M1: Study Guide Q's

Question 1

An employee welfare benefit plan Under ERISA has four basic elements. What are these elements? (Text, p. 8)

Answer 1

The four basic elements of an employee welfare benefit plan are:

(1) There must be a plan, fund or program.
(2) The plan, fund or program is established or maintained by an employer.
(3) The plan, fund or program is for the purpose of providing specifically listed benefits, through the purchase of insurance or otherwise.
(4) Benefits are provided to participants and beneficiaries.

Question 2

Explain how a plan, fund or program for an employee benefit plan is defined. (Text, p. 8)

Answer 2

The phrase plan, fund or program is not defined in the Employee Retirement Income Security Act (ERISA) but rather has been laid out in several court cases. The courts have held that a plan, fund or program under ERISA is established if, from the surrounding circumstances, a reasonable person can ascertain the intended benefits, the class of beneficiaries, the source of financing and the procedure to receive benefits.

Question 3

Describe the procedures required to establish an ERISA employee welfare benefit plan. (Text, pp. 8-9)

Answer 3

No particular formalities are required to create an ERISA plan, and no single action in and of itself necessarily constitutes establishment of an ERISA employee welfare benefit plan. Thus, ERISA plans have been deemed to be “established or maintained” by a practice that would cause a reasonable employee to perceive an ongoing commitment by the employer to provide employee benefits. This would include any contributions by the employer toward payment of benefits or by the employer simply administering the benefit.

It is easy to have a plan, fund or program—generally any ongoing administrative scheme will satisfy this condition. Showing that an employer maintains a plan is also easy—any contribution by the employer toward payment of benefits or administration of the plan is enough (including a contribution toward insurance coverage).

Question 4

List the types of employee welfare benefit plans not covered under ERISA and specifically excluded under the statute. (Text, pp. 9-10)

Answer 4

The types of benefit plans that are not subject to ERISA requirements are:

(a) Governmental plans

(b) Church plans

(c) A plan maintained to comply with state laws on workers’ compensation, unemployment or mandated disability insurance.

(d) A plan maintained outside the United States primarily for nonresident aliens.

(e) Plans that cover only self-employed individuals and that cover no “common-law employees” generally are not subject to ERISA.

(f) Plans that cover only married shareholders of a corporation are not treated as ERISA plans.

These are statutory exemptions specific to ERISA. An employer should be aware that it may be required to comply with other federal laws that affect employee benefit plans.

Question 5

List the types of benefits provided by ERISA health and welfare plans, and provide examples of such plans. (Text, p. 10)

Answer 5

An ERISA health and welfare plan provides:

(a) Medical, surgical or hospital care or benefits
(b) Benefits in the event of sickness, accident, disability, death or unemployment
(c) Vacation benefits
(d) Apprenticeship or other training benefits
(e) Day-care centers
(f) Scholarship funds
(g) Prepaid legal services

Examples include medical insurance, dental, vision, prescription drug plans, drug or alcohol treatment programs, health flexible spending accounts (FSAs), employee assistance programs, wellness programs, accidental death and dismemberment, and short- and long-term disability benefits.

Question 6

Discuss whether plans that involve payroll practices are treated as ERISA health and welfare plans. (Text, p. 11)

Answer 6

The payment of an employee’s normal compensation in full or in part out of the employer’s general assets for periods when the employee is physically or mentally unable to work—that is, an unfunded short-term disability plan—is generally not a welfare benefit plan subject to ERISA. However, if a disability program provides more than an employee’s normal compensation or is funded in any way—for example, it is provided through insurance—the program will be a welfare benefit plan subject to ERISA.

Question 7

List 5 types of payroll practices as not being ERISA plans. (Text, p. 11)

Answer 7

(a) While absent on a holiday or vacation
(b) While absent on active military duty
(c) While absent for the purpose of serving as a juror or as a witness in an official proceeding
(d) On account of periods of time during which the employee performs little or no productive work while engaged in training, or
(e) Who is relieved of duties while on sabbatical leave or while pursuing further education.

