Failure to file 5500 Welfare Medical Plan for failing to address refund allocations in SPD

[Insurnacegirl555]

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If your welfare plan (medical, dental, life insurance, disability, etc) has under 100 participants at the beginning of the year, you are exempt from filing Form 5500 if it is (a) unfunded, (b) fully insured, or (c) a combination of insured and unfunded. But wait, there’s more. 

The instructions to the 5500 toss in the following: "see 29CFR 2520.104-20."

If you whip out your copy of the CFR, you will see an "and", as in

"and for which, in the case of an insured plan——

(i) Refunds, to which contributing participants are entitled, are returned to them within three months of receipt by the employer or employee organization, and

(ii) Contributing participants are informed upon entry into the plan of the provisions of the plan concerning the allocation of refunds."

 

Based on the above rules for insured plans with under 100 participants being exempt from 5500 filing - has anyone run into someone getting fine for failure to file it they failed to address refund allocations?  Did MLR requirements from the ACA address this enough that having the refund allocation detail in the SPD is unnecessary to still have the 5500 exemption?

 

Has anyone ever had this issue come up post MLR/ACA as a road block to small fully insured plan exemption?  I ask because I see many small insured plans that are not filing and do NOT have any reference to refunds or refund allocations.  Some are claiming the MLR rules negate this since they dictate the refunds. 

[Brian Gilmore]

The issue here is the DOL nonenforcement policy for holding plan assets (typically employee contributions) in trust.  This primarily is derived from Technical Release 92-01.  Failure to meet the trust nonenforcement relief would mean the plan is funded and can't take advantage of the small plan exemption.

In the context of MLR rebates, Technical Release 2011-04 provides that employers need to allocate the portion of the rebate attributable to plan assets (typically employee contributions) in one of the approved ways within three months to rely on that trust nonenforcement relief with respect to the rebate.

Failure to act within three months would cause the plan to lose the trust relief, and thereby be subject to the 5500 requirements regardless of size and a whole host of other concerns.  If they act within three months by following one of the permitted allocation approaches, there will be no issue.

I've been writing about this recently in the context of the new J&J class action case:

https://www.newfront.com/blog/j-and-j-case-practical-considerations-the-erisa-trust-rules-for-health-plans-part-2

Why Employers Typically Want to Avoid the ERISA Trust Requirements for Health Plans

Establishing and maintaining a trust for the health plan can require additional documentation (trust agreement), procedural policies (trustee processes), fiduciary duties (assets must be held in trust for the exclusive benefit of participants and beneficiaries), administrative burdens (deadlines to deposit employee contributions into trust), and accounting and reporting obligations (loss of the small plan Form 5500 exemption and the requirement for an independent qualified public account’s opinion reported in Schedule H of the Form 5500).

• For more details: Newfront ERISA for Employers Guide

While employers are generally accustomed to these burdens on the retirement side—where no similar trust nonenforcement policy applies—the industry norm has developed around standard single-employer health and welfare plans being unfunded and operating without a trust pursuant to the DOL’s nonenforcement policy.

• The J&J Connection: The plan in the J&J case was funded by a voluntary employees’ benefit association (VEBA) trust. In some situations, typically limited to very large employers, companies choose to fund their health plan through a trust to address accounting and other similar considerations.

...

How Employers Could Inadvertently Lose Technical Release 92-01 Trust Relief: MLR Rebates

The DOL’s guidance for how to address the medical loss ratio (MLR) rebates required by the ACA provides that the portion of a rebate received by the employer that is attributable to employee contributions is considered ERISA plan assets. Those plan assets must be held in trust for the exclusive benefit of participants and beneficiaries, unless an exception applies.

The DOL piggybacks on the Technical Release 92-01 relief in its MLR guidance by providing that employers can avoid the trust requirement for such plan assets (i.e., the portion of the rebate attributable to employee contributions) provided those assets are spent within three months of receipt on refunds to participants, premium reductions, or benefit enhancements. Failure to expend the plan assets on one of those purposes within three months of receipt would cause the employer to lose the ERISA trust relief.

