Compliance concept Employers thatare not careful when preparing and distributing employeecommunications (or that fail to distribute them entirely) can runinto a number of problems,

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In addition to their already burdensome job duties, HR professionals whowork on their company’s health and welfare benefits are tasked withnavigating a wide array of complex federal laws that govern thosebenefits. This task has become increasingly important andchallenging in recent years due to rising health care costs, a competitive labormarket, and the expanding importance of health insurance toemployees.

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The consequences of non-compliance with these rules can becostly and administratively burdensome on an employer and itsresources, including its HR department. This non-complianceliability may include, for example, potentially hefty taxes andpenalties, employee lawsuits, and time-consuming governmentaudits.

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Related: 5 ACA and ‘unreal audit’ highlights, for insuranceagents and brokers

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As explained below, many of the more common compliance mistakescan be avoided or mitigated through careful planning and raising HRawareness of the applicable rules and regulations, includingthrough internal trainings and third-party reviews by consultantsand other benefits specialists.

Review service provider agreements carefully before signingthem

Selecting a health and welfare service provider (e.g., a healthplan administrator) is an important business decision that can havesignificant financial implications for companies. Many employers,however, fail to appreciate the importance of the process ofcontracting with that service provider—and the implications underthe Federal laws (e.g., ERISA) that govern the employer’srelationship with the service provider.

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Insufficient review and negotiation of these service provideragreements can lead to direct liability under ERISA because certainrequirements must be met for the services arrangement to be exemptfrom ERISA’s “prohibited transaction” rules. An inadequate review,too, can leave the employer needlessly unprotected from ERISA orother liabilities. Some examples of important contract provisionsinclude:

  • Fees (e.g., adequate disclosure of both direct and indirectcompensation);
  • Indemnification (e.g., is reasonable to the company, sufficientscope, etc.);
  • Representations regarding standard of care (e.g., ERISAcompliance) and other important matters (e.g., applicablelicenses);
  • Audit rights (to ensure the providers compliance with theagreement and applicable law);
  • Contract termination rules (e.g., advance-notice requirements,responsibilities upon termination, etc.);
  • Confidentiality (e.g., security safeguards); and
  • Dispute resolution (e.g., whether a particular method such asarbitration is reasonable to the employer).

Keep track of any taxable wellness and fringe benefits

Some wellness and fringe benefits cannot be provided tax-free toemployees (or can only be provided tax-free under certain limitedcircumstances). Mistakenly treating those benefits as tax-free toemployees can create a number of administrative and tax-complianceheadaches for employers (e.g., IRS liability for under-withholdingincome and employment taxes). These headaches can be particularlyburdensome when the error is discovered in a later taxable year(e.g., requiring the employer to prepare corrected Forms W-2).

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Some examples of taxable wellness and fringe benefits that areoften mistakenly treated as non-taxable by employers include:

  • Gift cards;
  • Holiday gifts that are more than “de minimis” (e.g., seasonsports tickets);
  • Wellness “indemnity” plans (e.g., where employees pay premiumspre-tax and receive tax-free cash payments for completing wellnessactivities); and
  • Employer payments or reimbursements of gym memberships(generally do not qualify as non-taxable medical care).

Make sure participant communications are timely, complete andaccurate

Federal laws governing certain employee benefit plans such asmedical plans (e.g., the Employee Retirement Income Security Act of1974 or “ERISA”) require sponsors of those plans to provide variousdisclosures to employees and other plan participants (e.g., noticeswhen material plan terms change, such as eligibility ordeductibles).

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Employers that are not careful when preparing and distributingemployee communications (or that fail to distribute them entirely)can run into a number of problems, such as:

  • Potential taxes, penalties, and participant lawsuits wheredisclosures are improper, late, or incomplete (e.g., failing totimely provide notices of COBRA continuation coverage to employeeswho terminate employment);
  • Potentially being unable to enforce a plan change (e.g., amedical service that is no longer covered) because the change wasnot disclosed (or timely disclosed) to participants; and
  • Potentially being unable to reduce/eliminate benefits (e.g.,retiree health care) because the communication failed to include“reservation of rights” language (i.e., stating that the employermay amend or terminate the plan at any time and for anyreason).

The key to preventing these potentially costly and burdensomeissues is to follow a compliance calendar related to thecommunications and complete a proper review of communicationsbefore they are sent out, with a particular focus on aspects thatcarry a high non-compliance risk (including timing and contentrequirements). Relevant questions in such an analysis caninclude:

  • Is there a legal deadline that needs to be met for thiscommunication (as is the case with certain annual notices)?
  • Does the communication meet the legal content requirements(e.g., the various disclosures that must be included in a summaryplan description)?
  • Is the communication accurate (e.g., does it match the terms ofthe “official” plan document)?
  • Does the communication include the proper caveats (e.g., theemployer’s right to amend or terminate the benefits)?
  • Is the communication being distributed in accordance with legalrequirements (e.g., specific rules apply to sending certaincommunications electronically rather than as paper copies)?

Stay on top of ACA employer mandate tracking and reporting

The employer mandate under the ACA imposes tax penalties on anemployer with the equivalent of 50 or more full-time employees ifthe employer either:

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Fails to offer at least 95 percent of itsfull-time employees the opportunity to enroll in certain medicalcoverage for themselves and their dependents, and one or more ofthose employees receives a Federal tax subsidy to purchaseindividual health insurance coverage on a State or Federal ACAexchange (the “no offer” penalty); or

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The employer offers this coverage, but it is either not“affordable” or does not provide “minimum value” to the full-timeemployee, and the employee buys ACA exchange coverage with asubsidy (the “unaffordable” penalty).

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The “no offer” penalty can be particularly significant becausethe penalty amount (roughly $208 per month or $2,500 annually for2019) is multiplied by the number of all the employer’s full-timeemployees (less 30 such employees). These large employers must alsocomply with related reporting requirements under the ACA, whichcarry separate tax penalties for non-compliance.

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Because of the complexity of these rules (e.g., determinewhether, when, and for how long a particular employee is“full-time”), a number of employers have begun—to their surprise—toreceive penalty notices (Letter 226-J) from the IRS. Commoncompliance mistakes include, for example, incorrect ACA reportingthat erroneously triggers an employer mandate penalty in the IRSsystem (i.e., where the employer actually offered the requiredhealth coverage but incorrectly reported to the IRS).

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Brennan Rittenhouse is a managing directorwith Alvarez & Marsal Taxand, LLC in Denver, Colorado,specializing in compensation and benefits planning and consulting.He brings an expertise in all areas of executive, independentdirector, health and welfare, nonqualified deferred compensation,and broad-based compensation consulting. 

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Eric Schillinger is a senior associate withthe firm, specializing in compensation and benefits planning andconsulting. He concentrates on the areas of qualified, health andwelfare, and nonqualified employee benefit plans.

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