Question 8

For a voluntary benefit arrangement to be exempt from ERISA based on the DOL safe harbor, it must meet certain requirements. What are these requirements? (Text, p. 12)

Answer 8

(a) No employer or employee organization contributions
(b) Participation is completely voluntary.
(c) No employer consideration except for reasonable compensation for administration
(d) No employer endorsement.

Question 9

Explain the meaning of the term no employer endorsement. (Text, pp. 12-13)

Answer 9

No employer endorsement means an employer can publicize, collect premiums, remit premiums, provide employee information to an insurance company and maintain a file on the voluntary plan.

However, an employer cannot express positive normative judgment and cannot urge/encourage employee participation. The participation of the employer or employee organization should be limited to the duties specified in the regulation, none of which involve the exercise of discretionary duties. An employer hoping to rely on this exemption should also be careful not to create the impression that the benefit is part of its benefit package by, for example, including it in enrollment materials or encouraging employees to enroll. DOL warns in the final Family and Medical Leave (FMLA) regulations that if a plan is intended to be exempt from ERISA under this provision, the employer should not pay an employee’s premium while the employee is on FMLA leave.

Question 10

What are the main disclosure requirements under ERISA? (Text, p. 15)

Answer 10

The main disclosure requirements under ERISA are:

(a) A plan document must exist for each plan.
(b) A summary plan description (SPD) must be furnished automatically to participants.
(c) A summary of material modifications (SMM) must be furnished automatically to participants when a plan is amended.
(d) A four-page summary of benefits and coverage (SBC) must be provided to applicants and enrollees before enrollment or reenrollment.
(e) Copies of certain plan documents must be furnished to participants and beneficiaries upon written request.
(f) Claim procedures must be established and followed when processing benefits claims and when reviewing appeals of denied claims.

Question 11

What are the main requirements that pertain to ERISA plan assets? (Text, p. 16)

Answer 11

The main requirements for ERISA plan assets are:

(a) Plan assets, including participant contributions, may be used only to pay plan benefits and reasonable administration costs.
(b) For some plans, plan assets may have to be held in trust.
(c) A fidelity bond must be purchased to cover every person who handles plan funds.

Question 12

Define plan document, and explain why it is vital to meet the written document requirement. (Text, p. 16)

Answer 12

ERISA requires that every ERISA health and welfare plan be established and maintained in writing, and the scope of an ERISA plan is defined by the official plan document. The plan document describes the plan’s terms and conditions related to the operation and administration of a plan. An insurance company’s master contract, certificate of coverage or summary of benefits is usually not sufficient to serve as a legal plan document and rarely fully protects the plan sponsor. Every plan participant has the right to examine the plan document.

Question 13

What specific liabilities or problems exist for an employer that fails to have a plan document? (Text, p. 18)

Answer 13

An ERISA plan may still exist even without a written plan document. A plan administrator’s failure or refusal to put a plan in writing is considered only a violation of ERISA and does not prevent coverage of the plan by ERISA. Failure to have a plan established in writing can result in the following liabilities or problems for the employer:

(a) Participants and beneficiaries may bring suit to enforce the ERISA written plan document requirement. Legal action may require the preparation of a formal document where none currently exists.

(b) A plan document must be furnished in response to a participant’s written request. The plan administrator may be charged up to $110 per day if the document is not provided within 30 days of a request.*

(c) Criminal penalties may be imposed on any individual or company that willfully violates any requirement of Title I of ERISA, which includes disclosure rules. The penalty per conviction could be $100,000 and/or imprisonment for up to ten years. The fine can be increased up to $500,000 if it is against a company.

(d) It can be difficult to prove plan terms and thus enforce plan provisions.

(e) Participants and beneficiaries who sue to enforce informal, unwritten plans can base their claims on past practice or other evidence outside the actual terms of a written plan document that is favorable to their position.

(f) A plan sponsor may not be able to amend or terminate an informal plan until it first adopts a written plan instrument, complete with the required ERISA procedure for amending the plan and for identifying persons having authority to amend the plan.

