What Benefits to Include in the Wrap SPD

Question: What health and welfare plan benefits should be included in the wrap plan document and wrap SPD?

Short Answer: Employers generally seek to include all ERISA welfare benefit plans under the umbrella of a single “mega” wrap plan document and SPD. This approach facilitates multiple efficiencies and is generally considered the best practice method to streamline plan administrative burdens.

General Overview: Why Have a Wrap Plan Document and Wrap SPD?
Every employee benefit plan subject to ERISA must be established and maintained pursuant to its written plan document. The plan document serves as the formal legal document governing plan benefits. ERISA does not require employers to provide the plan document except upon an employee’s written request.

The SPD is the employee-facing summary of the written plan document that is required by ERISA. The SPD must be written in a manner calculated to be understood by the average plan participant, sufficiently accurate and comprehensive to reasonably apprise employees of their rights and obligations under the plan, and distributed to employees within specific timeframes. There is no required format for the SPD, but ERISA does require that specific provisions and information be included.

• For more details: Newfront ERISA for Employers Guide

Employers typically use a wrap plan document and wrap SPD to work in tandem with the underlying insurance carrier and third-party administrator (TPA) materials (e.g., evidences of coverage (EOCs), policies, certificates of coverage (COCs), benefit summaries) for the health and welfare plan.

The wrap plan document and wrap SPD approach serves multiple useful functions for employers:

1. Avoid Restating Benefits: There is no reason for employers to attempt to restate and maintain the detailed benefits in the documents already made available by the carriers and TPAs. By wrapping around those materials and incorporating them by reference, the wrap approach allows the employer to rely on the specific benefit terms already outlined by the carriers/TPAs.

2. Avoid Conflicts: Employers specifically listing out plan benefit details in the wrap SPD independently would run the serious risk of having conflicting terms between the two sets of documents (the wrap SPD and the carrier/TPA materials), which would create many potential concerns and sources of liability.

3. Consolidate Benefits into One Plan/Form 5500: The wrap plan document and SPD typically “wrap” around all the carrier and TPA materials for each ERISA-covered health and welfare benefit offered by the employer, thereby creating one “mega wrap” umbrella plan (often plan 501) so that only one Form 5500 filing is required. Without a wrap document to consolidate all health and welfare benefits (medical, dental, vision, etc.) under a single ERISA plan, each line of coverage could be viewed as a separate ERISA plan that may need its own Form 5500 filing.

4. Satisfy Required Content: The wrap plan document and wrap SPD supplement the carrier/TPA materials to include any ERISA-required content not included in carrier/TPA materials.

5. Important Employer Protections: The wrap plan document and wrap SPD include important legal provisions for the employer, such as a discretionary clause granting authority to the employer plan administrator to interpret plan terms (for the deferential standard of review in a lawsuit) and a reservation of rights clause granting the employer plan sponsor the authority to amend or terminate the plan (avoiding claims that benefits are vested).

In most cases, employers sponsoring ERISA health and welfare benefits—regardless of size or funding arrangement—should have a wrap plan document and wrap SPD in place for these purposes. These wrap documents serve as the glue holding all benefits together under one comprehensive umbrella scheme. In the aggregate, the wrap plan document and the wrap SPD, plus the underlying carrier/TPA materials (which are generally incorporated by reference), serve as the ERISA plan document and ERISA SPD.

• Bottom Line: Employers sometimes incorrectly believe that the documents provided by insurance carriers and TPAs are sufficient to satisfy the ERISA plan document and/or SPD requirements. Typically, this is not correct because those materials do not include all of the ERISA-required content. Even if that were the case, that approach would not be advisable because the wrap documents serve multiple key purposes beyond simply meeting the ERISA content requirements.

Benefits to Include in the Health and Welfare Plan’s Wrap Plan Document and Wrap SPD
As discussed above, employers generally seek to consolidate all of their health and welfare plan benefits under a single “mega wrap” health and welfare plan document and wrap SPD. Under this approach, all of the following ERISA welfare benefits offered by the employer should generally be included in the wrap plan document and wrap SPD.

