Many business owners who offer health insurance, disability coverage, life insurance, and other employee benefits assume that because they are purchasing these benefits from an insurance company, the insurer’s policy documents satisfy all of the legal requirements for their employee benefit plans. This assumption is incorrect and surprisingly common, and it leaves a large number of employers in technical violation of ERISA’s fundamental plan documentation requirements. The solution, in most cases, is to adopt a wrap plan document and to ensure that a compliant summary plan description is provided to employees. This article explains what wrap plans and SPDs are, why they are required, what they must contain, and what happens when they are missing.
The Problem: Insurance Policies Are Not Plan Documents
When an employer purchases a group health insurance policy from a carrier, the carrier provides a certificate of coverage (or similar document) to covered employees describing the benefits under the policy. Employers often treat this certificate, along with any enrollment materials provided by the insurer, as the full documentation of their health plan. What they do not realize is that these insurance-company-issued documents typically fail to address many of the items that ERISA requires a plan document to contain.
ERISA requires that every employee welfare benefit plan be established and maintained pursuant to a written plan document that specifies, among other things, the procedure for establishing and carrying out the plan’s funding policy, the basis on which payments are to be made, the claims procedure, the procedure for amending the plan, the named fiduciary, and the plan’s formal governance structure. An insurance company’s certificate of coverage is designed to describe the insurance product, not to create an ERISA plan. It typically says nothing about the employer’s identity as plan sponsor and named fiduciary, the plan’s formal administrative structure, ERISA-required claims and appeals procedures, participants’ rights under ERISA, or the procedure for amending the plan.
Similarly, an employer who offers multiple welfare benefits — health, dental, vision, life insurance, disability insurance, and so forth — through separate insurance policies may have no single document that ties all of these benefits together into a coherent plan. ERISA’s document requirements apply to the plan as a whole, and a collection of separate insurance certificates does not constitute a proper ERISA plan document.
The Wrap Plan Solution
A wrap plan document is a legal instrument that “wraps around” the underlying insurance contracts and plan benefit documents and incorporates them by reference, while adding all the ERISA-required provisions that those underlying documents do not contain. The wrap plan document ties together the employer’s various welfare benefit programs under a single umbrella plan (or sometimes under a small number of plans organized by program type) and provides the formal governance structure, fiduciary designation, claims procedures, amendment procedures, and participant rights information that ERISA requires.
The wrap plan approach works because ERISA does not require that the plan document contain every detail of the plan’s benefits — it permits the document to incorporate other materials by reference, provided those materials are identified with sufficient specificity and are available to participants. A wrap plan that identifies each underlying insurance contract by carrier, policy number, and coverage type, and that makes those documents available as part of the plan’s documentation, satisfies the requirement that the plan be maintained pursuant to a written instrument.
Wrap plans can be structured as a single plan covering all of an employer’s welfare benefits, or as multiple plans (for example, a medical plan and a separate plan for disability and life insurance benefits). The choice has implications for the Form 5500 filing obligation, because large plans (generally those with 100 or more participants) must file an annual report with the Department of Labor, and each plan is a separate filing obligation. Small plans are exempt from the Form 5500 filing requirement, but the plan document requirement still applies.
Summary Plan Descriptions: The Participant-Facing Disclosure
A summary plan description, or SPD, is a separate document from the plan document. While the plan document is the governing legal instrument, the SPD is a participant-facing disclosure that must explain the plan’s benefits and rules in a manner calculated to be understood by the average plan participant. ERISA Section 104(b) requires that every covered plan distribute an SPD to participants and beneficiaries.
The SPD must be provided to new participants within 90 days of first becoming covered by the plan, to all participants at least once every five years if the plan has been amended during that period (or every ten years if there have been no amendments), and to anyone who requests a copy, within 30 days of request. The SPD must be written in a manner calculated to be understood by the average plan participant, which means it must avoid technical jargon, use clear language, and include sufficient detail that participants can understand their rights and obligations under the plan.
The required content of an SPD is specified in detail by DOL regulations. An SPD for a welfare benefit plan must include the plan name and type, the name and address of the plan sponsor and plan administrator, the employer identification number and plan number, the plan year, the names of any trustees, the plan’s eligibility requirements, a description of the benefits provided, the circumstances under which benefits may be denied, the claims procedure, a description of the plan’s grievance and appeals procedures, the plan’s COBRA rights, the plan’s HIPAA portability provisions (if applicable), a statement of ERISA rights, and other information specified in the regulations.