(g) ERISA requires a fiduciary to act “in accordance with the documents and instruments governing the plan.” This duty provides yet another incentive for careful plan drafting since, once reduced to writing as part of the plan document, plan language must generally be followed.

*The $110 per day amount along with other civil penalties violating ERISA provisions was increased in August 2016. In addition, the DOL announced that inflation adjustments to these penalties will occur annually.

Question 14

Describe a wrapper plan document. (Text, pp. 20-21)

Answer 14

A wrapper plan document is the typical way of supplementing an insurance company’s certificate of coverage or insurance contract with the missing ERISA provisions. The wrapper document should make clear to the participants that its contents and the carrier’s documents together constitute the plan document for the plan. If more than one benefit program is included under a single ERISA plan number (e.g., health, vision, dental and employee assistance plan benefits), then a wrapper plan document should be prepared to evidence the bundled approach. The result will be a single plan document that lists all of the welfare benefit options under that ERISA plan number. When multiple contracts or benefit arrangements are bundled under a single wrapper plan document, differences among the parts are inevitable. These differences should be identified and addressed at the outset as a matter of wrapper plan design.

Question 15

Explain the two often-conflicting requirements embodied in SPDs. (Text, p. 21)

Answer 15

ERISA provides that an SPD must be “written in a manner calculated to be understood by the average plan participant, and shall be sufficiently accurate and comprehensive to reasonably apprise such participants and beneficiaries of their rights and obligations under the plan.” Great care must be taken in composing the SPD language to meet these two often-conflicting requirements. In addition, plan sponsors generally want SPDs and other communication materials to convey positive messages to employees about their benefits.

Question 16

Explain how often a new SPD is required. (Text, p. 25)

Answer 16

At a minimum, ERISA requires employers to prepare new SPDs and distribute them to participants at least every ten years. For many plans, however, a five-year rule applies. A new SPD must be distributed to plan participants every five years if there has been a material change in the plan during that time. Each time a new SPD is distributed, a new five- or ten-year clock begins to run.

Question 17

How does DOL define a material reduction in covered services or benefits in a health plan that requires SMMs be distributed within 60 days after the modification or change? (Text, p. 24)

Answer 17

DOL defines a material reduction in a health plan as any modification or change that:

(a) Eliminates benefits payable under the plan

(b) Reduces benefits payable under the plan (for example, from a change in formulas, methodologies or schedules that serve as the basis for benefit determinations)

(c) Increases deductibles, copayments or other amounts paid by a participant or beneficiary

(d) Reduces the service area covered by a health maintenance organization (HMO), or

(e) Establishes new requirements (for example, preauthorization requirements) to obtain services or benefits.

Question 18

Discuss the acceptable methods of distributing required ERISA disclosure documents. (Text, pp. 26-27)

Answer 18

SPDs and SMMs must be furnished in a manner “reasonably calculated to ensure actual receipt of the material.” Acceptable methods include:

(a) In-hand delivery to employees

(b) First-class mail

(c) Second- or third-class mail, but only if return and forwarding postage is guaranteed and address correction is requested

(d) Inclusion in a union or company publication, but only if certain requirements are met

(e) Disclosure to participants (both employees and nonemployees) may be made electronically (for example, by email, an intranet or the internet). This option is not without limit, however. DOL issued safe harbor rules, meaning that plans are not required to comply with its conditions; however, compliance ensures that DOL will find a plan’s electronic delivery method acceptable.

Question 19

Explain the purpose of the SBC. (Text, p. 28)

Answer 19

ERISA disclosure requirements have been expanded by the health care reform requirement to provide a four-page SBC to applicants and enrollees before enrollment or reenrollment. The summary must accurately describe the “benefits and coverage under the applicable plan or coverage.” The SBC requirement applies in addition to the SPD and SMM requirements under ERISA.

