ERISA: How it Protects Self Funded Plans

Did you know self-funded plans are required to comply with ERISA guidelines? Typically when we think of ERISA we think of pensions and retirement benefits. However, even though the plan pays for healthcare coverage, a self-funded plan is fundamentally a pool of money. And that money needs to be insured. In order to protect the members, ERISA covers the plan and its fiduciaries.

The History of ERISA

When the Studebaker plant in South Bend, Indiana closed abruptly in 1963, thousands of workers were thrown into a desperate position. Unable to pay out the pensions its workers were expecting, Studebaker terminated its retirement system. Thousands of workers were left with little or no pension benefits. Many were nearing retirement age and had been counting on those benefits to be there when they needed them.

It would take another decade for the Employee Retirement Income Security Act of 1974 (ERISA) to become law, but the Studebaker pension failure set the wheels in motion by outraging politicians and the public. Congressional hearings followed, and in 1972 NBC aired a widely-viewed special called “Pensions: The Broken Promise” that raised public awareness about the need for pension reform. Two years later, on Sept. 2, 1974, President Ford signed ERISA into law.

How ERISA Works

In the most basic terms, ERISA protects employees’ benefits by holding plan administrators to a set of minimum standards. It applies to most employers but does not protect employees of government entities or churches.

Specifically, ERISA protects employees by:

  • Requiring plans to give participants relevant information about the features and funding of their benefits.
  • Setting minimum standards for employee benefit plans. These comprehensive standards address things like how plans can be funded and how long employees can be required to work before becoming eligible for benefits.
  • Making fiduciaries accountable for responsible plan administration. Anyone who has the authority and control over the plan and its assets can be held responsible if the plan fails. In the course of making decisions about a plan, fiduciaries are required to act in the best interest of the participants. A fiduciary who mismanages the plan according to ERISA standards can be made to repay any lost assets.
  • Requiring plans to establish processes by which employees can file written grievances and appeals. ERISA establishes a number of requirements around the appeals process. Plans must provide written guidance about their claims processes and, when an employee’s claim is denied, must provide written instructions for filing an appeal. Plans must respond to appeals within 60 days, or 120 days with an extension.
  • Giving participants the right to sue to get their benefits, or in response to breaches of fiduciary duty.
  • Guaranteeing that plan participants will receive certain benefits, even if the plan is terminated. If the Studebaker workers had had this provision in 1964, they would have been able to collect their pensions even though the company ran out of money. A federally chartered corporation, known as the Pension Benefit Guaranty Corporation (PBGC), pays these benefits when a plan is insufficiently funded.

Consequences for Violating ERISA

ERISA is a complicated, dense law. Employers sometimes run afoul of this law unintentionally, either due to miscommunication or negligence. The penalty for an ERISA violation depends entirely on its severity. ERISA is administered by the Labor Department’s Employee Benefits Security Administration (EBSA), which investigates violation reports that are made to its Benefit Advisors.

Some violations have purely financial ramifications. For example, failing to provide benefit reports to employees carries a penalty of $28 per employee, while failing to file required annual reports carries a penalty of more than $2,000 per day. Penalties are increased over time to account for inflation.

For serious civil violations, EBSA uses informal dispute resolution, but will bring lawsuits against violators when necessary. (For context, EBSA closed 1,329 civil investigations in 2018, with 56 ending in litigation.) Examples of civil violations include: using plan assets to benefit anyone other than participants; incorrectly valuing plan assets; retaliating against plan participants for accessing their benefits; and failing to comply with ERISA Part 7, which governs self-funded health plans and addresses the Affordable Care Act.

EBSA also investigates criminal violations involving activity like embezzlement and kickbacks. In some of these cases, ERISA violators are given jail time. In 2018, 142 people were indicted in criminal investigations.

The bulk of ERISA violations aren’t malicious. The protections afforded by ERISA are numerous and complex, and even employers that intend to correctly administer employee benefits programs sometimes make errors. Working with plan administrators who are well-versed in ERISA compliance is essential.

How can Stop Loss Insurance, Inc. help your business meet its self-funded and stop loss needs? Contact us today with questions.