Tips For "Faring Well" With Welfare Plans

Employers frequently sponsor at least one - health insurance, dental insurance, a vision plan, disability programs. In employee benefits-speak, they are called "welfare plans." And in the realm of hot benefits topics, welfare plans are the hottest. It is easy to get burned. Some of the most common "hot spots" – and helpful suggestions – follow.

Consistency with written plan documents. It is tempting – your CEO's daughter needs a medical procedure that your plan excludes. Or, several employees in your California location forgot the time difference between the coasts and missed the deadline for enrolling in the health plan during your annual enrollment period. Should you make an exception, just this once, and cover the procedure or allow the employees to access coverage under the plan? In general, it's not advisable to do so. Welfare plans, like their more formal pension plan sisters, are regulated by the Internal Revenue Service and the Department of Labor. Violating the terms of your welfare plan documents can lead to claims of discrimination and fiduciary breach, among others. For this reason, you should administer your welfare plans in accordance with the terms of your written plan document, and if you decide to grant exceptions, you should amend the plan document to reflect this.

But what is the plan document? Under the Employee Retirement Income Security Act of 1974 (ERISA), virtually every employee benefit plan that you sponsor must be maintained according to a written document. With a pension or 401(k) plan, you likely have a formal plan document, a summary plan description, and other participant materials, such as an enrollment guide or investment education brochure. But with welfare plans, pinning down the document(s) that serve as the plan document can be difficult. Often, insured welfare benefit plan arrangements have several documents, including an insurance policy, an insurance certificate, the provider's plan description booklet, and the sponsor's summary plan description. It is important to know which of these documents makes up the official "plan document." Employers have employed several strategies in response:

Wrapper plan document. In essence, wrapper plans (also known as omnibus or umbrella plans) typically "wrap" together your collection of welfare benefit programs into a single plan document. While the wrapper plan document generally does not define plan terms or lay out plan benefits, it does provide the important documentation backbone shared by every employee benefit plan you offer. Elements of the backbone usually include detailing who the participating employers are, who pays the cost of plan benefits, which employees are eligible, a claims procedure, language giving the plan sponsor and its delegates the power to amend or terminate the plan and to interpret the plan's terms, plan administration rules, and other ERISA requirements.

Multiple wrapper plan documents. Some employers choose to insure certain welfare plans and self-fund others, often through a voluntary employees beneficiary association ("VEBA"). Such an employer might choose to sponsor two separate wrapper plans – one for the insured component plans, and another for the self-funded component plans funded through the VEBA. The reason? Only self-funded welfare plans funded through VEBAs or other funding arrangements are subject to the Department of Labor's audit requirement, and segregating your plans helps your insured plans escape the detailed, and sometimes onerous and expensive, audit process.

Other employers may choose to have multiple wrapper plan documents for different plans, because they do not wish to wrap the plans together into a single plan document for reporting and disclosure purposes. Nonetheless, they may desire a wrapper document that wraps around each separate program (or like groups of programs) and which provides a place to park the backbone provisions described above.

Summary Plan Description as plan document. Some employers take the approach that the summary plan description, intended in ERISA to be a shorter, easier-to-understand version of the formal written document, is in fact also the plan document. Although this approach eliminates the need to maintain a separate plan document, it raises issues in its own right, such as whether there needs to be a formal process in place for adopting and amending the SPD, and whether the plan document provisions can be written in plain, understandable language that satisfies the SPD requirements.

The lesson here is to pay attention to your welfare plan documents and to know which documents serve as the official plan documents.

Are your plans covered by ERISA? While most of your welfare benefit programs are covered by ERISA, some fringe benefits, such as short-term disability and sick leave plans, and severance programs, fall in a gray area. It is often unclear whether they are just "payroll practices," which are not subject to ERISA, or whether they are ERISA-covered welfare plans. The answer may depend in part on how you have treated the plans. Typically, it will be to your advantage to have the plan covered by ERISA, because the rules that have developed under ERISA are generally more favorable to plan sponsors than the rules that exist under state law. Therefore, you should take steps to increase the likelihood of ERISA treatment – including asserting ERISA coverage of the plan in the plan document and SPD, complying with the form and filing requirements of ERISA (Form 5500, SPD requirements, claims procedures, etc.), and associating the plan with an insured plan, (for example, combining short-term disability with your long-term disability plan) to the extent possible.

Do your documents contain adequate reservation of rights language? Although ERISA exempts welfare plans from the vesting requirements which apply to pension plans, it is essential to review your welfare plan documents for language reserving your right to amend or terminate the plan and to consider adding explicit statements that welfare benefits are not "vested." Additionally, you should consider placing this reservation of rights language in all documents related to the welfare plans, including documents that you might otherwise forget. The "congratulations on your retirement" letter, the summary plan description, the forms provided to retirees, and even the script that your human resources manager uses when meeting with outgoing retirees to discuss retirement benefits – should all specifically, clearly and conspicuously reserve your right to change the welfare benefits you offer, even for retirees.

Are you complying with COBRA? COBRA is the federal law that requires you to continue coverage under group health plans for covered employees and their eligible dependents after certain "qualifying events" occur. COBRA is not new law - it was enacted nearly 20 years ago. However, new COBRA disclosure requirements went into effect for most plans on January 1, 2005. These new rules require you to revise the COBRA notices your plan had been using, and to provide two new notices – a notice that you send when COBRA does not apply, and a notice of early termination of COBRA coverage. You also have to let employees know how they should inform you when qualifying events occur that you wouldn't otherwise know about – such as when an employee gets divorced. Failure to comply with these requirements could make you liable for excise taxes, statutory penalties, medical benefits and litigation costs.

Are the new consumer-driven health plans right for you? Consumer-driven health plans are the rage, and you have probably been considering one at your company. A wide range of factors, from cost savings to employee relations to how the new plans fit with your overall benefits strategy, must be considered. There are a variety of consumer-driven plan options on the market – the most common being the health reimbursement account (HRA) and the health savings account (HSA). An employer pays the entire cost of an HRA (employees cannot contribute to it), and "account balances," which are generally unfunded, can be carried over from year to year. Typically, HRA account balances forfeit upon termination of employment. HRAs are often set up in combination with high deductible health plans, although this is not a legal requirement. HSAs, on the other hand, can be contributed to by an individual, or an employer, and must be established in combination with a high deductible health plan. HSAs are funded and portable, like an IRA in the retirement world. Complex rules regulate the interaction of HSAs and HRAs with one another, and with other health plans you may offer, such as a health flexible spending account. In considering a consumer-driven health plan for your organization, it is essential to "cut through the rhetoric" and find the right option for your workforce.

If you take away one thing from this article, take away this: Recently, more attention has been given to health and welfare plan issues by legislatures, regulators, the courts and the popular press than in the 30 plus years since ERISA was enacted. Employers are used to devoting time and attention to their retirement plans, which have always been highly regulated. The time has come to devote similar attention to your welfare plans.