Include:

• Medical

• Dental

• Vision

• HRA (may have separate document)

• Health FSA (may have separate document)

• Accidental Death and Dismemberment (AD&D)

• EAP (even if embedded in LTD or GTL)

• Short-Term Disability (confirm whether subject to ERISA)

• Long-Term Disability

• Wellness Program (if provides medical benefits like biometrics)

• Executive Physical or Other Health Benefits (may have separate document)

• Group-Term Life (GTL)

• Expatriate and Business Travel Accident (maintained in the U.S.)

• Telemedicine

• Prepaid Legal Services

• Employee-Paid “Voluntary” Benefits (that do not meet the ERISA voluntary plan safe harbor)

• Severance Benefits (confirm whether subject to ERISA, may have separate document)

Do Not Include (Non-ERISA):

• Adoption Assistance

• Educational Assistance

• Dependent Care FSA

• Premium Only Plan (Cafeteria Plan)

• Health Savings Account (HSA)

• Personal Lines (e.g., Auto/Home Insurance)

• Vacation, Sick Pay, PTO (unfunded, as is almost always the case)

• Paid Family Leave

• State Mandated Disability (including private alternatives)

• Pet Insurance

• Workers’ Compensation

• Identity Theft Protection

• 401(k) or other Retirement Plans (ERISA benefits subject to different plan documents)

• Voluntary Plans (that meet the complex ERISA safe harbor exemption, rare)

• Lifestyle Spending Account (LSA)

Issues to Consider with Specific Benefits
While the list above is the approach most employers take most of the time, there are some subtleties and potential different paths that may be worth considering with respect to a few of the benefit options listed.

Health FSAs and HRAs
The health FSA and HRA typically have their own plan document and SPD, which can cause some confusion as to whether these benefits should be housed under a fully distinct ERISA plan. Whether these benefits are incorporated into the main health and welfare plan (generally plan 501) or a separate ERISA plan (e.g., plan 502) is up to the employer.

For more details:

• Newfront Section 125 Cafeteria Plan Guide

• Newfront Fringe Benefits for Employers Guide

Most employers find that there is no advantage to maintaining the health FSA or HRA as a separate ERISA plan because that could require filing a separate Form 5500 for the health FSA and/or HRA if they have 100 or more participants on the first day of the plan year.

On the other hand, some employers with fewer than 100 participants in the health FSA or HRA may feel it is advantageous to keep the health FSA and HRA under a separate ERISA plan number to avoid the need to include them in the Form 5500. For example, some Form 5500 filing vendors charge additional fees for each line of benefits included, and therefore housing these benefits separately can save an annual administrative expense. Other employers may simply prefer not to report on any benefit unless compelled to do so.

Absent those less common issues/sentiments, including the health FSA and HRA is the more straightforward way to approach the issue for most employers. Adding these benefits to the “mega wrap” umbrella plan simply requires checking the “General assets of the sponsor” boxes in Line 9 of the Form 5500, which may be checked already anyway for any other self-insured benefit offered under the broader health and welfare plan. There is no Schedule A to report for the health FSA or HRA because they are not fully insured benefits. This typical approach has the compelling advantage of avoiding the need to file a separate Form 5500 for these benefits regardless of the number of participants enrolled.

EAP
The vast majority of EAPs are group health plans subject to ERISA. The main determining factor for ERISA status is whether the plan has trained professionals providing medical counseling. For example, most EAPs offer some form of mental health therapy by licensed professionals, which qualifies as an ERISA medical benefit.

• For more details: Most EAPs are Group Health Plans Subject to ERISA/COBRA

While that initial part of the analysis is in most cases a “slam dunk” in favor of inclusion of the EAP in the wrap document and Form 5500, the waters can be muddied to some degree by the variety of ways EAPs are delivered in the marketplace. For example, sometimes EAPs are embedded into other benefit arrangements as a “bundled” feature, such as inclusion with the long-term disability or group-term life insurance benefits.

