Download - Everything You Need to Know About ERISA


Basic ERISA Seminar

ByLarry GrudzienAttorney at Law


What is ERISA?

• “ERISA” stands for the Employee Retirement Income Security Act of 1974 (Pub.L. 93-406, 88 Stat. 829, enacted 1974-09-02.

• ERISA is comprehensive federal legislation, first enacted in 1974 and amended many times since then.

• Title I of ERISA is part of the labor laws of the United States and governs the structure of “employee benefits plans.”

• For most plans, it requires detailed disclosure to covered individuals, employees and beneficiaries).

• For many plans, it requires detailed reporting to the government (mainly on Form 5500).

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• ERISA Title I also imposes a strict fiduciary code of conduct on many of those who sponsor and administer ERISA plans.

• In addition, there is a federal mechanism for enforcing rights and duties with respect to ERISA plans, and it preempts a large body of state law.

• The Department of Labor (DOL) enforces ERISA Title I, mainly through its Employee Benefits Security Administration (EBSA) (formerly called PWBA).

• Failure to comply with ERISA’s requirements can be quite costly, either through DOL enforcement actions and penalty assessments or through employee lawsuits.

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What is ERISA?


• Virtually all private-sector employers are subject to ERISA - there is no size exemption.

• This includes corporations, partnerships, and sole proprietorships.

• Remember, non-profit organizations are covered as well.

• However, the plans of governmental employers and of churches are exempt from the application of ERISA Title I.

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Who must comply?


• If an employer sponsors a plan subject to ERISA, it must comply with its many requirements, but it also enjoys many protections.

• Advantages of ERISA status Employees and beneficiaries may not sue in state court. Courts apply a standard of review more favorable to the plan.

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Why is it important to determine if employer sponsors an ERISA plan?


• Many employee benefit arrangements that provide non-pension fringe benefits are “employee welfare benefit plans” covered by ERISA.

• However, there are important exemptions and safe harbors provided for certain categories of employee benefits.

• The definition of ERISA welfare benefit plan contains the following three basic elements: there must be a plan, fund or program; that is established or maintained by an employer, and for the purpose of providing the specified benefits to participants and

beneficiaries.

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What Plans must Comply?


• In determining whether there is a “plan, fund or program” within the meaning of the ERISA definition, the courts ask whether from the surrounding circumstances a reasonable person could ascertain: the intended benefits; a class of beneficiaries; the source of financing; and the procedures for receiving benefits

• In addition, under Fort Halifax Packing Co. v. Coyne (482 U.S.1, 8 EBC 1729(1987) S. Ct. provides that a plan exists only when there is a commitment to pay benefits systematically, including an ongoing administrative responsibility or scheme to determine eligibility and calculate benefits.

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Is There a Plan, Fund, or Program?


• Some Arrangements Do Not Qualify Even though it is easy to satisfy the basic “plan, fund or program” test, some

arrangements do not qualify. For example, where an employer offered only a one-time, lump-sum severance

bonus, there was no ongoing administrative scheme and therefore the bonus was not an ERISA benefit .

• Written Document Is Needed to Create a Plan, Fund or Program It should be recognized that no document is necessary for a plan to exist under

ERISA, if from the surrounding circumstances the above elements of a plan, fund or program can be ascertained .

When the necessary elements of a plan can be ascertained, however, maintaining the plan without a written document is a violation of ERISA.

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Is There a Plan, Fund, or Program?


• An Employer need not to do much to establish or maintain a plan.

• Issue is resolved in self-insured arrangements.

• Issue is more uncertain in insured arrangements Purchasing Insurance is employer maintenance. Effect of Voluntary Plans Safe Harbor.

• Individual insurance policies can create an ERISA plan.

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Is the Plan, Fund, or Program Employer- Established/Maintained?


• Specified listed benefits include: medical, surgical or hospital care or benefits benefits in the event of sickness, accident, disability, death or unemployment, vacation benefits apprenticeship or other training benefits, daycare centers scholarship funds pre-paid legal services holiday and severance benefits and housing assistance benefits

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Does the Plan Provide the Type of Benefits Listed in ERISA?


• Who are Participants and Beneficiaries? Current employees. Beneficiaries a person designated by a participant . Retired employees and COBRA qualified beneficiaries can be if they are entitled

to benefits.

• Plans Covering Self-Employed Individuals or partners: Not considered an ERISA plan.

• Plans Covering Only One Employee (or Former Employee: Can be if covers non-executive.

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Does the Plan Provide the Type of Benefits Listed in ERISA?


• Statutory and Regulatory exemptions include: Government, Church and Other Statutory Exemptions These include programs maintained solely to comply with state law

requirements: Workers Compensation; Unemployment; or Disability Laws.

