7 Common ERISA Compliance Mistakes

The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that requires employers to abide by specific regulations concerning disclosure requirements for their health and welfare benefit plans. All employers who sponsor health and welfare benefits with at least 2 participating employees are subject to ERISA, except for government entities and churches.

The following are seven common mistakes employers make regarding ERISA and how you can avoid them:

  1. Failure to disclose plan information

ERISA requires plans to have written Plan Documents and Summary Plan Descriptions (SPD). The Plan Document is the more legal of the two and should be kept on file with the employer’s other important documents.

The SPD describes the benefits as well as the participant’s rights and obligations under the plan. This document must be distributed within 90 days after the participant first becomes covered under the plan or within 30 days of a participant or beneficiary’s request.

A certificate of insurance or benefit plan summary are not ERISA compliant documents.

  1. Failure to properly administer the plan in accordance with the plan documents or certificates of coverage

Many employers administer their plan with different waiting periods and hours of eligibility than are documented in their insurance certificates. When it comes to a participant’s rights under the plan, the ERISA documentation should mirror the controlling language in the certificates and employers should proactively request plan amendments if the language contradicts their administrative practices.

  1. Failure to file 5500s or Filing Late 5500s

An alarming number of fully-insured plans are failing to file Form 5550, either at all or in a timely fashion.

The ERISA filing requirement affects large employers: those with 100 or more covered participants as of the first day of the plan year. It may also impact small employers if they have a funded, self-insured benefit. For more information on this, see #4 below.

If an employer has an umbrella or wrap document , they will need to file for all benefits included in the document even if only one of the benefits meets the 100-participant threshold as of the beginning of the plan year. This is often the case with employers just over 100 employees who sponsor an employer-paid benefit, such as a term life and AD&D policy.

Form 5500 filings are due the last day of the 7th month after the end of the plan year. For calendar year plans, the filing deadline is July 31st. A 2 ½ month extension can be granted by filing Form 5558.

The penalty for late filing of a 5500-series return is $2,233 per day (indexed annually) and is administered by the US Department of Labor (DOL). The Delinquent Filer Voluntary Compliance Program (DFVCP) can significantly reduce penalties if an employer voluntarily files delinquent filings prior to being subject to an audit.

If you missed a required filing, it is best to be proactive and utilize the DFVCP to cap any potential penalties or fines.

  1. Filing one Form 5500 for multiple benefit plans without a wrap document

If an employer does not have an umbrella or wrap document in place for the benefit plan, they may not file all of their benefits together under a single Form 5500. Rather, the employer would need to file a separate Form 5500 with the appropriate schedule attached for each benefit which meets the 100-participant threshold.

Penalties have increased in recent years, making this a costly mistake.

To overcome this, it is best to ensure that you have merged any and all ERISA qualified plans into one umbrella document. Before you create one umbrella document, be sure to evaluate the number of covered participants in each plan at the start of the plan year.

  1. Small employers segregating assets for self-insured plans, such as FSAs or HRAs

For self-insured benefits with segregated assets, employers must file a Form 5500 for that benefit with either a Schedule I or Schedule H (for large employers) attached. Even if the employer is small and would not otherwise need to file a Form 5500, they would be subject to the filing requirement if they have segregated assets.

To avoid this mistake, it is best to remove the appearance of a segregated and/or funded account by doing the following:

  • Fund the accounts out of the general assets of the employer
  • Pay/reimburse premiums and expenses out of the employer’s general checking or operations account or create a new zero balance account in the employer’s name
  1. Deducting pre-tax employee contributions without a Section 125 document

This is all too common of a mistake, but within the ERISA documentation, you must list how premiums are paid by the employer and/or the employee, and, the tax code requires that plans which permit pre-tax salary reductions for employee benefits be properly documented in a written Plan Document.

While it is not a direct requirement under ERISA, failure to have a written Section 125 Plan document at the time of an IRS audit could mean the employer must file:

  • Amended corporate tax returns
  • Amended W-2s for all employees who had deductions
  • Amended tax returns for affected employees
  1. Creating a self-administered FSA or HRA without appropriate documentation

Within the ERISA documentation, employers must list health FSA and HRA eligibility and funding methods.

While it is not a direct requirement under ERISA, the tax code requires that self-insured benefits be properly documented and perform annual non-discrimination testing to ensure that the plan does not discriminate in favor of highly compensated or key employees.

Reminder: The ERISA plan documentation will include all eligibility information, waiting periods, funding methods and measurement periods for variable hour employees for all ERISA-qualified benefits. This protects the employer and provides necessary information for the benefit of eligible employees.

If you have questions or need ERISA compliance assistance, please contact us.