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10 Costly Health and Welfare Plan Compliance Traps

| August 08, 2019
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Published in the June 2019 Benefits Magazine from International Foundation of Employee Benefit Plans (IFEBP)

Focusing on these ten compliance traps should help health and welfare plan sponsors reduce the chance of a Department of Labor audit.

Health and welfare plan sponsors often focus their energy on providing the best benefits and plans possible but allowing plan compliance to slip through the cracks can be financially devastating. The average request for documentation for a Department of Labor (DOL) audit ranges from 20 to 50 or more documents,which is a significant amount of paperwork. It may not be feasible for plan sponsors to conduct a test DOL audit due to internal limitations or the costs of hiring an attorney. In that case, focusing on the following ten compliance traps should help reduce the chance of being audited and paying significant fines in the process.

1.Summary Plan Description (SPD)

This is the most important document that every plan should have. The SPD also is the very first item a DOL audit letter will request, so plan sponsors should make sure the SPD is compliant and up to date. Plan sponsors should look for changes in DOL procedures; for example, DOL enacted new disability claims procedures effective April l, 2018 that SPDs should reflect.(It is important to note that some plans are not subject to the Employee Retirement Income Security Act (ERISA) and do not require an SPD.) The penalties for a noncompliant SPD can be up to $110 per day, and the Secretary of Labor also may bring a civil action against a plan sponsor under ERISA. A key reminder: If a participant requests a copy of the SPD, plan sponsors should provide a copy immediately. It's not a common request, since many participants really don't know what an SPD is. Therefore, if a request is made, there is a good chance the participant has already been talking to someone, possibly a lawyer.

2. Summary of Benefits and Coverage (SBC)

Plan sponsors must provide an SBC to participants at open enrollment and to new plan enrollees within 90 days of enrollment in the plan. Failure to provide the SBC will cost $1,156 per employee for each SBC not provided. An excise tax of $100 per participant per day also can be assessed.These penalties can be costly, particularly for plan sponsors that offer more than one plan. A key reminder: Health reimbursement arrangements (HRAs) are considered self-funded health plans under Section 105(h), so plan sponsors should make sure to have an SBC for HRAs.

3. IRS Form 5500 and Summary Annual Report

Plan sponsors with more than 100 participants in a health and welfare plan must electronically file a Form 5500. The penalty for noncompliance is $2,194 per day for each day the filing is late. Plans that find themselves in this situation would be wise to speak to their benefits advisor or counsel about the Delinquent Filer Voluntary Compliance Program (DFVCP)..There are proposed changes to the Form 5500 requirements that would remove the exemption for plans with 100 or fewer participants, which would have a large impact on small plans. DOL and the Internal Revenue Service (IRS) also have proposed a new Schedule J, which would ask plan sponsors to affirm compliance with Affordable Care Act (ACA) regulations covering SPDs, the summary of benefits and coverage,the Health Insurance Portability and Accountability Act (HIPAA), and the Mental Health Parity and Addiction Equity Act (MHPAEA). Plan sponsors will have to report on plan design, categories of benefits provided, integration with an HRA or health savings account (HSA), claims payment policies and practices, enrollment data, financial disclosures, denied claims and cost sharing, just to name a few. This change has not been enacted yet, but plan sponsors should be sure to stay up to date on developments.

4. Children's Health Insurance Program (CHIP)

Employers with group health plans are required to distribute a CHIP notice at least annually to employees in certain states. DOL issued in 2010 a model notice under the Children's Health Insurance Program Reauthorization Act of 2009 (CHIPRA). The model notice describes the rights of low-income participants in employer-sponsored group health plans to receive financial assistance toward payment of children's premiums from state-sponsored programs. The notice also informs employees that they have a special right to enroll in the employer's group health plan within 60 days of being determined eligible for CHIP premium assistance. The notice is updated semiannually in January and July and can be found on the DOL website. Surprisingly,this notice requirement often gets missed. Plan sponsors may incur penalties of $117 per participant per day if they do not distribute the notice.

5. ACA Affordability

ACA requires employers to offer 95%of their full-time employees affordable,minimum value coverage. Affordability is based on an employee's household income, and employers have three safe harbors for determining household income:the federal poverty level (FPL),rate of pay and W-2. Using one of these safe harbor methods for affordability will determine the safe harbor codes thata plan sponsor will use when reporting on the 1095-C line 14. Plan sponsors will be penalized $3,750, to be paid monthly at $312.50, for each employee that is eligible to receive a subsidy to purchase health insurance on an insurance exchange. Those amounts are for2019 and subject to change each year. According to the Congressional Budget Office (CBO), plan sponsors are projected to pay $130 billion in penalties over a ten-year period.6. Patient-Centered Outcomes Research Institute (PCORI) ACA regulations include an express penalty for failure to report or pay the PCORI fee, a fee charged to health plans to fund PCORI, which is intended to improve health care quality. The potential penalty might look like the penalties in U.S. Code §6651. Those penalties, if applied, would be equal to 5% of the unpaid PCORI fee for each month but not greater than 25% of the unpaid PCORI fee. Penalties may not apply if the failure is due to reasonable cause and not willful neglect. In some instances, the PCORI fee applies to HRAs as well. The fees are as follows:

  • $2.39 per covered life for plan year sending in January through September 2018, due by July 31, 2019.
  • $2.45 for plan years ending October through December 2018, due by July 31, 2019
  • $2.45 for plan years ending January2019 through September2019, due by July 31, 2020.

