What is the Delinquent Filer Voluntary Compliance Program (DFVCP or DFVC Program)?

The Delinquent Filer Voluntary Compliance Program (DFVCP, DFVC Program) was adopted by the Department of Labor’s Employee Benefits Security Administration (formerly the Pension and Welfare Benefits Administration) in an effort to encourage delinquent filers to voluntarily comply with the annual reporting requirements under Title I of ERISA. As adopted, the DFVCP permitted eligible plan administrators the opportunity to avoid the assessment of civil penalties otherwise applicable to administrators who failed to file timely annual reports (commonly referred to as the Form 5500) by voluntarily complying with the filing requirements under Title I of ERISA and paying reduced civil penalties specified in the DFVCP.

In early 2013, the DOL updated the DFVCP to reflect the mandatory electronic filing requirement for the Form 5500 under EFAST 2. The updated DFVCP replaces the program adopted on April 27, 1995, and updated on March 28, 2002, and became effective on January 29, 2013. The updated program maintains the penalty structure that was announced in the 2002 update.

In an effort to further encourage and facilitate voluntary compliance by plan administrators with the annual reporting requirements of Title I of ERISA, the DOL updated the DFVCP by simplifying the procedures governing participation and lowering the civil penalty assessments thereunder.

According to DOL guidance, the penalty structure under the DFVCP is as follows:

•    Reduced per-day penalty: The basic penalty under the program was reduced from $50 to $10 per day for delinquent filings.

•    Reduced per-filing cap: The maximum penalty for a single late annual report was reduced from $2,000 to $750 for a small plan (generally a plan with fewer than 100 participants at the beginning of the plan year) and from $5,000 to $2,000 for a large plan.

•    “Per plan” cap: The DFVCP’s “per plan” cap is designed to encourage reporting compliance by plan administrators who have failed to file an annual report for a plan for multiple years. The “per plan” cap limits the penalty to $1,500 for a small plan and $4,000 for a large plan regardless of the number of late annual reports filed for the plan at the same time. There is no “per administrator” or “per sponsor” cap. If the same person is the administrator or sponsor of several plans required to file annual reports under Title I of ERISA, the maximum applicable penalty amounts would apply for each plan.

•    Small plans sponsored by certain tax-exempt organizations: A special “per plan” cap of $750 applies to a small plan sponsored by an organization that is tax-exempt under Internal Revenue Code Section 501(c)(3). The $750 limitation applies regardless of the number of late annual reports filed for the plan at the same time. It is not available, however, if as of the date the plan files under the DFVCP, there is a delinquent annual report for a plan year during which the plan was a large plan.

•    Top hat plans and apprenticeship and training plans: The penalty amount for “top hat” plans and apprenticeship and training plans was reduced to $750.

Questions about the DFVCP should be directed to EBSA by calling (202) 693.8360 or accessing its Web site at http://www.dol.gov/ebsa.

Market Characteristics | VOLUNTARY BENEFITS

The voluntary market is very diverse. The remainder of this section briefly describes some of the variations.

Insurance Company Involvement

It is estimated that between 150 and 200 insurance companies offer voluntary benefits, with the number of companies offering individual products being about double the number of companies offering group products and with some companies offering both individual and group products. For a few companies, 50 to 100 percent of their premium income is from voluntary products. For the majority of companies, the figure is under 10 percent.

As a general rule, individual carriers tend to target employers with fewer employees than do group carriers. However, many insurance companies will provide coverage for the employees of almost any size employer. Most companies target employees in the middle income range.

Types of Products Available

The major goal of most insurance companies in the voluntary market is to sell life insurance to employees and their dependents. Individual carriers are heavily concentrated in this market. Life insurance is also the most popular product of group carriers, but they are more likely to also offer health insurance products.

Life insurance products run the gamut from basic term insurance to variable universal life insurance and include accidental death and dismemberment insurance. The most prevalent health insurance products are short-term and long-term disability income. Major medical coverage is seldom offered, but some insurance companies sell specified-disease policies and hospital-indemnity coverage. Dental insurance, prescription drug coverage, and vision coverage are also found, usually in the group insurance market. An increasingly common product is long-term care insurance. A few companies also write property and liability insurance.

Depending on the size of the employer, group products can be tailored to the employer's needs. In the individual marketplace, some providers of voluntary products sell the standard products that are listed in their rate books. Other carriers have specialized products for this market. This is common for universal life insurance and among companies that specialize in voluntary benefits.

Underwriting

Surveys of both employers and employees indicate that the success of a voluntary benefit plan is affected by insurance company underwriting. Although some voluntary benefits are individually underwritten, most plans are responsive to market demands and use either simplified underwriting or guaranteed issues, with group coverage being more likely than individual coverage to have the latter. As a general rule, employers want guaranteed-issue coverage unless simplified underwriting will result in significant cost savings to employees. Several factors affect the underwriting policy of an insurance company, including size, participation level, and issue limits. For example, an insurance company might use simplified underwriting for its universal life product if there is a minimum 8 percent participation rate among employers with 500 employees and the issue limit is $100,000. For a group of 50 employees, the percentage might be 15 and the issue limit, $85,000. For guaranteed issue, the figures might be 35 percent and $80,000 for employers with 500 employees and 55 percent and $50,000 for employers with 50 employees.

