Reporting and Disclosure Issues With Small Employer Employee
Benefit Plans
By Barry Kozak, Esq.
The John Marshall Law School, Chicago, IL
All qualified retirement plans and health and welfare plans subject
to ERISA have reporting and disclosure
requirements.1 The reporting forms
submitted to the government are standardized, but disclosure notices
are generally drafted by each plan sponsor, or their plan advisors, or
are model notices published by the regulatory agencies. The
disclosures to plan participants are oftentimes problematic for small
employers because different attorneys and consultants draft different
styles of documents, and yet, a common thread throughout many
ERISA-required communications is that each is “written in a
manner calculated to be understood by the average plan
participant.”
The starting point is the plan's Summary Plan Description (SPD),
which is always required to be distributed to employees upon being
hired or within 90 days of becoming a plan participant. Generally, the
attorney that drafts the legally effective plan document will also
draft a boiler-plate SPD to accompany that plan. This is especially
true in pre-approved qualified retirement plan documents, and while
the generic SPD might purposely be drafted in a simplistic, easy to
read manner, the legal requirement is actually that each SPD is
“written in a manner calculated to be understood by the average
plan participant and shall be sufficiently comprehensive to apprise
the plan's participants and beneficiaries of their rights and
obligations under the
plan.”2 The ERISA
regulations state further that “[i]n fulfilling these
requirements, the plan administrator shall exercise considered
judgment and discretion by taking into account such factors as the
level of comprehension and education of typical participants in the
plan and the complexity of the terms of the plan. Consideration of
these factors will usually require the limitation or elimination of
technical jargon and of long, complex sentences, the use of clarifying
examples and illustrations, the use of clear cross references and a
table of contents.”3
Although there has not been any substantial litigation thus far that
challenges the manner and style of a SPD, some unfortunate employer
might ultimately become the test case.
Therefore, every employer that sponsors a plan and receives a
boiler-plate SPD should, at the very least, staple a cover page
“written in a manner calculated to be understood by [its]
average plan participant” that provides a roadmap to the SPD,
answers frequently asked questions, provides examples based on its
particular workforce, or any other affirmative written communication
that demonstrates that instead of blindly accepting an SPD drafted by
an attorney, that they actually took their role as plan fiduciary
seriously and made an attempt to communicate the SPD in an appropriate
manner to their particular workforce. Additionally, if a small
plan (i.e., that covers fewer than 100 participants at the
beginning of a plan year) has 25% or more of all plan participants who
are literate only in the same non-English language, then the plan
administrator must provide these participants with an English-language
SPD which prominently displays a notice, in the non-English language
common to these participants, offering them
assistance.4
Other communications to plan participants include, among
others:5
•
Benefit claims procedures for all ERISA plans;
•
COBRA continuation rights and preexisting condition period
explanations for group health plans; and
•
Benefit statements while a participant and disclosure of relative
values and explanations of federal income tax treatment of
distributions after retirement, notices of reductions in future
accruals and the annual funded status of a plan, Qualified Domestic
Relations Order review procedures, and notices of default investments
and the right to divest self-directed accounts for retirement
plans.
Many of these communications are also burdened with the requirement
that they be written in a manner calculated to be understood by the
average plan participant. If the employer sponsoring the plan has
different advisors and third party administrators for different
purposes, then they might each be drafting the various notices in a
boiler-plate manner, each being quite different in style and level of
readability than the other boiler-plate notices for the same plan.
Again, while the respective drafters are usually quite competent and
conversant in the actual and technical content requirements, and while
they might be written in what seems to be easily-understood language,
it is still arguably the responsibility of the employer to take
affirmative steps in at least adding appropriate language in a cover
letter or a cover page that coordinates that particular notice with
all other notices and disclosures that will be received by that
particular plan participant from the day he or she participates in the
plan until the day he or she ceases to be a plan participant.
Another source of potential failure to provide truthful, yet
understandable and non-misleading, communications to plan participants
is when a regulatory agency, like the IRS or DOL, publishes a model
notice. Similar concerns affect to the plan sponsor. Obviously the
technical content of a model notice complies with statutory mandates,
but are the words chosen by the agency's attorneys truly the best word
choices for an employer's average plan participant? Do the examples or
charts in a model notice help to clarify the issues for an employer's
average plan participant? Therefore, caution must be exercised by the
employer before downloading a model notice and blindly assuming that
it is written in a manner and style appropriate for its workforce.
