This Employer Webinar Series program
is presented by Spencer Fane Britt & Browne LLP
in conjunction with United Benefit Advisors
This Employer Webinar Series program
is presented by Spencer Fane Britt & Browne LLP
in conjunction with United Benefit Advisors
Kansas City = Omaha = Overland Park
St. Louis = Jefferson City
www.spencerfane.com
www.UBAbenefits.com
Compliance 201 for Plan
Administrators
Gregory L. Ash
Julia M. Vander Weele
June 15, 2010
Copyright 2009
2
Presenters
Gregory L. Ash, JD
Partner
gash@spencerfane.com
913-327-5115
Julia Vander Weele, JD
Partner
jvanderweele@spencerfane.com
816-292-8182
Copyright 2009
3
Agenda
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Understanding When Welfare “Plan Assets”
Must be Held in Trust
ERISA Preemption
Claims and Appeal Procedures and Judicial
Review of Denied Claims
Cafeteria Plan Compliance Issues
Fiduciary Duties
Plan Discrimination Issues After Health Care
Reform
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Key ERISA Requirements
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Plan document – See “Compliance 101”
SPD, SMM – See “Compliance 101”
Participant disclosures – See “Compliance
101”
Form 5500 and SAR – See “Compliance
101”
Plan assets held in trust
Fidelity bond
Reasonable claim/appeal procedures
Fiduciary standards
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Funding of Welfare Plans
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No ERISA funding standards for
welfare plans
Four primary funding methods:

General assets of employer

Insurance

Separate funds set aside for plan
purposes

Contributions from participants
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Why Does Funding Matter?
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ERISA’s trust requirement applies only to
“funded” plans (those with “plan assets”)
ERISA’s exclusive benefit and fiduciary
requirements apply to arrangements with
“plan assets”
Bonding requirement applies when there are
“plan assets”
Funding method dictates extent of state
regulation
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What Are “Plan Assets”?
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ERISA does not define “plan assets”
Generally, two categories of “plan
assets”:

Participant/beneficiary contributions are
always plan assets

Use of separate funds to pay benefits
may create plan assets (e.g., trust,
separate account in plan’s name)
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ERISA’s Trust Requirement
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General Rule: Section 403(a) of
ERISA requires plan assets to be held
in trust
Trust options:

VEBA

Taxable trust
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Exceptions to Trust Requirement
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Exemption for assets held by insurance company
DOL nonenforcement policy (Technical Release 9201) for participant contributions
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Under cafeteria plan, if such contributions are sole source
of plan assets and contributions held as general corporate
assets

Under insured plan accepting participant contributions, if:
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Benefits paid exclusively through insurance policies
Premiums paid directly by employer from general assets
Participant contributions forwarded within 3 months
Certain insurance refunds returned to participants
Also applies to after-tax and COBRA contributions
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Examples of Nonenforcement Policy
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Insured Plan – Employer Contributions
Only
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No employee contributions; no cafeteria
plan

Employer sends premiums directly to
insurer from corporate checking account

No plan assets; no trust required
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Examples of Nonenforcement Policy
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Insured Plan – Employer Contributions
Only

COBRA contributions paid to employer,
who pays all premiums to insurer out of
corporate checking account

COBRA premiums are plan assets;
trust requirement subject to
nonenforcement policy
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Examples of Nonenforcement Policy
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Insured Plan – Employee Contributions
Through Payroll Deduction or 125 Plan

After-tax or pre-tax employee contributions

Employer sends one check for employee and
employer contributions to insurer

Employee contributions are plan assets;
trust requirement subject to nonenforcement
policy
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Examples of Nonenforcement Policy
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Insured Plan – TPA Collects and
Forwards Employee Contributions

Employees pay premiums through payroll
deduction, collected by employer, who
forwards to TPA in single corporate
check

TPA forwards premiums to insurer

Employee contributions are plan
assets; trust may be required
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Examples of Nonenforcement Policy
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Insured Plan – Premium Payments
from VEBA

Employee and employer contributions
made to VEBA

Premium payments to insurer made by
VEBA

Employee contributions and VEBA
assets are “plan assets”; trust present
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Examples of Nonenforcement Policy
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Self-Insured Plan – Benefits Paid from
Checking Account in Plan’s Name
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Employer contributions only; no
employee contributions
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Employer pays benefits from checking
account in plan’s name

