ERISA Disclosures

Kegler Brown Business Tax Alert

Retirement Plan Fee Disclosures

On February 3, 2012, the United States Department of Labor (DOL) issued final regulations under ERISA section 408(b)(2), which relate to service provider fee disclosures for qualified retirement plans. The DOL has been concerned with these disclosures since 2007. Between then and now we had proposed regulations issued and frozen, legislation proposed, new proposed regulations, interim final regulations, and lastly, the final regulations referenced above.

The interim final regulations published on July 16, 2010, changed the landscape for qualified retirement plans. Prior to these regulations, the regulations under section 408(b)(2) provided an exemption from the prohibited transaction rules for “reasonable arrangements” if the services are appropriate and helpful to the plan, the arrangement is terminable by the plan on reasonably short notice and without penalty, and the compensation received by the service provider is reasonable. With the interim final regulations (now confirmed by the final regulations), service providers must now assemble and report information relating to their direct or indirect compensation, and relating to any conflict of interest associated with the services provided to the plan.

The final rule retains most of the disclosures required by the interim final rule, but some significant modifications were made.

One significant modification under the final rule is the exclusion from these disclosure rules of a 403(b) plan that consists exclusively of “frozen” contracts or custodial accounts. A 403(b) frozen plan is a contract for which the plan sponsor ceased to have any obligation to make contributions (including employee salary reduction contributions) and for which no contributions were actually made for periods after January 1, 2009. The contract or account must have been issued to a current or former employee before January 1, 2009, and all the rights and benefits under the contracts must be legally enforceable against the insurer or custodian by the individual owner of the contract or account (without any involvement by the employer) and the individual owner must be fully vested in the contract or account.

More significantly, the final rule provides that upon discovering a covered service provider has failed to disclose certain information, the responsible plan fiduciary must request in writing the missing information. If the covered service provider fails to comply with the request within 90 days, the responsible plan fiduciary must determine whether to terminate or continue the contract or arrangement consistent with its fiduciary duties and duty of prudence. If the requested information is not disclosed promptly at the end of the 90 day period, the final rule requires the responsible plan fiduciary to terminate the contract.

Service providers must comply with these plan level fee disclosure requirements by July 1, 2012. Therefore, for current contracts, the disclosures must be made by said date. For contracts entered into after July 1, 2012, the disclosures must be made prior to entering the contract.

With these new effective dates, the participant level fee and investment disclosure requirements that were issued by the DOL in 2010 are effectively postponed until August 30, 2012, for calendar year plans. The original effective date of the participant disclosure rules was 60 days after the “applicability date.” The applicability date was the first day of the plan year beginning on or after November 1, 2011. The DOL issued a transition rule to change the effective date to the date that is no later than 60 days after the later of (i), the plan’s applicability date, or (ii) 60 days after the effective date of the service provider fee disclosure rules. This in turn also provides the fiduciary an additional 60 days to meet the quarterly disclosure requirements that must be made to plan participants to describe the actual fees and expenses charged to a participant’s account. Quarterly statements must be provided no later than 45 days from the end of the plan year quarter ending on or after the date of the initial disclosures. Thus, for calendar year plans, the initial participant level disclosures are due August 30, 2012, and the quarterly disclosures are due November 14, 2012.

Therefore with that said, we can no longer sit back idly waiting for further DOL guidance. Rather we must diligently pursue the information from our service providers so that in turn we can make disclosures on the 5500C (for large plans) and also make the initial and quarterly disclosures to the plan participants in a timely fashion.

In addition to gathering this information to make the requisite disclosures, it is imperative that you carry out your fiduciary duties to discern the fees being charged by the service providers are necessary and reasonable. The DOL will want to see that you have a process in place to monitor these fees and to make an assessment as an ‘expert’ that the fees are reasonable and the investments offered to the plan participants are performing appropriately. It is likely that you will need the assistance of someone outside of your organization to help you with these assessments and/or to assist you with developing a process, which the DOL will find acceptable in light of your fiduciary duties.

