erisa for employers 101

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).

What is ERISA?

• 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.

Who must Comply?

• 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.

Why is it important to determine if employer

sponsors an ERISA plan?

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.

What Plans Must Comply?

• 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.

Is there a Plan, Fund, or Program?

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.

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.

• 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.

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

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.

Are Plan Benefits Provided to Participants or

Beneficiaries?

Important Statutory and Regulatory Exemptions

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.



• 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.



• “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

Examples of Benefits | Are they subject?

• 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

Key ERISA Requirements

• 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.

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.

Plan Document 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?


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


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

Fiduciary Requirements

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.


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.


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.


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.


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.


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.


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.

Summary of Disclosure Requirements

• Summary Plan Description

• Summary of Material Modifications

• Summary of Benefits & Coverage

• Summary Annual Reports

• Providing copies of documents on written request

• Making documents available at principal office

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

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

Summary Plan Description (“SPD”)

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

Summary Plan Description

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.


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


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.


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.

Summary of Material Modifications (“SMM”)

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.

• 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.

Conflicts Between SPD/SMM & Plan or

Insurance Contract

Summary of Benefits and Coverage

• 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.


Employers and plan sponsors must provide an SBC:

• At annual enrollment.

• At initial enrollment

• At Special enrollment

• Upon Request


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.


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.


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.

Other Disclosures

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.

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,

Reporting Requirements

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.

Penalties for Non-Compliance

• 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.

How Many Forms are Required?

One form 5500 may be used for multiple ERISA benefits under

single plan.

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

Form 5500: When? What? Where?

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.

Claim Procedures

• 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.

Basic Structure of Claims 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.

Initial Benefit Claim

• Claim must be in writing.

• Claim must be processed within certain timeframes:

Health

Disability

Other

• Special notice requirements.

Processing Initial Claims

Timeframes for deciding claims

URGENT CARE CLAIM ASAP < 72 hours (24 hours) |

no extensions

PRE-SERVICE CLAIM reasonable period < 15 days |

15-day extension w/ notice

POST-SERVICE CLAIM reasonable period < 30 days |


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 |

two 30-day extensions w/ notice

ALL OTHER CLAIMS reasonable period < 90 days |



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.


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.

Appeal Process

• 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.

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.

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.

Processing Benefit Appeals

Timeframes for deciding claims

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 when plan reserves pre-approval, before

treatment ends or is reduced

DISABILITY CLAIM reasonable period < 45 days |

45-day extensions w/ notice

ALL OTHER CLAIMS reasonable period < 60 days |


External Appeal Process

In the case of most insured plans, the appeals regulations

essentially transfer the external review obligation from the plan itself

to the plan's insurer.

If state insurance law provides an external review process that

includes certain minimum standards under the NAIC Uniform Model

Act, 425 then insurers must comply with the state provisions (and

are not required to comply with the federal external review

procedures established by HHS.


• In states that do not have a compliant state process, insurers

must comply with a federally administered external review

process.

• Similarly, insurers whose external review processes are found not

to meet the minimum standards under the NAIC Uniform Model

Act must participate in a federally administered external review

process.

• Such insurers may choose to participate in the federal external

review process administered by HHS agreement through the

Office of Personnel Management (OPM), or engage in a private

accredited IRO process meeting the federal external review

standards applicable to self-insured plans


Federal external review procedures apply to self-insured ERISA

group health plans (and to insurers that are not subject to compliant

state law).

The appeals regulations and subsequent guidance establish

standards that the federal external review procedures must satisfy,

and address what claims are eligible for external review.


• Claimants must be permitted to request external review with the

plan, provided that the request is filed within four months after the

date of receipt of the benefits denial notice.

• The plan must complete a preliminary review of the claimant's

external review request within five business days after receiving

the request. The preliminary review must determine whether—

the claimant is (or was) covered under the plan when the health care

item or service was requested; for retroactive reviews, the plan must

determine whether the claimant was covered under the plan when the

health care item or service was provided;

the benefit denial does not relate to the claimant's failure to meet the

plan’s eligibility requirements (e.g., worker classification);

the claimant has exhausted the plan’s internal appeals process (unless

the claimant is not required to do so under the appeals regulations);

and

the claimant has provided all the information and forms needed to

process the external review.


• The plan must assign an accredited Independent Review

Organization(IRO) to perform the external review.

• The plan must also ensure against bias and ensure

independence.

• The plan should contract with at least three IROs for assignments

under the plan and rotate claims assignments among the IROs.

• If the IRO's decision is to reverse the plan's benefits denial, the

plan must immediately provide coverage or payment for the claim.

This includes immediately authorizing or paying benefits.

Recordkeeping Requirements

• 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.

Who must retain records?

• 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.

What records must be maintained?

• 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.

Questions?

Contact

Larry Grudzien

Phone(708) 717-9638

Email [email protected]

Site www.larrygrudzien.com

erisa for employers 101

Recruiting & HR