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@197 CHAP 5
┌──────────────────────────────────────────────┐
│ ERISA COMPLIANCE--EMPLOYEE BENEFIT PLANS │
└──────────────────────────────────────────────┘
If you have employees and provide them with "fringe benefits" such as
group insurance (other than workers' compensation) or other types of
employee "welfare plan" benefits, or if you adopt a pension or profit
sharing retirement plan, you will almost certainly have to comply with
at least some aspects of the Employee Retirement Income Security Act of
1974, popularly (or unpopularly) known as "ERISA." There are CRIMINAL
PENALTIES for willful failure to comply with two types of ERISA re-
quirements:
. Reporting -- to government agencies (IRS, Dept. of Labor, PBGC);
and
. Disclosure -- to employees.
In addition, there are a number of different types of civil penalties
for unintentional failures to comply with ERISA requirements, which are
incredibly numerous and complex. In short, compliance with ERISA is a
nightmare -- but one that won't go away at dawn.
ERISA deals with 2 kinds of employee benefit plans -- pension plans and
welfare plans. Pension plans under ERISA are pretty much what you
might expect -- tax qualified retirement plans, including both pension
and profit sharing plans (including Keogh plans), plus other types of
benefit programs that defer payments until after employment has termi-
nated. The ERISA reporting and disclosure requirements for pension
plans are quite extensive, and if your business adopts any such plans,
you will almost certainly need professional assistance in meeting the
ERISA requirements that may apply. See summary in paragraph (b) below.
"Welfare" plans under ERISA include most other types of employee bene-
fit plans that are not considered pension plans. These include the
typical fringe benefit plans adopted by small firms, such as health
insurance, long-term disability, group-term life insurance and acci-
dental death insurance plans. ERISA compliance for welfare plans is
usually less of a burden than for pension plans, but is required for
almost every business that provides any kind of benefits for employees
of the type mentioned above. Note that a number of so-called fringe
benefits that are in the nature of payroll practices, such as paid
holidays, vacation pay, bonuses, overtime premium pay and most kinds
of severance pay arrangements, usually are not considered to be either
pension OR welfare plans under ERISA. Thus, these kinds of payroll
practices are not subject to ERISA rules at all.
Compliance requirements for reporting and disclosure under ERISA are
briefly outlined below.
(a) WELFARE PLANS. The one ERISA compliance requirement that applies
to almost all small businesses is the requirement that an employer
prepare a Summary Plan Description ("SPD") for distribution to all
employees covered by any type of welfare plan sponsored by the em-
ployer, such as typical health, accident, life, or disability insur-
ance plans. An SPD must contain over 20 specific items of information
listed in U.S. Department of Labor regulations, including an "ERISA
Rights Statement" which must be copied more or less verbatim from the
regulations.
An SPD must be prepared for each plan and distributed to covered em-
ployees within 120 days after the plan is first adopted. Each new
employee must be given a copy of the SPD within 90 days after becoming
a participant in the plan. Since an SPD must be prepared for each
employeee plan subject to ERISA, even a very small business may find
that it has to produce three or four of these documents, each of which
must meet detailed technical requirements. One important consideration
in taking out insurance coverage for employees should be a firm commit-
ment from the insurance company or brokers that they will prepare the
necessary SPDs for the insurance plans they are selling you--otherwise,
you may need to have your attorney or benefit consultant prepare the
SPDs, which can result in substantial professional fees.
Other than the need for an employer to prepare SPDs and distribute them
to employees, there are no significant ERISA requirements that apply to
insured-type welfare plans that cover fewer than 100 employees. How-
ever, you must make available the insurance policies and other plan
documents for inspection by your employees and you must furnish copies
to them upon request.
If your business should grow to have 100 or more employees who are
covered by a plan, or if you adopt any type of uninsured (and "funded")
welfare plan, you will suddenly become subject to a whole array of
additional ERISA requirements, including the following:
. Filing a copy of the SPD with the Department of Labor;
. Filing an Annual Return/Report or Registration (Form 5500
series) with the IRS each year;
. Preparing and distributing a Summary Annual Report to covered
employees each year;
. Preparing a Summary of Material Modifications of the plan (if
any) and filing it with the Department of Labor and distributing
it to covered employees; and
. Filing a terminal report if the plan is terminated.
NOTE: In addition to these ERISA requirements, there are similar
filing requirements (for Forms 5500, 5500-C, etc.) for employer-
provided educational assistance plans, group legal services plans,
and so-called "cafeteria plans."
(b) PENSION PLANS. The ERISA compliance requirements for a pension or
profit sharing plan of even a very small business are very onerous,
complex, and expensive, despite numerous attempts by the IRS and the
Department of Labor to simplify the reporting requirements in response
to a barrage of criticism from small businesses. Because these com-
pliance requirements are so very complex and are constantly changing,
no attempt to spell them out in detail is made here. Instead, the
basic ERISA compliance requirements for most pension and profit sharing
plans are briefly summarized as follows:
┌─────────────────────────────────────────────────────────────────┐
│ ITEM: PROVIDED TO: │
└─────────────────────────────────────────────────────────────────┘
. Summary Plan Department of Labor; participants;
Description beneficiaries
. Annual Return/Report IRS (Required even for a
(Form 5500, 5500-C simple 1-person Keogh plan,
5500-EZ or 5500-R) if over $100,000 in assets)
. Schedule A, Form 5500 IRS
series (Insurance info)
. Schedule B, Form 5500 IRS
series (Actuarial informa-
tion prepared and signed by
an enrolled actuary--for de-
fined benefit plans only)
. Schedule SSA, Form 5500 IRS
series (Registration
statement)
. Form W-2P (Report of peri- IRS; recipient of distribution
odic plan benefit payments
made during the year)
. Form 1099-R (Report of IRS; recipient of distribution
total distribution of
benefits during the year)
. Form W-3 or W-3G (Trans- IRS
mittal of Forms W-2P and
1099-R)
. Form PBGC-1 (Premium pay- Pension Benefit Guaranty Corp.
ments of required plan (a government agency that insures
termination insurance--for pension plans of employers)
"defined benefit" plans
only)
. Summary Annual Report Participants; beneficiaries
. Individual Deferred Vested Former participant in plan
Benefit Statement to
Separated Employee
. Summary of Material Department of Labor; participants;
Modifications (to a plan) beneficiaries
. Terminal Report Department of Labor; participants;
(when plan is terminated) beneficiaries
. Written explanation of Participants
Joint & Survivor Annuity
. Written explanation of Person claiming entitlement to
reasons for denying benefit plan benefits
claim and description of
appeal procedures
. Various documents and Department of Labor; participants
information to be
provided on request
. Various formal notices Department of Labor; participants;
upon occurrence of IRS; Pension Benefit Guaranty
certain events Corporation
___________________________________________________________________
In addition to these ERISA reporting disclosure requirements, all em-
ployees who are deemed to handle assets of a pension or welfare plan
that is covered by ERISA are required to be covered by fidelity bond
of specified amounts. Also, note that withholding is now mandatory on
distributions of pension and profit sharing benefits, unless the re-
cipient elects IN ADVANCE not to have any tax withheld.
Penalties can be quite severe for non-compliance with ERISA regulation.
For example, there is a $25 per day penalty for late filing of any of
the Form 5500 series Annual Reports required of pension plans (and some
welfare plans).