Generally-speaking, voluntary benefits such as supplemental life or critical illness insurance are individually-elected benefits that the employee pays 100% of the premium. Some Plan Sponsors choose to sponsor/endorse the benefit which would keep it under their group health and welfare plan. Under this arrangement, the Plan Sponsor` is obligated to follow the federal governing provisions and laws under ERISA, such as reporting the voluntary benefits in the Form 5500. However, many Plan Sponsors endorse the benefit unintentionally.
ComplianceBug, LLC studied employers’ actions with voluntary benefits and concluded that as much as 80% of the voluntary benefits were actually subject to ERISA (source).
How can a Plan Sponsor know if the benefit is endorsed or not? To determine absolutely without the courts or assistance from an ERISA attorney is tricky.
To see if the benefit is considered not endorsed and as a result falls under safe harbor, here is a five-point test outlined from the key court hearing of Booth v. Life Ins. Co. of N. Am., 2006 WL 3306846 (W.D. Ky. 2006):
(1) Has the employer played an active role in either determining which employees will be eligible for coverage or in negotiating the terms of the policy or the benefits thereunder?
(2) Is the employer named as the plan administrator?
(3) Has the employer provided a plan description that specifically refers to ERISA or that the plan is governed by ERISA?
(4) Has the employer provided any materials to employees suggesting that it has endorsed the plan?
(5) Does the employer participate in processing claims?
Per the DOL: “An endorsement within the meaning of section 2510.3-1(j)(3) occurs if the employee organization urges or encourages member participation in the program or engages in activities that would lead a member reasonably to conclude that the program is part of a benefit arrangement established or maintained by the employee organization.”
ERISA Language to fall under Safe Harbor:
(1) No contributions are made by an employer or employee organization;
(2) Participation in the program is completely voluntary for employees or members;
(3) The sole functions of the employer or employee organization with respect to the program are, without endorsing the program,
- to permit the insurer to publicize the program to employees or members
- to collect premiums through payroll deductions or dues checkoffs [and not using pre-tax dollars through Section 125 plan]
- remit them to the insurer; and
(4) The employer or employee organization receives no consideration in the form of cash or otherwise in connection with the program, other than reasonable compensation, excluding any profit, for administrative services actually rendered in connection with payroll deductions or dues checkoffs
What are the consequences if a Plan Sponsor mistakenly did not consider the benefit endorsed?
Here are examples of ERISA penalties that could come into play:
Failing to file a Form 5500:
Non-filer: $300 per day, up to $30,000 per year
Late-filer: $50 per day, for each day an annual report is filed after the date on which the annual report was required to be filed,
Failure or Refusal to File: $2,194 per day
Not issuing a SPD to Plan Participants:
$156 per day
(but no greater than $1,566 per request)