A calendar of due dates is available on the IRS website at www.irs.gov/affordable-care-act/patient-centered-outreach-research-institute-filing-due-dates-and-applicable-rates. The IRS Form 720 is used to remit the PCORI fee; the second quarter Form720 is released by April and can be found on the IRS website at www.irs.gov/ forms-pubs/about-form-720.

7. 4980H(a) and 4980H(b) Look-Back Method

ACA requires plan sponsors to makean offer of coverage to full-time workers,defined as those who are scheduled towork 30 hours or more each week. One of the methods for determining whether an employee is full-time is the lookback method under Sections 4980H(a)and 4980H (b). If the look-back method is used, an employer may determine thestatus of an employee as full-time during a future period (referred to as the stability period), based upon the hours of service of the employee in a prior period (referred to as the measurement period).

Issues to consider are:

  • Is it determined upon hire whether the employee is reasonably expected to work more than 30 hours if the plan sponsor is not applying the initial measurement period for a new "variable hour" employee?
  • After completion of the initial measurement period, are employees who were determined to be full-time during the administration period receiving an offer of coverage?
  • Is an offer of coverage being made to at least 95% of full-time employees?

In 2019 the 4980H(a) penalty is $2,500 and 4980H(b) is $3,750. Plan sponsors should also be familiar with the "breakin service" rule of parity and ensure it is applied accordingly. More information can be found in the Federal Register Vol.79 No. 29.

8. Health Plan Claims-and-Appeals Protections

A plan document must describe in detail the plan's claims and-appeals process in compliance with DOL Regulation §2560.503-1 and ACA.The claims process and timelines must be described including pre-, post-, urgent and concurrent claims. The appeals process must be detailed and written in such a way that it can be understood by participants. In some cases, a plan must provide an external review process using an independent review organization. It is a plan sponsor's fiduciary responsibility to amend plan documents as new regulations arise, such as the DOL final rule on disability claims procedures, effective April 1, 2018. The final rule imposes procedural protections and consumer safeguards on disability claims similar to those that apply to group health plans under ACA.

9. IRS Letter 226-J

Some plan sponsors have received IRS Letters 226-J for ACA reporting for 2015 and 2016 tax years assessing employer shared responsibility payments (ESRPs), and many are assessing penalties in the millions of dollars. Even those plan sponsors that have not received a letter still face the potential for one in the future. Plan sponsors are required to respond within 30 days from the date of the letter, not the day it was received. These letters are mailed to the tax contact IRS has on file, not the person listed as the Form 1094-C contact.Plan sponsors should form a 226-J response team before the letter arrives, to include HR, finance, internal ACA subject matter experts and possibly an attorney. The 226-Jteam should be ready to prepare a response and accurately complete Forms 14764 and 14765.

10. W-2 Reporting

Plan sponsors that issue 250 or more W-2s should make sure that the cost of health insurance (and possibly other benefits)has been recorded in Box 12 DD. This ACA reporting requirement caused many employers to scratch their heads because it seemingly provides no real value but carries the potential for penalties if not completed. In its October public report to the IRS Commissioner, the IRS Program Advisory Council (IRPAC) recommended making the reporting of employer-sponsored health coverage voluntary. The council argued that the data in Box 12 DD does not meet the purpose "to provide useful and comparable consumer information to employees on the cost of their health care coverage." The recommendation for voluntary reporting was not accepted, so it remains reporting as usual for now. The full public report can be found at www.irs.gov/pub/irs-pdf/p53l5.pdf.

Conclusion

Managing an organization's benefits plan requires knowledge, hard work and creativity. While it is by no means exhaustive,this top ten list includes the more relevant details and requirements to ensure that a health and welfare plan is compliant. And with the right advisors and strategic plans in place, plan sponsors should earn high grades for their compliance efforts.

Takeaways

  • Plan sponsors should make sure their summary plan descriptions (SPDs) are compliant andup to date with Department of Labor (DDL) regulations. In addition to monetary penalties. DOL also may bring civil actions against plan sponsors for noncompliant SPDs.
  • Plan sponsors must provide a summary of benefits and coverage (SBC) at open enrollment and to new plan enrollees within 90 days of enrollment in the plan. Health reimbursement arrangements are considered self-funded health plans and must have an SBC.
  • Among Affordable Care Act (ACA) requirements that employers should pay attention to are the offer of affordable coverage, Patient-Centered Outcomes Research Institute fee. The determination of who is a full-time employee and Internal Revenue Service Letters 226-J.
  • The health and welfare plan document should describe its claims-and-appeals process in detail and in a way that can be understood by employees.
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