Top 4 Compliance Ticking Time Bombs

Is there a less-sexy topic for a blog post than benefit plan compliance? Few of us truly enjoy the topic, but if you’re reading this, chances are that you have at least an inkling about how important it is that your ducks are in a row. Over the last ten years, the number of regulations pertaining to health and welfare plans seems to have exploded, and the regulatory agencies responsible for enforcement (particularly the Department of Labor (DOL)) have gotten far more aggressive in their efforts. We routinely perform assessments of clients’ readiness for a DOL health and welfare plan audit, and these are the top four ticking time bombs we find – these are a combination of commonly-overlooked issues and issues that can cause your business real financial harm if you are negligent.

Bomb #1: Not having a Valid Section 125 Plan Document

Maintaining a valid Section 125 plan document is so simple and cheap, and the penalties for noncompliance are so serious... and yet we consistently find plan sponsors that either cannot find their plan document, or have not pulled it from the file cabinet in years. If you are withholding any money on a pre-tax basis related to employee benefits, the Section 125 plan document is the instrument required to make the arrangement legal. So you can imagine that the exposure for being caught without one is huge – imagine the impact if the IRS told you that all of your pre-tax deductions over the years were invalid. A copy of this document is #1 on the DOL audit data request for a reason: it involves real money.

It's inexpensive to hire someone to prepare this document for you, and inexpensive to have it restated periodically to accommodate changes to your programs and any changes to the law. Defuse this bomb by getting an up-to-date plan document, knowing where it is filed, distributing it as required, and revisiting it every few years.

Bomb #2: Self-administering Health Reimbursement Accounts

On more than one recent occasion when meeting a new plan sponsor, I’ve been told “no” when I asked if they have a Health Reimbursement Account (HRA), only to find out that they do. In most cases, the conversation goes something like this:

Me: Do you have an HRA, a Health Reimbursement Account?

Plan Sponsor: No.

(Another hour of conversation occurs about their plans)

Me: Well the deductible on the plan may be a little high compared to benchmarks.

Plan Sponsor: Not really because we give employees $1,000 per year toward their deductible.

Me: Remember when I asked about HRAs?

The confusion seems to come down to a basic lack understanding about what constitutes an HRA, which is itself a type of self-funded health plan. Many employers – with the best of intentions – are administering some type of reimbursement scheme to help employees with deductible and coinsurance expense. The strategy can actually be fairly wise – and maybe worthy of a future post – but stepping back, it becomes apparent that the employer is running a de facto HRA. Such an arrangement requires a plan document, and compliance with COBRA and HIPAA. This is usually a level of sophistication not present, but again, imagine the consequences if a DOL auditor arrives at your office and finds a staff member with employee EOBs spread out on his or her desk.

To defuse this bomb, hire an administrator to run the arrangement for you. They will prepare all the required plan documents and take risk out of having an employee administer such a sensitive arrangement.

Bomb #3: Delinquent 5500 Filings

As background, most health and welfare plans with over 100 participants must file a Form 5500 annually. It is sort of like a tax return for your plan. Under some circumstances, even plans with under 100 participants have to file, but the common pitfall we see has to do with employers that hover around (or just over) 100 employees.

Another typical interaction:

Me: How many employees do you have?

Plan sponsor: About 110.

Me: And how many on the health plan?

Plan sponsor: About 80.

Me: And do you offer other benefits?

Plan sponsor: Yes. Dental, vision, life and long-term disability. Employees pay for dental and vision. The company pays for life and disability.

(Some time later in the discussion)

Me: And are you filing 5500s?

Plan sponsor: No, we only have 80 people on the health plan.

Me: What about the life and disability?

At this point, a look of realization spreads on the client’s face. We still periodically find employers with over 100 employees that were simply unaware of the 5500 requirement. But more often, we find that the plan sponsor “sort of” knew the rules, but stopped their analysis at the health plan. When they have 80 people on the health plan, but 110 on the life insurance, guess what? The life insurance requires a 5500 filing.

To defuse this bomb, look at the number of participants on all of your health & welfare programs, and look carefully at reporting requirements if any have over 100 participants.

Bomb #4: Absence of ERISA Language

This is another area – like Section 125 plans – where compliance can be fairly inexpensive and straightforward, but many plan sponsors just haven’t given it much attention. Chances are, you’re running an ERISA plan if you sponsor any type of health and welfare plan. Having an ERISA plan means that you have to pay attention to the rules set forth in the landmark legislation from 1974. This includes making sure that your plan documents contain certain language and provisions. This is another area of focus for the DOL.

“But I don’t write my own plan documents, the insurance company does,” you exclaim. “It’s not my problem!” Au contraire, mon ami. Compliance with ERISA is the responsibility of the plan sponsor, regardless of who prepares the plan documents. The common pitfall here is that the insurance carrier you’re working with (this happens most on the health insurance side) provides certificates of coverage to members, rather than fully-ERISA-compliant summary plan descriptions (SPDs). Remember, it’s not the carrier’s responsibility that you’re compliant with ERISA – it’s your responsibility. One danger is that a member with an adverse claim decision hires an attorney, who will immediately zero in on whether you’ve followed ERISA rules and provided their client a valid SPD. (I’ve had this happen to a client.)

To defuse this bomb, consider getting an ERISA Wrap document. The concept is simple – “wrap” a document containing all the required ERISA language and policies around your other certificates and SPDs. Distribute the document as prescribed by law, and you’re good to go.

These four time bombs are critical, but only the tip of the iceberg when it comes to benefit plan compliance. Assured compliance is right in my firm’s mission statement – if you’re working with a broker who isn’t proactively helping you identify these types of time bombs, let us show you what you’re missing. You can drop me a line at bayoubenefits@gmail.com