Oct 28, 2009


Plan administration encompasses a host of clerical and managerial functions related to a plan, including record keeping, receipt and disbursement of funds, claim administration, and investments. The discussion of plan administration will focus on specific obligations imposed by ERISA and the Internal Revenue Code affecting plan administration.

Many of the administrative requirements of the law involve penalties for noncompliance, so it is important to impose these duties on specific individuals or groups of individuals to limit the scope of this liability to a known group. Otherwise, persons involved with the plan might find themselves held responsible for actions over which they may think they have no control. This problem is greatest in the area of investment decisions; therefore, it is important to be as specific as possible in the plan and trust agreement as to who has responsibility for making investment decisions and how these persons are chosen.

Employee Benefit Plans Other than Qualified Plans

Many of the requirements of ERISA apply to a broad range of employee benefit plans as well as to qualified plans. The rules are discussed in detail here because they typically have a much greater impact on qualified plans than on other plans, particularly the fiduciary rules.

The following employee benefit plans (retirement and other) are exempt from the fiduciary and reporting and disclosure requirements of ERISA:

  • Government plans

  • Church plans (unless they elect to be covered)

  • Plans maintained solely to comply with workers' compensation, unemployment compensation, or disability insurance laws

In addition, through regulations issued by the secretary of labor, certain types of plans have been declared not to be employee welfare benefit plans and are thus exempt from the regulations of ERISA. Among these are the following:

  • Compensation for work performed under other than normal circumstances, including overtime pay and shift, holiday, or weekend premiums

  • Compensation for absences from work due to sickness, vacation, holidays, military duty, jury duty, or sabbatical leave and training programs to the extent such compensation is paid out of the general assets of the employer

  • Group insurance programs under which (1) no contributions are made by the employer; (2) participation is completely voluntary for employees; (3) the sole function served by the employer, without endorsing the program, is to collect premiums through payroll deduction and remit the amount collected to the insurer; and (4) no consideration is paid to the employer in excess of reasonable compensation for administrative services actually performed.

Plan Administrator

Any employee benefit plan subject to ERISA is required to name a plan administrator in the plan document. If none is named, the employer is assumed to be the plan administrator. Some employers prefer to designate a plan committee to be the plan administrator. This committee is usually made up of a group of management and sometimes rank-and-file employees responsible for administering the plan. If this is done, the plan should spell out how committee members are to be named, so that there can be no doubt who has the responsibility of plan administrator. Many employers prefer to simply designate the employer as plan administrator, with administration duties delegated to specific employees, usually in the personnel department, in the same manner as other management functions are carried out. Where the plan is funded through an insurance contract, some administrative duties may be carried out by the insurance company for a fee; this is particularly likely for smaller employers where the amount of administrative work involved does not justify the employment of a qualified plan specialist. Often, plan administrators also rely on outside benefit consultants for assistance with various administrative duties.

Claims Procedure

One of the plan administrator's duties is to evaluate employee claims for benefits and to direct the trustee or other fund holder to make payments as appropriate. If the plan is properly drafted, there should be little ambiguity about whether a particular participant or beneficiary is entitled to a plan benefit. However, due to the complexity of many plan provisions, disputes sometimes arise.

Every plan must include a written procedure under which a claimant can appeal the denial of a plan benefit to the plan administrator. There are specific time limits, 60 to 120 days generally, within which the plan administrator must make a decision on the appeal. The purpose for the claims procedure requirement is to require plans to develop internal procedures for evaluating claims so that participants will not always be compelled to bring a lawsuit against the plan if a claim is denied. If a claim dispute cannot be satisfactorily resolved internally, however, claimants have the right to sue and many will do so.

Tax Withholding

Distributions from a qualified retirement plan are subject to federal income tax withholding in a manner similar to payments of wages or other compensation. However, a recipient can elect not to have tax withholding on the qualified plan distribution, without providing any reason. (This, of course, will not relieve the recipient of any obligation to pay whatever income taxes are due.) The payer of the plan distribution must notify the recipient of the right not to have taxes withheld.

The withholding requirement applies to both lump-sum distributions and periodic payments. The liability for withholding is imposed on the payer of the distribution, but the plan administrator will be held liable unless the plan administrator directs the payer to withhold the tax and provides the payer with the information necessary to make the withholding. If the payer is a different person from the plan administrator, a trustee for example, it is important that there is a clear understanding between the parties about the responsibilities for withholding.

Reporting and Disclosure

The reporting and disclosure provisions, enacted as part of ERISA in 1974, impose a variety of duties on employee benefit plans to report or disclose various plan information to the government and plan participants. The purpose of the reporting and disclosure provisions is to indirectly discourage various plan abuses on the theory that wrongdoers will be deterred by knowing that their wrongdoing may be exposed to public view. This approach to federal regulation is based on the success of the securities laws of the 1930s and is common in other areas of federal regulation. The statutory format in ERISA for reporting and disclosure is extremely complex and confusing, and many modifications of the original statutory procedure have since been made by regulation, although the underlying statutes remain the same.

