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The Importance Of Wrap Plans: Avoiding Regulatory Penalties

The Importance of Wrap Plans: Avoiding Regulatory Penalties

By Bonita L. Hatchett-Bodle, Esq.

Recently, we were engaged by a large hospital system (client) to defend an Employee Benefit Security Administration (EBSA) examination of the client’s benefit plans. The EBSA is the benefits enforcement arm of the Department of Labor and has the ability to impose serious penalties for regulatory noncompliance, fiduciary breaches and a series of other ERISA violations. If the EBSA finds a problem, they will communicate the same to the IRS and tax problems may result.

The client sponsored several insured medical major arrangements, long-term disability, short-term disability, vision and dental coverage, as well as other benefits. Upon examination, the EBSA discovered that the client did not sponsor a wrap plan. As a consequence, the client was liable for thousands of dollars in penalties for failure to file Forms 5500 on behalf of each of those arrangements because the arrangements were treated as separate plans for Employee Retirement Income Security Act (ERISA) purposes. The amnesty program was not available because the client was under examination. This unfortunate result could have been avoided if the client sponsored a wrap plan.

A “wrap” plan document is legal document that combines and incorporates, by reference, all group insurance policies and contracts that provide welfare benefits to employees. A summary plan description (SPD) is not a wrap plan document. Most welfare benefit plans are subject to the requirements of ERISA. In fact, ERISA’s language clearly requires that all welfare benefit plans must be established and maintained pursuant to a written document. ERISA also requires specific, express provisions to be part of the plan document. Oftentimes, sponsoring employers (often referred to as Plan Sponsors) look to their insurance company policy or contract as their “plan document.” This erroneous belief creates problems for Plan Sponsors because contracts and policies are almost always incomplete regarding the specific information required by ERISA. Those group insurance policies are written to cover the legal needs of the insurance carrier, not to satisfy the requirements of ERISA, or to provide legal protection to the Plan Sponsor.

The practical reasons for adopting a “wrap” plan document: First, the wrap plan document will contain important and explicit language clarifying the Plan Sponsor’s position on its legal obligations, discretionary powers, benefit limitations compared to the policy, entitlements to amend/terminate provisions, etc. Additionally, adopting a wrap plan document enables the Plan Sponsor to collapse 5500 filings [life, LTD, medical, dental, vision, etc.] into a single filing, eliminating much of the Form 5500 preparation expense.

Some Plan Sponsors believe that they can file all welfare benefit plans on a single Form 5500 filing simply because the benefits are similar or because it is convenient. Without a written wrap plan document combining the benefits into a single plan, this is mistaken thinking. If caught in audit or review, the IRS or DOL can impose missed filing penalties and take corrective action, by rejecting the filing and requiring that each of the plans refile separately for all prior years. In the absence of a plan document that combines the benefits into a single plan, the DOL will assess penalties based on each policy or program separately.

The benefits of documenting your welfare plans into a written plan document are numerous, but the top reasons are, in summary: it maximizes the Sponsor’s flexibility and operational discretion, and allows combining 5500s thereby improving efficiency and reducing expense.

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