Even where the EAP component is embedded in another benefit such as LTD/GTL, the best practice is still to refer to it separately in the wrap documents to ensure employees are aware of this distinct health benefit made available through a non-health welfare benefit. Regardless, the EAP needs to be reported on the Form 5500 by using code “4Q” (“Other”) in Line 8b, potentially with a note at the bottom of the first page of the Form 5500 to clarify that the code is a reference to the plan’s EAP offering.

Short-Term Disability (STD)
STD benefits in some cases are not subject to ERISA because the DOL regulations provide a significant exception from the definition of an “employee welfare benefit plan” for “payroll practices.” Employers may structure their short-term disability benefits program to meet this exception.

• For more details: The ERISA Payroll Practice Exception for Disability Benefits

The disability-related payroll practice exception applies to “[p]ayment of an employee’s normal compensation, out of the employer’s general assets, on account of periods of time during which the employee is physically or mentally unable to perform his or her duties, or is otherwise absent for medical reasons (such as pregnancy, a physical examination or psychiatric treatment).”

To meet this exception, a disability program generally must: a) not be insured, b) not be funded by a trust, c) not pay more than normal compensation, d) not cover terminated employees, and e) Not declare ERISA status in plan reporting/disclosure materials. Where the STD is designed to meet the payroll practice exception from ERISA, it must be excluded from the wrap documents.

Wellness Program
Wellness programs that qualify as a group health plan are subject to ERISA and therefore should be included in the wrap documents. The determinative inquiry for this standard is whether the program provides “medical care,” which generally refers to “the diagnosis, cure, mitigation, treatment, or prevention of disease, or amounts paid for the purpose of affecting any structure or function of the body.”

• For more details: Newfront Wellness Program Guide

Most wellness programs fall into this category of group health plan (and therefore inclusion in the wrap documents) by providing biometrics, blood draws, screening, examinations, assessments, disease management, health incentives, or counseling by trained professionals. Pure referral services, general information for promotion of good health, a basic gym reimbursement arrangement, or basic educational sessions not customized to the employee likely are not a group health plan and therefore would not be included in the wrap documents.

Executive Physical or Other Health Benefits
Many employers offer an executive physical benefit that creates personalized health assessments designed to promote the well-being of corporate officers and select senior-level or key employees. These programs typically go beyond standard health screenings available under the major medical plan and are tailored to the unique health risks and needs (as well as demanding schedules) of executives. Some employers may go beyond the executive physical services to offer a broader reimbursement arrangement that covers all or some significant portion of the potential §213 qualifying health expenses on a taxable basis.

• For more details: Executive Health Benefits

In most cases, these executive health benefits are included in the general mega wrap (typically plan 501) documents. However, in some cases employers prefer to have a sperate ERISA plan document for these benefits to shield rank-and-file employees from exposure to benefits for which they are not eligible.

Business Travel Accident (BTA) and Expatriate Benefits
BTA and expatriate plans are typically subject to ERISA and therefore included in the wrap documents. These benefits are excluded from ERISA only if “such plan is maintained outside of the United States primarily for the benefit of persons substantially all of whom are nonresident aliens.” (ERISA §4(b)(4)). For example, a plan designed primarily for the benefit of the local employees residing in that foreign country who are not U.S. citizens generally would not be subject to ERISA even if it covers a U.S. citizen residing in that foreign country.

A U.S.-based expatriate plan maintained in the U.S. is subject to ERISA even if everyone covered by the plan may be outside the U.S. There is no specific definition of what qualifies as being “maintained” in the U.S. Nonetheless, if the plan is written in the U.S. and administered by the U.S. benefits professionals in the U.S., it is generally clear that plan is maintained in the U.S. for purposes of determining ERISA status.

Voluntary Benefits
Employer-sponsored benefits that fall within the ERISA §3(1) scope of an “employee welfare benefit plan” are nevertheless exempt from ERISA if they satisfy the DOL’s regulatory safe harbor for voluntary plans. The safe harbor includes other more subtle and difficult barriers to entry beyond just being fully employee-paid.

