Are your organization’s health and
welfare plans up to date with the
most current state and federal regulations? Have you properly communicated
with plan participants?
“Employer-sponsored health and welfare
plans are subject to complex federal and
state laws and regulations, and many legislative changes have occurred over the
last five years,” says Monica Toth, J.D.,
director of compliance for Gallagher
Benefit Services, Inc., in Houston. “Compliance with these rules can be one of the
most challenging and confusing tasks for
HR directors and benefit managers. Non-compliance can put an organization at risk
for penalties, taxes, litigation costs, judgments, and even criminal liability, in limited cases.”
Smart Business spoke with Toth about
three common compliance failures that
can easily be avoided.
Is the insurance booklet or the summary of
benefits an SPD?
Plans that are subject to the Employee
Retirement Income Security Act of 1974
(ERISA) are required to distribute a
Summary Plan Description (SPD) to plan
participants at specific times. An SPD must
contain certain elements that are set forth
in Department of Labor regulations.
Often, the insurance booklet provided by
the insurance carrier, or the benefits summary provided by the third-party administrator (TPA), fall short of the SPD requirements. To remedy this situation, the plan
sponsor, together with ERISA counsel, can
typically develop a supplement that,
together with the existing document, will
meet the requirements of an SPD.
Failure to timely provide an SPD at a participant’s request can subject a plan sponsor to regulatory penalties of $110 per day.
In addition, an insufficient or outdated SPD
could result in the creation of unintended
benefit rights, which could lead to participant lawsuits. To further complicate matters, the creation of benefit rights that are
not supported by the insurance contract or the re-insurance contract (in the case of
self-funded health plans) could leave the
employer exposed for payment of the
claim.
Do spouses receive COBRA notices?
Employers are required to provide participants and their spouses (if covered under
the plan) with an initial COBRA notice
within 90 days after the beginning of coverage under the plan. This usually means
that notice must be sent to the home. Hand
delivery of the notice to the employee at
the worksite, inclusion of the notice in an
SPD that is addressed to the participant, or
inclusion of the notice in an employee’s
‘new hire’ packet that is distributed at work
does not achieve notice to the spouse.
Further, it is important to remember that
when spouses are subsequently enrolled in
the plan, such as at open enrollment or
where newly married, they need a COBRA
notice — even if the employee has previously participated in the plan and already
received his or her notice.
Employers should carefully review their
notice procedures, or those of their
COBRA vendor, to ensure that this common error is avoided. Failure to timely provide an initial COBRA notice can result in
statutory penalties of up to $110 per day,
with no maximum. Failure to provide a
timely initial notice or election notice (the
notice that is provided when participants
or beneficiaries has a qualifying event entitling them to COBRA coverage) can also
expose an employer to unintended COBRA
coverage, or to an unintended extension of
COBRA coverage that is not supported by
the insurance contract or the re-insurance
contract.
Does your plan cover non-tax dependents?
The IRS has a new definition of dependent that became effective in 2005. It does
not affect who an employer can cover
under its group health plan; however, certain dependents that were previously covered may no longer be covered on a tax-favored basis.
Employees cannot make plan contributions on a pretax basis for dependents who
fall outside the new definition, and the
value of the benefits for such dependents
would be included as taxable income on
the employee’s W-2 Form.
The new definition includes age, residency, relationship and support requirements.
Employers should amend their Section 125
cafeteria plan documents and should
review the dependent definition under
their underlying benefit plans (health, dental, vision) to ensure that no payroll deduction or tax reporting adjustments are needed. In the alternative, a plan sponsor may
wish to amend the plan to reflect a definition consistent with the tax rules.
Failure to comply with the new definition
could cause disqualification of the employer’s Section 125 cafeteria plan, taxation to
the participants of benefits provided there-under, and possible penalties for failure to
withhold income tax for the employer.
MONICA TOTH, J.D., is the director of compliance for
Gallagher Benefit Services, Inc.’s Houston office. Reach her at
(713) 358-5232 or [email protected].
