Common & Costly Employee Benefits Mistakes

Mistakes in employee benefits and human resources can be quite costly to employers in the form of extra benefits, complaints, lawsuits, government-assessed fines and penalties, and attorney fees, to name a few. Don’t learn the hard way what these mistakes are. This 3 part blog will identify some of the most common and costly HR and employee benefits mistakes and provide tips on how to avoid them.

This blog post will be broken up in to three sections: 1) HR  2) Employee Benefits and 3) Retirement Plans. This post will examine common and costly employee benefits mistakes.

No plan document or summary plan description. ERISA requires that employee benefit plans be maintained pursuant to a written instrument and that participants receive a summary plan description (SPD) that contains certain information. The DOL has a rule defining what needs to be in an SPD. Many employers rely on their insurance carriers or TPAs to provide booklets to distribute to employees. Often the booklets provided by carriers and TPAs do not contain all of the information that is required in an SPD and/or will not qualify as a plan document. This is often the case with health and welfare plans.

Failure to provide a plan participant with an SPD within 30 days of an employee request carries a maximum $110 per day penalty (measured from the date that is 30 days after the request). There is no specific penalty for failure to maintain a plan document, but pursuant to ERISA’s general enforcement provisions, any plan participant can bring a lawsuit to require a plan sponsor to prepare a formal plan document where none exists. Criminal penalties may be levied upon any individual or company that willfully violates Title I of ERISA, which could include these disclosure rules (maximums are $100,000 and ten years in prison or $500,000 for a company). Moreover, failing to maintain an updated plan document and/or SPD may jeopardize an employer’s chance of success in a legal dispute with an employee over benefits.

Solution: Have an SPD and plan document prepared for each plan your company sponsors, and keep the documents up to date. In some cases, a simple “wrap document” may suffice to supplement the information provided by the insurance company or TPA. The wrap document fills in the gaps of what you have and what is legally required and can apply to more than one plan.

Not communicating SPD changes to participants. ERISA requires notice to covered participants anytime there is a material modification in a plan’s terms, or there is a change in the information required to be in the SPD. If there is a legal dispute over benefits, courts will often enforce the terms of an out-of-date or incomplete SPD rather than the terms of the plan document, in favor of the participant.

Solution: ERISA allows plan administrators to communicate material changes through a simplified notice called a summary of material modifications (SMM) that limits itself to describing the modification or change. Since there is no guidance on what is a material change, you should err in favor of preparing and distributing SMMs. At a minimum your SMM should contain: (1) the name of the health plan and the SPD to which the SMM relates; (2) a description of the changes or the substituted language; (3) the effective date of the changes; (4) instruction to keep the SMM with the SPD; (5) an explanation that the SMM and the SPD must be read together; and (6) the name and title of the person to contact with questions.

Failure to compare group disability insurance policies. Many employers purchase group disability insurance policies without understanding them. They receive complaints from employees because their disability claims are denied because they are not considered “disabled” per the terms of the policy. Purchasing group disability insurance policies that do not provide worthwhile benefits when needed by employees is throwing money away on a useless benefit.

Solution: Choose group disability insurance policies with the assistance of your Connor & Gallagher OneSource insurance broker who specializes in these policies.

Maintaining a health plan that is inconsistent with an HSA. Contributions can be made to an HSA only when the employee is not covered by a general purpose health reimbursement arrangement or health flexible spending account (FSA), or other impermissible coverage. An employer that provides impermissible other health plan coverage can unintentionally disqualify its employees from making HSA contributions.

Solution: Consult with your Connor & Gallagher OneSource insurance broker, regarding the design of your HRA, health FSA, and other health plans, to ensure they are HSA-compatible.

Allowing employees to stay on group health coverage beyond the required time period. Many employers allow employees to stay on group health insurance plans after eligibility would otherwise end under the plan’s terms, without first getting approval from the insurance/stop-loss carrier. For example, employers often allow employees on leave to keep their health insurance beyond the period of time required by the FMLA. If the employee incurs significant medical expense and the insurance/stop loss carrier investigates, the carrier may decline to provide coverage, leaving the employer to “self-insure” the entire cost.

Solution: Offer COBRA coverage to employees that need extended leave but have exhausted or are not eligible for FMLA leave. In this way, employers shield themselves from liability. The employer can continue to pay the employee portion if they desire. Also make sure that insurance/stop-loss carriers are aware of collective bargaining agreements that may apply to coverage issues and have signed off on these agreements in writing.

Independent contractor/temporary employee issues. Some employers make the mistake of including independent contractors in health plan coverage and/or excluding temporary employees from benefit plan coverage. If an employer allows independent contractors to participate in its health plan, its health plan is technically a “multiple employer” plan, and an IRS Form M-1 needs to be filed annually. Failure to do so can cause the DOL to levy penalties. If the employer has wrongfully excluded “common law employees” from its benefit plans, those “employees” can seek retroactive reinstatement to the employer’s benefit plans, potentially causing large damages to the employer.

Solution: Do not allow independent contractors to participate in your health plan, or file an annual Form M-1. Ask your attorney or financial advisor to assist you if you have never filed a Form M-1 before. To preclude unintentional inclusion of “common law” employees, craft your benefit plan language to specifically exclude individuals not on your payroll.

Here are the links to all 3 parts of this blog series:

Source: Zywave, April 8, 2019

This blog post is not intended to be exhaustive nor should any discussions or opinions be construed as legal advice - it is intended for educational and/or informational purposes only.


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