ERISA: Still Changing After All These Years
The long name for ERISA—Employee Retirement Income Security Act—is a misnomer of sorts. When enacted into law in 1974, ERISA's focus was retirement plans, but many of the provisions of the law were targeted to health benefit programs, called employee welfare benefit plans.
If there is one overriding theme of ERISA it would be that "promises made by an employer must be kept." Many of the court cases and amendments to ERISA have surrounded the issue of what promises were made, by whom and whether the promises were broken.
Welfare Benefits Defined
Welfare benefits include medical, surgical or hospital care, dental care, sickness, accident, disability or death benefits and dependent care or severance pay. It also includes vacation benefits, prepaid legal services and training programs. More formally, an employee welfare benefit plan is a plan, fund or program established by an employer for the purpose of providing the types of benefits noted above. These plans can be provided through the purchase of insurance or self-funded or so-called self-insured plans.
There are several plans that have been specifically exempted from ERISA. They are:
- Government plans
- Church plans
- Plans maintained solely to comply with workers' compensation
- Unemployment compensation or disability insurance laws.
Compensation for absences from work because of sickness, vacation, holidays, military duty, jury duty, sabbatical leave or training programs may also be exempt from the regulations of ERISA. The determining factor is whether such compensation is paid out of the general assets of the employer.
ERISA has been an integral part of the health insurance and benefits arena since 1974. Not unlike a long term marriage, ERISA has been with us through "good times and in bad."
Over the past 23 years ERISA has been added to or amended many times. Just last year, ERISA was one of several laws that was amended as a part of the Health Insurance Portability and Accountability Act (HIPAA) of 1996, the Kassebaum/Kennedy legislation. Among these amendments are new reporting and disclosure requirements.
With the growing popularity of voluntary benefits, the specter of ERISA must also be considered. Group insurance programs may be exempt from ERISA if:
- They are not funded by employer contributions.
- Employee participation must be completely voluntary.
- The employer can only facilitate the program through collection of premiums by payroll deduction, without endorsing the program.
- Any compensation to the employer must be for administrative services actually performed and not considered "excessive."
ERISA's Preemption
The "preemption" provision of ERISA has been a bane and a boon to health care reform. The preemption effectively removes an ERISA plan from the jurisdiction of most state laws that would govern employee benefit plans. It is the preemption that allows states to mandate that certain benefits are covered for health insurance programs but that does not allow the states to enforce those same mandates on a self-funded health benefits plan.
The scope of the preemption has also been the subject of many court cases. Larger employers and union health and welfare plans have been strong advocates of an inviolable preemption. By avoiding state benefit and insurance laws, multi-state employers and union plans have been able to offer the same benefit program on a multi-state basis. Alternatively, an insurance company that sells health insurance in all 50 states may have to provide 50 different policies tweaked to represent the requirements of each individual state.
Fiduciary Responsibility
The most significant sections of ERISA that deal with employee welfare benefit plans address the responsibility of a fiduciary. A fiduciary is defined as any person who exercises discretionary authority or control over a plan's management or assets. A fiduciary may also be a person or entity that provides investment advice to a plan for a fee or other compensation. Additionally, a fiduciary can also have discretionary authority or responsibility in the administration of a plan.
ERISA requires that an employer, i.e., fiduciary, administer its employee benefit plans in accordance with the written terms of the plan and solely in the interests of the plan participants. In short, an employer's actions cannot be arbitrary or capricious when it comes to administering the plan. Also, the fiduciary must act for the exclusive purpose of providing benefits to participants and beneficiaries and to defray reasonable expenses of administering the plan.
The penalty for breach of fiduciary duty is severe. Any fiduciary found to breach any of the duties is personally liable for the full amount of any loss resulting from their actions. There is also the specter of civil penalties and, if the breach is willful, criminal penalties may apply.
The requirements for a plan to be written underscore the intent to avoid arbitrary decisions. The plan must be in writing and a summary of the plan, the Summary Plan Description (SPD), is given to plan participants.
ERISA Reporting
ERISA requires that many employers and/or plan administrators provide certain information on the plans they offer. This information may be required to be provided to plan participants and beneficiaries, the U.S. Department of Labor and the Internal Revenue Service.
Information that may be required includes:
SUMMARY PLAN DESCRIPTION (SPD)
The SPD must be provided to each plan participant and the Department of Labor within 120 days after the adoption of a plan. Copies must be provided to new participants within 90 days of first becoming eligible to participate. An updated SPD must be provided once every five years if a plan has been materially modified or once every ten years, if not modified.
