Employers that sponsor group health plans are subject to many different compliance requirements under federal law. Keeping track of these various requirements can be challenging, even for the most attentive employers. Mistakes may trigger penalties, excise taxes, enforcement action, or lawsuits, depending on the type of mistake. To help avoid these potential consequences, employers should regularly review their compliance with employee benefits laws and implement strategies to address any compliance gaps. Here are the top ten common compliance mistakes to avoid:
1. Not having an official plan document or providing plan participants with an SPD
ERISA sets minimum standards for employee benefit plans maintained by private-sector employers. Among other requirements, ERISA requires employers to maintain an official plan document for their employee benefit plans and provide plan participants with an SPD. Employers often overlook these requirements or mistakenly think documents provided by an insurance carrier or third-party administrator (TPA) will satisfy ERISA’s requirements on their own.
There are no specific penalties under ERISA for failing to adopt an official plan document or provide participants with an SPD. However, not having these documents can have serious consequences for an employer, including fines and a disadvantage in any related lawsuits.
2. Allowing pre-tax contributions without a Section 125 plan document
Internal Revenue Code (Code) Section 125 allows employers to establish a type of tax savings arrangement, called a Section 125 plan or cafeteria plan, for their employees. A Section 125 plan provides employees with an opportunity to pay for certain benefits on a pre-tax basis, allowing them to increase their take-home pay. To avoid taxation, the Section 125 plan must meet the specific requirements of Code Section 125 and underlying IRS regulations. One of these requirements is that a Section 125 plan must be maintained pursuant to a written plan document that is adopted by the employer on or before the first day of the plan year.
According to the IRS’ 2007 proposed regulations, if there is no written plan document in place (or if the written plan document does not comply with the IRS’ content or timing requirements), employees’ elections between taxable and nontaxable benefits will result in taxable income to the employees.
3. Overlooking nondiscrimination testing
The Code imposes nondiscrimination requirements on certain types of employee benefits to ensure employers do not impermissibly favor their highly compensated employees. These rules currently apply to self-insured health plans and Section 125 plans. The nondiscrimination requirements for fully insured health plans have been delayed indefinitely.
In general, a plan will not have problems passing any applicable nondiscrimination test when the employer treats all its employees the same for purposes of plan coverage (for example, all employees are eligible for the plan, and the plan’s eligibility rules and benefits are the same for all employees). However, treating employees differently may make it more difficult for a plan to pass the applicable nondiscrimination tests. If a self-insured health plan or Section 125 plan is discriminatory, highly compensated employees will lose certain tax benefits under the plan.
4. Failing to file a Form 5500
Employers that are subject to ERISA must file an annual report (Form 5500) with the DOL for their employee benefit plans. Small welfare benefit plans (i.e., fewer than 100 participants) that are unfunded or fully insured (or a combination of unfunded and insured) are exempt from the Form 5500 filing requirement.
The DOL can assess penalties of up to $2,739 per day for each day an administrator fails or refuses to file a complete Form 5500. However, the DOL maintains a voluntary correction program for late or missing Forms 5500. If an employer has not been notified by the DOL of a failure to file Form 5500, it can use this program to correct its Form 5500 noncompliance and pay a reduced penalty.
5. Not offering affordable health coverage to full-time employees
The Affordable Care Act (ACA) requires applicable large employers (ALEs) to offer affordable, minimum-value health coverage to their full-time employees (and their dependents) or potentially pay a penalty to the IRS. Common mistakes that ALEs make when it comes to the ACA’s pay-or-play rules include not following the IRS’ rules for identifying full-time employees and offering coverage that is unaffordable.
An ALE’s health coverage is considered affordable if the employee’s required contribution for the lowest-cost self-only coverage that provides minimum value does not exceed the specified percentage of the employee’s household income for the taxable year.