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Important Statutory and Regulatory Exemptions


• Statutory and Regulatory exemptions include: Payroll Practice Exemptions - This includes payment of:

wages, overtime pay, shift premiums, and holiday or weekend premiums ; unfunded sick-pay or income replacement benefits ;and vacation, holiday, jury duty and similar pay.

To qualify for this exemption, the amounts must be paid out of the employer’s general assets.

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• Statutory and Regulatory exemptions include: “Voluntary Employee-Pay-All” Exemption - The employer allows an insurance

company to sell voluntary policies to interested employees who pay the full cost of the coverage. Permits employees to pay their premiums through payroll deductions and permits the

employer to forward the deductions to the insurer. However, the employer may not make any contribution toward coverage and the insurer

may not pay the employer for being allowed into the workplace. The employer may not “endorse” the program - This element is the key element in

treating the program as an ERISA benefit. What makes up an endorsement? Selecting insurers Negotiating terms or design Linking plan coverage to employee status Using employer’s name Recommending plan to employees Doing more than permitted payroll deduction

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• Cafeteria Plan – No, but Health FSA is covered• Insured Major Medical Coverage - Yes• HMOs - Yes• Dental coverage - Yes• DCAP - No• AD&D Coverage -Yes• GTL coverage -Yes• LTD Coverage - Yes• PTO Coverage – No, payroll practice • Adoption Assistance - No• Educational Assistance - No• STD Coverage – Maybe if not payroll practice• Severance Coverage - Yes• Voluntary Insurance - no

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Examples of Benefits: Are They Subject?


• Plan document must exist for each plan.• Plan terms must be followed .• Strict fiduciary standards must be followed.• Fidelity bond must be purchased to cover every person who handles plan

funds.• Summary plan description (SPD) must be furnished automatically to plan

participants.• Summary of material modification (SMM) must be furnished automatically

to plan participants when a plan is amended.• Copies of certain plan documents must be furnished to participants and

beneficiaries on written request.

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Key ERISA Requirements


• Form 5500 must be filed annually for each plan (subject to important exemptions, especially for small plans).

• Summary annual report (summarizing Form 5500 information) must be furnished automatically to plan participants for a plan that files a Form 5500 (except totally unfunded welfare plans).

• Claim procedures must be established and carefully followed when processing benefit claims and when reviewing appeals of denied claims.

• Plan assets, including participant contributions, may be used only to pay plan benefits and reasonable administrative expenses.

• For a few welfare plans, plan assets may have to be held in trust.• Group health plans must conform to applicable mandates like COBRA and

HIPAA.

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Key ERISA Requirements


• Plan must be established and maintained through a written document. ERISA requires that every welfare plan “be established and maintained pursuant

to a written instrument.”

A written instrument does the following: Participants are on notice of benefits and their own benefits under the plan.

Plan administrator is provided guidelines by which to make decisions

• ERISA does not provide specific format or content requirements.

• Insured benefit requirements – use of “wrap documents.”

• A wrap document fills in missing ERISA requirements.

• Can a single document serve as both plan document and SPD?

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Plan Document Requirements


• Consequences of Failure to Comply: No Specific Penalties Inability to Respond to Written Participant Requests Benefits Lawsuits May Be Based on Past Practice and Similar Evidence Less Favorable Standard of Review in Benefits Lawsuits Limited Ability to Amend or Terminate Plan Fiduciary Duty to Follow Plan Document

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• ERISA Required Plan provisions: Named Fiduciary Procedures for allocation of responsibilities Funding policy How payments are made Claims procedures Amendment procedures Distribution of assets on plan termination Required provisions for group health plans:

COBRA & USERRA rules HIPAA Portability, Special enrollment and nondiscrimination rules HIPAA Privacy and Security Minimum hospital stays after childbirth QMCSO rules Disclosures regarding remaining Federal Mandates and other Laws

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• ERISA’s fiduciary rules are distinguished from many other rules of behavior by the following major characteristics: the rules incorporate a broad, functional definition of the term “fiduciary,” which

sweeps in all kinds of individuals and business entities depending on the duties they actually perform in connection with ERISA plans;

the standard of behavior expected from ERISA fiduciaries is very high;

broadly-defined fiduciary responsibilities apply to every act taken in a fiduciary capacity;

certain specifically-enumerated transactions between an ERISA plan and persons acting in connection with the plan are absolutely prohibited; and

ERISA fiduciaries who breach their duties can be personally liable for damages to the ERISA plan and for DOL penalties imposed in connection with fiduciary breaches.

