Back to Basics: Fixing Common ERISA Mistakes

By Cynthia Boyle Lande

This time of the year many people are working on New Year’s resolutions to break bad habits, learn a new skill, or spend more time with close friends and family.  With year-end deadlines met and the holidays over, now is also a good time for employers to review their benefit plans and make sure they are in compliance with applicable ERISA requirements. (Remember, ERISA often applies to health and welfare benefit plans, not just retirement plans.) We have prepared this summary of some of the most common ERISA mistakes we see to help you with this review.

Following Plan Terms

One of the most common ERISA plan mistakes is a failure to follow the terms of the governing Plan Document. It is easy for plan sponsors to operate a plan based on a combination of memory and intuition and forget that ERISA requires the plan to be operated in accordance with the terms of the Plan Document. Examples of common failures relating to following the terms of a governing Plan Document include the following:

•  Definition of Compensation: Employers have some flexibility in determining what constitutes employee compensation for purposes of things like matching contributions and elective employer contributions. Compensation may or may not include bonuses, commissions, or other amounts separate from an employee’s base pay. Notwithstanding the fact that employers have discretion to determine what is or is not part of compensation, they must ensure that their actual practices for defining compensation comply with the definition under their Plan Document.
•  Eligibility Requirements: While ERISA (and, in the case of group health plans, the Affordable Care Act) limit employers’ ability to impose employee eligibility requirements, employers often choose to exclude certain employees from their benefit plans. Employers must ensure that in addition to complying with ERISA and the ACA these eligibility restrictions comply with the terms of the applicable Plan Document.
•   Hardship Distributions and Plan Loans: Retirement plans may make hardship distributions and loans to participants, but only in limited circumstances. Failure to follow ERISA and IRS requirements relating to these distributions and loans can have negative consequences for the plan and the participant receiving the distribution or loan. Additionally, plan sponsors can only make these distributions and loans as authorized under the terms of the applicable Plan Document.

 Maintaining Plan Document and Summary Plan Description.

One of the other most common ERISA mistakes is a failure to maintain Plan Documents and other required documentation.  ERISA plans, including most health and welfare benefit plans, are required to maintain a Plan Document and Summary Plan Description (or SPD). Failure to maintain these documents or to provide them to a participant when requested can result in substantial statutory penalties. 

Additionally, plan sponsors are required to regularly update the Plan Document and SPD based on changes in the law or plan terms. Failure to make these changes can similarly result in significant statutory penalties. Updating the Plan Document and SPD can also help ensure that the plan sponsor is following current ERISA and other requirements.

As with other significant business actions, plan sponsors should make sure that the Plan Document, SPD, and amendments are properly adopted, typically in the form of board or manager resolutions. On audit the Department of Labor or Internal Revenue Service will often expect the plan sponsor to be able to provide originals of these resolutions showing that the Plan Document, SPD, and amendments were properly adopted. 

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The best approach for dealing with these common ERISA mistakes is to ensure that they never happen. In the event that they do, it is best to correct the mistakes, in accordance with correction procedures approved by the Department of Labor and IRS, as quickly as possible. If you find yourself identifying with any of these common mistakes, or if you have any question about how the general requirements described in this post apply to your plan, you should contact your BrownWinick employment practice group attorney.