Greenberg Traurig, LLP



GT Alert

Increased DOL Activity Compels Compliance Review of Welfare Benefit Plans

June 2002
By Jeffrey D. Mamorsky, Esq. & Deanna H. NiŮo, Esq., Greenberg Traurig, New York Office

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The Department of Laborís Pension & Welfare Benefits Administration ("PWBA"), the federal agency with enforcement jurisdiction over private employee pension and welfare benefit plans under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), has increased enforcement activity within the past few years with respect to health plans. In fact, during the end of 1999 and the early part of 2000, the Department of Labor ("DOL") commenced an enforcement initiative specifically targeting health plans. This health plan audit initiative has grown significantly within the past few years resulting in an increase in the number of health plan compliance audits performed by the DOL. Currently, PWBA is targeting both pension plans and health plans due to the downturn in the economy especially in the light of recent publicity regarding high profile cases in the ERISA area and with the numerous filings of bankruptcies. Nonetheless, all health plans are subject to such scrutiny regardless of whether a plan sponsor files for bankruptcy as PWBA is conducting numerous "random target audits" of health plans merely to ensure premiums and claims are being paid timely and generally to spot check compliance with ERISA and HIPAA as explained in greater detail below.

Jeffrey D. Mamorsky
"This health plan audit initiative has grown significantly within the past few years resulting in an increase in the number of health plan compliance audits."

Plan Documentation

One of the items the DOL focuses on during health plan audits is the overall plan documentation and compliance with the reporting and disclosure requirements of ERISA. Often many employers of health plans do not have appropriate plan documentation for their plans which meets all of the requirements of ERISA. Many plan sponsors do not have actual ERISA plan documents for their health plans, but instead utilize booklets supplied by the insurance carriers. These booklets often do not meet ERISAís plan document standards and the many other compliance standards and requirements mandated by ERISA. In addition, the plan booklets issued by the insurance carrier frequently do not conform with the planís actual administrative practices, but instead are blanket insurance policies or contracts created by the insurer for the majority of their clients. Since those insurance policies or contracts are rarely tailored to the clientís specific needs, many plan sponsors are not operating their plan in conformity with their plan document, which is a per se violation of ERISA Section 404(a)(1)(D). ERISA Section 404(a)(1)(D) requires that the plan be operated in conformity with its governing instruments. Thus, not having a plan document that complies with the actual operations of the plan is a violation of ERISAís fiduciary duty provisions.

Lastly, health plan documentation created by an insurance carrier is often not in compliance with all of the legal requirements of ERISA and the Health Insurance Portability and Accountability Act ("HIPAA"). Generally, the focus of the insurance carrier is on applicable state insurance law as opposed to ERISA requirements which must be contained in the plan documentation (e.g., claims procedures, plan amendment and termination provisions, provisions detailing the named ERISA fiduciaries, a statement of ERISA rights, etc.). If your company utilizes health plan documentation created by an insurance carrier, you should contact GTís Employee Benefits Group to have those documents reviewed for ERISA and HIPAA compliance.

Additionally, many plan sponsors who have numerous insurance contracts should consider having a "wrap plan" drafted for their health plan. This "wrap plan" is an ERISA plan document that contains all the necessary legal requirements of ERISA and compliance language while incorporating all of the insurance certificate booklets by reference. This "wrap plan" in effect bundles the insurance contracts into one "umbrella plan" for compliance purposes thereby creating a cost effective alternative for ERISA compliance. Without such a "wrap plan," the DOL and IRS can, and often do, take the position that each insurance contract offered to the participants is in fact a separate plan requiring an annual report or Form 5500 series for each insurance contract. With the creation of a "wrap plan," the plan sponsor need only file one Form 5500 with various Schedules A for each insurance contract offered under the "wrap plan." Thus, a "wrap plan" can reduce the number of annual filings required which will ultimately reduce administrative costs by merely having to file one annual report rather than numerous reports.

