Avoiding Penalties
Persistent action on legislative compliance is critical to your organization. But compliance goes beyond filing specific paperwork by specific deadlines. It means understanding how laws and regulations apply to your employee benefits offerings and how to minimize the costs associated with noncompliance in order to maximize your organization's resources to ensure continuous operations, attracting and engaging employees, and overall organizational wellbeing.
Compliance Continuity is a monthly publication designed to help your organization sustain the total wellbeing and engagement of your workforce, pursue your business goals, and help you achieve better results by providing ongoing benefits and HR compliance guidance, key considerations, and action steps. While your best is finite, your better is never finished. Check out the action steps below to help you prioritize your employee benefits compliance efforts.
- Provide. Notify. Improve. Unfortunately, health plans frequently fail to properly provide COBRA notices. Failure to provide an initial notice can have substantial monetary consequences. First, the IRS can impose excise taxes of up to $110 per day. Thus, a plan that is 365 days late with an initial notice for a single individual would be subject to an excise tax of up to $40,150 (365 x $110). Furthering the seriousness of the potential of a COBRA excise tax is a requirement to self-report, using Form 8928. Interest is charged on taxes not paid by the due date even if an extension of time to file is granted. Second, a court of law can impose civil penalties, and a nongovernmental plan can be subjected to "other relief," including extra-contractual damages. In addition, qualified beneficiaries under nongovernmental plans may sue to recover COBRA coverage under ERISA. Such suits carry the potential for large damages. What COBRA notice practices can your organization improve to avoid large penalties?
- Test. Retest. Avoid. Discriminatory benefits can negatively impact organizational leaders. For example, a dependent care flexible spending account (DCAP) that discriminates in favor of highly compensated employees (HCEs) will cause the benefits for the HCEs to become includable in the HCEs' gross income. However, while the cafeteria plan nondiscrimination rules require HCEs to include in gross income any amount that could have been received as cash (e.g., their total salary reduction amounts), the DCAP nondiscrimination rules only require an HCE to include in gross income those amounts (or reimbursements) that were actually received as dependent care assistance. Thus, if an HCE received $3,500 as dependent care assistance, then the $3,500 would be included in that HCE's taxable income. Similar nondiscrimination requirements apply to other benefits such as self-insured medical, dental, and vision benefits, life insurance, and health flexible spending accounts. Critical to avoiding discrimination is an annual program with estimated testing and actual testing to provide the opportunity to correct before a plan year ends. Which of your benefits are part of your nondiscrimination testing needs?
- Calculate. Determine. Satisfy. In addition to nondiscrimination requirements for underlying benefits, organizations providing benefits through cafeteria plans are required to conduct testing under Section 125 of the Internal Revenue Code. Generally, Section 125 nondiscrimination testing requires specific calculations to determine whether a plan's structure satisfies certain mathematical testing requirements. More specifically, cafeteria plans are not permitted to discriminate in favor of a specified prohibited group, which consists of highly compensated individuals and key employees, with regard to eligibility, contributions and benefits, and utilization. For example, if your highly compensated individuals are only required to pay 10% of the cost of medical coverage through a cafeteria plan, and non-highly compensated individuals must pay 30% of the cost for the same coverage through your cafeteria plan, then your plan is likely to fail Section 125 nondiscrimination testing. Exclusion of tax-free benefits under a cafeteria plan is not available to the group of highly compensated individuals if the plan discriminates in their favor. This means that the prohibited group members will lose their Code Section 125 safe harbor from constructive receipt and must include additional amounts in gross income. However, employees who are not in the prohibited group can still exclude the benefits from income. What actions does your organization take to ensure that your cafeteria plan does not discriminate in favor of highly compensated individuals or key employees?
- Summarize. Create. Distribute. The Patient Protection and Affordable Care Act (PPACA) created two new major disclosures that group and individual health plans must provide to participants: the Summary of Benefits and Coverage (SBC) and a Uniform Glossary of Terms (Glossary). The SBC requirement applies to group health plans (both insured and self-insured), including medical plans and health reimbursement arrangements (HRAs) that are not excepted benefits. An SBC's purpose is to summarize a health plan's benefits and costs in a standard format that allows participants, dependents, and potential enrollees to make "apples-to-apples" comparisons with other health plans offered through an employer, Marketplace, or other insurers. The Glossary is a list of standardized definitions of terms used in the SBC, such as "deductible," "out-of-pocket limit," and "network." There are four key times when plan sponsors and insurers must provide SBCs to participants, beneficiaries, and eligible individuals: upon new enrollment, at special enrollment, upon request, and in conjunction with open or annual enrollment. Failing to provide an SBC can be costly, and unfortunately, employers with HRAs often overlook the requirement to provide SBCs for their HRAs. While information about an HRA can be combined with information about medical benefits on an SBC, employers with fully insured medical benefits may have difficulty in persuading their carriers to combine the information. The results can be costly. For example, if an employer with 100 employees overlooks the requirement to provide an SBC for its HRA for a full year, the penalty would be $115,600 (100 employees x $1,156). What steps has your organization taken to ensure that your SBCs accurately summarize your benefits under PPACA?
- Include. File. Comply. Employers subject to ERISA with 100 or more participants covered under a plan as of the first day of the plan year must file a Form 5500 for that plan each plan year. If you include all of your applicable plans in a single wrap document, you can file one Form 5500, but if you don't have a wrap document or only include some of your applicable benefits in a wrap document, then you must file multiple Forms 5500. If you maintain a wrap document for all of your benefits, but only one benefit has more than 100 participants as of the beginning of the plan year, then you must file a Form 5500 for all of the benefits included in the wrap document. Note that proposed changes to the Form 5500 would remove the exemption for ERISA plans with fewer than 100 participants at the beginning of the plan year. The penalty for non-compliance is $2,194 per day that the filing is late. This amount is to be indexed each January. If you miss the deadline for a full year for one benefit, the penalty would be 365 days x $2,194, for a total of $800,810. Fortunately, there is an opportunity for organizations that find and voluntarily self-correct errors to obtain a reduced penalty under certain circumstances through the Delinquent Voluntary Filer Program (DVFC). Criminal penalties can also be imposed for willful violation of the Form 5500 reporting rules. Criminal penalties include a fine of not more than $100,000 (not more than $500,000 in the case of a corporation), imprisonment for not more than ten years, or both. How has your organization ensured that it is accurately and timely filing all necessary Forms 5500?
This is a preview of Compliance Continuity. For five more considerations to avoid penalties, contact your Gallagher representative or click here to subscribe and receive the full version of Compliance Continuity.
Compliance is a series of actions, not a final destination. As a trusted advisor, Gallagher has developed this Compliance Continuity series to help you pursue a path through employee benefits compliance issues as part of an overall continuing 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 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.