Plan assets due to employer’s transfer
to checking account in plan’s name;
trust required
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Caveats to Nonenforcement Policy
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Exclusive benefit rule still applies
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Fiduciary duties still apply
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Participants and beneficiaries may still
sue to enforce
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ERISA Preemption
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Primary purpose of ERISA is uniform,
national system of enforcement
ERISA contains a broad “preemption”
clause, superseding application of
most state laws
State laws (statutes or common law)
that “relate to” ERISA plans are
preempted (i.e., do not apply)
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The “Savings Clause”
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Many state insurance laws are “saved”
from preemption
State insurance laws governing
insurance policies (e.g., to require
mandated benefits) still apply
Fully-insured plans therefore remain
subject to indirect state regulation
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ERISA Preemption – So What?
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Preemption protects employers and
fiduciaries
Self-insured plans not subject to mandated
benefits
State causes of action for benefits are
preempted

Bad-faith refusal to pay

Claims for punitive and compensatory damages
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Generally no jury trials
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Claims and Appeals
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ERISA requires “reasonable” procedures
Rules/time frames differ by benefit

Group health
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Disability
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Other (severance, life, AD&D, etc.)
Formal claim/appeal procedures must
appear in SPD (or be furnished in separate
document with SPD)
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Who is Responsible?
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Insured Plans – Insurer typically decides all
claims and appeals

Employer may retain responsibility for
distributing claims and appeals procedures with
SPD

Make sure policy and certificate accurately
reflect who decides claims and appeals
Self-Insured Plans – Plan fiduciaries decide
claims and appeals
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Compliance Affords Protection
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Compliance with reasonable procedures affords
protection to plan sponsors
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Claimants must “exhaust” administrative procedures
before suing
Unreasonable procedures, or failure to follow them, allows
immediate resort to courts
Courts defer to decisions made under such
procedures unless arbitrary and capricious

1989 Supreme Court decision in Firestone Tire & Rubber
v. Bruch

But plan (and SPD) must afford plan administrator or
fiduciary the discretionary authority to interpret plan
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Judicial Deference
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Even conflicted decision makers entitled to
deference

Metropolitan Life v. Glenn (S. Ct. 2008) – when
“dual role” administrators both fund plan and
decide claims, conflict of interest is just one
factor courts must weigh

Conkright v. Frommert (S. Ct. 2010) – if
administrator’s first decision is rejected by court,
administrator still entitled to deference on
second review
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Steps to Preserve Deferential Review
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Wall off claims from financial
departments
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Avoid placing CFO on claims committee
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Have two committees; one to hear
claims, and one to review plan finances
Document and follow procedures for
claim/appeal processing
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Steps to Preserve Deferential Review
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Produce thorough, carefully reasoned
claim decisions

Denial letters should articulate all
grounds on which claim is being rejected
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Include citations to applicable plan
provisions
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Describe appeal process (for claim
denials) or right to bring suit (for appeal
denials)
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Steps to Preserve Deferential Review
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Do not weigh economic consequences of
claim decisions
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Minimize incentives for claim denials
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Don’t ask about extent of benefits that may be
paid
Ensure that claims examiners aren’t paid more
for denying claims
Make sure the party to whom the plan gives
discretionary authority is the party deciding
claims/appeals
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What is a Cafeteria Plan?
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Choice between taxable benefits (e.g., cash)
and non-taxable benefits (e.g., health care
coverage)
Section 125 is the exclusive means by which
employer can offer a choice without the choice
itself resulting in taxable income to the
employee (under “constructive receipt” doctrine)
A plan offering a choice between only taxable
benefits (cash or paid time off), or only nontaxable benefits (e.g., a “flex plan”) is not a
cafeteria plan
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Qualified Benefits
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Employer-provided health coverage
Health flexible spending account (“FSA”)
Dependent care FSA
Group-term life insurance
AD&D insurance
STD and LTD insurance
Adoption assistance
HSA contributions
401(k) contributions
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Impermissible (But Tax-Favored)
Benefits
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Scholarships
Educational assistance benefits
Dependent life insurance
Long-term care insurance
Fringe benefits
403(b) deferrals
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Eligibility
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Current employees
Former employees (so long as plan
is not maintained predominantly for
them)
But not self-employed individuals,
sole proprietors, partners, directors,
or 2% shareholders of Scorporations
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Written Plan Document
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Copyright 2009
Must have a written plan document
Program must be operated in
accordance with plan’s terms
Plan must be adopted and effective on
or before first day of plan year
Any amendments must be made
through formal written instrument
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Value to Employees
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Advantages for employees:
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Disadvantages for employees:
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No income tax
No FICA or Medicare tax
Generally, no state or city tax
Allows choice among benefits (or cash)
Irrevocable elections
“Use-it-or-lose-it” rule
Possibly lower Social Security benefits
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Value to Employers
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Advantages for employers:
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No FICA or Medicare tax