• For more details: The ERISA Voluntary Plan Safe Harbor

To qualify for the DOL’s voluntary plan safe harbor ERISA exemption, programs must meet four conditions: a) no employer contributions, b) completely voluntary participation, c) no employer endorsement of the program, d) employer receives no compensation from the insurance carrier in connection with the voluntary program.

Meeting the ERISA voluntary plan safe harbor exemption for employee-paid programs such as hospital and other fixed indemnity, cancer or other specific disease coverage, critical illness, or supplemental disability or life policies is quite difficult. In many (if not most) cases, employers engage in at least one of the activities that could potentially be viewed by the DOL or a court as an endorsement of the program that may cause the program to lose its exemption.

Accordingly, the best practice approach for any situation where a benefit offering is in the gray area of meeting the voluntary plan safe harbor is to treat the benefit as subject to ERISA. It is relatively easy to include the benefit in the wrap plan document and SPD, and to reflect its incorporation in the Form 5500 by requesting the Schedule A and adding the correct benefit code in Line 8b.

Severance Benefits
ERISA §3(1) states that an “employee welfare benefit plan” is a “plan, fund, or program” providing one of the listed benefits. This “plan, fund, or program” component is most commonly at issue with respect to severance benefits. The U.S. Supreme Court addressed the question of when an employer severance payment is an ERISA plan in the 1987 seminal case Fort Halifax Packing Company v. Coyne.

• For more details: Severance Benefits May be Subject to ERISA

In that case, the court reviewed an employer’s one-time severance payment upon a plant closure. The court stated that an employer’s severance benefits give rise to an ERISA severance plan only if the arrangement “requires an ongoing administrative program to meet the employer’s obligation.” The dividing line between a non-ERISA severance arrangement and a severance plan subject to ERISA is nuanced and generally depends on all of the facts and circumstances in each situation. Where there is a question whether a severance arrangement is subject to ERISA, we recommend that employers work with in-house or outside ERISA counsel to receive a legal opinion on the plan’s ERISA status.

ERISA severance plans are sometimes included in the “mega wrap” umbrella documents (typically plan 501) with the other health and welfare benefits. However, given the distinct differences between severance benefits and all other welfare benefits, as well as the need for additional documentation to define the plan terms, it is common for employers to establish and maintain a distinct ERISA plan with its own plan document, SPD, plan number, and (if applicable) Form 5500 for any severance arrangement subject to ERISA.

Reminder: When to Distribute the Wrap SPD to Employees
Newly Covered Participants:
Within 90 days after the participant first becomes covered under the plan.

• This refers to when a participant first becomes covered under any of the health and welfare benefits incorporated into the wrap SPD.

• An ongoing employee electing a new line of coverage or carrier at open enrollment is not a newly covered participant if they were already enrolled in at least one ERISA benefit under the wrap SPD.

Ongoing Participants:
Every five years if material changes are made within that five-year period.

• Technically, distribution is not required until 210 days following the last day of the fifth plan year.

• In virtually all situations there is at least one material change made in any five-year period.

• In a rare situation where no material change is made, the deadline is extended to ten years.

Some employers choose to distribute a new wrap SPD each year or each time the employer changes a carrier or TPA listed in the wrap SPD. There is no problem with engaging in this practice, but it is not required. Employers can distribute an updated wrap SPD only once every five years without issue by relying on open enrollment materials to serve as an SMM informing employees of material changes to the plan in the interim.

• For more details: When to Distribute an Updated Wrap SPD

Disclaimer: The intent of this analysis is to provide the recipient with general information regarding the status of, and/or potential concerns related to, the recipient’s current employee benefits issues. This analysis does not necessarily fully address the recipient’s specific issue, and it should not be construed as, nor is it intended to provide, legal advice. Furthermore, this message does not establish an attorney-client relationship. Questions regarding specific issues should be addressed to the person(s) who provide legal advice to the recipient regarding employee benefits issues (e.g., the recipient’s general counsel or an attorney hired by the recipient who specializes in employee benefits law).