To Audit or Not to Audit? A Good Question for Self-Funded Group Health Plans
The rise in insurance premiums for group health plans has prompted many employers to reexamine the decision whether to fund participant health benefits with insurance or self-fund benefits and limit their claims risk by purchasing stop-loss insurance. The increasing number of self-funded health plans in workplaces across the country has caused some confusion among employers and their advisors as to the requirements for Form 5500 reporting and fiduciary audits for these plans. The last time the Department of Labor (“DOL”) weighed in on these issues was in 1992 (see EBSA Technical Release 92-01), so it is easy for advisors to look upon the rules associated with group health plan reporting as “old news.” Surprisingly, however, many advisors assume that, so long as self-funded health plan benefits are paid out of an employer’s general assets, and not a trust or VEBA , no reporting or fiduciary audit obligations exist. In reality, with respect to most self-funded health plans existing in workplaces today, this assumption is dead wrong.
In Technical Release 92-01, the DOL addressed the question whether the use of cafeteria plans to collect and process employee contributions to group health plans violated the rule that employee contributions must be segregated from employer assets and held in trust. The DOL’s technical guidance and regulations established the rule that, for fully insured plans, employee contributions could be collected through a cafeteria plan, and remitted to the insurance carrier within a short time period, without violating ERISA trust requirements. Such plans would be excused from the Form 5500 filing requirement if there were fewer than 100 participants at the beginning of the plan year. Plans with more than 100 participants at the beginning of the plan year would be required to file a Form 5500, but were exempted from the requirement to submit a fiduciary audit report or Schedule H. For fully insured plans it was simple.
However, Technical Release 92-01 left the situation with self-funded health plans caught up in a complex compliance environment caused by the fact that virtually 100% of such plans are, first, funded in part through participant contributions for themselves, their spouses, or their dependents, and second, that participant contributions are paid on a pre-tax basis through cafeteria plans. Under these circumstances, the question whether a Form 5500 with a Schedule H must be filed, and a fiduciary audit report included, depends upon the following: (i) whether the plan document language causes participants to infer that the money deducted from their wages is segregated (either placed in trust or sent to a special account) to be used to pay plan benefits; (ii) whether COBRA premium payments are remitted directly to a TPA or held in a separate plan account segregated from the employer’s general assets; (iii) whether the participant contributions, employer contributions and COBRA premium payments are placed in a TPA “zero balance account” and used to pay plan benefits without accumulation or carry-over of any account balances from one month to the next, or one year to the next; and (iv) whether the TPA’s account comingles assets from more than one employer.
In the current environment of group health plans, the customary arrangement with TPAs often results in the employer wiring employee contributions through the cafeteria plan, COBRA premiums, and any required employer contributions, to the TPA to be held in an account (which may or may not be the employer’s segregated account) from which the TPA writes checks for allowed claims. Often, the TPA maintains one account for many of its employer plans, but accounts for each employer’s plan assets and claims separately. Some TPA’s take the “float” or earnings from these accounts as compensation. Also often, the accounts attributable to any individual employer’s plan are not completely depleted or “zeroed out” at any time. Participant contributions taken from payroll at the end of the calendar year (and corresponding plan year) are used to pay claims submitted in the subsequent year. Plan documents describe the health plan’s funding as “from participant and employer contributions,” without any reference to whether these accumulated amounts are available to the employer’s creditors, as well as the plan’s creditors.
Under these common, self-funded health plan scenarios, non-enforcement promises in Technical Release 92-01, and exemptions from reporting and disclosure requirements, do not apply. All self-funded health plans must file a Form 5500. Employers with small group health plans, i.e., those with less than 100 participants, must file a Form 5500 and include Schedule I. Employers with large group health plans must file Form 5500, include a Schedule H, and submit an independent auditor’s (accountant’s) report. In circumstances where the TPA comingles funds from unrelated employers, a Form M-1 (MEWA report) may need to be filed.
Thus, under the most common of administrative scenarios relied upon today, employers that are sponsors and plan administrators of self-funded health plans have reporting and fiduciary audit obligations. The employers are not relieved of these obligations merely because they fund plan benefits out of their general assets, rather than a trust or VEBA. It is prudent, therefore, for all employers who sponsor and administer self-funded health plans to review their plan document language, their own and their TPA’s asset collection and benefit payment processes (including the administration of COBRA premiums and benefits) and determine whether their current reporting and disclosure practices comply with ERISA’s requirements. In sum, for self-funded health plans today, answers to old questions, may be entirely new.