Employee benefit plans represent a major investment of time and money by an employer. Employee benefits are a significant component of total compensation and are therefore an important link between the employer and its employees. Because of the potential impact of a benefit plan on the employer's bottom line as well as the satisfaction and welfare of employees, it is essential that the risk of loss associated with the plan be assessed and minimized to prevent negative consequences to the employer and its employees from operational or administrative errors.
Errors in benefit administration can result in significant losses, such as
- Internal Revenue Service- and Department of Labor-imposed penalties and interest
- Disgruntled employees whose focus may be on their benefits rather than their jobs
- Costs of restoring benefits or otherwise correcting errors
- Litigation costs
- Unflattering media coverage
In a perfect world, we could attain error-free administration of benefit plans. However, in the real world of legislation, regulations, and court cases that constantly change the rules we operate under, error-free benefit plan administration is difficult if not impossible. Benefit plans are especially at risk if an employer has experienced rapid growth, or has multiple payrolls, decentralized administration, merger or acquisition activity, or new or inexperienced benefit administration staff.
An employer can lower the risks associated with employee benefit plans by identifying the potential sources of errors, correcting errors made in the past, and changing or establishing written administrative practices to decrease the number of errors in the future. The following steps can help identify and contain the risks described above:
- Review plan documents, summary plan descriptions, administrative procedures, and forms for clarity and consistency, as well as compliance with the applicable law and with the plan's terms.
- Interview administration personnel (internal or external) to determine if their processes comply with the documentation.
- Review individual transactions to determine if the plan's terms and legal requirements are being carried out in practice.
- Review vendor and outsourcing contracts and procedures to determine if they are consistent with the plan documentation, the law, and the employer's intent.
- Train staff members so they will provide more accurate and consistent plan administration.
Practical Application
Why should an employer manage these risks now? In addition to limiting the types of losses described above, managing benefit plan risks provides employers with information that helps determine whether benefits are actually being provided as intended, whether vendors are providing services in accordance with their contract, and whether changes are needed with respect to internal administration functions. Further, a smoothly running plan increases efficiency and decreases administration costs. Over the last few years, the Internal Revenue Service has developed an increasingly "user-friendly" voluntary compliance program, and they expect employers to take advantage of it.
In the employee benefits industry, proactive review and correction of errors in benefit plan administration are becoming recognized as an industry "best practice." Presumably it will not be long before the courts begin to impose a higher standard in this area as well.
Sandy Murphy is special counsel in RJ&L's Denver office where she practices in the area of employee benefit planning, compliance, and administration. She assists employers with all types of pension and welfare benefit plan issues involving fiduciary responsibility, plan administration, benefit claims, and federal and state tax and labor law consequences. Ms. Murphy helps clients ensure that they maximize tax benefits while complying with the many laws and regulations surrounding benefit plan administration.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
