Jan 03, 2025
Amwins Connect – January 2025 Question of the Month
Question
A plan sponsor/employer offers medical benefits, life benefits, disability benefits, and a Section 125 plan. Is plan documentation a requirement and if so, what are the penalties for non-compliance?
Answer
Yes, plan documentation is required for the benefits listed above under ERISA, Department of Labor (DOL), and the Internal Revenue Code (IRC). If the Medical and/or disability benefits are self funded (or level funded for medical), plan documentation is also required under the Department of Labor regulations and ERISA guidelines. There are different approaches in order to meet the different requirements.
Under ERISA
Plan Information – US Department of Labor
One of the most important documents participants are entitled to receive automatically when becoming a participant of an ERISA-covered retirement or health benefit plan or a beneficiary receiving benefits under such a plan, is a summary of the plan, called the summary plan description or SPD. The plan administrator is legally obligated to provide to participants, free of charge, the SPD. The summary plan description is an important document that tells participants what the plan provides and how it operates. It provides information on when an employee can begin to participate in the plan and how to file a claim for benefits. If a plan is changed, participants must be informed, either through a revised summary plan description, or in a separate document, called a summary of material modifications, which also must be given to participants free of charge.
Under Section 125
Section 125(d)(1) defines a cafeteria plan as a written plan maintained by an employer under which all participants are employees and under which all participants may choose among two or more benefits consisting of cash and qualified benefits. The employer must draft a document that outlines the benefits offered, contribution limits, participation rules and other information required by the IRS. This document would be amended or redocumented with annual changes to limits.
Different Summary Plan Description Approaches
- Wrap Plan Document - A wrap document simplifies your employee health and welfare benefits by consolidating all plan information (including summary plan documents) under a single plan document. It brings separate employee benefits together and presents a complete overview of benefits, administrators, fiduciaries, plan types, eligibility, and other important details.
- Separate Plan Document for Each Benefit – each different benefit would have it’s own plan document describing the information as required by ERISA, DOL and/or the IRS.
Penalties for Not Having or Providing a Plan Document
Under ERISA 502(c) - ERISA 502(c), 29 U.S.C. 1132(c) provides for penalties for an administrator’s refusal to supply required information. Under ERISA § 502 (c)(1)(B), 29 U.S.C. § 1132(c)(1)(B), a plan participant can sue an administrator who, within 30 days of the request, fails to provide requested plan documents. The civil monetary penalty of up to $1,000 established by section 502 (c) (4) of ERISA is adjusted to $1,632 for penalties assessed after August 1, 2016, and before the effective date of the next adjustment for inflation made by the Secretary in accordance with the Inflation Adjustment Act and § 2575.3.
- Failure to provide a plan document or summary plan document - $110 per day per participant or beneficiary for each violation within 30 days of receiving a request from a plan participant or beneficiary.
- Failure to have or maintain an SPD – a potential plan audit by the DOL.
- Failure to furnish information to the DOL – if the DOL requests information relating to an employee benefit plan and the plan sponsor/employer does not provide, there is a penalty of up to $190 per day (not to exceed $1,906 per request). This amount is adjusted annually.
ERISA penalty amounts for penalties assessed after January 15, 2024 for violations occurring after November 2, 2015.
Under IRC Section 125 - Failure to maintain a written section 125 cafeteria plan document – penalties from the IRS up to and including disqualification of the plan resulting in all benefits becoming taxable to all employees.
While every effort has been taken in compiling this information to ensure that its contents are totally accurate, neither the publisher nor the author can accept liability for any inaccuracies or changed circumstances of any information herein or for the consequences of any reliance placed upon it. This publication is distributed on the understanding that the publisher is not engaged in rendering legal, accounting, or other professional advice or services. Readers should always seek professional advice before entering into any commitments.
