Understanding Wrap Documents for Employee Welfare Benefit Plans

As an employer, you may be asking yourself, “What is a wrap document, and why is it important?” Before we get into the full definition, let’s review the history behind wrap documents to better understand how they originated and why they’re important.

The federal Employee Retirement Income Security Act of 1974 set minimum standards for employee benefit plans maintained by private-sector employers. Under ERISA, employer-sponsored welfare benefit plans, such as group health plans, must be described in a written plan document. In addition, employers must explain the plans’ terms to participants by providing them with a summary plan description.

The insurance certificate or benefit booklet provided by an insurance carrier or other third party for a welfare benefit plan typically does not satisfy ERISA’s content requirements for plan documents and summary plan descriptions.

However, employers may use wrap documents in conjunction with the insurance certificate or benefit booklet to satisfy ERISA’s requirements. It’s called a “wrap document” because it essentially wraps around the insurance certificate or benefits booklet to fill in the missing ERISA-required provisions — which we’ll talk about more below.

When a wrap document is used, the ERISA plan document or SPD is made up of two documents — the insurance certificate or benefit booklet and the wrap document. Useful links and resources you can use to learn more:

• The Department of Labor’s Reporting and Disclosure Guide for Employee Benefit Plans
• ERISA Section 402 – plan document requirements
• ERISA Section 102(b) and DOL Reg. §2520.102-3 – SPD requirements
  
  

ERISA coverage

Covered employers

ERISA applies to virtually all private-sector employers that maintain welfare benefit plans for their employees, regardless of the employer’s size. This includes corporations, partnerships, limited liability companies, sole proprietorships and nonprofit organizations.

ERISA exempts only two types of employers:

• Employee benefit plans maintained by governmental employers are exempt from ERISA’s requirements. This exemption includes plans maintained by the federal, state or local (for example, a city, county or township) governments.
• Church plans are also exempt from ERISA. A church plan is any employee benefit plan established or maintained by a church, or convention or association of churches, that is exempt from tax under Section 501 of the Internal Revenue Code and has not made an election under Code Section 410(d) to be subject to ERISA.

Small employers are subject to ERISA’s requirements unless they meet the exemption for governmental employers or churches.

Welfare benefit plans

Many employment plans or programs that provide non-retirement benefits to employees are considered employee welfare benefit plans that are subject to ERISA. To qualify as an ERISA plan, there must be a plan, fund or program established by the employer to provide ERISA-covered benefits (through the purchase of insurance or otherwise) to participants and their beneficiaries.

ERISA applies to the following common employee benefits, regardless of whether they are insured or self-funded:

• medical, surgical or hospital benefits;
• dental and vision benefits;
• prescription drug benefits;
• health reimbursement arrangements;
• health flexible spending accounts;
• group life insurance benefits;
• wellness programs (when medical care is provided);
• employee assistance plans (when medical care is provided);
• disability benefits, if insured or funded other than as a payroll practice; and
• disease-specific coverage (i.e., cancer policies).
  
  

Written plan document

ERISA requires welfare benefit plans to “be established and maintained pursuant to a written instrument.” Thus, an employer’s welfare benefit plan must be described in a written plan document. There is no small employer exception to ERISA’s plan document requirement.

ERISA does not require that a plan document be in any particular format. However, there are several topics that must be addressed in the written plan document for a welfare benefit plan, including:

• benefits and eligibility;
• funding of benefits;
• procedures for allocating and delegating plan responsibilities;
• plan amendment and termination procedures;
• designation of named fiduciary; and
• required provisions for group health plans, such as COBRA rights and HIPAA compliance.

Does the booklet prepared by the insurer or TPA qualify as a plan document?

In general, the detailed coverage document (or certificate of coverage) provided by an insurance carrier for a welfare benefit does not contain all the information required by ERISA for a plan document. For example, while carrier certificates include detailed benefit information, they do not designate plan fiduciaries or provide procedures for amending or terminating the plan. Thus, the carrier’s certificates, on their own, are not ERISA-compliant plan documents. Benefit booklets provided by TPAs for self-insured welfare benefits may also fail to include the ERISA-required information for plan documents.

