Preview of June Compliance Guide: Plan Document Updates, Amendments, and Terminations
Plan documents are significant because they specify the promises made to employees about the terms and conditions of employer-sponsored benefits. Having up-to-date and accurate plan documents helps employers avoid misunderstandings and potential liability associated with the creation of unintended benefits. Sometimes, making changes or terminating benefits may not be as easy as you would imagine. If you are committed to becoming a destination employer, you must keep pace with evolving legislative and regulatory initiatives that may pose risks to meeting cost targets, developing strategic benefits and compensation programs, and attracting and retaining top talent. As a trusted advisor, Arthur J. Gallagher & Co. will help you navigate the ever-changing landscape of employee benefits compliance issues. Check out the critical considerations below as you navigate the requirements associated with updating, amending, or terminating your employee benefits.
1. Begin at the beginning with your plan documents.
Several federal laws, such as ERISA and Sections 125 and 105 of the Internal Revenue Code, require plans to be established and maintained according to written instruments. For example, Section 125 requires that a cafeteria plan be conducted according to a written plan document. Likewise, a self-insured health plan must be established and maintained pursuant to a written document under Section 105(h). Thus, even employers not subject to ERISA may be required under federal law to have “written instruments.” Do you have plan documents for your employer-sponsored benefits as required by applicable law?
2. Clearly state the directions for amendments.
If your organization intends to change or terminate benefits, the plan documents must reserve the right to amend or terminate. However, plans are not required to use certain words to reserve the right to amend or terminate the terms or conditions of a plan. For example, your plan may simply state that your organization “as plan sponsor, reserves the right to amend or terminate the plan at any time.” Further, your plan should indicate that the amendment or termination will be made “pursuant to a written instrument duly adopted by” your organization or any of your organization’s delegates. Even plans not subject to ERISA should reserve the right to amend or terminate, because plans that are not subject to ERISA may find themselves contractually bound to offer certain benefits described in benefit communications. The reservation must be included, as applicable, in both the plan document and the Summary Plan Description (“SPD”). Do your plan documents and SPDs contain a reservation of rights to amend or terminate your plans?
3. Remember that uncommunicated changes are not operative changes.
Plans subject to ERISA are required to provide notice of a change that is not a material reduction covered under a Summary of Material Modification (“SMM”) within 210 days after the end of the plan year in which the change occurred. An employer nonetheless will likely be responsible for any benefits incurred between the date an amendment is adopted and the date the amendment is communicated. So, for example, if you change the process an employee must use to notify the plan about a COBRA qualifying event, but you don’t communicate that change to your employees, then employees may rely upon either the new process or the old process until you provide them with an SMM. Are you communicating changes to your benefits in a timely manner so that they are effective when you intend them to be?
4. Make the right connection on communications.
Employers frequently communicate changes through their annual enrollment materials, which can be a permissible way to communicate the changes. There are no specific rules governing the content of an SMM for a health or welfare benefit, but you should clearly state in your annual enrollment materials that those materials serve as an official SMM to the SPD. Participants and beneficiaries should be instructed to retain the information with their other plan documents for future reference, that the SMM provides only certain information about changes of benefit provisions, and that the SMM is not intended to be a complete explanation. Further, participants and beneficiaries should be instructed that, if there are any discrepancies between the SMM and the legal plan documents, the legal plan documents will prevail to the extent permitted by law. Are your annual enrollment materials clearly labeled as SMMs?
5. Understand the difference between adopted and effective dates.
Employers must be careful to understand when a change is adopted if a change triggers a Summary of Material Reduction (“SMR”). For example, increasing a copayment or eliminating a benefit would constitute a material reduction and thus trigger an SMR. The SMR must be furnished within 60 days after adopting the change — not within 60 days after the reduction is effective. For example, if you adopt a change resulting in a material reduction (and thus trigger an SMR) on August 15 and wish to communicate about that change in your annual enrollment communications released on November 1, then the communication would be untimely because more than 60 days (16 + 30 + 31 = 77) would have lapsed between the time the change was adopted and the time the change would be communicated. A change may be adopted, for example, when the person with authority to change the plan decides to make the change and signs an amendment. Or, the change may be adopted when the committee responsible for oversight approves the change. The process should be described in your plan documents to help you determine when a change is adopted. Are you correctly determining when a plan change is adopted for purposes of providing SMRs?
And five more detours between your benefits plan language and your compliance destination, available in the full version of the June Compliance Guide. To get the full version of the Compliance Guide, or additional information on how Gallagher constantly monitors laws and regulations impacting employee benefits and supports employers in their compliance efforts, please contact your Gallagher Benefit Services representative or contact us online.
Compliance is a journey, not a destination.
As a trusted advisor, Arthur J. Gallagher & Co. has developed this Compliance Guide series to help you map a path through employee benefits compliance issues as part of an overall compliance plan. Employers should carefully evaluate their health and welfare plans to determine if they are in compliance with both federal and state law. If you have any questions about one or more of the compliance destinations listed above, or would like additional information on how Gallagher constantly monitors laws and regulations impacting employee benefits in order to support employers in their compliance efforts, please contact your Gallagher Benefit Services representative.
The intent of this analysis is to provide you with general information. It does not necessarily fully address all your organization’s specific issues. It should not be construed as, nor is it intended to provide, legal advice. Questions regarding specific issues should be addressed by your organization’s general counsel or an attorney who specializes in this practice area.