The July 31 Form 5500 filing deadline for calendar-year ERISA plan sponsors is right around the corner. You may think you have all of your ducks in a row, but employers sponsoring health and welfare plans often make common errors which can lead to hefty penalties. It’s worth your time to take a closer look and make sure none of your ducks have gone astray.
Every ERISA health and welfare plan is required to file a 5500 annually unless an exception applies. Exceptions fall into three main categories:
With that understanding, let’s take a look at where we see common errors.
In order to make sure you are not missing any ERISA plans, start by taking an inventory all your benefits. The benefits listed in ERISA can include:
Some of these — like vacation benefits — may seem surprising. Remember there are some exceptionssuch as the “payroll practice” exemption, which applies if the payment is made as part of your normal payroll practice. Wages, holiday pay, sick time, vacation, jury duty and similar types of pay would fall under this exemption, as long as these are paid only to current employees and out of the employer’s general assets.
One common failure is not recognizing that your severance program is an ERISA plan. Occasionally providing a one-off severance payment may not constitute a “program,” but if you have a formal program designed to pay severance on a regular basis to employees based on predefined criteria, that likely meets the definition of an ERISA plan.
It is also common to mistakenly assume because employees pay the full premium for your voluntary benefits that they automatically meet the voluntary plan safe harbor. There is another requirement for a plan to meet the voluntary safe harbor, namely that the employer have minimal involvement. Minimal involvement means you collect premiums through payroll deduction and pay the insurer — and that’s about it. To meet the voluntary plan safe harbor, you cannot endorse the program. This is a fine line. As you takes steps to promote the benefit, such as including it in benefit summaries alongside your other offerings, you are taking steps closer to that line. In many cases, you may have stepped over the line, and that voluntary benefit became an ERISA plan.
Unless a health and welfare plan is funded, meaning claims are paid from a trust rather than insurance or the employer’s general assets, it will be eligible for the “small plan exception,” and a filing won’t be necessary until the plan reaches 100 participants. There are a couple common reasons employers miss crossing this threshold. Health plans have more compliance issues, so employers tend to focus more of their attention on them. But not all employees are going to participate in your health plan. On the other hand, you may provide a base amount of life or disability to all full-time employees, making those plans more likely to cross the 100-participant threshold well before your health plan does. It’s not uncommon that while you were watching for one benefit to cross the threshold, you missed when another one did.
Another common issue stems from relying on the Schedule A provided by your insurer —which can be misleading. The Schedule A is provided after the plan year ends, listing the number of covered persons, including dependents, as of the last day of the plan year. For the purposes of 5500 filing, however, the participant count is based on the first day of the plan year and the definition of “participants” includes current and former employees (e.g. COBRA and retirees), but not covered dependents.
If you have more than one health and welfare plan with a 5500 filing requirement, you are required to file a separate 5500 for each plan. For many employers, it can simplify the filing process and be more cost effective to “bundle” all the health and welfare plans as one ERISA plan. The problem comes from another ERISA requirement that each ERISA plan has a plan document. Bundling multiple plans together for the purpose of filing one 5500 is technically creating another ERISA plan, so a separate plan document is needed. This document is often referred to as a bundled wrap document, as its primary purpose is to “wrap” around the separate ERISA plans being bundled together in order to file them under a single filing. If you don’t have a bundled wrap document then technically you are required to file a separate 5500 for each plan with more than 100 participants.If you have been filing a bundled ERISA plan without the wrap document, you are not in compliance. While there is some upfront cost and administrative time to put a wrap document in place, it is generally worth the effort when it comes time to file.
After the 5500 filing is done, many employers stash their copy for future reference, without realizing that included with the filing is a Summary Annual Report (SAR) which must be distributed to participants. The SAR summarizes the Form 5500 report, providing a basic financial statement regarding the plan and informing participants of their rights to be provided additional plan information. The deadline for distributing the SAR is 2 months after the 5500 filing deadline (or September 30 for calendar-year plans).
If the Department of Labor (DOL) discovers the failure to file a Form 5500, the maximum penalty is $2,140 per day for every day that the Form 5500 is late. While it’s unlikely the DOL would impose the maximum, the standard penalty is still significant at $300 per day (up to $30,000 per year) for non-filers, and $50 per day with no cap (up to $18,250 per year) for late filers.
To encourage plan sponsors to file their overdue annual reports, the DOL established a Delinquent Filer Voluntary Compliance Program (DFVCP) which significantly reduces the penalties for filing failures. If you file under this program, the penalty is $10 per day for each day the annual report is filed late, not to exceed $2,000 per plan per filing and not to exceed $4,000 per plan regardless of the number of late filings. The key is to file under the DFVCP before the DOL has discovered the error.
For questions about filing your Form 5500 or assistance with wrap documents, ERISA clients can contact us.
LouAnne's specialty is managing special projects designed to assist clients with their benefit-related compliance responsibilities. LouAnne monitors the legislative and legal environments and the state and federal mandates that impact our clients.
LouAnne's specialty is managing special projects designed to assist clients with their benefit-related compliance responsibilities. LouAnne monitors the legislative and legal environments and the state and federal mandates that impact our clients. She is the former chairwoman of the Compliance Committee for Benefit Advisors Network, where she frequently served as a panelist on issues involving healthcare reform. LouAnne is also a frequently sought-after panelist (for the MN State Bar Association, Business Journal and other organizations) to lend her expertise on healthcare reform and the HR perspective. LouAnne has a Bachelor’s of Arts degree from the University of Minnesota, Minneapolis and a Masters in Human Resources from the University of St. Thomas, St. Paul.
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