The Problem
In the early years of Holloway Benefits Concepts, I realized the need for an affordable compliance offering for our business partners. An offering was needed that could tie into our HR service offering so H|BC could help manage the documents and notices like we do with most of our clients adds and terms. This need/concern stemmed from the prior several years I had spent in this space that was completely void of any conversation about anything compliance-related. Although I had spent time at insurance companies, TPA’s, and a few brokerages of various sizes, all these big companies wanted to do was sell. Nobody was educating or genuinely helping their clients start their benefits programs up properly.
When we started, and even to this day, about 90% of the businesses, we speak to have no idea what ERISA documents are. It isn’t easy to maintain these documents as an organization if you don’t even know what they are. I blame this mostly on short-sided agents and brokers. Most who are in this space know their clients need these documents. Still, very few actually educate their business partner clients on why they are important and the potential ramifications for NOT maintaining these documents. It is so much easier to focus on your new business sales (aka your paycheck) and stick your head in the sand to let your clients deal with compliance issues on their own, right? Well, I hope you sense the sarcasm here, but we certainly do not believe this; unfortunately, this behavior appears to be the norm, especially for those working with small and mid-sized companies.
Even worse, we see companies all the time who are handling their payroll deductions on a pre-tax basis yet there are no Section 125 Documents in place. So not only are these companies ignorant of the rules and regulations related to pre-tax deductions, they are also actually out of compliance and don’t even know it. It’s one thing not to know rules exist but to be breaking the rules outright; that’s where you can blindly stumble into issues.
Again, shame on the agents that aren’t educating their clients. Admittedly, it’s really easy to pass the blame here. I mean, isn’t this something a company’s CPA or controller or payroll coordinator should be helping with? Probably so, at least with maybe a mention, but I do feel that as an agent who darn well knows these requirements exist, you should be at least talking through these items with your clients to make sure they know what the requirements are so they can choose to comply or not. If they then still choose to be non-compliant, then that is one thing, but sticking your head in the sand and not ever saying anything to a business you KNOW is not educated makes you a part of the problem. At that point, that agent is complicit in the non-compliance. Are most companies going to get audited by the DOL or IRS and have their documents reviewed? Probably not, but if they were, and the broker who was helping them failed to educate them on what was required, you think that relationship won’t go south real fast and potentially end up in court? I would say at minimum that broker is definitely going to get fired, possibly even sued. Beyond that, I believe as an agent, it’s your job to educate the client on everything related to benefits, not just what makes you a quick buck.
So, let’s take a step back. What in the world are we talking about here? What is this sorcery you speak of? What is ERISA, and what is a Section 125 document?
What are we talking about here? Part 1 – ERISA
ERISA is the Employee Retirement Information Security Act of 1974. At a very high level, the Federal Legislation governs almost all things related to employee benefits, from retirement plans to health plans to many other types of benefit programs (life, disability, etc.). It has requirements for communications and notices that must be provided to plan participants in an effort to help protect them (the employees) and their dependent plan participants. In plain English, the legislation is intended to help protect mainly against white-collar crime that can occur when there are very liquid plan finances such as retirement plans and self-funded plans where funds are easy to hide and misdirect.
At H|BC, we don’t often deal with those types of plans. Instead, we deal with programs geared more towards smaller employers where liability (and funds) is transferred to a 3rd party insurance provider or third party administrator (TPA). In these situations, you are still required to set up your ERISA Plan Documents at the company level, document benefit programs, establish a plan in writing, and communicate it. By the way, you are also supposed to treat all employees in similar working classes the same. Employee discrimination is a surefire way to get in trouble and lose your ability to get tax advantages for these types of programs.
Like a business, a marriage, a divorce, or any other legal partnership, a company’s benefits program is a “thing” that needs to be established in writing. This is what ERISA Formation Documents do. They create a company’s benefits program in writing and document the changes that occur, year after year. Along with these documents, several plan notices, benefit summaries, certificates, etc., have to be provided to plan participants (aka employees and their families). Still, a good portion of those items are often provided by the insurance provider. The ERISA formation documents are most commonly NOT provided by insurance providers, which many employers are confused about. Most tend to think they got their summaries and certificates of coverage from the insurance company and think they are good to go. That is NOT the case. Others simply don’t know that ERISA documents are needed and that there are required notice deliveries. My favorite quote that I have ever heard regarding ERISA and setup documents was from the National Association of Health Underwriters CEO, and she stated that a “…benefit program is a legal entity; it can sue and it can be sued. Therefore, you have to establish it in writing and maintain it.” This was many moons ago on a training call, so I might have the verbiage off slightly, but you get the idea.
Part 2 – Section 125 Documents
The other main item we include in our compliance package is a Section 125 Document (aka Premium Only (POP) Plans, aka Premium Conversion Plans). This is an additional benefit that requires legal documentation so that health, dental, vision, accident, FSA & HSA deductions can all be deducted on a pre-tax basis. Think about it. As an employer, you can deduct employee benefit premiums and contributions through payroll and not tax your employees on those dollars. This lowers your payroll taxes and also your employee’s taxable income. This is a benefit allowed by the IRS but doesn’t happen automatically. Like all other types of benefits, most of which you actually have to apply for and be approved for, the pre-tax deduction benefit has to be established in writing by the company sponsoring it, it just doesn’t need outside approval. The main difference here is that you are not applying for the benefit and getting accepted. You are simply deciding that yes, as an employer, we want to do this, so instead of some outside insurer or TPA creating the plan and setting it up for you, you are doing that on your own, which means you are also responsible for sourcing the legal documents to establish the plan.
The last thing anyone should ever want to do is upset the IRS and have an auditor digging through your payroll records. When they start digging around, they tend to find other things they don’t like, and every strike against your company can turn into a potential fine or penalty, depending on how the auditor feels that day. They can require a company to go back and pay back taxes, re-file W-2’s, etc., if they choose to do so.
The Section 125 reference is a reference to the IRS Code that allows for pre-tax deductions.
The Solution
Source these documents through your broker, a CPA, attorney, or local TPA. It’s that simple. These items typically are not very expensive if using the right partner. They also should not be avoided as these all are required under federal legislation.
I cannot speak to why more people in this space don’t do a better job taking care of their small business partners by educating them on what they can buy to put into their benefits program or set everything up properly to comply.
Like us, the good news is that there are many good, quality consultants out there that are looking out for their clients in their entirety.
If you or anyone you know needs help getting compliance documents updated or sourced for the first time, please do not hesitate to reach out.
