ERISA SPD Overview

What is an SPD (aka: wrap)?

A Summary Plan Description (SPD), also known as a “wrap”, is document that sets out information about an employer’s health and welfare plan, and which incorporates (or “wraps around”) other documents that provide more detailed information about the benefits offered (such as insurance policies, evidence of coverage, etc.). An SPD document can be used by employer if you offer:

• Multiple benefit coverages or a single benefit coverage
• Fully-insured and/or self-insured benefits
• Plan documents and/or summary plan documents

If the other documents (e.g., insurance policies) provide detailed information about the benefits, what information does a wrap document have?

• Specific eligibility provisions and exclusions
• General description of all benefits offered under a single plan
• Description of how different benefits interact with other benefits
• Employer’s reservation of right to amend or terminate the plan
• Governance provisions such as specifying who has the power to interpret plan provisions, decide eligibility claims, etc.
• ERISA-required information that may be missing from insurer-prepared documents
• Other information affecting the plan as a whole and that is specific to the employer, such as benefit coverage during a leave of absence

Why does an employer need an SPD?

• ERISA requires that all plans subject to ERISA have a governing plan document and a summary plan description. Insurance documents generally do not meet all of the specific requirements of ERISA for plan documents and summary plan descriptions.
• A wrap document is an important part of establishing a single ERISA plan, allowing an employer to file a single Form 5500 for multiple benefit coverages.
• Insurance-prepared documents are written from the insurers’ perspective and generally do not contain language which is important or desirable to include from the employers’ perspective.

What are the potential consequences of not having an SPD?

• ERISA provides for penalties of up to $110 per day that may be assessed where an employer fails to provide plan documents to an employee who has requested such documents in writing within 30 days of the request.
• Without a wrap document to establish a single ERISA plan, an employer could be determined to have multiple, separate ERISA plans, each with its own Form 5500 filing requirement and applicable late penalties.
• Inaccurate or incomplete plan documents can increase the risk of participant claims and lawsuits – having a well-written wrap document can help to mitigate these risks.

Which employers are subject to ERISA requirements?

If an employer is offering a benefit plan that is for the purpose of providing one or more benefits listed in ERISA to employees and beneficiaries (e.g., medical, surgical, or hospital care), then generally, that employer would need to comply with ERISA.

A common rule of thumb is any employer that offers a group-sponsored health plan must comply with the ERISA notice and disclosure, and possibly, reporting requirements unless an exemption applies.

Exemptions apply to organizations such as churches and government entities, and include plans maintained to comply with workers’ compensation or disability that fall under a statutory exemption status.

Examples of benefits that are subject to ERISA include group medical, dental and vision. They can also include life/AD&D, short-term and long-term disability, health flexible spending accounts, and health reimbursement arrangements.

ERISA does not apply to those exempt organizations and to employers that do not offer a benefit identified under ERISA that is for the benefit of their employees and beneficiaries. An example might be a municipality that offers a medical plan to their employees. The municipality would not need to comply with ERISA’s requirements.

What do an employers need to do to stay compliant?

Here is a current checklist for small employers to ensure compliance with ERISA:

• Do you currently provide an ERISA-compliant plan document? This plan document is an employer document that can separate or combine (sometimes called wrap or umbrella documents) your offering of employer-sponsored benefits.
• Have you created an SPD of your benefits and distributed them within 90 days of coverage for new participants?
• If required, have you filed Form 5500 in the plan years required?
• Have your benefit eligibility requirements been updated in your plan documents to reflect the latest requirements under Healthcare Reform, COBRA, and other regulations?

Employer Advantages

Employee benefits purchased on a pre-tax basis reduce the employer wage base for purposes of calculating payroll taxes. Employers can realize direct bottom-line savings from the reduced employer FICA taxes, FUTA taxes, and disability and workers’ compensation insurance premiums (varies state by state).

Employee Advantages

When employees purchase benefits on a pre-tax basis, their compensation is reduced for purposes of calculating wages subject to Federal and FICA (Social Security & Medicare) taxes. Based on 2007 tax rates, potential savings can range from 17.65% to 35.65% depending on an employee’s individual tax bracket, and, in most states, employees can also save on their state income tax.

A Premium Only Plan allows employees to pre-tax their contribution toward certain types of insurance including their employer provided health coverage, group benefits such as dental and group term life, and employee voluntary benefits such as accident, supplemental health, disability, and cancer coverage.

Steps to implement a Section 125 Plan

1. Adopt a written plan document that reflects the plan’s design and
   complies with Section 125;
2. Update plan enrollment forms to include the rules for Section 125
   plan elections; and
3. Select a vendor to perform nondiscrimination testing.

Types of Section 125 Plans

There are different types of Section 125 plans that employers can choose from when setting up their
cafeteria plans. The four basic forms of Section 125 plans are as follows:

Nondiscrimination Tests

Section 125 plans must generally pass certain tests that are designed to ensure that the plan does not discriminate in favor of highly compensated employees. If a cafeteria plan fails to pass nondiscrimination testing, highly compensated employees lose the tax benefits of participating in the plan (that is, they must include the benefits or compensation in their income). However, even if a cafeteria plan is discriminatory, non-highly compensated employees will not lose the tax benefits of participating in the plan

In general, a cafeteria plan must satisfy the following three nondiscrimination tests:

1. Eligibility Test: This test looks at whether a sufficient number of non-highly compensated employees are eligible to participate in the cafeteria plan. If too many non-highly compensated employees are ineligible to participate, the plan will fail this discrimination test.

2. Benefits and Contributions Test: This test is designed to make sure that a plan’s contributions and benefits are available on a nondiscriminatory basis and that highly compensated employees do not select more nontaxable benefits than non-highly compensated employees select.

3. Key Employee Concentration Test: This test looks at whether key employees impermissibly utilize the plan’s benefits more than non-key employees. Under this text, key employees must not receive more than 25 percent of the aggregate nontaxable benefits provided to all employees.

Certain exceptions and safe harbors apply to the cafeteria plan nondiscrimination tests. For example, a Section 125 plan that is a premium-only plan is deemed to satisfy the cafeteria plan nondiscrimination requirements if it passes the eligibility test. In other words, the plan will automatically satisfy the contributions and benefits test and the key employee concentration test if it passes the eligibility test. In addition, simple cafeteria plans are treated as meeting the Section 125 nondiscrimination requirements as long as certain eligibility, participation, and minimum contribution requirements are met.

Reporting & Disclosure

Because a Section 125 plan is a tax savings arrangement, it generally is not subject to the reporting and disclosure requirements that apply to employee benefit plans under federal law. This means, for example, that a Section 125 plan is not required to file an annual Form 5500 with the Department of Labor (DOL) and is not required to have a summary plan description (SPD). However, many of the benefits that can be purchased on a tax-free basis through a Section 125 plan (for example, a health FSA) are subject to the federal reporting and disclosure requirements for employee benefit plans, unless an exception applies.