Remember ERISA Basics: SPD and Eligibility
With all of the recent changes flowing from PPACA, it is important not to forget some very basic and long-standing aspects of plan compliance, design, drafting and administration, particularly those rooted in significant part in a law enacted 40 years ago, the Employee Retirement Income Security Act, also known as “ERISA.”
This article will discuss a basic ERISA requirement that if left unaddressed can have significant conse-quences under PPACA – defining who is eligible to participate in an employee benefit plan. Of course, defining who is eligible is not specific to group health plans, and is critically important for all employee benefit plans, including retirement plans, although, here we are focusing on group health plans.
In short, plan documents that employers receive from their insurance carriers and third party administrators often do not drill down on which employees are eligible to participate. Adding to the long-standing requirement under ERISA to describe the rules for eligibility in plan documents furnished to employees, the employer shared responsibility penalties under Internal Revenue Code § 4980H, added by PPACA, and related regulations, make it critically important to ensure that eligibility provisions are carefully drafted. For many employers, a “wrap-document” may be a useful tool for addressing this and other provisions concerning the plan.
Section 101 of ERISA requires plan administrators to furnish summary plan descriptions (SPDs) to plan participants and beneficiaries. DOL regulations provide a laundry list of content requirements for SPDs, which include that the SPD must describe “the plan’s requirements respecting eligibility for partici-pation.” See DOL Reg. § 2520.102-3(j) for the list. To this day, many continue to believe that the insurance certificate they receive from their insurance carriers (or plan description in the case of a self-funded plan) are compliant SPDs. In most cases, they are not.
Does this look familiar?
You are eligible to participate in the plan if you are actively employed by the employer at least 20 or more hours per week and meet the requirements established by your employer.
This is language one might typically find in an insurance certificate for group health insurance. It is not uncommon to find that no additional requirements were specifically established by the employer, or if established, they might be found in an employee handbook, which is not the SPD or a plan document. However, many employers attempt to clarify this basic language, such as by including the following in the SPD – an employee is eligible to participate in the plan if the employee is regularly working 30 or more hours per week.
But what does this really mean? Under PPACA, a large employer (generally one with 50 or more full-time equivalent employees) could incur significant penalties if it fails to offer minimum essential coverage to its full-time employees. IRS regulations provide extensive guidance concerning how to determine which employees are “full-time” employees for purposes of the employee shared responsibility penalties (in general, a full-time employee is one that on average works 30 or more hours per week). For those employers seeking to avoid the shared responsibility penalties under IRC 4980H, they must be offering the right kind of coverage to the right kind of “full-time” employees.
Offering coverage to all employees “regularly working 30 or more hours per week,” may result in the employer avoiding 4980H penalties, but it also could result in the company offering coverage to more employees than necessary, or not enough. For employers that have a significant part of their workforce on variable hour schedules, it can be a challenge to determine when employees are “regularly working” the minimum number of hours required for eligibility. This challenge is heightened when employees take leaves of absence, change positions or make other changes in their employment.
In addition to concerns about PPACA penalties, employers should also consider that employees may be more likely to closely scrutinize plan documents for eligibility as they seek to avoid penalties of their own under PPACA individual mandate. An employee may feel he or she has been “regularly working” 30 hours per week after working 30 hours per week for two months, even though the employer is using a twelve-month period permitted under IRS regulations to determine full-time status. Under the terms of a plan stating the eligibility requirement as “regularly working 30 or more hours per week,” the employee would have a claim for benefits under ERISA, regardless of PPACA penalty issues.
The IRS regulations referenced above provide safe harbors to determine when employees are “full-time” employees for purposes of the 4980H penalty. Under one method, employers can “look back” over a period of months (as few as three, but not more than 12) to determine if a person worked on average more than 30 hours per week, and for those that do treat them as full-time employees during a future period, generally regardless of the hours worked during that future period. Many employers are following those rules to determine who is eligible under their plans, believing that if they offer the appropriate level of affordable coverage to those employees, they will avoid the penalties.
However, their plan documents and SPDs may not describe these rules; that is, the rules to comply with the IRS safe harbors. And, incorporating the IRS rules into the SPD by reference is not a preferred approach, and likely would not comply with ERISA and the DOL regulations above.
So, as employers scramble to comply with PPACA employer shared responsibility mandate for 2015, they need to remember their ERISA basics and ask themselves, “What does the plan say?”