ERISA Basics

Summary Plan Description and Material Modifications

The summary plan description (SPD) tells participants what the plan provides and how it operates. It provides information on when an employee can begin to participate in the plan, how service and benefits are calculated, when benefits becomes vested, when and in what form benefits are paid, and how to file a claim for benefits. If a plan is changed, participants must be informed, either through a revised summary plan description, or in a separate document, called a summary of material modifications (SMM), which also must be given to participants free of charge.

Who is responsible for furnishing SPDs?

Given that the employer-sponsor typically is the plan administrator, it follows that the employer, not the insurer, generally is responsible for furnishing Summary Plan Descriptions (SPDs), and that the employer will be held liable if adequate SPDs are lacking.

Of course, insurance carriers are responsible for paying claims. Yet, many employers mistakenly assume that carriers also provide SPDs. Even when an insurer provides booklets describing benefits for distribution to participants, the insurer generally does not assume the statutory responsibility for SPDs.

Who must be furnished with SPDs and/or SMMs?

1. Covered participants but not beneficiaries
Under the literal language of ERISA, an SPD must be furnished to each participant and to each beneficiary receiving benefits under the plan. The Department of Labor (DOL) has authority, however, to exempt any welfare benefit plan from all or part of the reporting and disclosure requirements. Under DOL regulations, the plan administrator of a welfare benefit plan is required to furnish SPDs and SMMs to participants covered under the plan only, and not to beneficiaries.

• Definitions of participant and beneficiary:  By statutory definition, the term “participant” means an employee or former employee of any employer who is or may become eligible for benefits under an ERISA plan or whose beneficiaries are or may be eligible for benefits. Because the definition is not limited to current employees, it can include COBRA qualified beneficiaries, covered retirees, and other former employees who may remain eligible under a plan. The term participant does not specifically include a beneficiary, which is defined separately in ERISA to mean “a person designated by a participant, or by the terms of an [ERISA] plan, who is or may become entitled to a benefit there under.” While beneficiaries typically include covered spouses and children, other individuals can become beneficiaries under the terms of a plan (e.g., a healthcare provider that receives an assignment of benefits under a patient’s health plan).
• Definition of covered participant:  A participant becomes “covered” under a plan on the earlier of (1) the date on which the plan provides that participation begins; (2) the date on which the individual becomes eligible to receive a benefit “subject only to the occurrence of the contingency for which the benefit is provided”; or (3) the date on which the individual makes a plan contribution, whether voluntary or mandatory. At least one court has determined that SPDs need not be distributed to employees before they join a plan.

2. COBRA qualified beneficiaries
A covered employee, spouse, or dependent child who elects COBRA healthcare continuation coverage should be furnished with SPDs and SMMs while he or she receives COBRA coverage under the ERISA plan. Provided that all enrollees live at the same address, it appears that the SPD may be furnished to the covered employee on behalf of other qualified beneficiaries in the same family unit (or to the spouse who elects COBRA coverage for children in the same family unit).

3. QMCSO alternate recipients
An alternate recipient under a qualified medical child support order (QMCSO) is treated as a plan participant for ERISA disclosure purposes. The SPD and SMMs must, therefore, be provided to these children. Generally, the SPD should be furnished to the custodial parent or guardian of a minor child.

4. Spouses and other dependents of deceased participants
Despite the regulatory carve-out for beneficiaries as noted above, the spirit of the disclosure obligation suggests that, where there is no participant to receive an SPD, the document should be furnished to the persons who remain entitled to plan benefits. Thus, plan administrators should adopt a practice of furnishing SPDs and SMMs to spouses or other dependents of a deceased participant who continue to receive benefits after the participant’s death (e.g., under a retiree medical plan).

5. Representatives or guardians of incapacitated persons
Under case law, SPDs and SMMs should be provided to a representative or guardian when the plan is on notice that the participant or other person entitled to an SPD is incapacitated.

6. Employees eligible to enroll in a plan
Even though an SPD technically is not required until an employee is covered by a plan, some employers provide SPDs (along with necessary enrollment forms) to employees who are eligible to enroll in a plan, when enrollment is necessary in order to be covered by the plan. Regardless of whether SPDs are furnished to eligible employees before they enroll, it is essential that these employees receive some kind of effective notice that active enrollment (and payment of premiums) is a condition of receiving benefits under the plan. If non-SPD enrollment materials are used for this purpose, the enrollment materials should contain information about where to obtain an SPD.

7. DOL only upon request
ERISA no longer requires the plan administrator to file a welfare plan’s SPD or SMM with the DOL. However, these documents must be available for inspection upon request by the DOL and/or plan participants.

What happens when there is a conflict between SPD/SMM and plan documents or insurance contracts?

There are no initial penalties for failure to prepare or distribute a required SPD, unlike the case with Form 5500 reporting failures. Instead, repercussions from failing to have an adequate SPD arise when participants and beneficiaries sue to enforce plan rights. An inadequate SPD, for example, one that conflicts with the plan document it seeks to summarize, will normally be enforced by the courts in lieu of the underlying plan document, if doing so will favor the participant or beneficiary involved. In sum, without an adequate SPD in place may become liable for benefits they never intended to provide.

