Actuarial, Legal, Reporting and Disclosure

Examining IRS business master file to locate employers that take Form 1120 deductions for welfare and pension plan contributions

DOL searches for non-filers by: examining past Form 5500 returns for those that stopped filing, examining IRS business master file for Form 1120 deductions for welfare/pension contributions, using DOL field agents, and cross-checking master trusts' list of participants.

Omission of needed information and attaching supplemental information to the form instead of completing the necessary line items

The most common filing errors include (1) omission of needed information and (2) attaching supplemental information to the form instead of completing the necessary line items. DOL stresses that 'see attached' is not acceptable in place of entering information on the forms.

On or before the last day of the ninth month after the close of the plan year

A SAR must be furnished to each participant covered under the plan and each beneficiary receiving benefits on or before the last day of the ninth month after the close of the plan year. If an extension to file the annual report has been granted, the SAR need not be furnished until two months after the close of the extension period.

For plans under 100 participants, if 25% or more are literate only in the same non-English language; for plans over 100 participants, if the lesser of 500 or 10% are literate only in the same non-English language

The SAR must contain a notice in the appropriate foreign language if: the plan covers fewer than 100 participants and 25% or more are literate only in the same non-English language, OR the plan covers more than 100 participants and the lesser of 500 or 10% are literate only in the same non-English language.

Statements of assets/liabilities and income/expenses (furnished free of charge upon request), versus a copy of the full annual report (not required to be furnished free of charge)

The SAR must advise recipients that statements of assets and liabilities and of income and expenses (with accompanying notes) are available free of charge upon request. The SAR must also note that participants may obtain the full annual report, but this is not required to be furnished free of charge.

A fill-in-the-blanks format that must be used by both pension and welfare plans; variations are generally not permitted

DOL has prescribed a fill-in-the-blanks format for the SAR that must be used by both pension and welfare plans. Variations are generally not permitted. Information used to complete the SAR must be based on information contained in the most recent Form 5500.

Unfunded welfare plans (regardless of participant count) and plans exempt from filing an annual report are exempt from distributing a SAR, EXCEPT welfare plans that are part of a group insurance arrangement must still distribute a SAR

Unfunded welfare and pension plans, regardless of participant count, are exempt from distributing a SAR. All plans exempt from filing an annual report are also exempt from distributing a SAR. However, welfare plans that are part of a group insurance arrangement must still distribute a SAR, even if otherwise exempt.

Because stop-loss carriers look to the plan document (not the booklet) as their basis for payment, and a detailed plan document reduces stop-loss disputes

Making the plan document expansive ensures all details are in writing and allows it to serve as an administrative manual. This is especially critical because stop-loss carriers look to the plan document, not the booklet, as their basis for payment. The more explicitly benefits are stated, the fewer stop-loss problems there will be.

The schedule of benefits (SOB)

The course states that the schedule of benefits (SOB) must be identical in both documents. The ERISA statement of rights must be in the booklet (not necessarily the plan document). Definitions and detailed claims procedures may differ between the two documents.

Method Three: freestanding document text and booklet text with a common SOB, because it satisfies ERISA's letter and spirit, provides stop-loss comfort, serves as an administrative guide, and is more economical

Method Three (freestanding document and booklet texts with a common SOB) is preferred for multiple reasons: legal (ERISA requires the booklet to be a summary, not a reproduction), stop-loss (detailed plan documents reduce disputes), administrative (document serves as a guide), economic (shorter booklets cost less to produce), and communication (simpler booklets are less threatening to participants).

The booklet, not the plan document, must contain the ERISA statement of rights

The course identifies three key considerations, the first being that the booklet, not the plan document, must contain the ERISA statement of rights. The booklet should also contain special alerts and do's and don'ts for participants.

The stop-loss carrier may see benefits described in Terms X while participants see the same benefits described in Terms Y, creating opportunities for misunderstanding and denial disputes that may hinge on a word or comma

The course warns that when the stop-loss carrier sees benefits in one set of terms and participants see the same benefits in different terms, misunderstanding is possible. The stop-loss carrier will seek justification to deny while the participant will seek justification for payment. The argument may hinge on a word or comma.

