Aug 08, 2023
Why do plans need wrap documents?
Wrap documents are generally used for either (or both) of the following reasons:
Supplement already-existing documentation to meet ERISA plan documentation requirements.
ERISA requires proper documentation for all ERISA plans. The plan document serves to provide participants with notice of the benefits to which they are entitled and of their obligations under the plan. While there is no distribution requirement for the formal ERISA plan document, ERISA requires the plan document to be provided within 30 days of a written request for disclosure.
In addition, the plan document provides the plan administrator with guidelines by which to make decisions. Without a formal plan document, it can be difficult to prove plan terms and thus enforce plan provisions. For example, if an employer lacks a written plan document, participants disputing claims can base their contention on past practice or other “extrinsic” evidence that is favorable to their position, whereas in the presence of a formal written plan, extrinsic evidence will not normally be allowed.
In fulfilling the ERISA plan documentation requirement, employers often cannot rely entirely on what a carrier provides. For example, a carrier might issue a Certificate of Coverage (COC) for a particular plan, but these are generally drafted to comply with state insurance requirements and often don’t contain all of the required ERISA provisions. A wrap document supplements the COC to ensure that the COC and the wrap together compose a compliant ERISA plan document. In some cases, for the plan document requirement to be met, the wrap document is necessary.
Combine more than one type of benefit together to form a single plan.
The ERISA plan document also functions to help establish the number of ERISA plans sponsored by the employer. This is important when it comes to determining how many annual Form 5500s are required to be filed, since an employer is required to file a Form 5500 for each separate ERISA plan that has at least 100 participants as of the first day of the plan year.
If an employer offers multiple ERISA benefits, they will need to file a separate Form 5500 for each of those benefits – unless there is a wrap document in place that bundles these benefits together to form a single plan. When a wrap document does this, along with supplying the necessary ERISA provisions, it's often referred to as a "mega-wrap" or "umbrella" document. Having a single ERISA plan makes Form 5500 filing easier and can ease other administrative tasks, but it is not a compliance requirement.
Retroactive Adoption
One final note on wrap documents - on occasion, employers will inquire as to whether they are permitted to retroactively adopt a wrap document to establish one single ERISA plan for Form 5500 filing purposes. It is certainly a much safer option to put a wrap document in place on a prospective basis. However, courts have used the number of 5500 filings to determine the number of ERISA plans sponsored by the employer. Therefore, in some cases the retroactive adoption of a wrap document may be viewed as a formal acknowledgment of the actual operation of the plan.
The answer to whether this is appropriate or not may also depend on whether the Form 5500 filings will be timely or late. Under the delinquent filer voluntary compliance program, penalties are capped for multiple years of filings under a single plan. Therefore, if a plan sponsor is attempting to avoid additional penalties by retroactively putting a wrap document in place, it is possible that the DOL could disregard the bundling. Plan sponsors will need to weigh this risk when determining how to file missing Form 5500s for a plan that did not have a wrap document in place when the filing was originally due.
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