Preview of March Compliance Checkpoints: Plan Documentation

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Tracking various laws and regulations which impact employee benefits can divert time and resources from your core functions such as recruiting top talent, developing strategic benefits and compensation programs, and meeting cost targets. After all, it takes a lot of work to sustain a destination workplace that attracts, retains, and engages the right people to increase your organization’s productivity and growth. How can you keep pace with evolving legislative and regulatory initiatives and still have the time, resources, and drive to sustain a destination workplace?

As a trusted advisor, Gallagher will help you navigate the ever-changing landscape of employee benefits compliance issues. Compliance Checkpoints provides information to help you decrease the risks associated with human capital management while maximizing your investment in your workforce. Use this monthly guide to learn about potential compliance issues that can lead to penalties and expensive litigation for employers who offer employee benefits. Check out the action steps below.

1. Itemize. Customize. Implement. Section 125 of the Tax Code requires cafeteria plans to be written. That means you must have a cafeteria plan document. Period. If you permit employees to choose between taxable (e.g., cash) and nontaxable benefits (e.g., health insurance coverage) and do not have a plan document that complies with the applicable rules for content and date of adoption, then the plan is not a cafeteria plan, and you and your employees will have tax consequences. Many associate a written plan document requirement with the Employee Retirement Income Security Act (“ERISA”), but whether your organization is subject to ERISA or not, you must have a written plan document complying with applicable content and adoption timing requirements if you have a cafeteria plan. Specifically, cafeteria plan documents must contain: (1) a description of available benefits; (2) participation rules; (3) election and election change procedures; (4) the manner of contributions; (5) the maximum amount of contributions; (6) the plan year; (7) if purchase or sale of paid time off (“PTO”) days is offered, the ordering rules for use of nonelective and elective PTO; (8) if the plan includes flexible spending arrangements (“FSAs”), the plan's provisions complying with any additional requirements for those FSAs; and (9) if the plan includes a grace period or carry over, the plan’s provisions complying with IRS requirements regarding the grace period or carry over. How well does your cafeteria plan document meet the content and timing requirements of Section 125?


2. Compare. Unify. Comply. Both cafeteria plan documents and underlying plan documents typically address when benefit elections can be changed. However, the cafeteria plan is concerned about enforcing changes related to salary reduction elections and thus may limit when an individual may revoke or change an election. The underlying plan may permit changes more frequently than the underlying cafeteria plan, which is permissible so long as those changes occur on a post-tax basis. Section 125 limits when an individual may revoke a plan election. For example, an underlying medical plan could permit an employee to decrease coverage by selecting a less expensive option when his salary decreases; however, the employee cannot change his pre-tax salary reduction election under the cafeteria plan. Organizations wishing to avoid conflicts between cafeteria plan permissible changes in status should review underlying plan documents to make sure that the underlying plans do not recognize any changes that would not be permitted under the cafeteria plan. Are there any situations that would permit a change in coverage under any of your underlying benefits that are not reasons permitting a change in an individual’s pre-tax salary reduction under your cafeteria plan?


3. Identify. Document. Administer. Having a written plan document is an important element of ERISA compliance, but ERISA is not the only law requiring a written plan document. As noted above Section 125 requires that a cafeteria plan be administered according to a written plan document, and Section 105(h) requires that a self-insured health benefit be administered according to a written instrument. Thus, even self-insured health plans sponsored by non-ERISA employers must have written plan documents. Many employers sponsoring insured plans may rely upon insurers for plan documents, but such documentation typically does not contain the required ERISA provisions and may not be drafted to provide important protection for employers and plan fiduciaries. Other specific benefits must be established under written plans such as adoption assistance programs, qualified educational assistance programs, group term life insurance, and employee assistance programs (“EAPs”). Further, the plan document requirement should not be confused with the Summary Plan Description (“SPD”) requirement. Those are two separate requirements for ERISA-covered benefits. Organizations that only have SPDs may not have met their plan document requirements if the appropriate content required for a plan document is not included in the SPD. Are there any benefits sponsored by your organization that should be administered according to a written plan document, but are not?


4. Specify. Establish. Protect. ERISA has specific plan document content requirements. For example, a plan document for a benefit subject to ERISA must (and the associated SPD should) include a specific procedure to follow for amending the plan and a means to identify the individuals authorized to amend the plan. In addition, plan sponsors should ensure that plan documents include provisions that, while not required under ERISA, help the plan sponsor to avoid or defend against litigation. For example, if the plan document expressly states that the plan decision maker has “discretionary authority” to interpret and administer the plan and to make factual determinations, then a court generally will apply a deferential standard or review and respect the decision maker’s determination unless that decision represents an abuse of discretion. Further, a plan document should document a plan’s compliance with other legal requirements. Which of your plan document provisions, if any, should be revised to meet content requirements or better protect your organization as plan sponsor?


And, there are six more action items this month. This is just a preview of the March issue of Compliance Checkpoints. If you would like the full version of Compliance Checkpoints or would like additional information on how Gallagher constantly monitors laws and regulations impacting employee benefits and supports employers in their compliance efforts, please contact your Gallagher representative or click here to Contact Us via

Compliance is a series of checkpoints, not a final destination. As a trusted advisor, Gallagher has developed this Compliance Checkpoints series to help you pursue a path through employee benefits compliance issues as part of an overall compliance plan.


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.