Whether benefits are rich or lean, single/dual/triple options, defined contribution vs. defined benefit, number of plans, and general asset vs. trust funding

The plan document addresses these primary decisions: benefit richness, option structure (single/dual/triple), participant risk (defined contribution vs. defined benefit), plan structure (one plan vs. multiple), and risk pool integration (general asset vs. trust).

A summary of the summary plan description — essentially, an SPD of an SPD

The ACA added the SBC as a new document that plan sponsors must distribute. The SBC is intended to be a summary of the summary plan description (essentially, an SPD of an SPD). Plan sponsors must follow a template version of the SBC.

Additional details could contradict the SPD or make the SBC too long, putting it out of compliance and creating legal risks

The course states that adding details to the SBC can create legal risks. The additional details could contradict the SPD or make the SBC too long and thus out of compliance. Plan sponsors should track the template as closely as possible.

Plan participants generally must receive 60 days advance notice of any change to an SBC, except for changes made in connection with a plan renewal such as open enrollment

One unique legal requirement related to an SBC is advance notice. Except for changes made in connection with a plan renewal (e.g., open enrollment), plan participants generally must receive 60 days advance notice of any change to an SBC.

Up to $100 per day, plus potential criminal penalties (large fines and jail time) for willful violations

ERISA sets forth a fine or penalty for failure to disclose of up to $100 per day. Criminal penalties including large fines and jail time may be assessed where there is a willful violation.

In a practical and expedient manner; hand delivery is acceptable, but stacking in a corner for random pickup is not

The course states that SPDs, SBCs, and SARs must be given to participants in a practical and expedient manner. Hand delivery is acceptable. However, stacking documents in a corner for random pickup is specifically identified as unacceptable.

Participants must have worksite access and ability to convert to hard copy at no cost; audit disciplines must be in place; format must conform to ERISA; hard copy must be available upon request without charge with notice of this right communicated

DOL permits electronic distribution subject to four conditions: worksite access with free hard-copy conversion, audit disciplines to confirm the system works, ERISA-compliant format, and availability of hard copy by traditional methods upon request without charge with notice of this right communicated to each participant.

Electronic signatures have the same legal status as pen-and-ink counterparts under federal law

It is now federal law that electronic signatures have the same legal status as their pen-and-ink counterparts, as established by the Electronic Signatures in Global and National Commerce Act. This opens up electronic communication with healthcare plans.

Language stating that the plan administrator has the final authority to adjudicate claims and determine eligibility

To have claims/recordkeeping disputes reviewed by courts using discretionary (as opposed to de novo) rules, the document should state that the plan administrator has the final authority to adjudicate claims and determine eligibility. This derives from the Supreme Court's Firestone ruling.

The denial notice with appeal rights

ERISA requires all plans to have reasonable claims procedures, including the all-important denial notice with appeal rights. An important set of claims procedure regulations became effective January 1, 2002, and have been updated several times since.

External review is available when a claim is denied because of a medical judgment; it does not apply to grandfathered health plans (plans existing in March 2010 with minimal changes since)

The ACA added external review as a new level of appeal. It is only available in certain situations, such as when a claim is denied because of a medical judgment. External review is not applicable to grandfathered health plans (plans that existed in March 2010 and have had minimal changes since that date).

Cover the ex-spouse and participant's children under the participant's plan, even if the ex-spouse is not a covered person and the participant objects

The QMCSO ERISA amendment permits an ex-spouse to force the plan to cover the ex-spouse and participant's children under the participant's plan. This applies even when the ex-spouse was not a covered person on the plan and even if the participant objects.

When a beneficiary is first enrolled and annually thereafter

Federal law mandates notification of the availability of reconstructive surgery benefits following a mastectomy to each potential beneficiary when first enrolled and annually thereafter.

A duty to not misinform, a duty to disclose information not requested if silence might be harmful, and a duty to give full and correct information

The course identifies three fiduciary disclosure obligations: (1) the duty to inform includes a duty to not misinform, (2) a duty to disclose information not requested if the fiduciary knows silence might be harmful, and (3) a positive duty to give full and correct information, including provider discounts and incentives.