The ERISA Rights Statement
One of the required components of an SPD that is frequently overlooked is the statement of ERISA rights. ERISA requires that every SPD include a statement describing the participants’ rights under ERISA, including the right to examine plan documents free of charge at the plan administrator’s office, the right to obtain copies of plan documents upon written request for a reasonable copying charge, and the right to bring a civil lawsuit for benefits under ERISA Section 502. The statement must also describe the role of the Department of Labor and provide contact information for the DOL’s Employee Benefits Security Administration.
Omitting the ERISA rights statement from an SPD is a technical violation that, while it may not immediately harm any participant, reflects a failure to meet the basic disclosure requirements of the statute. When the DOL conducts an audit of a plan’s compliance, the absence of a compliant ERISA rights statement in the SPD is one of the first things the auditors will note.
Summary of Material Modifications
When a plan is amended in a way that materially changes the information contained in the SPD, ERISA requires that a summary of material modifications, or SMM, be distributed to participants within 210 days after the end of the plan year in which the change was adopted. If a material reduction in covered services or benefits occurs under a group health plan, a special rule requires that participants be notified within 60 days of the change’s adoption, rather than waiting until the end of the plan year.
The SMM must describe the modification in a manner that is calculated to be understood by the average plan participant and must contain sufficient detail to inform participants of the nature of the change. Employers who amend their plans without preparing and distributing an SMM are in violation of ERISA’s disclosure requirements, even if the SPD itself is otherwise adequate.
Consequences of Operating Without a Wrap Plan or SPD
The consequences of failing to have proper plan documentation are both legal and practical. On the regulatory side, the Department of Labor can assess civil monetary penalties of up to $110 per day per participant for failure to provide an SPD when requested. In the case of a health plan, the DOL can also pursue an enforcement action for the failure to maintain a proper plan document, which can result in civil penalties and, in egregious cases, DOL litigation.
On the litigation side, an employer who faces a participant lawsuit over a denied benefit claim is in a difficult position if no compliant plan document exists. Courts apply ERISA’s deferential review standard to benefit determinations made by plan administrators who have been granted discretionary authority in the plan document. When there is no plan document, there is no discretionary authority grant, and courts apply a less deferential standard of review that gives more latitude to the participant’s claim. In the absence of a plan document, participants may be able to rely on insurance certificates, enrollment materials, or even oral representations to establish what benefits they were promised.
Employers who have been operating without a wrap plan or proper SPD can remedy the situation prospectively by adopting a wrap plan document and preparing a compliant SPD. The document does not need to retroactively cure past failures, but once adopted, it provides the governance structure needed for future operations. For employers who become aware of the deficiency, prompt corrective action is far preferable to continuing to operate without proper documentation.
Form 5500 Filing Obligations
Large welfare benefit plans — generally those with 100 or more participants on the first day of the plan year — must file an annual report on Form 5500 with the Department of Labor. The Form 5500 must be filed within seven months after the end of the plan year, or within two and a half months after that deadline with an extension. For plans covered by ERISA, the wrap plan structure facilitates compliance with the Form 5500 filing requirement by establishing a single plan encompassing multiple benefits that can be reported on a single filing, rather than requiring separate filings for each benefit program.
The penalty for failure to file a timely Form 5500 is significant: the DOL can assess penalties of up to $250 per day, capped at $150,000 per plan year. The IRS also imposes penalties for failure to file for retirement plans. These penalties can be reduced or waived through the DOL’s Delinquent Filer Voluntary Correction Program, which allows employers to file overdue reports and pay a reduced penalty. Employers who discover they have been failing to file required Form 5500s should consult benefits counsel promptly and consider taking advantage of the DFVCP before the DOL identifies the delinquency on its own.
Practical Guidance
For most small and mid-sized employers, adopting a wrap plan document and preparing a compliant SPD is a straightforward process when handled by qualified benefits counsel. The cost of this work is modest compared to the compliance risk of operating without proper documentation. Employers should review their existing plan documentation annually to confirm that the wrap plan document and SPD accurately reflect the current plan terms, that any material amendments have been reflected in a timely SMM, and that the Form 5500 filing obligations have been met.
When an employer changes its health insurance carrier, adds or drops a benefit, changes the premium contribution structure, or makes any other material change to its benefits program, updating the wrap plan document and SPD should be part of the standard process for implementing that change. Treating benefits compliance as an ongoing administrative function, rather than a one-time event, is the most reliable approach to maintaining compliant documentation over the long term.