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Fiduciary Requirements


• Automatic Fiduciaries: Named Fiduciaries Plan Administrators Trustees Others

• A plan must provide for one or more names fiduciaries who jointly or severally have authority to control and manage the operation and administration of the plan.

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• Functional Fiduciaries Persons or entities become ERISA fiduciaries to the extent that they: Have discretionary authority or discretionary control regarding the management

of an ERISA plan; Have any authority or control respecting management or disposition of plan

assets; Render investment advice for a fee; or Have discretionary authority or discretionary responsibility in the administration

of the plan.

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• Fiduciary Standard of Behavior One of Highest in Law The duties of care and integrity imposed on fiduciaries have been among the

highest, if not the very highest, in the common law . In enacting the ERISA fiduciary duty rules, Congress intended to incorporate

principles of the common law of trusts, tailored as necessary to employee benefit plans.

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• The principal duties of ERISA fiduciaries are: To act solely in the best interest of plan participants and beneficiaries (the duty of

undivided loyalty); To use plan assets for the exclusive purpose of paying plan benefits or

reasonable expenses of plan administration (the exclusive benefit rule); To act with the care, skill, prudence and diligence that a prudent person in similar

circumstances would use ; To diversify the plan’s investments (if any) to minimize the risk of large losses;

and To act in accordance with the documents governing the plan.

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• Fiduciaries are liable for breaches that occur while they serve as fiduciaries, but not for breaches in the period before they become fiduciaries or after they cease to be fiduciaries.

• Liability includes: personal liability for losses caused to the plan;

personal liability to restore to the plan any profits the fiduciary made through the use of plan assets ; and

other equitable or remedial relief, as a court may deem appropriate, including removal of the fiduciary.

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• Fiduciary bonding requirements It is required if there are plan assets. Who must be bonded? Amount of Bond?

An amount equal to at least 10% of the funds handled during the prior reporting year, subject to a minimum of $1,000 and a maximum of $500,000.

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• Summary Plan Description• Summary of Material Modifications• Uniform Explanation of Benefits• Summary Annual Reports• Providing copies of documents on written request• Making documents available at principal office

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Summary of Disclosure Requirements


• Which plans must comply? Almost every employee benefit plan must comply

• Are there any plans that are exempt? Exemption of employer-provided daycare centers Exemption of welfare plans for certain select employees Cafeteria plans - considered a fringe benefit plan, but health FSA must comply

• Note: No small plan exemption

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Disclosure Requirements


• Who is responsible for complying? Plan Administrator is responsible .

• Who must be furnished with SPD and SMMs In general, covered participants, but not beneficiaries Exceptions, the following must receive copy:

COBRA Qualified Beneficiary QMCSO Alternative Recipient Spouse/Dependent of Deceased Participant Representatives or Guardians of Incapacitated Persons

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Disclosure Requirements


When must it be provided? Within 90 days for newly-covered participants. Within 120 days for new plans. Updated SPD is required every 5 (or 10) years.

How must it be provided? Must be furnished in a way ”reasonably calculated to ensure actual receipt of the

material.” Must use method ”likely to result in full distribution”. Satisfactory method will depend on facts and circumstances.

Furnish by Mail Furnish by In-hand delivery Electronic means

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Summary Plan Description (SPD)


• General format and style requirements: Be sufficiently accurate and comprehensive to inform plan participants and

beneficiaries of their rights and obligations under the plan. Be written in a manner understandable to the average plan participant. Not have the effect of misleading, misinforming or failing to inform participants

and beneficiaries. Any description of exceptions, limitations, reductions, and other restrictions of

plan benefits must be apparent in the SPD.

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• The items to be included in a welfare plan SPD: Plan-identifying information Description of plan eligibility provisions Description of plan benefits Statement clearly identifying circumstances that may result in loss or denial of

benefits Description of plan amendment and termination provisions Description of plan subrogation provisions (if any) Information regarding plan contributions and funding

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• The items to be included in a welfare plan SPD: Information regarding plan contributions and funding. Information regarding claims procedures. Model statement of ERISA rights. Prominent offer of assistance in a non-English language, if it applies. Explanation of Plan’s Policy regarding Recovery of Overpaid benefits. Explanation of plan’s allocation policy for insurer refunds and similar payments. Discretionary authority to interpret plan terms and resolve factual disputes.

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• The following additional items must be included in the SPD for a group health plan: Detailed description of group health plan benefit provisions; Description of the role of health insurers (i.e., whether a related insurer actually

insures plan benefits or merely provides administrative services for the plan); Description of group heath plan claims procedures; Description of effect of group health plan provider discounts; Group health plan provider incentives disclosure required. Information regarding COBRA coverage; and Disclosures regarding other federal mandates.