Cushion blow of premium increases

Non-comparable employer HSA
contributions
Disadvantages for employers:

Set-up and administration costs

“Uniform coverage” rule (under health
FSAs)
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Election Rules
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General Rule: Elections must be
made – and irrevocable – before
beginning of coverage period
(generally, 12 months)
Several exceptions specified in IRS
regulations
Exceptions apply only if also set forth
in plan document
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Cafeteria Plans and Health Care
Reform
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Copyright 2009
OTC medicines (other than insulin) may not
be reimbursed from FSA, HRA, HSA, or
Archer MSA – unless prescribed by a
physician (effective in 2011)
Excise tax on non-medical distributions from
HSA increased from 10% to 20% (effective
in 2011)
Health FSA contributions capped at $2,500
(effective in 2013)
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Fiduciary Basics
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Who Are Fiduciaries?

Discretionary authority or control
concerning management or administration
of plan
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Any authority or control over management
or disposition of plan assets
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Renders investment advice for a fee
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“Named” fiduciary
37
Fiduciary Duties
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Exclusive Benefit Rule… fiduciaries
must discharge their duties solely in the
interests of participants and
beneficiaries, and for the exclusive
purpose of:

providing benefits, or
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defraying reasonable expenses of plan
administration
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Fiduciary Duties
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Prudent Expert Rule . . . fiduciaries
must discharge their duties:
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With the care, skill, prudence, and
diligence under the circumstances then
prevailing that a prudent person acting in
a like capacity and familiar with such
matters would use in the conduct of an
enterprise of a like character and with like
aims
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Fiduciary Duties
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Comply with Plan Documents . . .
fiduciaries must discharge their duties:
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In accordance with the documents and
instruments governing the plan
40
Fiduciary Duties
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Duty to Monitor . . .
“At reasonable intervals the performance of … other
fiduciaries should be reviewed by the appointing
fiduciary in such manner as may be reasonably
expected to ensure that their performance has been
in compliance with the terms of the plan and
statutory standards, and satisfies the needs of the
plan.”
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Minimizing Fiduciary Risk
Carefully Review Plan Documents
 Watch What You Say to Plan
Participants
 Identify and Educate Fiduciaries
 Document Plan Governance Structure
 Hold Regular Meetings
 Choose Service Providers Carefully
 Review Fiduciary Liability Insurance
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42
Discrimination Issues
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As part of health care reform, fully
insured plans must comply with
nondiscrimination requirements of
Code Section 105(h)
These are the same rules to which
self-funded plans are already subject
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Discrimination Issues
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Plans may not discriminate in favor of
“highly compensated individuals” in
terms of eligibility to participate or
benefits
HCI = five highest paid officers, any
10% or more owners, and the highest
paid 25% of all employees
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Discrimination Issues
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Effective for plan year beginning on or
after September 23, 2010 (January 1,
2011 for a calendar-year plan)
Grandfathered plans exempt
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Unclear whether renewal or change in
carriers will destroy grandfathered status
45
Discrimination Issues
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Consequences of noncompliance fall
on the plan (in the form of a $100
daily penalty)
In contrast to self-funded plans, where
consequences of noncompliance fall
on the highly compensated individuals
(in the form of taxable benefits)
46
Contact Information
Gregory L. Ash, JD
Partner
gash@spencerfane.com
913-327-5115
Julia Vander Weele, JD
Partner
jvanderweele@spencerfane.com
816-292-8182
www.benefitsinbrief.com
Copyright 2009
47
This webinar has been submitted to HRCI for 1.5 hours of
recertification credit toward PHR, SPHR and GPHR designation
through the HR Certification Institute. At this time, UBA has not
received notification of approval from HRCI. Once received, UBA
will send an email to each attendee notifying them of the event
number. As always, certificates will not be sent for this event.
Thank You For Your Participation
Kansas City = Omaha = Overland Park
St. Louis = Jefferson City
www.spencerfane.com
www.UBAbenefits.com