In determining how communications should be tailored for its cohort
of employees, employers are advised to consider some studies about
reading comprehension levels. In 2006, one study looked at the
readability of health care plans and found that: the average
readability level for important information concerning eligibility,
benefits, and participant rights and responsibilities in SPDs is
written at a first year college reading level; the average level of
readability for SPDs is higher than the recommended reading level for
technical material; and that some of the SPDs use language written at
a 9th grade reading level while others use language written at nearly
a college graduate (16th grade) reading
level.6 The study concludes that
fundamental improvements are needed in the readability of written
SPDs, and that employers and plan administrators should explore the
use of alternative methods of communication to plan participants
beyond the written SPD.
Although not controlling, another source that might provide some
level of security might be an alternate federal agency, the Department
of Health and Human Services (HHS). HIPAA privacy notices are required
to be drafted in “Plain Language.” Because group health
plans are considered covered entities under HIPAA's privacy rule,
there is arguably a link between HIPAA covered entities and ERISA
group health plan communications (and then, arguably, a lesser link
with ERISA retirement plan communications). In its “Plain
Language Principles and Thesaurus for Making HIPAA Privacy Notices
More Readable,” the HHS
suggests:7
•
a layered notice, where the first layer is a short notice that
summarizes individual's rights and other information, and then the
second layer would be a more comprehensive notice satisfying the
statutory elements of the notice;
•
arranging the required information in the order that would be in the
reader's best interest (including appropriate preambles and
appendices);
•
drafting the notice at a 9th grade reading level;
•
making the notice easier to read by using a conversational style
rather than a formal style, using common words, using short sentences,
avoiding hyphens and compound words, providing examples to explain
problem words, using lower case rather than all capital letters;
•
making the notice look easier to read by allowing more white space by
using wider margins, chunking long lists into smaller bites, by
inserting pictures, graphs or other visuals where appropriate, using
large fonts and high contrasts, giving the context first before
supplementing with new information;
•
making it suitable for the culture by matching logic, language and
experience; and
•
preparing in some situations to draft all or some of the notices in an
even simpler manner for those plan participants and beneficiaries with
limited reading skills.
Again, there is no guarantee that following the guidance set forth
by the HHS for “Plain English” HIPAA privacy notices will
fulfill the ERISA notice requirements that they be drafted in a
“manner calculated to be understood by the average plan
participant.” However, every plan sponsor must start somewhere,
and why not start with those suggestions (at least until the
Departments of Treasury or Labor issue pertinent guidance).
Small employers that sponsor ERISA plans generally rely entirely on
outside attorneys and consultants to draft the SPDs and other employee
disclosures, or sometime use model notices published by the IRS or
DOL. However, the employers still have the responsibility to
understand the meaning and purpose of each and every communication,
and if in their judgment the document is not written in a manner
calculated to be understood by its particular workforce, then it
should append the boiler-plate communication with at least a tailored
cover letter.
For more information, in the Tax Management Portfolios, see
Kozak, 353 T.M., Employee Benefits for Small and Mid-Sized
Employers, and in Tax Practice Series, see ¶5570, Reporting
and Disclosure.
1
For a complete discussion, see Kozak, 353 T.M., Employee Benefit Plans and Issues for Small Employers.
2
ERISA Regs. §2520.102-2 (and ERISA Regs. §2520.102-4 when there is a good reason to draft different SPD's for the same plan).
3
ERISA Regs. §2520.102-2(a).
4
ERISA Regs. §2520.102-2(c)(1). For large plans, then this requirement attaches where the lesser of 500 participants or 10% of plan participants speak a common non-English language.
5
For a complete guide, see http://www.dol.gov/ebsa/pdf/rdguide.pdf.
6
“How Readable are Summary Plan Descriptions for Health Care Plans?” Employee Benefits Research Institute (Notes, October 2006, Vol. 27, No. 10). Downloadable at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=938147.
7
Available at ftp://ftp.hrsa.gov/hrsa/hipaaplainlang.pdf.
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