The reporting and disclosure requirements currently consist of this series of reports, some annual and some not, that must be provided to the participant or filed with the government or both:

  • Summary Plan Description (SPD). The SPD is a document intended to describe the plan to its participants in plain language. Whether they ask for it or not, it must be furnished to participants within 120 days after the plan is established or 90 days after a new participant enters the plan. There is no government form for the SPD; it can be designed according to the employer's specifications. However, the contents of the SPD are specified in minute detail by Department of Labor regulations. These regulations require, among other things, clear identification of the plan sponsor and funding entities, the plan's eligibility requirements, any possibilities of losses or forfeiture of benefits, procedures for making claims for benefits under the plan, and a prescribed statement of the participant's rights under the law.

    There is also a plain language requirement, and this can be extremely important in practice. If a participant or beneficiary claims a benefit and is disappointed to find that the benefit was not provided under the plan, it is quite likely that the disappointed claimant will find a lawyer who will look closely at the SPD for any ambiguities that might provide grounds for a lawsuit. Such lawsuits sometimes prove successful.

  • Annual Report (Form 5500). This form is the centerpiece of the reporting requirements. The form is filed only with the IRS, but is made available to both the IRS and the Department of Labor. The form includes detailed financial information about the plan, including a signed report by an independent, qualified public accountant, along with any separate financial statements forming the basis of the independent accountant's report. If a qualified plan is subject to the minimum funding requirements, a signed report by the plan's enrolled actuary must be included, along with a certified actuarial valuation.

    Plans covering fewer than 100 participants are subject to simpler reporting requirements designed to reduce the cost of compliance for these plans. To get a better idea of the scope of the reporting requirements, it is useful to obtain from the IRS copies of Form 5500 and accompanying instructions and review them. These are available on the IRS web site.

    Form 5500 also includes schedule SSA, a schedule identifying participants who have separated from service during the year with deferred vested benefits under the plan. It is provided by the IRS to the Social Security Administration so that at retirement any former participant may be notified of a deferred vested benefit from the plan.

  • Report on Termination, Merger, or Other Changes (Forms 5310 and 5310A). The plan administrator of a plan covered under the PBGC plan termination insurance must notify the PBGC in advance of the termination. The Code and ERISA also contain a number of other reporting requirements in the event of a plan termination, merger, split up, transfer of assets and various other similar events. These are generally reported on Form 5310 or 5310A.

  • Individual Benefit Statement. On written request, the plan administrator must furnish an individual participant or beneficiary with a prescribed statement of his or her vested and unvested current plan benefits. This need not be furnished more than once a year. Some plan administrators provide these individual statements annually, even without a request from participants or beneficiaries.

The Health Insurance Portability and Accountability Act (HIPAA) imposes some additional requirements for information that must be included in summary plan descriptions for group health plans. These include the following:

  • Whether a plan is self-funded or whether an insurer (including a health maintenance organization) is responsible for the administration or financing of a plan

  • The name and address of any insurer responsible for administration or financing of a plan, the extent to which benefits under the plan are guaranteed by a contract or policy issued by the insurer, and the nature of any administrative services provided by the insurer

  • The office of the Department of Labor from which a participant may obtain information about HIPAA

ERISA does not require that a summary plan description be provided on a specific form, only that certain information be provided. Some employers use a single document; other employers incorporate much of the required information into the employee benefits handbook provided to their employees. Electronic transmissions of summary plan descriptions and other required information for participants are acceptable as long as certain conditions are met:

  • Electronic documents may be used only for participants who can access the documents at work and convert them to paper form.

  • The plan administrator must take appropriate measures to ensure that documents are actually received, such as the use of return receipt electronic mail features.

  • The electronic documents must be prepared in accordance with style, format, and content requirements of Department of Labor regulations.

  • Each participant must be notified, electronically or in writing, which documents will be furnished electronically, the significance of such documents, and the fact that paper copies of the documents can be received free of charge.

  • The plan administrator must furnish a paper copy of any electronically submitted documents free of charge on request of a participant.

The reporting requirements are enforced by various types of penalties, including criminal penalties for willful violations or false statements.

In addition to the specific forms that must be filed or distributed, the reporting and disclosure requirements include a variety of sunshine provisions that give government agencies and participants rights to inspect and copy various documents and records relevant to the plan and its operation. Also, to obtain an advance determination letter or other IRS ruling, the plan documents usually must be submitted to the IRS.


Related Posts with Thumbnails