If you are interested in having a "wrap plan" drafted for your health plan, feel free to contact GTís Employee Benefits Group as we have designed a model "wrap plan" which we can easily tailor to your specific needs using our unique approach to the preparation of a plan document and Summary Plan Description that results in a comprehensive, complete, up-to-date document (or set of documents) that is highly readable, conveniently organized with a table of contents and alphabetical index, and thus is extremely easy to use. It also helps explain and coordinate complicated areas of health and benefits law such as COBRA, subrogation and coordination of benefits ("COB") provisions in language "calculated to be understood by the average plan participant" (which is itself an important ERISA reporting and disclosure requirement).

HIPAA Audits

As mentioned previously, PWBA has been conducting health plan audits to determine compliance with ERISA (most specifically the reporting and disclosure requirements) and HIPAA. The DOL audit may be a HIPAA compliance targeted audit or the HIPAA audit may be triggered as part of another audit. In any event, the HIPAA audit requires the plan sponsor to produce voluminous records to evidence compliance with HIPAA, the Mental Health Parity Act, the Newbornsí and Mothersí Health Protection Act and Womensí Health and Cancer Rights Act ("WHCRA"). Some of the documents requested during a HIPAA audit are the following:

  • evidence of the issuance of certificates of creditable coverage;
  • documentation provided to individuals which sets forth the procedure by which they may request and receive certificates of creditable coverage;
  • documentation evidencing the issuance of preexisting condition exclusion period notices;
  • evidence of claims that were denied due to the imposition of a preexisting condition exclusion;
  • documentation evidencing the issuance of notices of special enrollment rights provided to participants, if applicable;
  • planís or insurance issuerís compensation agreement with physicians or physician groups that provide obstetric services for the plan; and
  • documentation evidencing that the one-time notice requirement for WHCRA are and have been provided and evidence of the annual furnishing or WHCRA evidence of the annual furnishing of WHCRA notices to participants.

This increased enforcement activity requires that plan sponsors review their plans for compliance with HIPAA disclosures relating to certificates of creditable coverage, pre-existing condition exclusions, special enrollment rights, etc. Generally, procedural prudence for reporting and disclosure requirements means written procedures for ensuring that disclosures are made to participants as required by ERISA and HIPAA. Since the DOL focuses on notices which are furnished to participants to ensure that all employer

communications with plan participants and beneficiaries regarding the health plan comply with ERISA, we strongly urge that all plan sponsors have their HIPAA notices and related health plan documentation reviewed by our Employee Benefits Group to ensure plan compliance with ERISA and HIPAA. After reviewing compliance and related plan documentation, we can advise plan sponsors of any necessary changes which might be needed in order to avoid civil penalties (and in some cases criminal penalties which exist regarding HIPAA compliance) which may be discovered during a governmental audit, if such an audit occurs.

New Claims Procedure

The regulation governing ERISA procedures with respect to the denial or approval of benefit claims which employee benefit plans must adhere to was recently amended by the DOL. In fact, the DOL issued additional guidance on May 29, 2002 regarding the new claims procedures. Although these new claims procedures apply to both pension and health plans, the most significant changes apply to medical benefit claims. Specifically, the revised regulation requires new claims processing procedures, more stringent deadlines with respect to responding to medical claims and the requirement to provide additional information to participants or beneficiaries if a claim has been denied. The effective date for the new medical claims procedure is for claims filed on or after the first day of the first plan year beginning on or after July 1, 2002, but in no event later than January 1, 2003 (simply, the changes will be effective for claims filed on or after January 1, 2003 for calendar year health plans). Please note, however, that the new claims procedures for pension plans became effective as of January 1, 2002.

The new claims procedure guidance recently issued by PWBA provides guidance with respect to the regulationís application to prescription drug programs, arbitration of non-benefits claims, and "top hat" plans. In addition, the guidance addresses situations where the plan fails to establish or follow a claims procedure that is consistent with the new claims procedure regulations and the "exhaustion of administrative remedies" doctrine in such circumstances.

It is critical that plan sponsors review their claims procedures to ensure compliance with the new regulations regarding medical claims. In addition, there are new rules applicable to disability benefit claims which are not merely restricted to disability plans, but instead apply to any ERISA plan where the benefit is conditioned upon the finding of a disability. We strongly suggest plan sponsors have their plans reviewed by GTís Employee Benefits Group to ensure that all plan documentation (both health and pension plan documentation) is in compliance with the new regulations.

