What can go wrong?
Employee benefit administration can be fraught with compliance headaches, litigation risk and fiduciary legal exposure. Fiduciaries under the plan put at risk their personal assets and those assets can be seized should the plan incur losses on account of the act, unintentional act or omission by the fiduciary. Less than meticulous attention to the law and regulations due to ignorance or overwork is not a valid defense. When such shortcomings result in an employee or participant complaint, mediation and arbitration can greatly help to resolve the conflict before it escalates into a formal claim or full-blown, costly litigation. Of course, the optimal course of action is to take steps to identify and correct errors and improper application of plan provisions before controversy occurs.
Many plan sponsors I have worked with ask for examples of potential problem areas. While every plan has its particular quirks and ambiguous, muddy provisions, there are a number of areas that seem to be particularly vexing for administrators. While it is impossible to list all potential pitfalls, the following four areas of plan administration have proven to be especially troublesome to sponsors, based on my experience. If you wish to obtain a more detailed listing, please contact me at jtkoss@benefitplancounsel.com.
Documentation
Maintenance of an original, up-to-date plan that is executed and includes all signed, executed amendments is crucial. Most importantly, that plan should be identified as the sole, current written authority for guidance and direction in administering the plan. In addition, the plan sponsor must maintain an up-to-date Summary Plan Description (SPD).
For health and welfare plans, maintenance of coherent plan documentation (not insurance policies or summary plan descriptions substituting for the formal plan) is especially important after the Supreme Court decision in Cigna Corp. v. Amara, 131 S. Ct. 1866 (2011). In that case, the Court in part held that the plan document is the governing document for an ERISA plan and that if there exists a conflict between the plan document and the SPD, the plan document must be enforced. If there is only an SPD, then the SPD becomes enforceable as the Plan and thus must be concise and complete. If not, ambiguities are construed against the plan administrator.
Finally, the Plan and SPD language should include a number of clauses that offer protection for the plan, plan sponsor and plan fiduciaries: Firestone language, statute of limitations clause, forum selection, subrogation clause (primarily for health and welfare plans), and choice of law provisions.
Records
The plan sponsor must maintain records and archives that include documents that are used to determine benefits and administer the plan. This includes an array of documents: prior plans, trusts, collective bargaining agreements, auditor agreements, determination letters, investment management contracts, investment policy statements, summary plan descriptions, Summary of Benefits and Coverage, to name just a few.
Reporting, Notification and Disclosure
The list is endless here, but the importance of compliance in this area is prompted by two very different considerations: regulatory requirements and the potential for claims, appeals and litigation. While the importance of compliance with government regulations is straightforward and self-evident, it is too often forgotten that it is participant (or spouse) dissatisfaction the often results in unpleasant surprises for plan sponsors and failure to provide proper disclosures on a timely basis are actionable under ERISA and sometimes, state law.
Participant Inquiries, Benefit Claims and Appeals
A written, strict protocol governing how to (and who should) respond to participant, beneficiary and spouse inquiries is essential. If the responsibility is delegated to a third party, such as a third party administrator (TPA), the delegation must be in writing and accepted by the TPA. The potential for litigation is greatly magnified when procedures do not exist or are casual, since incorrect or incomplete information could be offered by an unqualified person in response to a question or an inquiry that seems like a neutral question but in reality is an appeal of a prior decision.
In addition, formal written claims and appeals procedures are mandated and prescribed in detail by ERISA. The Department of Labor regulation governing these procedures is exceedingly complex and in some instances, counter-intuitive. Different types of claims and inquiries require different responses, and these in turn are subject to different timelines depending on the particular circumstances, including type of plan.