Wrap documents

A wrap document supplements existing documentation for a welfare benefit plan. When a wrap document is used, the ERISA plan document is comprised of two pieces:

1. The insurance certificate or benefits booklet, reflecting many of the plan’s important terms and requirements; and
2. The wrap document that fills in the ERISA-required information that is missing from the insurance certificate or benefits booklet.

Together, the wrap document and the carrier certificate (or third-party administrator booklet) make up the plan document. Because the wrap document incorporates the insurance certificate or benefits booklet by reference, the plan’s benefit provisions continue to be governed by the terms of those documents.

Mega wrap plans

Wrap documents can be used to combine more than one welfare benefit under a single plan, which is sometimes referred to as a “mega wrap plan” or an “umbrella plan.” For example, a wrap document could be used to bundle medical benefits, dental benefits, disability coverage and an HRA under a single ERISA plan. This document would wrap around all the third-party documentation (for example, insurance certificates or benefit booklets) to include the missing ERISA provisions and combine the benefits into one plan.

The decision of whether to combine or bundle welfare benefits often depends on how it will affect the Form 5500 filing obligation.

• For larger employers, combining different benefits together may simplify the annual reporting requirement because only one Form 5500 will be required for the bundled plan.
• For smaller employers, however, each benefit offered as a separate plan may qualify for the Form 5500 exemption for small plans. Combining the benefits together under a bundled plan might cause the plan to exceed the threshold for small plans, which would trigger the Form 5500 filing requirement.

Form 5500 Exemption — Small welfare plans are exempt from the Form 5500 filing requirement if they have fewer than 100 covered participants and their benefits are insured or unfunded.

Summary plan descriptions

All welfare benefit plans that are subject to ERISA must provide participants with a summary plan description, regardless of the size of the sponsoring employer. An SPD is provided to plan participants to explain their rights and benefits under the plan document. ERISA includes detailed content requirements for welfare benefit plan SPDs.

In general, a carrier’s insurance certificate will not include all the information that must be included in an SPD under ERISA. A benefit booklet prepared by a TPA may also fail to include the ERISA-required information for SPDs. To create an SPD in this situation, an employer can use a wrap document (wrap SPD) that includes the ERISA-required information that the certificate or booklet prepared by the insurer or TPA does not include. In this scenario, the wrap SPD and the insurance certificate or booklet, together, make up the plan’s SPD. To comply with ERISA, both the wrap SPD and the insurance certificate or booklet must be distributed to plan participants by the appropriate deadline.

Noncompliance

There are no specific penalties under ERISA for failing to have a plan document or SPD. However, not having a plan document or SPD can have serious consequences for an employer, including:

• Inability to respond to participant requests: The plan document/SPD must be furnished in response to a participant’s written request. The plan administrator may be charged up to $110 per day if it does not provide the plan document within 30 days after an individual’s request. These penalties may apply even where a plan document/SPD does not exist.
• Benefit lawsuits: Not having a plan document may put an employer at a disadvantage in the event a participant brings a lawsuit for benefits under the plan. Without a plan document, it will be difficult for a plan administrator to prove that the plan’s terms support benefit decisions. Also, without a plan document, plan participants can use past practice or other evidence outside of the actual plan’s terms to support their claims. Additionally, courts will likely apply a standard of review that is less favorable to the employer (and more favorable to participants) when reviewing benefit claims under an unwritten plan.
• DOL audits: The Department of Labor has broad authority to investigate or audit an employee benefit plan’s compliance with ERISA. When the DOL selects an employer’s health plan for audit, it will almost always ask to see a copy of the plan document and SPD, in addition to other plan-related documents. If an employer cannot respond to the DOL’s document requests, it may trigger additional document requests, interviews, onsite visits or even DOL enforcement actions. Also, the DOL may impose a penalty of up to $184 per day (up to $1,846 per request) for failing to provide information requested by the agency.
  
  

Questions about wrap documents? Contact us.

Understanding whether you need a wrap document doesn’t have to be complicated. Contact us today to learn more about how we can assist. Our team of experts can walk you through your current employee benefits and more!