HEALTH & WELFARE PLAN LUNCH GROUP

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1 HEALTH & WELFARE PLAN LUNCH GROUP May 4, 2006 ALSTON & BIRD LLP One Atlantic Center 1201 W. Peachtree Street Atlanta, GA (404) All Rights Reserved

2 HSAs, HIPAA and Federal Health Benefit Mandates: Practical Questions And Answers The Health Insurance Portability and Accountability Act of 1996 (HIPAA) and other federal health benefit mandates (e.g., the Mental Health Parity Act, the Newborns and Mothers Health Protection Act, and the Women s Health and Cancer Rights Act) dramatically impact the administration of self-insured health plans. This monthly column provides practical answers to administration questions and current guidance on HSAs, HIPAA and other federal benefit mandates. Attorneys John R. Hickman and Ashley Gillihan provide the answers in this column. Mr. Hickman is partner in charge of the Health & Welfare Benefits Practice with Alston & Bird, LLP, an Atlanta, New York, Charlotte and Washington, D.C. law firm. Mr. Gillihan is also a partner in the Health & Welfare Benefits Practice. Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner's situation. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of your situation. Readers are encouraged to send questions by to Mr. Hickman at jhickman@alston.com. Do s and Don ts of Wrap Plan Documents Many self funded group health plan sponsors have adopted, or are considering adopting, a wrap plan document. In some cases, the wrap approach is used to combine otherwise unrelated welfare plan benefits into a single integrated welfare benefit plan (i.e., the unrelated benefits are wrapped together). In other cases, separate benefits are not wrapped ; rather the plan document consists of a shell that wraps around the benefit provisions contained in an SPD to comprise the formal ERISA plan. The touted advantages of taking a wrap approach include easier document administration and maintenance, reduction in potential litigation attributable to discrepancies between the plan and summary plan description, and a possible reduction in the number of required Form 5500 filings. Seldom mentioned disadvantages include ERISA compliance headaches (such as Form 5500, audit, and trust requirements) that may arise when previously unrelated ERISA plans are wrapped imprudently. This article provides a summary of many of the most commonly overlooked wrap traps. Question: What are the two different types of welfare plan wrap documents? As indicated above, a wrap document is a generic description of an approach that may accomplish one (or both) of two distinct goals. First, the plan sponsor may combine one or more welfare benefit offerings (health, dental, vision, disability) under a single integrated ERISA umbrella plan. For purposes of this article we will call this an Umbrella Wrap. Alternatively, the plan sponsor may craft its current documentation to combine its formal ERISA plan and summary plan description (SPD) into an integrated plan document. For purposes of this article we call this a Document Wrap.. Question: Why would a plan sponsor implement an Umbrella Wrap? Few would dispute that ERISA-covered plans are subject to a certain amount of required compliance baggage. Among other things, each ERISA plan is required to: be maintained pursuant to a formal plan document; be described to participants through a summary plan description; have assets maintained in an ERISA-compliant trust, and file an annual Form 5500 (likely including

