Audit report required for health plan with participant contributions?

[Carol V. Calhoun]

I have what seems to me like a very simple question that must come up every day of the week, but I'm getting totally bogged down. Here's the situation:

• Employer has self-funded health plan.
• Participants make pre-tax contributions.

Plan has thousands of participants. Other counsel I'm dealing with is telling me that the plan doesn't have to file an audit report with its Form 5500, because the plan is unfunded. But I'm not 100% sure an exemption applies, and would like to figure out what others are doing.

Here is what I've found:

• ERISA § 103(a)(3)(A) provides the general requirement of an audit report.
• 29 CFR § 2520.104-44(b)(1) provides an exemption for an employee welfare benefit plan under the terms of which benefits are to be paid solely from the general assets of the employer or employee organization maintaining the plan. However, "the exemptive relief would, in the absence of additional relief, be available only to those contributory welfare plans which apply participant contributions toward the payment of premiums in accordance with the terms of the regulations." Technical Release No. 1992-01. Since the plan is self-funded, participant contributions are not used to pay premiums, so the 29 CFR § 2520.104-44(b)(1) exemption does not apply.

Thus, if there is an exemption, it must come from Technical Release No. 1992-01, which states as follows:

In the case of a cafeteria plan described in section 125 of the Internal Revenue Code, the Department will not assert a violation in any enforcement proceeding solely because of a failure to hold participant contributions in trust. Nor, in the absence of a trust, will the Department assert a violation in any enforcement proceeding or assess a civil penalty with respect to a cafeteria plan because of a failure to meet the reporting requirements by reason of not coming within the exemptions set forth in §§2520.104-20 and 2520.104-44 solely as a result of using participant contributions to pay plan benefits or expenses attendant to the provision of benefits.

In the case of any other contributory welfare plan with respect to which participant contributions are applied only to the payment of premiums in a manner consistent with §§2520.104-20(b)(2)(ii) or (iii) and 2520.104-44(b)(1)(ii) or (iii), as applicable, the Department will not assert a violation in any enforcement proceeding or assess a civil penalty solely because of a failure to hold participant contributions in trust.

However, I can come up with two possible interpretations of the above language. Does it mean:

1. The first paragraph applies only if the plan contributions consist entirely of participant cafeteria plan contributions. If the plan also has employer contributions, then there is an exemption only if the second paragraph applies (i.e., the plan is insured).
2. The first paragraph applies if all of the participant contributions are cafeteria plan contributions, regardless of whether there are also employer contributions.

To be honest, neither interpretation makes a lot of sense to me. With regard to the first interpretation, if a plan with only participant contributions would be exempt, and a plan with only unfunded employer contributions would be exempt, why would putting both of them into the same plan eliminate the exemption? But with regard to the second interpretation, why would having participant contributions be cafeteria plan (pretax) contributions be different from having them be after-tax contributions?

[Belgarath]

Almost seems to me like mixing apples and oranges? In other words, the Technical release 92-01 is only necessary in this context when determining whether or not the plan is exempt from filing the 5500 form as a small unfunded or fully insured welfare plan. Once you have determined that you are not exempt from filing, as in your situation 'cause you are way over the 100 participant number, then you just look to 2520.104-44(b) to determine if the audit is required. If you satisfy those requirements, no audit. Section (b)(1)(i) provides for the audit waiver if unfunded, (ii) provides for a waiver if paid through insurance contracts (either employer or employee contributions, with certain "hooks") and (iii) provides for a combination of (i) and (ii).

Sounds to me like you are probably exempt from the audit requirement, but obviously I don't know if the plan/policy/funding provisions satisfy all the "hooks" in (ii).

[Carol V. Calhoun]

Yeah, but if you are counting on 2520.104-44(b) to say than an audit is not required, the following language in Technical Release No. 1992-01 would say 2520.104-44(b) does not provide an exemption:

[T]he exemptive relief [of 2520.104-44(b)] would, in the absence of additional relief, be available only to those contributory welfare plans which apply participant contributions toward the payment of premiums in accordance with the terms of the regulations.

In this case, participant contributions are not applied toward the payment of premiums. (The plan being self-funded, there are not premiums.) So unless Technical Release No. 1992-01 provides additional relief, the audit report is required.

[Belgarath]

Ah, sorry, now I get it. And I don't have a good answer!

[Flyboyjohn]

If you're looking for "what others do" we take the position these plans are not required to have an audit.

Perhaps another way to look at it:

The auditor has to have something to audit. If it's an unfunded, general assets plan (no trust) there are no plan assets, no plan transactions, no Schedule H and no audit.

That being said I have seen 5500 filings and audits where the IQPA tried to audit the separate bank account that the employer ran plan transactions through but disagree with that position.

[Carol V. Calhoun]

Thanks! The impression I get is that the law on the subject is muddy, and that employers vary in what they do, but that DOL hasn't been going after those who don't file auditi reports.

If you're looking for "what others do" we take the position these plans are not required to have an audit.

Perhaps another way to look at it:

The auditor has to have something to audit. If it's an unfunded, general assets plan (no trust) there are no plan assets, no plan transactions, no Schedule H and no audit.

That being said I have seen 5500 filings and audits where the IQPA tried to audit the separate bank account that the employer ran plan transactions through but disagree with that position.

[Peter Gulia]

It's a shame that non-rule non-enforcement statements in 1988, 1992, and 1996 remain the limited guidance.

The 1992 Technical Release stated: "The Department cautions that the foregoing enforcement policy in no way relieves plan sponsors and fiduciaries of their obligation to ensure that participant contributions are applied only to the payment of benefits and reasonable administrative expenses of the plan."

If there is such a duty or obligation, isn't that a trust?

[Juan Kelly]

Stop loss reinsurance premiums are premiums, folks (if a contributing employee has no claims, his/her monies are used to pay premiums). There is a DOL Advisory Opinion on point which collapses to "no trust no audit". In addition, pre-tax employee contributions are employer money (not subject to FICA).

if a trust is used to pay premiums, claims and/.or fees, a diversion of funds has been established requiring an audit. The audit requirement only exists if there is a trust which is required if employeees contribute after-tax (deemed to be the case if a formal cafeteria plan has not been adopted).

If employees don't contribute at all (including retirees which is next to impossible), there is no need to establish a trust, hence no need for an audit.

 

[jeanh]

On 9/20/2016 at 7:37 AM, Flyboyjohn said:

If you're looking for "what others do" we take the position these plans are not required to have an audit.

Perhaps another way to look at it:

The auditor has to have something to audit. If it's an unfunded, general assets plan (no trust) there are no plan assets, no plan transactions, no Schedule H and no audit.

That being said I have seen 5500 filings and audits where the IQPA tried to audit the separate bank account that the employer ran plan transactions through but disagree with that position.

In regards to above - what is filed - only the 3 page 5500  with no schedules ?

 

[Flyboyjohn]

Yes, that's what we do