Four Common Plan Document Mistakes
By Emily Marr
Could this happen to you?
A $40,150 penalty fee was slapped onto a Plan Sponsor for neglecting to hand out a Plan Document for a year to a plan participants’ request.
(A court in its discretion may award up to $110 per day for each day against a plan administrator who fails to provide requested documents within 30 days, under § 502(c)(1) of ERISA, 29 USC § 1132(c)).
Many Brokers are held accountable for their clients’ understanding of ERISA and Plan Documents. To help brokers bridge this responsibility, Emily Marr, from Wrangle’s ERISA Desk who has prepared over 2,400 Plan Documents in her career, outlined action plans to avoid 4 common Plan Document mistakes to take directly to the client, roll up the sleeves and get to work.
1. No Plan Document or Summary Plan Description
The Employee Retirement Income Security Act of 1974 (ERISA) requires that each plan sponsor maintain official written plan documents describing the terms and conditions of its welfare benefit plans and to distribute a corresponding summary plan description (SPD) to plan participants.
[Although each fully-insured policy’s certificate of insurance often contains some of the required elements of the official plan documents, these booklets are only summaries and not the written instrument itself]
Unlike Form 5500 filings, there is no exemption for plans with less than 100 participants. Plan sponsors of All Sizes who have established a welfare plan for their employees should comply with ERISA’s written plan document and SPD requirements.
Why It Matters. Failure to execute a written plan document and distribute the SPD will open the door to multiple areas of plan sponsor business risk:
- If a participant does not timely receive the plan document or SPD upon request, the plan sponsor could be subject to a Department of Labor (DOL) penalty of $110/day until the document or documents are received by the participant.
- Not having a plan document and SPD may put the plan sponsor at a disadvantage in the event a participant brings a lawsuit for benefits. Without the documents, it could be difficult for the plan sponsor to prove the plan’s terms support any benefits decision, resulting in the court applying a standard of review more favorable to the participant, not the plan sponsor.
- A DOL auditor will ask the plan sponsor for a copy of the plan document and SPD allotting usually only 10 days to send. Not responding with the documents may trigger additional auditor requests, an interview, on-site visits, or DOL enforcement actions. The DOL also may impose a penalty of $152/day for failing to provide the requested documents.
- The DOL can impose criminal charges against the plan sponsor for willful intent to not provide the documents.
- The plan sponsor should establish and execute a written plan document as soon as the error is discovered. The corresponding SPD should be prepared at the same time and distributed to plan participants in accordance with ERISA’s distribution timelines. Procedures to maintain the plan documents in an up-to-date form should be implemented, including the preparation and distribution of newly amended and restated plan documents every five years (ten years if no changes occur).
2. Deducting Employee Contributions from Payroll on a Pre-Tax Basis without Establishing a Section 125 Plan
A Section 125 plan or cafeteria plan is set up to channel employee’s premium contributions for qualifying insurance coverage, (e.g. medical, dental, vision, life etc.), on a pre-tax basis. Under Internal Revenue Service (IRS) regulations, a fundamental requirement of a cafeteria plan, and of the tax benefits associated with such a plan, is that the plan be maintained pursuant to a formal written document adopted by the plan sponsor. Until a legally sufficient cafeteria plan document is in place and the employee enrolled pursuant to its terms, premium contributions must be taxable to the employee.
Why It Matters. The penalty for failing to comply with the Code Section 125 requirements could be severe—including the imposition of income taxes against participants, employment taxes against the employer and employees, and penalties for failing to withhold and report taxes properly.
- If no plan document exists, or if only an unsigned or unadopted draft of the plan exists, the plan sponsor should take steps to complete and formally adopt the cafeteria plan. Premium Only Plans (POP) (without flexible spending accounts) are not ERISA plans, which means the plan sponsor has no obligation to distribute a SPD to plan participants for this type of cafeteria plan.
3. Filing one Form 5500 for Multiple Benefit Plans without a Wrap Document
Plan sponsors often assume, as their plan grows, that they can file a single Form 5500 for all of the benefit plans offered to their employees. However, in order to prepare a single Form 5500 that includes all benefit plans, the plan sponsor must adopt a wraparound plan document (and corresponding SPD) that incorporates those benefit plans under one plan with one plan number.
Why It Matters. The DOL has broad authority to investigate and audit plans. If the DOL auditor determines that a Form 5500 filing only counts for one benefit plan, the other plan filings would be treated as delinquent and subject to penalties. The DOL penalty for failing to file a Form 5500 for each plan is $2,140/day. In addition, because Form 5500 filings are a joint DOL and IRS requirement, the IRS can assess an additional penalty of $25/day up to a maximum of $15,000 per plan.
- Plan sponsors filing a single Form 5500 for multiple plans without first establishing a wraparound plan document should establish and execute the plan document as soon as possible. The corresponding SPD should be distributed to plan participants forthwith in a good-faith effort to correct the mistake.
4. Not Communicating SPD Changes to Participants.
If a welfare plan is materially modified ERISA requires participants to be informed, either through a revised SPD, or in a separate document, called a Summary of Material Modifications (SMM).
Why It Matters. If there is a legal dispute over benefits, courts will often enforce the terms of an out-of- date or incomplete SPD rather than the terms of the plan document, likely in favor of the participant. In addition, if a participant does not receive the SMM upon request, the employer could be subject to a $110/day penalty until the SMM or SMMs are received by the participant.
- ERISA allows plan sponsors to communicate material changes through the SMM, which is a simplified notice that describes the plan modification or benefits change. Plan Sponsors should have procedures in place for preparing and distributing SMMs in compliance with ERISA’s content requirements and distribution timelines.
For more information on Plan Documents and its corresponding SPDs, feel free to reach out to Emily Marr, Wrangle’s ERISA Desk Employee Benefits Consultant at firstname.lastname@example.org.