The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that requires employers to abide by specific regulations concerning health and welfare benefit plans. All employers which sponsor health and welfare benefits with at least 2 participating employees are subject to ERISA, except for government entities and churches.
The following are seven common mistakes employers make about ERISA (and how you can avoid them):
1. Failure to disclose plan information.
ERISA requires plans to have written Plan Documents and Summary Plan Descriptions (SPD). The Plan Document is the more legal of the two documents and should be kept on file with the employer’s other important documents.
The SPD describes the benefits as well as the participant’s rights and obligations under the plan. This document must be distributed within 90 days after the participant (meaning, enrolled employee) first becomes covered under the plan or within 30 days of a participant or beneficiary’s request.
A certificate of insurance or benefit plan summary are not ERISA compliant documents.
2. Failure to properly administer the plan in accordance with the plan documents or certificates of coverage.
Many employers administer their plan with different waiting periods and hours of eligibility than are documented in their Certificates of Coverage/Insurance Certificates. When it comes to a participant’s rights under the plan, the certificates ultimately control, so the ERISA documentation should mirror the controlling language in the certificates and employers should proactively request plan amendments if the language contradicts their administrative practice.
This mistake may impact both ERISA and ACA requirements.
3. Failure to file 5500s or Filing Late 5500s.
An alarming number of fully-insured plans are failing to file Form 5550, either at all or in a timely fashion.
The ERISA filing requirement affects large employers – 100 or more covered participants as of the first day of the plan year. It may also impact small employers if they have a funded, self-insured benefit. For more information on this mistake, see Mistake #4 below.
If an employer has an umbrella or wrap document in place, they will need to file for all benefits included in the document even if only one of the benefits meets the 100-participant threshold as of the beginning of the plan year. This is often the case with employers just over 100 employees who sponsor an employer paid benefit, such as a term life and AD&D policy.
Form 5500 filings are due the last day of the 7th month after the end of the plan year. For calendar year plans, the filing deadline is July 31st. A 2 ½ month extension can be granted by filing Form 5558.
What are the penalties for not filing Form 5500 or filing late? The DOL penalty for late filing of a 5500-series return is $2,233 per day (indexed annually). The Delinquent Filer Voluntary Compliance Program (DFVCP) can significantly reduce penalties if an employer voluntarily files delinquent filings prior to being subject to an audit.
Recommendation: Be proactive. Have you missed a required filing? Utilize the DFVCP to cap any potential penalties or fines.
4. Filing one Form 5500 for multiple benefit plans without a wrap document.
If an employer does not have an umbrella or wrap document in place for the benefit plan, they may not file all of their benefits together under a single Form 5500. Rather, the employer would need to file a separate Form 5500 with the appropriate schedule attached for each benefit which meets the 100-participant threshold.
Why is this a mistake? Technically, the filing would be considered delinquent. Penalties have increased in recent years, making this a costly mistake.
How do you overcome this? Ensure that you have merged any and all ERISA qualified plans into one umbrella document. Before you create one umbrella document, be sure to evaluate the number of covered participants in each plan at the start of the plan year.
5. Small employers segregating assets for self-insured plans, such as FSAs or HRAs.
Here is a typical scenario: An employer hires a third-party administrator, adopts an HRA and is concerned about the reconciliation of the account. What does this employer sometimes do? Opens another employer-based account in the employer’s name and funds it with a portion of the estimated liability or fully funds the account.
Potential ERISA mistake? For self-insured benefits with segregated assets, employers must file a Form 5500 for that benefit with either a Schedule I or Schedule H (for large employers) attached. Even if the employer is small and would not otherwise need to file a Form 5500, they would be subject to the filing requirement if they have segregated assets.
How to fix or avoid this mistake? Remove the appearance of a segregated and/or funded account. Here’s how:
- Fund the accounts out of the general assets of the employer
- Pay/reimburse premiums and expenses out of the employer’s general checking or operations account or create a new zero balance account in the employer’s name
6. Deducting pre-tax employee contributions without a Section 125 document.
Within the ERISA documentation, you must list how premiums are paid by the employer and/or the employee. The tax code requires that plans which permit pre-tax salary reductions for employee benefits be properly documented in a written Plan Document.
While it is not a direct requirement under ERISA, failure to have a written Section 125 Plan document at the time of an IRS audit could cause this domino effect:
- Amended corporate tax returns
- Amended W-2s for all employees who had deductions
- Amended tax returns for those affected employees
7. Creating a self-administered FSA or HRA without appropriate documentation.
Within the ERISA documentation, you must list health FSA and HRA eligibility and funding methods.
While it is not a direct requirement under ERISA, the tax code requires that self-insured benefits be properly documented and perform annual non-discrimination testing to ensure that the plan does not discriminate in favor of highly compensated or key employees.
Reminder: The ERISA plan documentation will include all eligibility information, waiting periods, funding methods and measurement periods for variable hour employees for all ERISA-qualified benefits.
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Disclaimer: Please note that this is not all-inclusive. Our guidance is designed only to give general information on the issues actually covered. It is not intended to be a comprehensive summary of all laws which may be applicable to your situation, treat exhaustively the subjects covered, provide legal advice, or render a legal opinion. Consult your own legal advisor regarding specific application of the information to your own plan.
Editor’s Note: This post was originally published in Aug 2016 and has been updated for freshness, accuracy, and comprehensiveness.