Expansion of the DOL Voluntary Fiduciary Correction Program ("VFCP") and the Delinquent Filer Voluntary Compliance Program ("DFVCP"):

On March 27, 2002, the DOL issued a Press Release regarding their recent expansion of the voluntary compliance programs offered by the DOL. Briefly, the VFCP is a program which allows plan sponsors and plan officials to self correct certain fiduciary breaches through a voluntary program, if the transaction which is being corrected falls within one of the specific transactions available through the program. If the correction is deemed to be properly completed, based on DOL guidance, the DOL will issue a "no action" letter which provides that no further enforcement activity will occur with respect to that specific transaction. These specific transactions which are eligible for the VFCP, have been grouped into five (5) subcategorizes, as follows:


  • delinquent participant contributions to pension plans;
  • delinquent participant contributions to insured welfare plans; and
  • delinquent participant contributions to welfare plan trusts.


  • loan at fair market interest rate to a party in interest ("PII");
  • loan at below-market interest rate to a PII;
  • loan at below-market interest rate to a non-PII; and
  • loan at below-market interest rate due solely to delay in perfecting planís security interest.

Purchases, Sales and Exchanges

  • purchase of an asset (including real property) by a plan from a PII;
  • sale of an asset (including real property) by a plan to a PII;
  • sale and leaseback of real property to employer;
  • purchase of an asset (including real property) by a plan from a non-PII at a price other than fair market value; and
  • sale of an asset (including real property) by a plan to a non-PII at a price less than fair market value.


  • payment of benefits without properly valuing plan assets on which payment is based (under-valuation and over-valuation of plan assets).

Plan Expenses

  • duplicative, excessive or unnecessary compensation paid by a plan; and payment of dual compensation to a plan fiduciary.

One major change with respect to this program is that it has been expanded to include the correction of delinquent employee contributions of welfare benefit plans. Prior to this expansion, only corrections with respect to fiduciary breaches in pension plans were permissible through the VFCP. There are additional changes to the VFCP which are quite significant, such as the elimination of the IRS excise tax in certain circumstances through the imposition of a new proposed class exemption and the elimination of the notice requirement to plan participants in most circumstances unless the applicant takes advantage of the excise tax elimination, in which case notice requirements contained in the proposed class exemption must be adhered to. Although the class exemption with respect to the excise tax is in proposed form, applicants may use the exemption immediately.

The DFVCP is a different program than the one described above and is available for plan administrators who are interested in complying with ERISAís annual return filing requirements by allowing them to voluntarily file untimely annual

returns with reduced civil penalties. The recent changes made to this program are significant reductions in daily filing penalties for filing late returns through the program and reduced per plan caps on the penalty for late filings. Specifically, the per day late penalty for plan administrators who file returns under the DFVCP has been reduced from $50 per day under the old program to $10 per day under the new program. The new caps for filing an annual return which is only one year late for a small plan is $750 and for large plans is $2,000 per return. Lastly, the new caps for filing an annual return which is late for multiple years for a small plan is $1,500 and $4,000 for a large plan.

The DFVCP is a very desirable program as the penalties for late or non-filers who do not use the program and are subsequently discovered by the DOL or IRS are often fined $50 per day from the date the filing was due until the date it was actually filed for late filers and $300 per day up to a maximum amount of $30,000 per year per filing per plan for non-filers (although the statutory authority permits an assessment of $1,100 per day for every day that the annual report is not timely filed up to $30,000 per year, per plan, per filing, starting with any filings due on or after January 1, 1988).


© 2002 Greenberg Traurig

Additional Information:

For more information, please review our Executive Compensation & Employee Benefits Group description, or feel free to contact one of our attorneys.

This GT ALERT is issued for general purposes only and is not intended to be construed or used as legal advice. Greenberg Traurig attorneys provide practical, result-oriented strategies and solutions tailored to meet our clientsí individual legal needs. The Firmís responsive approach to client service often cuts across legal subject matter, applying the right experience and resources to provide cost-effective solutions.