• For more details: How to Address MLR Rebates

 

[Insurnacegirl555]

4 hours ago, Brian Gilmore said:

The issue here is the DOL nonenforcement policy for holding plan assets (typically employee contributions) in trust.  This primarily is derived from Technical Release 92-01.  Failure to meet the trust nonenforcement relief would mean the plan is funded and can't take advantage of the small plan exemption.

In the context of MLR rebates, Technical Release 2011-04 provides that employers need to allocate the portion of the rebate attributable to plan assets (typically employee contributions) in one of the approved ways within three months to rely on that trust nonenforcement relief with respect to the rebate.

Failure to act within three months would cause the plan to lose the trust relief, and thereby be subject to the 5500 requirements regardless of size and a whole host of other concerns.  If they act within three months by following one of the permitted allocation approaches, there will be no issue.

I've been writing about this recently in the context of the new J&J class action case:

https://www.newfront.com/blog/j-and-j-case-practical-considerations-the-erisa-trust-rules-for-health-plans-part-2

Why Employers Typically Want to Avoid the ERISA Trust Requirements for Health Plans

Establishing and maintaining a trust for the health plan can require additional documentation (trust agreement), procedural policies (trustee processes), fiduciary duties (assets must be held in trust for the exclusive benefit of participants and beneficiaries), administrative burdens (deadlines to deposit employee contributions into trust), and accounting and reporting obligations (loss of the small plan Form 5500 exemption and the requirement for an independent qualified public account’s opinion reported in Schedule H of the Form 5500).

• For more details: Newfront ERISA for Employers Guide

While employers are generally accustomed to these burdens on the retirement side—where no similar trust nonenforcement policy applies—the industry norm has developed around standard single-employer health and welfare plans being unfunded and operating without a trust pursuant to the DOL’s nonenforcement policy.

• The J&J Connection: The plan in the J&J case was funded by a voluntary employees’ benefit association (VEBA) trust. In some situations, typically limited to very large employers, companies choose to fund their health plan through a trust to address accounting and other similar considerations.

...

How Employers Could Inadvertently Lose Technical Release 92-01 Trust Relief: MLR Rebates

The DOL’s guidance for how to address the medical loss ratio (MLR) rebates required by the ACA provides that the portion of a rebate received by the employer that is attributable to employee contributions is considered ERISA plan assets. Those plan assets must be held in trust for the exclusive benefit of participants and beneficiaries, unless an exception applies.

The DOL piggybacks on the Technical Release 92-01 relief in its MLR guidance by providing that employers can avoid the trust requirement for such plan assets (i.e., the portion of the rebate attributable to employee contributions) provided those assets are spent within three months of receipt on refunds to participants, premium reductions, or benefit enhancements. Failure to expend the plan assets on one of those purposes within three months of receipt would cause the employer to lose the ERISA trust relief.

• For more details: How to Address MLR Rebates

 

Thank you for responding in such detail!  To clarify, does this mean you do *not* believe that failing to put in the SPD the item below is an issue?  As long as the MLR rebates are handled in an approved manner within 3 months?  My concern/question lies mostly in the potential issue of the needing to address how the rebates will be allocated right in the spd (in my interpretation, which of the approved ways will the potential refund be handled).  Your belief is that it does *not* lose exemption for a small fully insured plan if they fail to put in their plan documents exactly how the MLR rebates will be handled?  Just clarifying that I am following properly - thank you!  

 

(ii) Contributing participants are informed upon entry into the plan of the provisions of the plan concerning the allocation of refunds."

[Brian Gilmore]

Yeah good point.  While what happens in practice is probably more important, I agree that rebates should be mentioned in the SPD (or some other material provided upon entry) to meet that disclosure condition of the small filer exemption.  Since all plans should have a wrap SPD, that's the logical place to address it.  But I also think that provision can be something relatively generic.  Here's how our client wrap SPD template handles:

Under ERISA, the Plan Administrator of the group health plan may have fiduciary responsibilities regarding distribution of dividends, demutualization and use of the Medical Loss Ratio rebates from group health insurers. Some or all of any rebate may be an asset of the plan, which must be used for the benefit of the participants covered by the policy. Participants should contact the Plan Administrator directly for information on how the rebate will be used.