Since you asked: Do group health and welfare benefit plan sponsors need written plan documents?

Question

Our company sponsors several employee health and welfare benefit plans under ERISA (e.g., health, life, long-term disability), as well as an Internal Revenue Code (IRC) section 125 cafeteria plan (i.e., a plan for salary reductions, premium payments and/or flexible spending accounts). Is plan documentation required, and what are the penalties for noncompliance?

Answer

Yes, ERISA (and IRC section 125) requires an official written plan document for each health and welfare benefit plan as well as a summary of that plan document, called a summary plan description (SPD). Penalties for noncompliance vary and are described below.

ERISA requirements

Plan document

A plan document is a legal document containing plan provisions specific to that sponsor, such as plan operation and administration details, fiduciary duties, claims procedures and governance provisions. ERISA requires a written plan document for each employee health and welfare benefit plan.

A sponsor may choose among several different approaches to meet these plan document requirements. Assume an employer sponsors medical, dental, life insurance and long-term disability benefits. The following summarizes the different available plan document approaches:

1. Separate plan document for each benefit. The employer maintains four separate plans and has four separate plan documents, each having its own plan number and filing its own Form 5500. In the absence of plan documentation providing otherwise (e.g., a wrap plan document), the Department of Labor (DOL) likely would use this method to determine the number of plans sponsored by an employer. Many employers no longer use this approach because of its inefficiencies.
2. Comprehensive plan document. The employer combines four separate plan documents for the four separate plans into one very large comprehensive document. Each plan would continue to have a separate plan number and file separate 5500s. Many employers no longer use this approach because it can create a massive, inefficient document.
3. Wrap plan document. The wrap plan document method is the most efficient. The employer combines all four benefits into one plan document with one plan number. The plan document includes all ERISA-required provisions either directly or indirectly through other materials that are incorporated by reference (e.g., policies, certificates, SPDs). The plan document does not have to be amended every time a benefit provision is changed, only when there are major changes in the law. Any benefit changes would be reflected in the materials that are incorporated by reference into the wrap plan document. It may also help an employer use commissions from one benefit to pay for expenses of another benefit that is “wrapped” into the plan.

Note: Some employers rely on insurance carrier documents (e.g., policies, certificates of coverage) as their ERISA plan documents. Typically, these do not meet ERISA’s plan document requirements. Employers relying on those documents should consider investing in an ERISA-compliant plan document and confer with their legal counsel.

Summary plan description

The SPD is intended to summarize a plan’s terms in a way that can be easily understood by the average participant and includes specific required provisions.

In the past, employers maintained a separate plan document and SPD for each specific benefit. Today, many employers have adopted the wrap plan document approach discussed above, which incorporates two or more health and welfare benefit options into one official plan document.

Similarly, employers frequently use a wrap SPD approach to satisfy ERISA’s SPD requirements. Unlike the plan document, an SPD must be distributed to participants and beneficiaries of an ERISA plan.

Again, assume an employer sponsors medical, dental, life insurance and long-term disability benefits. The following summarizes the different available SPD approaches:

1. Separate SPD for each benefit. Each SPD for each benefit would contain all ERISA-required SPD language; however, the resulting repetitive language in each SPD makes this approach inefficient.
2. Comprehensive SPD. Each benefit has its own SPD with most of the ERISA-required SPD language, with all four SPDs then combined into one massive SPD. A section may be included with common language. This type of document is difficult for the average participant to use, which is key to a compliant SPD.
3. Wrap SPD. The wrap SPD is the preferred approach for many employers. Much of the SPD content required under ERISA that applies to all the benefits included in the wrap plan document are included in the wrap SPD (e.g., eligibility, enrollment, change in elections, when benefits begin and end). This approach, however, relies on certificates of coverage, schedules of benefits and other vendor materials, which are incorporated by reference, to describe the benefits offered under the plan — that is, what is covered or not covered, benefit limits, coordination of benefits and the like. This method reduces repetitive language and gives readers a place to start understanding their benefits, while the vendor documents provide details on those benefits.

Note: Some employers rely on insurance carrier materials (e.g., certificates of coverage) or third-party administrator materials (e.g., benefit descriptions) as their SPDs. Rarely do those materials meet all the ERISA SPD requirements, particularly the requirement that the document be written in a manner that the average participant can understand. Employers relying solely on carrier or third-party administrator materials for their SPDs should consider investing in ERISA-compliant SPDs and confer with their legal counsel.

Combined ERISA plan document and SPD

The DOL has stated that the ERISA plan document and SPD may be combined into one document; however, because the two documents serve very different purposes, this is not a favored approach. Typically, a plan document is much more formal and contains “legalese” that may not be understandable to the average participant, as is required by an SPD.

IRC section 125 plan

A written plan document also is required to establish a section 125 cafeteria plan (a separate requirement that allows for a choice between cash and qualified benefits, typically through a salary reduction approach). A cafeteria plan is not itself an ERISA plan.

Generally, a cafeteria plan must be in writing and must be adopted and effective on or before the first day of the cafeteria plan year to which it relates. The cafeteria plan document may be composed of multiple documents, but as a whole, it must contain all of the information prescribed in IRS proposed regulations.

To comply with both ERISA and IRC section 125 plan document requirements, employers should consider a split document approach, meaning the employer would maintain an ERISA plan document and a separate section 125 plan document. Using the wrap plan document approach, the section 125 plan document would be incorporated by reference into the ERISA plan document. This ensures that the two documents can be read and administered separately.

Penalties for noncompliance

ERISA

In addition to potential lawsuits filed by a participant or beneficiary, ERISA contains the following potential penalties regarding plan documents and SPDs:

• Failure to provide a plan document or an SPD within 30 days of receiving a request from a plan participant or beneficiary — a penalty of up to $110 per day per participant or beneficiary for each violation
• Failure to maintain an SPD — a potential plan audit by the DOL
• Failure to furnish to the DOL any requested information relating to an employee benefit plan — a penalty of up to $190 per day (not to exceed $1,906 per request), amount adjusted annually

IRC section 125

The following potential penalty applies if an employer does not have a written cafeteria plan document:

• Failure to maintain a written section 125 cafeteria plan document — discretionary penalties from the IRS up to and including disqualification of the plan resulting in all benefits becoming taxable to all employees