Mistakes in employee benefits and human resources can be quite costly to employers—in the form of extra benefits, complaints, lawsuits, government-assessed fines and penalties, and attorney fees, to name a few. Don’t learn the hard way what these mistakes are. Below are some common costly mistakes that employers make. AUI can help you avoid these common and costly mistakes. Contact us today for a free consultation.
- Not communicating SPD changes to participants. ERISA requires notice to covered participants anytime there is a material modification in a plan’s terms, or there is a change in the information required to be in the SPD. If there is a legal dispute over benefits, courts will often enforce the terms of an out-of-date or incomplete SPD rather than the terms of the plan document, in favor of the participant.
- Solution: ERISA allows plan administrators to communicate material changes through a simplified notice called a summary of material modifications (SMM) that limits itself to describing the modification or change. Since there is no guidance on what is a material change, you should err in favor of preparing and distributing SMMs. At a minimum your SMM should contain: (1) the name of the health plan and the SPD to which the SMM relates; (2) a description of the changes or the substituted language; (3) the effective date of the changes; (4) instruction to keep the SMM with the SPD; (5) an explanation that the SMM and the SPD must be read together; and (6) the name and title of the person to contact with questions.
- Using the wrong definition of compensation when computing retirement plan contributions. Employees are entitled to receive and make contributions based on the definition of compensation set forth in the plan document, up to applicable limits. Employers sometimes fail to compute profit-sharing contributions based on certain types of compensation (e.g., bonus payments, commissions and service awards), contrary to the plan language. Failure to comply with the terms of the plan can result in disqualification of the plan. To avoid plan disqualification, employers follow EPCRS correction principles and end up making the extra profit-sharing contributions, plus lost earnings, to make the employee plan accounts whole.
- Solution: Confirm with the administrator of your qualified retirement plan that you are computing compensation correctly. If any changes are made to the plan’s definition of compensation, make sure to communicate the changes to plan service providers.
- Failure to compare group disability insurance policies. Many employers purchase group disability insurance policies without understanding them. They receive complaints from employees because their disability claims are denied because they are not considered “disabled” per the terms of the policy. Purchasing group disability insurance policies that do not provide worthwhile benefits when needed by employees is throwing money away on a useless benefit.
- Solution: Choose group disability insurance policies with the assistance of your Associated Underwriters Insurance insurance broker who specializes in these policies.
- Maintaining a health plan that is inconsistent with an HSA. Contributions can be made to an HSA only when the employee is not covered by a general purpose health reimbursement arrangement or health flexible spending account (FSA), or other impermissible coverage. An employer that provides impermissible other health plan coverage can unintentionally disqualify its employees from making HSA contributions.
- Solution: Consult with your Associated Underwriters Insurance insurance broker, regarding the design of your HRA, health FSA, and other health plans, to ensure they are HSA-compatible.
- Failure to recognize deferred compensation. Many employers do not understand IRC 409A, which generally applies after Dec. 31, 2004 to any arrangement that defers compensation more than 2½ months beyond the end of the year in which the individual first had a vested (legally-enforceable) right to the compensation. A violation of 409A is very costly because it results in taxation of the deferred compensation prematurely (when it is vested, not when it is later paid), along with a 20 percent penalty and interest.
- Solution: Have your deferred-compensation plans, employment contracts and severance-pay arrangements reviewed by an attorney or financial advisor specializing in 409A.
- Allowing employees to stay on group health coverage beyond the required time period. Many employers allow employees to stay on group health insurance plans after eligibility would otherwise end under the plan’s terms, without first getting approval from the insurance/stop-loss carrier. For example, employers often allow employees on leave to keep their health insurance beyond the period of time required by the FMLA. If the employee incurs significant medical expense and the insurance/stop loss carrier investigates, the carrier may decline to provide coverage, leaving the employer to “self-insure” the entire cost.
- Solution: Offer COBRA coverage to employees that need extended leave but have exhausted or are not eligible for FMLA leave. In this way, employers shield themselves from liability. The employer can continue to pay the employee portion if they desire. Also make sure that insurance/stop-loss carriers are aware of collective bargaining agreements that may apply to coverage issues and have signed off on these agreements in writing.
- State/Federal FMLA coordination. Many employers assume that state and federal FMLA laws are congruent and need not be accounted for separately. This sometimes provides employees with more (or less) leave than is required by law. If employees are offered more FMLA leave than they are entitled to, then the same risk as described in 11 above can occur. Conversely, if employees are not allowed to take as much leave as they are entitled to, employers can find themselves facing a lawsuit or a complaint.
- Solution: Set forth the state and federal entitlements separately in your FMLA Policy and understand how they work together.