Question 20

Describe the basic rules for presenting the SBC to entitled parties. (Text, p. 30)

Answer 20

The statute requires that the SBC must be presented in a uniform format, utilize terminology understandable by the average plan participant, not exceed four pages in length and not include print smaller than 12-point font. While the health care reform law called for a four-page summary, the regulations interpret the four-page limitation as four double-sided pages. This will give employers additional flexibility in providing the required information. The SBC must be provided as a standalone document. It must be presented in a culturally and linguistically appropriate manner. In general, the rules provide that, in specified counties of the U.S., plans and insurers must provide interpretive services.

Question 21

List the penalties or problems a plan sponsor might incur if it does not provide SPDs or SMMs as required. (Text, pp. 32-33)

Answer 21

(a) A plan sponsor may be charged a penalty per day if it does not provide a plan participant with an SPD or SMM within 30 days of an individual’s request. (See note on page 13.)

(b) Many courts look to the SPD and other plan descriptive material as important evidence of the benefits employees have been promised by the employer. For this reason, a clearly worded SPD is an important line of defense for employers in benefit disputes.

(c) The plan may be forced to provide benefits described in any other written documents describing the plan.

(d) Participants and beneficiaries may bring a civil action in federal district court to enforce any provision of ERISA.

(e) Criminal penalties may be imposed against any individual or company that willfully violates any ERISA reporting and disclosure requirements.

(f) Failure to distribute SPDs or SMMs could be used against the plan sponsor, in actions brought by the government or plan participants and beneficiaries, to argue that the sponsor has engaged in a pattern of noncompliance with or violations of ERISA. (A pattern of noncompliance usually would cause DOL or the court to be less sympathetic to any arguments the plan sponsor may use.) In certain situations it might give the government impetus to initiate an audit of the sponsor’s benefit programs in order to look for other ERISA violations.

Candidate note: The criminal penalties for willfully violating ERISA reporting and disclosure requirements described on page 48 of the text do not reflect current law. The third bullet on page 33 of the text (see Learning Objective 2.5 (c) in Module 1 of this Learning Guide) describes the penalties/fines in effect at the writing of this note.

Question 22

Briefly discuss the summary annual report (SAR). (Text, pp. 33-34)

Answer 22

An SAR is considered a plan disclosure requirement under ERISA. An SAR is a summary of certain information contained in a plan’s Form 5500 Annual Report/Return, along with notification to participants of their rights under ERISA to receive additional information. ERISA requires that an SAR be given to each participant, including former employees who are still covered by a plan (for example, COBRA participants or retirees with plan coverage), in an ERISA welfare benefit plan. It is not necessary to file an SAR with DOL, because the SAR contains information already reported to DOL on the Form 5500. An SAR does not have to be provided if the plan is a totally unfunded welfare plan under which benefits are paid solely from the general assets of the employer or employee organization maintaining the plan.

Question 23

Describe the general types of information that must be maintained for an ERISA welfare benefit plan and the record retention requirement for these documents. (Text, p. 35)

Answer 23

Employers are required to keep sufficiently detailed information and data necessary to verify, explain, clarify or check on documents for accuracy and completeness, including vouchers, worksheets, receipts and applicable resolutions. Records must be maintained for six years for ERISA purposes, but other laws may require record retention for longer periods.

Candidate note: ERISA stipulates that records be maintained for at least six years from the date the plan’s associated Form 5500 is filed; however, because of filing extensions, practitioners recommend retaining records for eight years after the end of the applicable plan year.

Question 24

Discuss the obligation that the plan administrator for an ERISA welfare benefit plan has when electronic recordkeeping has been delegated to another party. (Text, p. 39)

Answer 24

The duty to maintain records as required by ERISA cannot be avoided by contract, delegation or otherwise. Thus, the use of a third party to provide an electronic recordkeeping system does not relieve the person responsible for maintaining and retaining records under ERISA of those duties. For example, the preamble states that when a plan administrator contracts with a service provider for the preparation, maintenance and retention of the plan’s records, it nonetheless remains the plan administrator’s obligation to ensure that the records are properly maintained and retained under ERISA. In addition, in the event of a DOL investigation, the plan administrator would be required to provide the necessary equipment and resources (including software, hardware and personnel) for inspecting, examining and converting electronic records into legible and readable paper copies.