The SPD covers the plan administrator and sponsor, information on the operation of the plan and benefit and eligibility requirements. It must also include the procedures for filing claims and remedies or procedures to protest denied claims. The SPD also sets forth the rights participants have under ERISA regarding access to information on the plan.
The courts have been quite active in interpreting the language in SPDs. As important' unless an employer has reserved the right to make changes to a plan, the courts have often viewed the right to change a plan as limited, at best. Court cases have gone beyond the written summary to consider oral promises or assertions made in other employer drafted documents such as an employee handbook.
SUMMARY OF MATERIAL MODIFICATION (SMM)
This summary covers the same information as the SPD. It is an annual update of any information that has changed. It must be provided to each plan participant and the Department of Labor within 210 days after the end of the plan year.
ANNUAL REPORT—FORM 5500
The 5500 Form is filed annually with the Internal Revenue Service within 210 days after the end of the plan year. It includes financial information about the plan and must be provided to plan participants upon request. Employers with fewer than 100 employees must file using Form 5500-C/R.
SUMMARY ANNUAL REPORT (SAR)
This report is a brief summary of information in the annual report. It consists of a list of the plan's assets and liabilities or a description of the insurance contract used. It also includes a schedule of the plan's receipts and disbursements. It must be provided to each plan participant within 9 months after the end of the plan year.
TERMINAL REPORT
When a plan is terminated, a terminal report must be filed with the IRS. This report may be the annual return for the final plan year. It must be provided to plan participants on request.
The Department of Labor may request other reports and information. Such additional information may include a collective bargaining agreement or a trust agreement.
Reporting Exceptions for Small Employers
Many employers are unfamiliar with the reporting requirements of ERISA because of their small size. Employee welfare benefit plans that cover fewer than 100 participants at the beginning of the plan year are exempt from certain reporting and disclosure requirements.
This exemption from reporting requires the following conditions to be met:
- Benefits are paid as needed solely from the general assets of the employer maintaining the plan.
- Benefits are provided exclusively through insurance contracts or policies and the employer pays the premiums directly from its general assets or partly from its general assets and partly from participants' contributions.
If these requirements are met, the plan administrator does not have to furnish a summary annual report to participants or furnish an annual report or terminal report, even upon request. The annual report must be available for examination in the plan administrator's office.
Form 5500, the annual report, must be filed for plans that provide educational assistance and cafeteria benefits, irrespective of the size of the employer. These "fringe benefit plans" must file annual reports as specified by the Internal Revenue Code, Section 6039D.
A plan administrator must still furnish a summary plan description and a summary of material modification to plan participants. Other documents may be required to be furnished upon participant request.
Disclosure and Reporting Requirements
Employers have two important reporting requirements resulting from the Kassebaum/Kennedy legislation passed in 1996. One addresses disclosure of information regarding changes to a health plan. The other addresses proof of prior coverage for pre-existing conditions credit. These requirements are effective for plan years beginning July 1, 1997.
ERISA was amended to require group health plans to notify participants and beneficiaries when there is a material reduction in covered services or benefits under the plan. The description of the change must be distributed no later than 60 days after the date the change is adopted. SPDs must also be amended to include information regarding any insurer's involvement in the financing or administration of the plan. A new statement is also required to inform participants of their right to obtain information on their rights from the US Department of Labor.
Many employers will find the requirement to provide certification of prior plan coverage to be burdensome. The certificate will document the employee's period of coverage under a prior plan to offset the employee's pre-existing condition exclusion under a new employer's group health plan. The certificate must include any COBRA continuation coverage.
The certificate must be provided on three occasions:
- When an individual ceases to be covered under an employer's group health plan or when the individual becomes covered under COBRA.
- When an individual who is covered under COBRA ceases to be covered under COBRA.
- At the request of the individual made within 24 months after the date coverage ended under the group health plan.
Employers are required to comply "in good faith" pending the issue of regulations. Employers are required to certify periods of coverage, upon request, for periods of coverage that began on or after July 1, 1996. This requires that employers track group health plan coverage of current or former employees retroactive to July 1, 1996.
Note: The above summary was prepared by Euclid Managers®, 977 Oaklawn Ave., Elmhurst, IL 60126, and appears here pursuant to their permission.
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