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• Who must be provided SMM? Same rules as SPD.

• What must the SMM report? Any “material” change in plan or any change in the information required in the

SPD.

• When must it be provided? Must be furnished within 210 days after the end of the plan year in which

change is adopted. Special rules for group health plans – 60 days if change is a material reduction.

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Summary of Material Modifications (SMM)


• SPD will generally control where it conflicts with plan document.• What constitutes sufficient conflict for rule?• Effect of SPD disclaimers.• Non-SPD summaries do not control over conflicting plan documents.• SPD ambiguities may be construed against plan sponsor.

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Conflicts Between SPD/SMM & Plan or Insurance Contract


• HHS developed standards for plans to use in summarizing plan benefits and coverage for participants.

• The required summaries will be a short “highlights” description of the plan.

• It must not exceed 4 pages in length and must not include print smaller than 12-point font.

• The statute describes the information that must be covered by the summary.

• Plans will have until March 23, 2012, to begin using these new summaries.

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Summary of Benefits and Coverage


• Deadline for summaries of material modification: A notice of any material modification must be given to participants at least 60

days prior to the date the plan modification is to become effective. This provision is generally effective March 23, 2012.

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• Penalty for failure to provide new summary or SMM: A penalty of not more than $1,000 may apply for each willful failure to provide the

required plan summary or advance summary of a material modification.

Each participant who fails to receive a required summary (or summary of material modification) is counted separately in determining the amount of the penalty, so it appears that a willful failure to timely provide 5 participants with a summary could result in a fine of up to $5,000.

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• Standardized definitions: HHS promulgate regulations providing for the standardized definitions of terms

used in insured plans.

The required four-page plan summary discussed previously must include these definitions, to enable participants to better understand and compare coverage.

The terms for which standardized definitions include many common terms.

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• Written requests: What must provided?

Copy of SPDs, plan documents, contracts and agreements. Must provide within 30 days of request. Failure to provide - penalty -$110 per day.

• Documents available for inspection: At the principal office of the plan administrator or employer (if different). Within 10 days of request.

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Other Disclosures


• Summary Annual Report (SARs) Summarizes the information on Form 5500, Plan administrator must furnish SARs to participants and others entitled to

receive SPD, Provided within 9 months of filing From 5500, Information required to be included in SAR is provided in Model SAR, Exemption - small welfare plans

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Other Disclosures


• The plan administrator of each separate ERISA plan must report specified plan information annually to DOL .

• Exemption for certain plans: Complete exemption for small unfunded plans.

Plans must have fewer than 100 “covered participants” at start of the plan year.

Plans for certain select employees. Daycare centers. GIAs.

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Reporting Requirements


• Penalties apply for late or unfiled Forms 5500s.• DOL may assess a civil penalty against a plan administrator of up to $1,100

per day from the date of failure or refusal to file.• Penalties are cumulative - against each Form 5500 not filed.• No statute of limitations.

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Penalties for Non-Compliance


• One form 5500 may be used for multiple ERISA benefits under single plan.

• How many Form 5500s are maintained by more than one employer?

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How Many Forms are Required?


Due date of return: By end of 7th month after plan year, unless extended Extended by filing Form 5558 or extending employer’s return.

What must be filed? Form 5500 Schedule A Schedule C Financial schedules and accountant’s opinion, if funded

Filed with DOL - paper or electronically.

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Forms 5500: When? What? Where?


• ERISA plans must establish and maintain procedures under which benefits can be requested by participants and beneficiaries and disputes about benefit entitlements can be addressed.

• Claimant must exhaust plan’s procedures before filing suit.

• If plan has inadequate procedures, claimants may skip procedures and directly to court.

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Claim Procedures


• The basic steps in any claims procedure are: a claim for benefits by a claimant or authorized representative; a benefit determination by the plan, with required notification to the claimant; an appeal by the claimant or authorized representative of any adverse

determination ;and the determination on review by the plan, with required notification to the claimant.

• Procedures can vary depending on the type of claim involved.• Plan administrator is responsible for complying with procedures.

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Basic Structure of Claims Procedures


• Claim must be in writing.• Claim must be processed within certain timeframes:

Health Disability Other

• Special notice requirements.

