Many small businesses offer some form of qualified retirement plan or welfare benefit plan, and in doing so, they fall under the governance guidelines of The Employee Retirement Income Security Act of 1974 (ERISA). ERISA establishes guidelines and minimum standards designed to protect employees of private sector companies who participate in retirement and welfare benefit plans. Business owners administering either type of plan who aren’t in full compliance with ERISA could find themselves a heap of legal trouble.
Your Business is ERISA’s Business
If your employee retirement plan provides a future retirement income or allows employees to defer earnings for the purpose of retirement, then it is an ERISA plan. If you provide health benefits that cover medical expenses or pays a benefit in the event of a disability, sickness, death or unemployment, it is an ERISA welfare benefit plan.
As an employer who provides these ERISA plan benefits, you are also considered by ERISA to be a fiduciary who takes on the responsibility of administering these plans, and, likewise, the liability should your plans not comply with the guidelines and standards established by ERISA.
The recent economic turmoil has raised the antenna of the Department of Labor (DOL) in its scrutiny of employers in their handling of ERISA plans during these times of high unemployment. The DOL has stepped up compliance review efforts in an effort to curb some of the abuses and mismanagement that have occurred in some health benefit cases. Last year saw a record amount of civil and criminal penalties applied to employers who failed to provide adequate oversight in the management of health benefits plans.
An ERISA Audit Could Make the IRS Look Tame
When the DOL comes knocking they will want to conduct a complete review of your company’s plan, plan description, employee communications, enrollment procedures and filings. As the fiduciary, you will need to be able to answer questions regarding your responsibilities and your compliance with the requirements of a fiduciary.
All plan documents must meet ERISA plan standards. It is not uncommon for auditors to find health insurance booklets provided by insurance providers not to be in compliance with ERISA’s written plan documents. When claims go bad, it’s these documents that can help keep the employer out of trouble.
The Employer as the Fiduciary
The employer can name someone else, such as another officer of the company, or even a trustee as the fiduciary, however, ERISA still points to the employer as the one who has ultimate fiduciary responsibility, and as the one who is obligated to ensure the plans are in compliance.
The biggest area of deficiency uncovered through compliance reviews is the lack of understanding of fiduciary responsibilities by the employer and those who have been named as fiduciaries.
The second major deficiency and the one that can be most costly for an employer is the number of plans found that have not been updated. The DOL frequently issues new guidelines on claims procedures and it is the employer’s responsibility to update its documentation and procedures to conform to the requirements.
Providing employee benefits is essential to a growing business. For most businesses these costs are more than offset by the reduction of turnover and the increase in productivity.
Employers shouldn’t simply establish a plan and then hand it off to a third party administrator without having a process for follow up and review. Although most third-party administrators provide able assistance with ERISA compliance, that does not relieve the employer of responsibility. Since most small business employers are not ERISA experts, be sure to get the legal or other guidance you need to fully understand your responsibilities. The penalties for ERISA violations can be substantial.