to prove and enforce benefit terms and conditions, thereby potentially giving participants benefits that they otherwise would not be entitled to.
Q. Are there any penalties?
Failure to have the ERISA required documents creates significant liability exposure:
Criminal penalties may be imposed on any company or individual that willfully violates the disclosure requirements of ERISA. The penalty could be up to $500,000 or imprisonment for up to 10 years.
If a plan participant requests a plan document, the plan sponsor must provide it within 30 days and can be charged a $110/per day penalty for failure to comply.
In addition, employees have a right to file a lawsuit in federal court to enforce their ERISA rights, including the requirement to provide plan documents. Failure to comply with ERISA requirements also exposes a plan sponsor and its officers to legal claims for breach of fiduciary duties.
Q. How does a Wrap Plan affect annual reporting requirements for welfare benefit plans?
Generally, a company must file a Form 5500 with the IRS and Department of Labor for each welfare benefit plan it sponsors that covers 100 or more participants. By adopting a Wrap Plan, the company can streamline this process and file only one Form 5500 with separate Schedules A for each component welfare benefit plan included in the Wrap.
Some plan sponsors believe they can file a single Form 5500 for multiple welfare benefits without adopting a Wrap Plan. This is incorrect. In the absence of a plan document that combines the benefits into a single plan, the IRS and the Department of Labor can reject the filing and require separate filings for each plan and assess penalties.
ERISA also requires plan sponsors subject to the annual reporting requirement to distribute a Summary Annual Report (SAR) to each participant, along with notification of their ERISA right to receive additional information. With a Wrap Plan, the plan sponsor can prepare a single SAR for all the individual benefit plans included in the Wrap.
Therefore, a significant benefit of adopting a Wrap Plan is the reduction of administrative costs incurred when filing multiple Form 5500s and distributing multiple SARs. It also reduces the risk of late or missed filings and the associated penalties.
Q. What is the procedure for adopting a Wrap Plan?
Adopting a Wrap Plan is not a complicated process. The first step is to identify the benefit plans and programs a company sponsors that are subject to ERISA and appropriate for including in a Wrap Plan. This review includes identification of plans sponsored by any affiliated employers and plans subject to the annual Form 5500 filing requirement.
The next step is to review the basic terms, insurance arrangements, and administration procedures for each benefit plan, including eligibility requirements, source of contributions, original effective date, plan year, and claims procedures. A plan document and SPD are then prepared. After the documents have been reviewed and finalized, the Wrap Plan is formally adopted by the company’s governing body (e.g., the board of directors) and the SPD is distributed to employees who are eligible to participate in any of the component benefit plans.
The Hirschler Fleischer Employee Benefits and Executive Compensation Practice Group provides comprehensive compliance guidance in all areas of employee benefits law, including ERISA and Internal Revenue Service requirements governing 401(k) plans, ESOPS, and other types of qualified retirement plans, IRAs, welfare benefit plans, health savings and flexible spending accounts, non-qualified deferred compensation plans, equity compensation programs, and executive employment agreements. Members of the group also are experienced in employee benefits litigation, representing both employees and employee benefit plans and their fiduciaries in ERISA litigation arising out of benefits claims and plan administration.
Myrna H. Rooks