Avoiding mistakes in day-to-day benefits administration

By Candace Walters

Published in the Rochester Business Journal, May 28, 2010 © HR Works, Inc.

A recent U.S. Supreme Court ruling pertaining to ERISA, one of the major federal laws that covers employee benefits, underscores a fact that every employer – big or small -  already knows: managing employee benefits is rapidly moving from challenging to downright daunting.

Newspaper accounts of the ruling quoted an attorney who summed up the case with one sentence: The law is so complex, mistakes can happen.

You don’t have to leave New York State to find examples. An employer in upstate New York - acting as their own plan administrator – recently was fined more than $17,000 for failing to comply with federal ERISA Summary Plan Description regulations. 

And during the past 14 months, employers in New York have seen four federal amendments and one change to New York State’s mini-COBRA law.   Each of these “updates” calls for new notice requirements and communications with eligible individuals.

So how do employers ensure that day-to-day benefits administration is being handled correctly?Awareness and familiarity are good places to start. In this column we’ll cover some of the basics. Let’s begin with ERISA.

ERISA, the Employee Retirement Income Security Act of 1974, sets minimum standards for retirement and employee welfare benefit plans in private industry. It covers two major areas:

• Employee Welfare Benefit Plans: Includes, but is not limited to, plans such as health, life/AD&D insurance, disability, flexible spending accounts, severance pay plans, dental, certain employee assistance programs, vision, prescription, and certain tuition reimbursement and voluntary benefits.
• Employee Pension Benefit Plans: Includes virtually any type of plan where income is deferred until termination of employment or beyond.

It’s important to note that ERISA contains detailed provisions for reporting to the government and disclosure to participants. Two very important disclosure requirements are Plan Documents and Summary Plan Descriptions (SPD). Both disclosure requirements typically generate a great deal of confusion. It’s important for plan administrators to have a clear understanding of these documents. Failing to comply with disclosure requirements can lead to some pretty hefty fines during a U.S. Department of Labor (DOL) investigation.

Plan Documents & SPDs – Know the Difference

Employers often assume that materials provided by insurance companies (master contract, certificate of coverage, benefit summaries) are sufficient to meet Plan Document/SPD requirements.  This is rarely – if ever – the case.

The Plan Document establishes your benefits plan, and describes certain terms and conditions related to the operation of the plan. ERISA requires a copy of the plan document must be given to participants and beneficiaries upon request.

The SPD is a summary of benefits that informs participants about their plan and explains how it operates.  The SPD must be written in a way that is understandable to the average participant. Its content must advise participants of their benefits, rights and obligations under the plan (e.g. when participation begins, when benefits become vested, how to file a claim for benefits).

The SPD must be given to all participants within the first 90 days of joining an ERISA-covered plan.  SPDs must also be provided upon request and must be updated when plans and regulations change  Penalties for failing to provide these required documents generally cost up to $110 per day.  Employers should consider this a wakeup call and make sure all documents related to ERISA regulated benefit plans are up to date and in compliance.

For additional information on the types of plans subject to ERISA and on ERISA’s disclosure requirements, refer to the DOL web site (www.dol.gov) or consult with an employee benefits attorney specializing in ERISA.

Coping with COBRA

As mentioned above, COBRA is another area where administration mistakes often are made. COBRA, which allows continuation of group health coverage to certain workers and their families after a qualifying event, such as loss of employment, applies to ALL group health plans, including:

• Medical & prescription drug plans
• Dental
• Vision
• Health care flexible spending accounts (in certain cases, depending on the balance)
• Employee assistance plans (if providing medical benefits, not just referral services)
• Health reimbursement accounts

COBRA regulations require employers to notify employees of their COBRA rights within the first 90 days of coverage in a group health plan; and upon the occurrence of a qualifying event. Some of the most common errors associated with COBRA administration include: 

• Not providing general notices to newly covered employees
• Not mailing a separate general notice to the spouse, if covered by the benefit
• Not including covered dependents on qualifying event COBRA notifications
• Not offering COBRA continuation coverage for all group health plans (see above list)
• Not extending open enrollment rights to COBRA beneficiaries (Qualified beneficiaries must be allowed to make the same choices among plan options offered to non-COBRA beneficiaries under the plan during open enrollment.)

Employers are advised to keep a log noting who received these notifications and when they were given or mailed.  Failure to provide COBRA notices also carries the $110 per day ERISA penalty.  In addition, the IRS can assess excise taxes of $100 per day for each day of noncompliance. (But if there is more than one qualified beneficiary with respect to the same violation, the maximum amount of tax for any day is $200 per family).  Depending on the circumstances, an employer also may be found liable for uncovered medical claims due to the failure to notify a participant of his/her COBRA continuation rights.

It is important to keep your COBRA notices and procedures up to date.  The past year is a perfect example. Administrators needed to update notices five separate times to keep up with the changes brought about by the American Recovery and Reinvestment Act (ARRA) and its three subsequent amendments as well as update NYS’s mini-COBRA notice.  

Hiring a third party administrator (TPA) to send required COBRA notices does not exempt an employer from liability.  Several court cases involving TPAs have held the employer liable when required notices were not issued.

Domestic Partner Coverage

In several private letter rulings, the IRS has stated that an employer’s contribution to the cost of health care coverage of an individual who does not meet the definition of a “dependent” for tax purposes must be reported as income on the W-2.  This applies to coverage for domestic partners in New York State, unless they otherwise qualify as dependents.  The amount of imputed income is equal to the “fair market value” of the coverage minus any amount paid for by the employee.  In addition, the employee’s share of the cost for that individual cannot be paid with pre-tax deductions. 

While the IRS has not specifically defined what constitutes fair market value, in another private letter ruling they suggested the use of the value of group coverage.

Medicare Part D

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA) added a new prescription drug program to Medicare, referred to as Medicare Part D.  Prescription drug coverage under Medicare became available starting January 1, 2006.

Under the MMA regulations, most entities that currently provide prescription drug coverage to Medicare beneficiaries must provide disclosure notices indicating whether the entity’s coverage is creditable or non-creditable prescription drug coverage.

The distinction between creditable and non-creditable coverage is significant, as beneficiaries who are not covered under creditable prescription drug coverage and who choose not to enroll in Medicare Part D during their initial enrollment period may pay a higher premium on a permanent basis if they enroll at a later date.  This late enrollment penalty applies to individuals who have a break in creditable coverage of 63 continuous days or longer, and it may increase the monthly premium by at least 1% for every month that the individual did not have creditable coverage.

At a minimum, the disclosure notices must be provided at the following times:

1. Prior to the Medicare Part D Annual Coordinated Election Period (November 15 – December 31 of each year);
2. Prior to an individual’s Initial Enrollment Period for Part D;
3. Prior to the effective date of coverage for any Medicare eligible individual that joins the plan;
4. Whenever a company stops offering prescription drug coverage or changes the coverage offered so that it becomes creditable or non-creditable;
5. Upon request by the individual.

If the notices are provided to all plan participants annually prior to November 15, CMS (Centers for Medicare & Medicaid Services) will consider items 1 and 2 to be met.  Notices should also be provided to all newly eligible employees prior to enrolling in a prescription plan in order to meet the requirements of item 3.

In addition to these notices to individuals, employers are also required to report annually to CMS on the number of individuals covered by both creditable and non-creditable prescription drug plans.

For more information on Medicare Part D disclosure requirements, refer to the CMS web site (www.cms.gov).