Employee benefits compliance issues can challenge any size company, but can be especially troublesome in small firms that lack dedicated human resources specialists on staff who are trained and up-to-date on the deadlines and intricacies of the numerous rules and regulations that govern the field. That’s why an annual compliance review is so important. A missed filing, inadequate document or neglected rule violation, if uncovered on a Department of Labor or Internal Revenue Service audit, can result in harsh consequences for both the employee benefit plan sponsor and, possibly, employees.
The following lists some of the compliance issues that frequently plague employers, especially small businesses:
Summary plan description content and distribution. Employee benefit plans that are subject to ERISA require a summary plan description (SPD) written for and distributed to employees. The SPD describes the plan’s provisions and requirements and participants’ rights and obligations. If a plan is provided through a third party — such as a health plan through an insurance company or a 401(k) plan through a mutual fund company — that provider may supply a SPD. In many cases, a SPD may not include all the information required by ERISA or may not state information in terms that are specific enough to the particular plan or plan sponsor. Also, a busy employer might overlook that a revised SPD or a summary of material modifications must be distributed within a certain timeframe when a plan undergoes a significant change, and that a completely up-to-date SPD is required every five years. SPD distribution must be made through a method “reasonably calculated” to ensure actual receipt by participants and beneficiaries, which means more than simply making the original or revised document available to participants.
Cafeteria plan document requirements and participation restrictions. All Sec. 125 cafeteria plans require a written plan document, even simple cafeteria plans such as premium-only plans and flexible spending accounts. This requirement can be easily overlooked, especially in the case of a premium-only plan, since it is essentially a funding mechanism for the company’s health care plan. IRS regulations detail what must be included in the written plan document. A plan that does not comply with the written plan document fails to be a cafeteria plan, meaning that participants’ contributions will lose their pretax advantage. Also, cafeteria plan participants must be “employees,” a term which regulations state does not encompass self-employed individuals, including sole proprietors, partners and 2% shareholders in Subchapter S corporations. Thus, small businesses that operate in these forms must remember to restrict participation in their premium-only plan (or other type of cafeteria plan) to employees only.
Annual report filing. Except for fully insured welfare plans with fewer than 100 participants, a Form 5500 must be filed for employee benefit plans subject to ERISA for IRS and DOL reporting. Many employers are tuned into this requirement for their qualified retirement plans, but are unaware that it applies to welfare plans — health plans, for example — as well, unless the plan meets the exception noted. Fortunately, if filings have been missed in the past, a plan sponsor can file them late under the Delinquent Filer Voluntary Compliance Program and received reduced penalties. Unfortunately, if the missed filings are uncovered on an agency audit, that program is not available.
Employee benefit plans are a critical element of most companies’ overall compensation programs, and are key in attracting and retaining the best employees. They also provide tax advantages for participating employees and the organizations sponsoring the plans. Compliance with applicable rules and regulations is essential to avoiding adverse consequences and getting the most from your company’s investment in your employee benefits programs. Contact one of our benefits specialists today.