Provider discounts and incentives

The course states that a fiduciary has a positive duty to disclose such information as provider discounts and incentives. This goes beyond basic plan information and reflects the fiduciary's obligation to ensure participants understand the financial arrangements affecting their care.

Earlier decisions were generally favorable to the plan, but later decisions tended to view a booklet discrepancy as a plan modification, which is now generally followed

The course notes that participants picked up early on language differences and sued for benefits. Earlier decisions were generally favorable to the plan. Later decisions, however, tended to view a booklet discrepancy as a plan modification. This practice is now generally followed.

When technical oversights are flagrant or wholesale, and/or when they result in detrimental reliance and relevant harm

Courts usually hold that technical or procedural ERISA oversights do not demand that the plan pay unintended benefits. However, courts require payment when oversights are flagrant or wholesale and/or when such oversights result in detrimental reliance and relevant harm.

Disclaimers have merit in themselves; they have merit unless the oversight was flagrant; they may have merit if in large type and prominent; and they have no merit at all

The course identifies four judicial positions: (1) the disclaimer has merit in and of itself, (2) the disclaimer is meritorious unless the oversight was flagrant, (3) the disclaimer may have merit if it is in large type, prominent, etc., and (4) disclaimers have no merit.

Courts have been consistent in holding that state law defenses are not available to the participant due to ERISA preemption

Courts have been consistent in holding that any state law defenses regarding booklet-document differences are not available to the participant. This reflects ERISA's broad preemption of state laws that relate to employee benefit plans.

The booklet must be inaccurate or inconsistent with the document; the booklet error must have been relied upon significantly; and there must be harm, prejudice, or deliberate omission or concealment as a result

Three elements are required: (1) the booklet must be inaccurate or inconsistent with the document, (2) the booklet error must have been relied upon significantly, and (3) as a result of such reliance, there was either harm or prejudice, or there was deliberate omission or concealment.

Court-provided equitable relief, fiduciary breach requiring corrective action, fiduciary held personally liable, or improper disclosure providing substantive relief

The course identifies multiple recovery methods: court-provided equitable relief (requiring the benefit to be paid), fiduciary breach (mandating correction), fiduciary held personally liable (individual pays), and improper disclosure (substantive relief possible). The view of 'no relief' is no longer considered reasonable.

Yes, the majority of court opinions hold that the plan document can also serve as the booklet/SPD, though it is still sometimes challenged

The practice of having the booklet also serve as the plan document was initially controversial. However, the majority of opinions generally hold that the plan document can also serve as the booklet/SPD. Although this is now a common design, participants sometimes still challenge it in lawsuits.

Only the plan document need be disclosed to the plan participant

In Curtiss-Wright Corporation v. Schoonejongen, 514 U.S. 73 (1995), the Supreme Court held that only the plan document need be disclosed to the plan participant. This narrowed the scope of what 'plan documents' participants can demand to see.

Trustees meeting minutes and TPA-employer administrative agreements

DOL opinion letters clarify that trustees meeting minutes are not plan documents (Opn. Ltrs. §§82-21A, 82-33A, 87-10A) and that TPA-employer administrative agreements are not plan documents (Opn. Ltr. §97-11A). However, schedules of reasonable and customary fees were deemed part of the plan document and subject to disclosure.

Both courts held the brochures were NOT the SPD because the brochures either stated they were not the SPD or specifically referred to the SPD as a separate document

In Hicks v. Fleming (5th Cir. 1992), the personalized highlights brochure included statements that it was not the SPD, and the court agreed. In Gridley v. Cleveland Pneumatic (3d Cir. 1991), the overview/highlights brochure specifically referred to the SPD, and it was held not to be the SPD. The key is clear disclaimer language.

Since the purpose of the highlights brochure was essentially that of the SPD, the court held that it was, in fact, part of the SPD

In Kochendorjer v. Rockdale Sash and Trim Company (N.D.Ind. 1977), unlike Hicks and Gridley, the court found that the highlights brochure's purpose was essentially that of the SPD and held it was part of the SPD. This illustrates that without clear disclaimers, supplementary materials may be treated as part of the SPD.

