You Need a Wrap Document for Your Health and Welfare Plan
ERISA was passed and signed into law over 40 years ago. Among its attributes for the protection of benefits and transparency is the requirement for any benefit plan subject to ERISA to be established and maintained pursuant to a written plan document. Nonetheless, 40 years after ERISA’s becoming law, many employers still do not have a plan document for the employer’s health and welfare plans, e.g. health care, group term life insurance and disability benefits.
Why don’t employers have a H&W plan document?
Unlike retirement plans where employers are quite conscious of the obligation to have a plan document, perhaps because of IRS requirements, employers tend to think of the insurance contracts and agreements with third party administrators and related employee explanations as defining the health and welfare programs adequately. That assumption is about half right. Those contracts, agreements and explanations probably do define the benefits and general operations well, but lack some of the ERISA required provisions, such as listing the “named fiduciary” or describing the funding policy and methods.
What is a “wrap document”?
A wrap document refers to and incorporates those insurance contracts, TPA agreements and general employee explanations into the wrap document (hence wraps around those items) and also provides the missing ERISA-required provisions. In summary, those requirements concern:
- procedures for establishing and carrying out a funding policy and method;
- procedures under the plan for the allocation of responsibilities for the operation and administration of the plan;
- procedures for amending such plan, and for identifying the persons who have authority to amend the plan; and
- specify the basis on which payments are made to and from the plan.
There are other reasons for adopting a wrap plan besides complying with the basic ERISA requirements:
- That document also can describe and limit the plan sponsor’s legal obligations; provide for discretionary powers with respect to interpreting and applying the plan’s provisions; and define and clarify the plan’s procedures for claims reviews and appeals, including the time limits for filing claims. Reserving broad discretionary powers of interpretation and application of plan terms can be extremely important when some plan terms or provisions may be not perfectly clear. If a participant filed a lawsuit regarding a right to benefits denied, the interpretation given to plan terms by the plan administrator granted discretion to interpret generally will be accepted by the court in that lawsuit. The court will not “start over” and reconsider that interpretation, unless the interpretation and application would be found to be an abuse of discretion.
- Clearly defining and communicating the plan’s procedures for claims and appeals, and following those in action, will require the participants to adhere to that process. Adhering to that process should minimize the opportunity for expensive litigation. A condition of filing an ERISA lawsuit is the participant adhere to that plan’s claims and appeals process, but only if that is well communicated and a fair process does exist in reality. Failure to follow that process will preclude the participant from being able to pursue litigation.
- By incorporating all the H&W programs in one wrap plan, the plan administrator can then file only one Form 5500 to report on all those programs. That each separate program has a different contract year or accounting year, is irrelevant. For example, if the health care plan uses a calendar year and the long term disability contract has a renewal date of March 31, that will not preclude both being part of one wrap document which then defines the “plan year” used for purposes of the Form 5500 filing.
What are the penalties for failure to have a H&W plan document?
The ERISA provided penalties include:
- ERISA gives participants the right to receive a copy of the plan document. Failure to provide one if requested can result in a penalty of $110/day being assessed for each violation.
- As stated above, one wrap document for all the H&W programs will result in there only being one Form 5500. The DOL and the IRS could treat each separate H&W program as a separate plan requiring a Form 5500. The IRS and Department of Labor (DOL) each have the authority to assess separate penalties for failure to file a Form 5500. Hence, both the IRS and the DOL could impose penalties for failure to file 5500s for each H&W program. The IRS penalty for the late filing of a Form 5500 is $25 per day, up to a maximum of $15,000. The DOL maximum penalty for a late filing is $2,140 per day for assessments after January 2, 2018, (subject to annual increases), with no maximum.
- Failure to comply with ERISA could result in participant complaints to the DOL which, in turn, could result in an audit.
As noted above, defining and communicating the claims and appeals process limits the ability of a participant to file suit. Further, reserving discretion to the plan administrator to interpret the plan document can also result in limiting the issues that might be litigated. Both of these limit the employer’s exposure to litigation and consequently, are practical reasons for having wrap document.
Who to call to discuss?
Disclaimer: This alert has been prepared by Eastman & Smith Ltd. for informational purposes only and should not be considered legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney/client relationship.