Summary of Benefits and Coverage

On February 14, 2012, the Employee Benefit Security Administration (EBSA) issued final regulations on the Health Care Reform Act’s requirement for insurers or insured plans and plan administrators of self-insured health plans to provide applicants and enrollees a “Summary of Benefits and Coverage” (SBC) before enrollment or reenrollment. The effective date of these new rules is generally September 23, 2012. The stated general purpose of the SBC requirements is to allow employees to understand coverage, thereby causing employers and insurers to take competitive steps on the price of benefits and the quality of benefits. The new SBC requirements apply to all group health plans except those that provide “excepted benefits.” Thus, for example, a SBC need not be provided for a stand-alone dental or vision plans or health FSAs. However, a health reimbursement arrangement would need to be provided for a SBC.

The SBC must include the following information:

  • Uniform definition of standard insurance terms and medical terms so that consumers may compare health coverage and understand the terms of their coverage.
  • A description of the coverage, including cost sharing, for each category of benefits identified by the government.
  • The exceptions, reductions and limitations on coverage.
  • The cost sharing provisions of the coverage, including deductibles, co-insurance, and co-payment obligations.
  • The renewability and continuation of coverage provisions.
  • A coverage facts label that includes examples to illustrate common benefit scenarios (including pregnancy and serious or chronic medical conditions) and related cost sharing based on recognized clinical practice guidelines.
  • A statement about whether the plan provides “minimum essential coverage” or whether the plan or coverage share of total allowed costs of benefits provided under the plan or coverage meet applicable requirements.
  • Statement that the SBC is only a summary and the plan document, policy or certificate of insurance should be consulted to determine the governing contractual provisions of the coverage.
  • A contact number to call with questions and an internet web address where a copy of the actual individual coverage policy or group certificate of coverage can be reviewed and obtained.
  • An internet address (or other contact information) for obtaining a list of the network providers.
  • An internet address (or similar contact information) where an individual may find more information about the prescription drug coverage under the plan, if any.
  • An internet address where an individual may review and obtain the uniform glossary.

A SBC must be provided by the insurer to a health care plan as soon as practicable following receipt of the application but no later than seven business days following receipt of the application. A group health plan (including the plan administrator) and health insurance issuer offering group health insurance coverage must provide a SBC to a participant or beneficiary upon enrollment. However, to the extent individuals who are eligible for special enrollment would like to receive an SBC earlier, they may request the same from the plan and the SBC must be provided as soon as practicable, but no later than seven business days following receipt of the request.

The Health Care Reform Act directs a group health plan or health insurance issuer offering group or individual health insurance coverage provide notice of any “material modification” to enrollees no later than 60 days prior to the date on which such change would become effective. A material modification includes any modification to the coverage offered under the plan, independently, or in conjunction with other contemporaneous modifications or changes, would be considered by an average plan participant to be an important change in coverage benefits or other terms of coverage under the plan.

Failure to provide a SBC will result in a fine up to $1,000 for each failure. A failure with respect to each participant and beneficiary constitutes a separate offense.

If you sponsor a self-insured plan, the process of preparing a SBC should start now. A guidance document was provided by the DOL and can be found at the website for EBSA. For those of you who sponsor insured plans, you should be communicating with your insurance provider to be sure the SBC is forthcoming on a timely basis.

Summary Plan Descriptions

Do you have a summary plan description for your welfare benefit plans? We are discovering health insurance sponsors are noncompliant with the ERISA SPD requirements for their healthcare plans. Many sponsors believe the policy along with the certificate of coverage is adequate to comply with the SPD requirements. However, these documents fall short of complying with the SPD requirements provided by ERISA and substantial penalties, including excise taxes, can be assessed for failure to provide a SPD to participants in a health insurance plan. The insurance company is not responsible for preparing a SPD. Therefore, the plan administrator, which is often the sponsoring company, must be sure that a SPD is prepared and distributed in a timely manner.

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