Cost

It is estimated that voluntary benefits are about 10 percent less expensive than coverage purchased in the individual marketplace outside the employment relationship. However, significant variations exist. Even when there is no cost differential, the ease of payroll deduction is appealing to employees.

Because both employers and employees have considerable interest in voluntary products being offered on a tax-favored basis, benefits may be provided under a cafeteria plan. However, the use of a cafeteria plan may pose problems, and some benefit consultants feel that voluntary benefits should be kept separate from a firm's cafeteria plan. The issue arises over regulation by ERISA. Most voluntary plans, being employee pay all, are exempt from ERISA rules, which is a definite plus from the employer's perspective. Any benefits purchased under a cafeteria plan are technically purchased with employer funds, even if made with voluntary salary reductions. It is argued that this would bring a voluntary benefit plan under ERISA rules. In 1996 the Pension and Welfare Benefits Administration issued an advisory opinion that ERISA did not apply to premium-conversion plans (also called premium-only plans) used to allow before-tax salary reductions for medical expense benefits. However, the government has not addressed the issue of other voluntary benefits.

Methods of Premium Payment

The vast majority of voluntary benefits use payroll deduction (also referred to as salary allotment or salary reduction) as the method for premium payments, with the employer remitting the premiums to the insurance company. Some insurance companies will bill employees directly if an employer is unwilling to participate in a payroll deduction arrangement. Payroll deduction is very popular with employees, however, and direct billing will probably have an adverse effect on plan participation, although it may also reduce the rate at which coverage lapses when employment terminates.

Premiums are usually determined by the benefits purchased and the frequency of payroll deductions. However, life insurance is often sold on a money-purchase basis. The term money purchase comes from the fact that amounts of coverage are sold on the basis of what can be purchased with a given premium, such as $1, $2, or $5 per week (or other period). Because the amount of coverage is a function of the employee's attained age, larger amounts of coverage are available to younger employees than to older employees.

Some insurance companies sell universal life insurance on a money-purchase basis, but other companies take a different approach. Rather than selecting the desired premium, employees choose the amount of pure death protection. Several options—such as $10,000, $25,000, and $50,000—may be offered, and the available options may vary by salary level or position. A minimum periodic premium will then be specified for each option and a given employee's age. The premium will be sufficient to generate a cash value at retirement age if the insurer's current interest assumptions are met. Employees, however, can elect to pay higher premiums so that a larger cash value will develop. Some insurers set the initial premium at a multiple of the pure insurance cost (such as twice the cost); others make it an amount that will generate a cash value equal to a percentage (such as 50 percent) of the original amount of insurance. After the policy has been in force for a specified time period, employees typically have flexibility in premium levels similar to what is available to persons purchasing universal life insurance outside the employment relationship.

Reasons for Increase in Popularity | VOLUNTARY BENEFITS

A major area of growth for insurance companies in recent years has been through the marketing of voluntary benefits for employees. These products—which can be either group insurance or individual insurance—vary considerably among insurance companies. Even the names used to describe these products are not uniform, with terminology like payroll deduction plans and worksite marketing often being used. For purposes, voluntary benefits will be defined as products provided by the employer that the employee purchases and for which he or she pays 100 percent of the premium.

It is difficult to measure the precise extent of voluntary benefits because statistics are often included with other group or individual products sold by a company. However, surveys indicate that more than half of the employers with 20 to 100 employees make voluntary benefit products available. This figure increases to 90 percent for employers with 1,000 or more employees. It is also estimated that more than half of the employers that provide voluntary benefit plans make at least three products available.

Reasons for Increase in Popularity

Voluntary benefits have increased in popularity in recent years, primarily because of employers' attempts to contain the rising costs of employee benefits. For example, an employer may determine that it cannot afford to institute a new group insurance program and pay any portion of the cost of coverage. Even though employees would naturally like to have the employer share in the cost, the ease of payroll deduction and more liberal underwriting still make a payroll deduction plan attractive to them. In addition, the portability of the coverage is often appealing.

Voluntary benefits have also grown in popularity as a method of providing individual insurance coverage to supplement the benefits provided under a group plan financed by the employer. For example, an employer may pay for a group long-term disability income plan that provides benefits equal to 50 percent of salary. Voluntary benefits then allow employees to purchase additional protection. Or the employer may pay for short-term disability income protection only and make long-term protection available under a voluntary benefit plan.

Changes in demographics make it increasingly difficult for employers to offer an overall benefit plan that meets the needs of all employees. One alternative is to offer a cafeteria plan. Another option is to provide a basic core of benefits that all employees want. Additional benefits, such as long-term care insurance, can be offered on a voluntary basis.

Another reason for the increase in the popularity of voluntary benefits is the increased availability of products. More insurance companies have entered the market to obtain additional revenue at a time when revenue from other sources has been decreasing. As is often the case, this has sometimes resulted in lower costs and more liberal underwriting. However, before entering the voluntary benefits market, agents should be sure they are dealing with a stable company whose market line will stay current with the changing demands of the marketplace.