How to avoid the plan administration pitfalls of employee benefits

There are numerous employee benefits laws requiring compliance. Staying on top of compliance can be daunting, and it’s easy for something to fall through the cracks.

As you gear up for the New Year, take some time to review the pitfalls of employee benefits plan administration.

Smart Business spoke with Frances Horn, Employee Benefits Compliance officer at JRG Advisors, about what to watch for with employee benefits compliance.

What’s the first step to compliance?

As employers gear up for 2018, they need to set some time aside to review their employee benefits plan administration. An employer may not be subject to every law, due to size or type of benefit offered, but no employer is not subject to any of the laws.

The major laws are the Employee Retirement Income Security Act of 1974 (ERISA), Consolidated Omnibus Budget Reconciliation Act (COBRA), Health Insurance Portability and Accountability Act of 1996 (HIPAA), Internal Revenue Code (IRC) Section 125, Family and Medical Leave Act of 1993, Medicare and the Affordable Care Act, with many having several compliance provisions.

How is failing to properly communicate with the plan participants a pitfall?

Under ERISA, plan administrators have disclosure and reporting requirements. Every plan may not be subject to these requirements, due to size or type of plan funding, but every plan subject to ERISA has disclosure or communicating requirements, such as distribution of a Summary Plan Description, Summary of Benefits and Coverage and numerous other notices.

Under COBRA, many administrators don’t recognize that there are several more notices required than just an election notice. These include, but are not limited to, an initial notice, notice of early termination and notice of unavailability of COBRA coverage.

Other communications that remain the plan administrator’s responsibility are the Medicare Part D notice, HIPAA Special Enrollment Rights, Women’s Health and Cancer Rights Act notice and the Children’s Health Insurance Program Reauthorization Act of 2009 notice.

Where else do employers go wrong with plan administration?

Understanding who is actually the plan administrator can be another pitfall. With most laws governing employee benefits plans, the responsibility for compliance rests with the plan administrator, which is the person usually designated in the plan documents. If no such designation exists, the administrator role defaults to the plan sponsor, i.e. the employer.

While the plan administrator is responsible for disclosures to participants, plan document preparation and penalties for any noncompliance, many employers incorrectly feel these requirements fall with either the insurer or the insurance broker. Even for a self-insured plan, the third party administrator rarely agrees to be the plan administrator, but may assist with an employer’s documentation responsibility.

The pre-taxing of an employee’s premium contribution share is another pitfall. Many employers require that employees pay a portion of the premiums, particularly medical, dental and vision insurance coverage. To assist employees with these contributions, an employer will take the premium out of an employee’s compensation before applying taxes, thus the term pre-tax. An employee’s taxable wages for the Federal Insurance Contributions Act, federal withholding and state withholding are then reduced. This practice is often referred to as being a tax-favored treatment for employees.

The capability to pre-tax benefits comes under Section 125 of the IRC. The code requires that an employer establish its pre-tax plan, often referred to as a cafeteria plan, Section 125 plan or a premium-only-plan, in writing. Not meeting this requirement means a Section 125 plan doesn’t exist and that the employer is more than likely improperly taxing its employees’ benefits.

Numerous laws govern employee benefit plans. Ultimately the employer is responsible for complying with these laws and can be subject to costly penalties for noncompliance. As the year draws to a close, employers should review the governance of their benefits plans and determine if they need assistance to climb out of any pitfalls.

Insights Employee Benefits is brought to you by JRG Advisors