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Initial Benefit Claim


• Timeframes for deciding claims• URGENT CARE CLAIM: ASAP < 72 hours (24 hours) no extensions• PRE-SERVICE CLAIM : reasonable period < 15 days, or 15-day extension

w/ notice• POST-SERVICE CLAIM: reasonable period < 30 days, or 15-day extension

w/ notice• CONCURRENT CARE: when plan reverses pre-approval, in time to permit

appeal before treatment ends or is reduced, or when request for extension involves urgent care, ASAP < 24 hours (if request is made w/in 24 hours of end of treatment series)

• DISABILITY CLAIM: reasonable period < 45 days, or two 30-day extensions w/ notice

• ALL OTHER CLAIMS: reasonable period < 90 days, or 90-day extension w/ notice

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Processing Initial Claims


• All adverse determinations must be in writing, understandable and must address: The specific reasons for the denial and the plan provisions relied on. A description of any additional information required from the claimant. A description of the appeals process.

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• A statement that a copy of “internal rules or guidelines” relied on in denying the claim may be obtained on request and without cost; and

• A statement that a written explanation of any “scientific or clinical judgment” relied on in denying the claim may be obtained on request and without cost.

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• Appeal must be filed at least 180 days after adverse determination.• If no appeal, claimant loses right to file further claim with plan or in court.• Once appeal is filed, claimant must receive “full and fair review” by

named fiduciary.• Claimant must be permitted to submit written comments and access

documents.

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Appeal Process


• Adverse determinations must contain the following information: The specific reasons for the denial and the plan provisions relied on. A description of any additional information required from the claimant. A statement of the claimant’s right (discussed earlier) to obtain relevant

documents and other information.

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Appeal Process


• Adverse determinations must contain the following information: A description of any additional required or voluntary appeals and a statement

of the claimant’s right to sue For group health and disability claims, a statement that a copy of “internal

rules or guidelines” relied on in denying the claim may be obtained without cost upon request and

For group health and disability claims, a statement that a written explanation of any “scientific or clinical judgment” relied on in denying the claim may be obtained on request and without cost.

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Appeal Process


• Timeframes for deciding appeals• URGENT CARE CLAIM : ASAP < 72 hours (24 hours) no extensions• PRE-SERVICE CLAIM: reasonable period < 30 days no extensions• POST-SERVICE CLAIM: reasonable period < 60 days no extensions• CONCURRENT CARE DECISION: when plan reverses pre-approval,

before treatment ends or is reduced• DISABILITY CLAIM: reasonable period < 45 days, or 45-day extension w/

notice• ALL OTHER CLAIM: reasonable period < 60 days, or 60-day extension w/

notice

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Processing Benefit Appeals


• Appeal Process: Plans must comply with either a state external review process or the federal

external review process.

If a state has in place an external review process offering at least as much protection as the NAIC Model Act, an insurance company must comply with the state law.

Plans not subject to state law (self-insured employee benefit plans), or located in states without external review laws as protective as the NAIC Model Act, must comply with a federal external review process yet to be established.

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Effective for Plans Beginning After September 23, 2010


• Appeal Process: HHS is authorized to deem the external review process of a plan or insurer, in

operation on March 23, 2010 (i.e., the enactment date of health care reform), to be in compliance with either the state external review procedures) or the federal procedures, if the expedited review requirements of the appeals regulations are substantially met.

HHS will issue additional guidance addressing how plans and insurers can obtain certification of their procedures

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• Appeal Process: The agencies have provided an enforcement grace period for some (but not all)

of the additional internal claims and appeals requirements under health care reform

The grace period (originally available only until July 1, 2011) was intended to provide plans and insurers more time to change plan procedures and to modify computer systems to come into compliance. Originally, the agencies indicated that they would not take any enforcement action against a group health plan working in good faith to implement the additional standards with respect to internal claims and appeals even though it did not yet have them in place.

In March 2011, the grace period was modified and extended until plan years beginning on or after January 1, 2012 (with one exception).

Notably, the agencies indicated that no requirement would apply for plans to be working in good faith to implement the additional standards for either the extended or the original enforcement period.

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• Specific recordkeeping requirements are imposed.

• Requires retention of records sufficient to document information that is required by Form 5500.

• Retain the records to document the information on From 5500 for a period of not less than 6 years after From 5500 is filed or would have been filed.

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Recordkeeping Requirements


• Those “persons” who have reporting or certification requirements must maintain records.

• Requirements apply to plan administrator, insurer, TPA and CPA.

• Applies to those plans who do not file Form 5500.

• Responsibilities can not be delegated.

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Who Must Maintain Records?


• Records sufficient to verify information on Form 5500.

• Records subject to rules are defined broadly and include claims record.

• Summaries or recaps of actual records are not sufficient.

• Electronic records requirements.

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What Records Must Be Maintained?


Questions?

• Contact Larry Grudzien at: Go to my website: www.larrygrudzien.com or E-mail: [email protected] or Phone: 708-717-9638

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Download - Everything You Need to Know About ERISA

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