3 audited financial statements) each year. The theory behind an Umbrella Wrap is that the cost of the ERISA infrastructure can be spread across many benefits resulting in less costly administration for each benefit that is provided. Since ERISA does not prescribe a specific plan design for welfare benefits, the plan sponsor is free to wrap together one or more otherwise unrelated welfare benefits into an Umbrella Wrap document. Question: What are some of the pitfalls to avoid when designing or drafting an Umbrella Wrap document? Among the issues that should be considered prior to wrapping unrelated benefits into an Umbrella Wrap plan are the following: Form 5500 (including audit) requirements: Department of Labor regulations provide an exception from filing the annual Form 5500 report for plans that both: i) have fewer than 100 participants; and ii) are fully insured and/or self funded without employee contributions (i.e., unfunded). In ERISA Technical Release 92-01, the Department of Labor indicated that a plan may continue to be treated as unfunded where employee contributions are made through a Section 125 cafeteria plan. Moreover, even if a Form 5500 is required (e.g., because there are 100 or more participants), a plan that is unfunded (i.e., fully insured and/or self-funded without employee contributions) will generally be exempt from the Form 5500 audit requirement. Plan sponsors may unwittingly increase their Form 5500 obligations when adopting an Umbrella Wrap. For example, an employer that offers dental coverage with 70 participants and vision coverage with 40 participants (only 10 of whom also have dental coverage) may subject itself to Form 5500 requirements for the first time when the benefits are wrapped (i.e., because there are now 100 participants in a single plan). Particular care should be taken when supplemental insured benefits are wrapped with a base plan (such as medical) to ensure that all appropriate Schedule A (and other insured benefit) information is included. Likewise, an employer that offers unfunded benefits (such as a health FSA or HRA) that may otherwise be exempt from ERISA s audit requirements may subject the unfunded benefits to the audit requirement when the benefit is wrapped with a funded benefit (e.g., primary health coverage). Plan asset trust contribution requirement: ERISA generally requires that participant contributions be deposited in trust as soon as feasible. An exception from the trust requirement applies under ERISA Tech Rel for a contributory benefit offered through a cafeteria plan. However, the trust exception is lost if the plan (or any benefit offered under it) utilizes a trust. Thus, for example, an employer may offer employees self-funded health coverage for which a trust has been established and a pre-tax funded health flexible spending arrangement (FSA) benefit through separate plans. If the two benefits are combined in a single Umbrella Wrap document, employee health FSA contributions must be placed in trust (and will be subject to ERISA s 5500 audit requirements). Likewise, if an insured benefit is wrapped with a trustfunded benefit (e.g., self-funded health coverage) the employee premium contributions likely need to flow through the trust as well. VEBA compensation limit: The Internal Revenue Code generally requires that any plan associated with a VEBA ignore compensation in excess of a compensation cap which is currently $220,000. Medical benefits seldom consider compensation so the cap generally has no impact on such benefits. However, when a VEBA-funded medical plan is wrapped with a plan that bases benefits on compensation (e.g., disability or severance benefits), the newly applicable VEBA compensation cap may limit or curtail the compensation based benefit. HIPAA Privacy: HIPAA s privacy and security requirements apply to health plans. Where an Umbrella Wrap includes both health and non-health benefits, HIPAA privacy requirements could apply to all aspects of plan administration. This could greatly complicate the - 2 -