The courts typically view an SPD as part of the plan documents required under ERISA. If the plan sponsor’s intent in unclear within a provision in the SPD when read alone, the court will read the language of the SPD as a whole. The courts have been relatively protective of the right of participants and beneficiaries to receive adequate SPDs. One court, for example, has described the SPD as the primary embodiment of participants’ reasonable expectations of coverage under an ERISA plan. Many reported cases address what should happen when a conflict exists between an SPD and the underlying plan document or insurance contract. Of course, an SPD that conflicts with the plan document fails to meet ERISA’s basic requirement that it be an accurate and comprehensive description of rights and obligations under the plan.

Summary of Benefits and Coverage

The healthcare reform law expands ERISA’s disclosure requirements by mandating that a four-page “summary of benefits and coverage” be provided to applicants and enrollees before enrollment or re-enrollment. The summary (which we will refer to as the “four-page summary of benefits and coverage” or “four-page summary”), must accurately describe the “benefits and coverage under the applicable plan or coverage.” The four-page summary requirement applies in addition to ERISA’s SPD and SMM requirements.

The four-page summary requirement applies to health plans “grandfathered” in by healthcare reform — that is, it is also a requirement of preexisting group health plans and health coverage.

The healthcare reform law required the Secretary of Health & Human Services to issue guidance (referred to as “standards”) addressing the four-page summary requirement.

The four-page summary requirement applies to group health plans and insurers (as defined by applicable provisions of the PHSA, ERISA, or IRS Code) but not to certain “excepted benefits.” Grandfathered group health plans must comply with this mandate as well.

The four-page summaries must be provided by plan administrators (for self-insured health plans) and insurers (for insured health plans). Note that a different rule applies in the case of SPDs and SMMs, for which ERISA plan insurers are never directly liable.

Self-insured plans must prepare and provide the four-page summaries themselves or make arrangements with a third-party administrator to provide the notice on the plan’s behalf. Finally, if the third-party administrator fails to provide the four-page summaries, the plan will be out of compliance and subject to penalties, as required under the healthcare reform law, despite its arrangement with the third-party administrator.

Reporting Requirements

The primary reporting obligation ERISA imposes on welfare benefit plans is IRS Form 5500 or “annual report” requirement (the Form 5500 requirement is subject to numerous exemptions). (Full title for Form 5500: Annual Return/Report of Employee Benefit Plan.) This requirement is detailed below.

ERISA also imposes an annual Schedule M-1 reporting obligation on multiple employer welfare arrangements (MEWAs) that provide health benefits. (Full title for Schedule M-1: Reconciliation of Income (Loss) per Books With Income per Return.)

In addition, if an ERISA welfare benefit plan uses a Voluntary Employees’ Beneficiary Association (VEBA), the VEBA will be subject to a requirement under the IRS Code to file IRS Form 990, an annual information return. (Full title for Form 990: Return of Organization Exempt From Income Tax.)

ERISA Annual Report Requirement

Unless an exemption applies, ERISA requires the plan administrator of each separate ERISA plan to file an “annual report” with the DOL containing specified plan information. IRS Form 5500 is used for this purpose. ERISA authorizes the DOL to issue regulations exempting welfare plans from all or part of the Form 5500 reporting requirements, and the DOL has issued numerous exemptions for health and welfare plans. Unless an ERISA welfare plan qualifies for one of the enumerated Form 5500 exemptions, it must file Form 5500.

“Small unfunded, insured, and combination unfunded/insured welfare plans” are, as noted above, completely exempt from the Form 5500 requirement. To qualify for this exemption, a plan must cover “fewer than 100 participants at the beginning of the plan year.”

Consequences of IRS Form 5500 Noncompliance

Under ERISA, penalties can be imposed by the DOL for any refusal or failure to file a required IRS Form 5500. Penalties may be assessed for late or un-filed Form 5500s as well as for incomplete or otherwise deficient Form 5500s.

Statutory Civil Penalties

ERISA §502 provides civil penalties for failure or refusal to file a required IRS Form 5500; for this purpose, a Form 5500 that has been rejected by the DOL for failure to provide material information will be treated as not having been filed. The penalties for noncompliance can be heavy: under ERISA §502, the DOL may assess a civil penalty against a plan administrator of up to $1,100 per day starting from the date of the administrator’s failure or refusal to file the Form 5500.

a. Penalties are cumulative
The DOL takes the position that the penalties are cumulative so that the maximum per day penalty may be assessed for each Form 5500 that is not filed as required.

b. DOL Position: No statute of limitations
The DOL also takes the position that it is not subject to a statute of limitations with respect to Form 5500. As such, it can assess penalties in connection with Form 5500 failures reaching as far back as the 1988 plan year (the first plan year following the ERISA amendment giving the DOL authority to assess Form 5500 penalties). Failure to correct a missed or incomplete Form 5500 may therefore leave the liability open and the potential penalty amount compounding.

c. Reduced penalties under DOL’s “Late-Filer Enforcement Program” and “Non-Filer Enforcement Program”
The DOL maintains two programs under which penalties of less than the full statutory amount ($1,100 per day) may be assessed for compliance failures identified by the DOL: one concerns Form 5500s that are filed after their due dates and one concerns Form 5500s that are not filed at all.

Under the Late-Filer Enforcement Program, plan administrators may be assessed $50 per day for each day a Form 5500 is filed after its required due date (determined without regard to any extensions of time for filing). Under the Non-Filer Enforcement Program, “to reflect the egregious nature of the [non-filing] violation,” a penalty may be assessed at a rate of $300 per day up to a maximum of $30,000 per year for each plan year filing