The Employee Retirement Income Security Act of 1974 (“ERISA”) has a reputation for being intimidating and understandably so.  Although plan sponsors must practically consider business needs and evaluate benefits alongside general labor and employment considerations, ERISA’s fiduciary standards may seem more stringent than what general corporate decisionmakers find reasonable and ERISA has become so expansive that it has become its own universe alongside labor and employment considerations.  Consequently, ERISA remains an elephant in the room to individuals well-versed in general corporate and employment matters.  The goal of this series is to provide a brief list of considerations that a company can use to review their current plans and operations to help prevent or identify common errors.  These considerations are in the nature of brief out-patient check-up and not expected to serve as a comprehensive diagnostic evaluation or a substitute for customized review.  This week, we are starting with a short list of documents that plan sponsors should ensure they have in place when reviewing their benefits and compensation arrangements.  

The Benefit Plan Documents

Title 1 of ERISA requires that a plan sponsor have a written document in place.  Having a plan document is more than keeping a stack of paper that is placed in a forgotten drawer; plan sponsors have to maintain the documents. Consider the following as part of “maintenance”:

• Plan documents are used as administrative guidebooks for the plans and must be timely amended for changes in plan operation or law (as failure to follow the terms of the plan could lead to disqualification of the plan by the Internal Revenue Service). 
• Plan documents should be available for examination with copies made available to plan participants and beneficiaries upon a 30-day request. 
• Plan documents must be summarized in the form of summary plan descriptions and these summary plan descriptions follow their own content requirements as well as become a part of the plan sponsor’s disclosure obligations (moreover, summaries of material modifications need to be provided when there is a material change to benefit plans). 
• Finally, to prevent failure to comply with plan terms, good practice is to occasionally review provisions of the plans to ensure continued compliance. 

The Cafeteria Plan 

A cafeteria plan (sometimes referred to as a Code Section 125 plan or premium conversion plan) is the plan document which allows employees to withhold from their wages on a pre-tax basis for payment of plan premiums.  The cafeteria plan offers a menu of benefits in exchange for pre-tax deductions from an employee’s paychecks. Cafeteria plans also frequently contain the provisions for flexible spending accounts and health reimbursement accounts.  As these documents are not required to be filed with the Internal Revenue Service, it is not uncommon for plan sponsors to forget to keep these documents on file or forget to update them.  Failure to maintain this plan document may result in income taxes being imposed against employees, employees and plan sponsors being subject to employment taxes, and additional penalties.

The Wrap Plan

Title 1 of ERISA requires that a plan sponsor files Forms 5500 with the Department of Labor for its health and welfare benefit plans when there are more than 100 plan participants as of the first day of any plan year.  Employers often will file a single Form 5500 for their health and welfare plans without a unifying plan document that permits this method of filing.  A wrap plan allows for this form of filing and without such document employers would generally need to file separate Forms 5500 for each plan.  Without a wrap plan, plan sponsors may be inadvertently failing to file necessary Forms 5500 and consequently subject to hefty penalties. 

Promises to Pay Deferred Compensation at a Later Date

Plan sponsors occasionally enter into deferred compensation arrangements with employees and other service providers without realizing. Subject to certain exceptions, if an employee has a legally binding right to compensation in one year that is payable in a later year, it is generally deferred compensation subject to Code Section 409A.  In addition to rules surrounding time and form of payment, Code Section 409A requires the arrangement to be in writing.  Penalties for not conforming to Code Section 409A are taxation of the compensation involved at the time the right to payment vests along with a 20 percent penalty tax on the amount involved. 

The above is not intended to serve as a complete list of every necessary writing for an employee benefit plan, but is intended to serve as a quick reminder list for plan sponsors.