Employers of all sizes offer a wide variety of benefits to their employees. Employers generally know that formal arrangements, such as retirement plans and group medical insurance programs, are subject to federal laws including the Employee Retirement Income Security Act of 1974, as amended (ERISA). However, there is a common misconception that these laws do not apply to benefits of small employers or they only apply to benefits that employers have formalized through a written plan or other formal steps. ERISA’s coverage of welfare benefits is very broad and includes a number of programs that often surprise business owners.
Do You Have an ERISA Welfare Plan?
When establishing any benefit program, you should carefully consider whether you are creating an ERISA welfare plan. A benefit program is subject to ERISA if (1) there is a plan, fund, or program; (2) that is established or maintained by an employer; (3) for the purpose of providing benefits specifically covered by ERISA; (4) to participants or their beneficiaries.
Do you have a ‘plan, fund, or program’? Generally, it is easy to satisfy the ‘plan, fund, or program’ component of the ERISA-coverage test—your benefit is a ‘plan, fund, or program’ if a reasonable person could determine the intended benefits, a class of beneficiaries, the source of financing, and the procedures for receiving benefits. These elements don’t need to be in writing to establish a plan—they may be determined from how the benefit has been and is being administered. Benefits that are not provided on an ongoing basis to similarly situated employees are not generally plans, but the benefit should be scrutinized closely since the determination is based on all the facts and circumstances surrounding provision of the benefit. Is it established or maintained by an employer?
The second part of the ERISA-coverage test considers the level of the employer’s involvement. If you contribute funds to provide a benefit to employees, this test will generally be met. Therefore, as an example, a plan or program that provides employees with a set dollar amount to purchase private insurance will generally be maintained by the employer. In contrast, certain voluntary, fully-insured, employee-pay-all programs are not subject to ERISA under a safe harbor established by the Department of Labor.
Does it provide a benefit specifically covered by ERISA? An employer-provided plan, fund, or program is only subject to ERISA if it provides benefits specifically identified by ERISA as covered benefits. Benefits subject to ERISA generally include:
- Medical, surgical, or hospital care or benefits—including, but not limited to, major medical, dental, vision, and prescription drug benefits; healthcare flexible spending accounts (Health FSAs); health reimbursement arrangements (HRAs), including premium reimbursement plans; and certain employee assistance programs (EAPs), wellness programs, disease-management programs, and cancer policies;
- Benefits in the event of sickness, accident, disability, death, or unemployment—including insured disability income plans, insured sick-pay plans, accidental death and dismemberment (AD&D) plans, and life insurance plans;
- Funded vacation benefits;
- Funded apprenticeship or training benefits;
- Day-care centers;
- Funded scholarship benefits;
- Certain prepaid legal service arrangements;
- Severance and holiday benefits; and
- Certain housing assistance benefits.
Are benefits provided to participants or beneficiaries? Finally, to be an ERISA plan, the listed benefit must be provided to a ‘participant or beneficiary’. A participant is any employee or former employee of an employer who is or may become eligible to receive a benefit from the plan. Thus, a benefit provided only to retirees may still be covered by ERISA. A beneficiary is a person designated by the participant, or the terms of a benefit plan, who is or may become entitled to benefits under the plan (such as a spouse or child of an employee). Since self-employed individuals and partners are not considered employees, a plan covering only those individuals would not be covered by ERISA. However, if the plan covers both employees and self-employed individuals, the plan could be subject to ERISA.
If your benefit meets the four elements of the ERISA coverage test, then the next consideration is whether a statutory or regulatory exclusion applies. There are a number of exclusions from part or all of ERISA’s rules for plans that would otherwise be subject to ERISA. These exclusions include, but are not limited to, governmental plans; church plans; plans maintained solely to comply with worker’s compensation, unemployment compensation, or disability insurance laws; plans maintained outside the U.S. for non-resident aliens; and certain payroll practices. If an exclusion doesn’t apply, then your benefit is likely an ERISA-covered welfare plan.
Your Welfare Plan is Subject to ERISA—Now What?
ERISA provides both benefits and burdens for employers that maintain covered plans. If you have a benefit program subject to ERISA you need to consider whether you are complying with ERISA’s requirements. These requirements include, among other things, maintaining a written plan document (with an ERISA-compliant claims procedure); filing annual returns (Form 5500s), when required; responding to participant requests for documents in a timely manner; and maintaining and distributing summary plan descriptions.
Although some of ERISA’s requirements may add work that would not be necessary otherwise, ERISA-coverage also provides some benefits for an employer. ERISA preempts state law with respect to benefits provided under an ERISA-covered plan. This preemption is advantageous for you because state laws generally provide more expansive remedies than the remedies available under ERISA. Therefore, you can use ERISA to protect yourself from exposure to the liabilities associated with state court remedies. In addition, ERISA also allows you to further limit your potential liability by setting time limits in the plan on when participants may file a lawsuit for benefits. Finally, if a dispute with a participant does arise, benefit denials under an ERISA plan are generally entitled to deferential treatment in federal court.
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