The demand for voluntary benefits spurred by passage of theAffordable Care Act has created potential compliance pitfalls foremployers struggling to contain health care premium costs.

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A recent analysis from ComplianceBug LLC, a provider of benefitscompliance monitoring tools, showed more than 80 percent ofvoluntary benefit offerings are subject to the Employee RetirementIncome Security Act.

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The problem with that? As the voluntary market has exceeded $7billion in annual sales, more employers are deploying voluntarystrategies under the assumption that the products are not governedby ERISA's reporting requirements.

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According to data from Eastbridge Consulting Group Inc., 60percent of the voluntary market is now sold by traditional grouphealth brokers. Some of those brokers may be operating under thepretense that voluntary products are not subject to ERISA'scompliance and reporting requirements.

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That potential confusion, particularly for a broker not expertin the voluntary market, is understandable. The Department ofLabor's voluntary plan safe harbor, which allows employers to avoidERISA reporting requirements for voluntary benefits so long ascertain conditions are met, could be misinterpreted as acomprehensive free pass for all voluntary products.

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Some aspects of the safe harbor are straightforward. Forinstance, in order for a voluntary benefit to qualify for the safeharbor, the employee must pay the full premium.

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Simple enough. But from there the safe harbor gets a bitmurkier. Participation in a voluntary benefit has to be justthat—voluntary. Employers' sole functions in the process ofoffering a voluntary benefit are to allow access to the option andcollect premiums via payroll deductions. In other words, employersare not allowed to endorse a voluntary benefit if they expect thatbenefit offering to qualify for DOL's safe harbor.

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That provision of the safe harbor, which prohibits employersfrom acting as a cheerleader for the value of a voluntary benefit,is the source of much of employers', and brokers', potentialconfusion.

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Voluntary benefits specialists often report that support fromemployers during enrollment is fundamental to successfulpenetration rates. For instance, mandatory information meetings area tactic voluntary brokers commonly benefit from.

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Would that constitute an endorsement? To be clear, the DOL doesnot consider allowing brokers to publicize or market voluntaryproducts a disqualifying endorsement, according to a compliancealert published this year by EPIC Insurance Brokers.

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In EPIC's alert, the brokerage provides several examples ofemployer actions that would disqualify a voluntary offering fromDOL's safe harbor.

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To benefit from the safe harbor exemption, companies can'tengage workers in the selection of insurers, negotiate the terms ofthe policies, use the employer's name or associate the voluntaryoffering with other company-sponsored ERISA plans, recommendvoluntary offerings during open enrollment or any other time, orassist employees with disputing claims on voluntary policies.

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Even with that clarification, vagaries remain.According to an exhaustive benefits compliance manual published byThomson Reuters in 2015, “the many reported cases and DOL opinionletters on the safe harbor are difficult to reconcile, particularlyregarding what constitutes 'employer endorsement.'”

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The Thomson Reuters manual's list of disqualifying actions iscomparable to EPIC's list. While an individual infraction may notbe enough to disqualify a plan from the safe harbor on its own, oneaction in particular is “likely” to do so, according to the manual:Employers that allow voluntary premiums to be paid with pre-taxbenefits dollars through a cafeteria plan are likely to draw theire of regulators. While doing so has always been a risk to safeharbor status, ACA provisions enacted in 2014 that prohibit pre-taxcompensation from being used to pay for individual health policiesmakes the practice even riskier, according to Thomson Reuters'analysis.

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Employers may not need the safe harbor for voluntarybenefits

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Brokers play as indispensible a role as any other party in thedelivery of voluntary benefits when it comes to educating employerson ERISA reporting requirements and the voluntary plan safeharbor.

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For many employers, complying with the safe harbor may be anunnecessary exercise, according to Thomson Reuters.

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Companies that already sponsor an ERISA-covered plan may notincrease their compliance burdens excessively by offering voluntarybenefits as ERISA-covered benefits. Thomson Reuters' analysisactually suggests it may be easier for employers to fold voluntaryoptions into existing ERISA reporting requirements than it would beto comply with the voluntary plan safe harbor, a process that willcontinue long after voluntary benefits are first introduced into asuite of coverage options.

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Given the uncertainty as to what employer action constitutes anendorsement of a voluntary benefit—it is imaginable that a courtcould view a mandatory meeting on voluntary benefits as anendorsement—the safest play for employers may be to treat voluntarybenefits like their ERISA-covered traditional group plans.

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Even when employers are acting in good faith to comply with thevoluntary safe harbor, “the DOL may decide that a voluntary plandoes not satisfy the safe harbor,” says Thomson Reuters. And thatcould mean employers would have to cough up fines and fees for notfiling the compliance documents required under ERISA.

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What employers need to do to comply with ERISA whenoffering voluntary benefits

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If employers decide to fold their voluntary offerings into thecompliance program of their larger ERISA-covered plans, they ofcourse will have to report them on their Form 5500 filings when theplan has more than 100 participants. All employers will have toamend their summary plan documents to account for voluntarypolicies if the employer opts to not qualify for the voluntary safeharbor.

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Failure to comply with ERISA's filing requirements can lead tofines ranging from $110 to $1,100 per day, according to DOL, and itcan also expose employers to potential lawsuits from current andformer employees.

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Enforcement priority

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Thomson Reuters' manual says the DOL is making voluntarybenefits options an enforcement priority.

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Too often, employers give little consideration as to whether ornot their voluntary offerings are subject to ERISA compliance.Thomson Reuters says much of that is explained by benefits brokers'failure to raise the issue with employers.

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True as that may be, it presents a potential competitive openingfor enterprising brokers looking to grow through the voluntarymarket. Brokers can take the lead in educating employers on thevoluntary safe harbor and guiding their decision as to whether ornot qualifying for the exemption is in their best interest.

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The last thing a broker wants is to get a call from a clientwondering why their voluntary lineup is subject to ERISA after aparticipant sues an insurer, or worse, a DOL auditor comesknocking.

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Nick Thornton

Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.