4 administration of non-health benefits that require medical information (e.g., LTD or life benefits). Under HIPAA, an election can be made (i.e., a hybrid entity election) that specifies which parts of the wrap plan are subject to HIPAA. This critical election (which should be included in any Umbrella Wrap that includes medical benefits) limits HIPAA s impact (and the use of PHI) within the covered medical plan function. HIPAA special enrollment right and retiree medical coverage: Many retiree medical plans attempt to close the class of eligible dependents to those specifically covered by an employee at the time of their retirement. In contrast, under HIPAA, health plan participants are entitled to a special enrollment right if they acquire a new dependent through birth, adoption, or placement for adoption. While this special enrollment requirement applies to health plans generally, the requirement should not apply to a medical plan covering exclusively retirees. Care should be taken when wrapping active and retiree medical benefit options in an Umbrella Wrap to ensure that these HIPAA special enrollment requirements are not inadvertently triggered. ERISA claims procedure: With the final DOL claims regulations, different claim procedure timelines and procedures apply for medical, disability, and other welfare benefits. The Umbrella Wrap document should very clearly address which procedures apply with respect to each benefit. The plan sponsor should carefully consider the advantages and disadvantages of imposing the ERISA claims procedure regime on non-erisa benefits (such as dependent care assistance). Keeping tabs on pre-funded amounts: One of the advantages of wrapping otherwise unrelated benefits in a single Umbrella Wrap document is that, absent restrictive plan language, plan assets can generally be used to fund any benefits under the plan. Care should be taken, however, to ensure that tax-advantaged pre-funded amounts (e.g., amounts pre-funded for collectively bargained employees, or retiree medical, etc) are kept segregated. Otherwise somewhat complicated income tax deduction recapture and unrelated business income tax (UBIT) requirements may apply. Question: Is there a best practice to follow when deciding whether to combine benefits into a single Umbrella Wrap document? In light of the pitfalls described above, a general rule of thumb to follow when combining otherwise unrelated benefits is to establish separate Umbrella Wrap documents for trust-funded benefits (especially when funded through a VEBA) and benefits that qualify for the ERISA trust exemption (i.e., fully insured and/or self funded benefits including benefits exempt from trust funding under the ERISA Tech Rel relief applicable to cafeteria plan funded benefits). With regard to health benefits, retiree benefits should be provided in a plan separate from plans providing active employee coverage in order to avoid the special enrollment requirements for retirees. Question: What are the advantages and disadvantages associated with the Document Wrap approach? First and foremost, the greatest advantage of a Document Wrap is a reduced risk of error due to inconsistency between the plan document and the SPD. When disputes arise in court over benefits, the trend in the courts over the last few years is to look first to the SPD to determine whether and/or to what extent the claimant is eligible for benefits (that makes sense since the SPD, not the plan document, is provided to the participants). However, if there is an inconsistency between the plan document and the SPD, the courts tend to look to the document with the most claimant friendly provisions for guidance. Inconsistency occurs in a traditional document and SPD approach where both the plan document and the SPD address certain - 3 -

5 provisions but the terms do not match one another (this typically occurs because the plan document is drafted by attorneys and uses much more formal language when compared to the language in the SPD) or where changes in the plan are reflected only in one of the documents and not the other. The Document Wrap approach reduces the risk of inconsistency because plan provisions that are required to be included in the SPD are not also covered in the plan document; instead, the plan document simply refers to and incorporates by reference the provisions of the SPD. For example, ERISA requires the SPD to describe the plan s claims procedures. In a Document Wrap approach, the plan document would indicate that the plan has indeed adopted claims procedures as required by ERISA and those procedures are as set forth in the SPD. Another advantage to the Document Wrap approach is administrative efficiency. When you have a plan document and SPD that address the same provisions, any changes to the plan must be reflected both in an amendment to the plan document and to the SPD in a Summary of Material Modifications (SMM) (note that this also increases the risk of inconsistency). In the Document Wrap approach, many of the changes to a plan must only be reflected in an SMM because they are only addressed in the SPD. For example, assume a plan wanted to change the terms of eligibility under the plan from full-time to both full-time and part-time employees. In the Document Wrap approach, only the SPD would describe the terms of eligibility and the plan document would incorporate those SPD provisions by reference. Thus, the plan sponsor would amend the plan (typically by resolution of the board or other person(s) responsible for approving plan changes) and then prepare an SMM for distribution as required under ERISA. The plan sponsor in this case would not also have to prepare a plan document amendment. It is important to note here that when following the Document Wrap approach, you should be sure to indicate in the plan document that the SPD and any SMMs to the SPD are incorporated by reference. As with everything, there are disadvantages to this approach (although we believe that any disadvantages are minor and outweighed by the advantages). First, if a participant or covered dependent asks for a copy of the plan document in accordance with ERISA Sec. 104(b)(4) or as otherwise required by ERISA, the plan administrator must provide both the wrap document and the SPD (despite the fact that the SPD has already been provided). This can increase copying costs. Also, this Document Wrap approach may require the SPD to be more detailed than desired so that key legal concepts are captured. In fact, unless drafted carefully, the Document Wrap approach could result in an unreadable SPD. This would violate ERISA s requirement that the SPD be written such that the average person can understand it. With proper attention to detail and readability, the SPD can still be drafted in a readable fashion without compromising legal sufficiency