For fully insured plans, courts apply the drafter-beware doctrine (ambiguities held against the insurer); for self-funded plans, courts apply the Firestone abuse-of-discretion standard (denial stands unless there was abuse of discretion)

For fully insured plans, courts apply the traditional rule of construction (drafter-beware doctrine), holding ambiguities against the insurer. For self-funded plans, under the Firestone ruling, courts will let the plan's denial stand unless abuse of discretion is shown, so long as the plan administrator had adjudicating authority.

It broke the exclusive use of the arbitrary and capricious standard, holding that if the plan did not give the plan administrator exclusive authority to adjudicate, the harsher de novo standard would apply

Pre-Firestone, courts used the preferential arbitrary and capricious standard for ERISA disputes. The Firestone ruling changed this by holding that if the plan did not give the plan administrator (as fiduciary) exclusive authority to adjudicate, the harsher de novo standard would be used.

A written plan, once communicated, is etched in stone and clerical errors cannot be corrected retroactively

IRS relies on a tax-court decision that held a written plan, once communicated, is etched in stone. This creates problems when clerical errors (scrivener's errors) are found, as they are prevented from being corrected. The position was originally set for pension plans pre-ERISA, and some observers believe it will be successfully challenged.

Banking, securities, or insurance statutes

Congress crafted ERISA so as to preempt any state statutes that relate to an employee benefit plan, except for banking, securities, or insurance statutes. This exception is significant because it preserves state insurance regulation while still maintaining ERISA's broad preemptive reach.

SOP 92-6 on claim reserve issues and SAS 70 on due diligence standards for plan service providers such as TPAs

The AICPA guide contains the SOP 92-6 pronouncement on claim reserve issues and the SAS 70 pronouncement on due diligence standards for plan service providers such as TPAs. These are critical components for the independent accountant's Form 5500 audit opinion.

Investments are to be carried at cost because of the short-range nature of the fund's obligations

The AICPA guide specifies that investments are to be carried at cost because of the short-range nature of the fund's obligations. Other principles include accrual basis accounting, establishing liabilities for both reported and incurred-but-not-reported benefits, and accruing contributions even if other accruals are not recognized.

Originally prepared primarily for labor-management welfare plans (since they are required by law to be annually audited); it does not distinguish between trusteed and non-trusteed welfare plans

The AICPA guide was originally prepared primarily for labor-management welfare plans, since these plans are required by law to be annually audited. The guide is limited to plan accounting and does not distinguish between trusteed and non-trusteed welfare plans.

Asset-related records, benefit-related records, compliance-related records, and plan-related records

The audit involves four categories: asset-related records (general accounting practices), benefit-related records (the largest cost area), compliance-related records (ERISA reporting, disclosure, and fiduciary standards), and plan-related records (banking, cash flow, audit functions).

Stratified sampling concentrating on the larger dollar claims, though block or specific problem-sampling methods are appropriate if systems review revealed weaknesses

Generally, a stratified sampling of claims is the most efficient sampling technique, concentrating on the larger dollar claims. However, block or specific problem-sampling methods are appropriate if the initial systems review revealed weaknesses in certain areas or indicated special problems.

Review of checks/drafts written, comparison of payments to worksheets and supporting bills, confirmation of payments with participants/providers, and verification of the control sequence of paid checks

Since independent accountants normally lack claims adjustment expertise, their normal procedures include: reviewing checks/drafts written, comparing payments to worksheets and supporting bills, confirming payments with participants/providers, and verifying the control sequence of paid checks. They may engage professional claims consultants for in-depth reviews.

Certification of participant's eligibility, adjustment of the claim, payment of the claim, and periodic internal review of claims payments

The auditor must trace the cycle through which a claim proceeds: (1) certification of participant's eligibility, (2) adjustment of the claim, (3) payment of the claim, and (4) periodic internal review of claims payments. The internal claims review is identified as probably the most important step.

Control environment, risk assessment, control activities, information and communication, and monitoring; only by understanding all five can the auditor determine the nature, timing, and extent of substantive tests for financial assertions

Five components of plan internal control should be reviewed: control environment, risk assessment, control activities, information and communication, and monitoring. Only by understanding the five components will the auditor be able to determine the nature, timing, and extent of substantive tests needed for financial assertions.