6. Failing to send a separate COBRA election notice to a spouse living at a different address
In addition to continuation coverage, COBRA requires employers to provide specific notices to employees and their covered family members at certain times. One such notice informs qualified beneficiaries of their right to elect COBRA coverage, how to elect and pay for the coverage, and the duration of COBRA coverage. It must be provided to each qualified beneficiary after an employer learns that a qualifying event has occurred.
An employer may use a single COBRA election notice for qualified beneficiaries who reside at the same address. However, if an employer knows that a spouse lives at a different address (based on the most recent information available), the employer must send a separate COBRA election notice to the spouse. Employers often overlook this detail and fail to send a separate COBRA election notice to a spouse living at a different address. Failing to provide a COBRA election notice can result in penalties, excise taxes, and a disadvantage in any related legal disputes.
7. Offering a health-contingent wellness program but not disclosing the availability of an alternative standard for qualifying for the program’s reward
Under HIPAA, a health-contingent wellness program’s reward must be available to all similarly situated individuals. To meet this requirement, health-contingent wellness programs must provide a reasonable alternative standard (or waiver of the otherwise applicable standard) in certain circumstances.
Employers are required to disclose the availability of a reasonable alternative standard (or, if applicable, waiver of the otherwise applicable standard) to qualify for the reward in all plan materials describing the terms of a health-contingent wellness program. For health-contingent wellness programs that require individuals to meet a health outcome to obtain a reward, this notice must also be included when an individual is informed that they did not satisfy the program’s outcome-based standard. Violations of HIPAA can trigger excise taxes, possible DOL enforcement action, civil penalties, and a disadvantage in resulting lawsuits.
8. Taking into account employees’ (or spouses’) Medicare coverage
When individuals have Medicare coverage and employer-sponsored health coverage, each type of coverage is called a “payer.” Medicare’s coordination of benefits rules decide which payer pays first on a health care claim (that is, pays primary). For example, health plans sponsored by employers with 20 or more employees are typically the primary payers for individuals who are entitled to Medicare due to age.
The Medicare Secondary Payer rules include requirements for employers that sponsor group health plans that are primary to Medicare. These requirements are intended to protect Medicare’s secondary payer status. For example, when an employer’s group health plan is the primary payer, Medicare-eligible employees and spouses cannot be excluded from health plan coverage or discouraged from enrolling in coverage. Also, employers cannot offer any financial or other incentive for an individual entitled to Medicare to not enroll (or terminate enrollment) in a health plan that would pay primary. A violation of these restrictions can trigger financial penalties of up to $11,524.
9. Forgetting the Medicare Part D disclosures
Each year, applicable employers must disclose to individuals who are eligible for Medicare Part D and to the Centers for Medicare and Medicaid Services (CMS) whether the health plan’s prescription drug coverage is “creditable” (i.e., its actuarial value equals or exceeds the actuarial value of the standard Medicare Part D prescription drug coverage). The disclosure to individuals must be made by Oct. 15 each year, which is the start of the Medicare Part D annual election period. The disclosure to CMS must be made within 60 days of the beginning of the plan year.
There are no specific penalties associated with these annual notice requirements (except for employers that are claiming a retiree drug subsidy). However, failing to comply with the individual notice requirement may be detrimental to employees because knowing whether an employer’s coverage is creditable helps employees make informed decisions regarding their Medicare enrollment. Medicare beneficiaries who are not covered by creditable prescription drug coverage and do not enroll in Medicare Part D when first eligible will likely pay higher premiums if they enroll at a later date.
10. Not providing the annual Children’s Health Insurance Program (CHIP) notice
The Children’s Health Insurance Program Reauthorization Act of 2009 (CHIPRA) permits states to offer eligible low-income children and their families a premium assistance subsidy to help pay for employer-sponsored group health coverage. CHIPRA imposes an annual notice requirement on employers that maintain group health plans in states that provide premium assistance subsidies under a Medicaid plan or a CHIP plan. An employer is subject to this annual notice requirement if its group health plan covers participants who reside in a state that provides a premium assistance subsidy, regardless of the employer’s location. Employers that fail to send the required notice may be subject to penalties of $145 per day.
