“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 In addition, an insufficient or outdated SPD could result in the creation of unintended benefit rights, which could lead to participant lawsuits.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 firstname.lastname@example.org.