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This report was produced by the Advisory Council on Employee Welfare and
Pension Benefit Plans, which was created by ERISA to provide advice to the
Secretary of Labor. The contents of this report do not necessarily
represent the position of the Department of Labor.
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November 10, 2004
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The 2004 ERISA Advisory Council formed a Working Group (Working Group) on
Health and Welfare Form 5500 Requirements to assess whether the current Form
5500 is a practical and useful form of reporting for health and welfare plans to
the Employee Benefits Security Administration (EBSA). The following issues were addressed:
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Assessing the usefulness of Form 5500 data by the Department of Labor
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Exploring the possibility of establishing Forms 5500 uniquely for health
& welfare plans, separate from pension plans
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Examining costs incurred and efforts made by plan sponsors and third-party
administrators to prepare Form 5500
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Assessing the value provided by the existing audit requirements in the
current environment
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Testimony to the Working Group was provided on August 3rd and September 22nd
by 4 employees of the Department of Labor, an insurance company executive, 3
service providers/plan advisors, a research professor and a representative of
the accounting profession. There were no representatives who testified who are
currently acting as a plan administrator. (The witnesses and their testimony are
provided in the appendix and transcripts.)
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After thoughtful debate and analysis of the issues and transcripts, the
Working Group submits the following recommendation to the Secretary of Labor for
consideration:
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Form 5500 Short-Term Recommendations
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Enhance Form 5500 instructions to provide more specific guidance on health
and welfare requirements
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Publish health and welfare Q&A’s or FAQ’s on WWW.DOL.GOV to
provide further clarification and examples.
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Revise Form 5500 and Summary Annual Report to include such questions that
would specifically capture relevant plan data focusing solely on health and
welfare plans.
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Enforce existing requirements requiring insurance companies to provide
Form 5500 Schedule A to plan sponsors within 120 days after year-end.
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Provide mechanism for direct filing of Schedule A by insurance companies
using existing EFAST system.
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Consider providing formal guidance on reporting multiple health and
welfare plans at one plan sponsor on a single Form 5500.
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Form 5500 Long-Term Recommendation
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Form a Department of Labor Advisory Group to research the costs/benefits
of completely revamping or eliminating the existing health and welfare Form 5500
requirements.
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Audit Requirement Recommendations
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Maintain existing audit requirements (per Form 5500) for multi-employer
health welfare plans.
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Apply lesser reporting requirements or consider eliminating the audit
requirement for health and welfare plans that have a trust but are otherwise not
accumulating assets.
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The Working Group believes that these recommendations will further enable the
DOL to meet its goal of providing plan participants and plan sponsors with
useful information to support the voluntary employee benefit plan structure for
Americans and their families.
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Respectfully submitted
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The ERISA Advisory Council (Council), in a report dated November 8, 2002,
studied electronic reporting of the Form 5500. One of the fundamental
recommendations of the Council at that time was that the Department of Labor
should expedite work to implement a next generation electronic filing system
that maximizes the benefits and cost savings achieved by other best-in-class
government electronic filing systems. It was recommended to:
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Base the system structure on real-time data from stakeholders who will be
participating and who benefit from use of the system
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Develop a rough framework for the system by surveying the stakeholders for
their desires with regard to the specifics of electronic filing system and
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Form an Advisory Group consisting of stakeholders and include other
agencies and vendors as well other agencies (i.e. PBGC and IRS) that will use
the data collected.
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In the event that implementing the above recommendations would be a lengthy
process, the Advisory Council suggested a number of items to improve the current
system in the interim.
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Since 2002, it has been brought to the Council’s attention that there are a
number of issues with respect to the Form 5500 that are specifically related to
health and welfare plans. The Form 5500 was initially designed as an annual
report to collect information about the activity of retirement plans and has not
been specifically tailored for health and welfare plans. The last time major a
redesign was performed for the Form 5000 relating to health and welfare plans
was for the 1999 filing year. Since then there have been minor revisions to the
instructions.
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The 2004 ERISA Advisory Council formed a Working Group on Health and Welfare
Form 5500 Requirements to study these issues bearing in mind the recommendations
noted in the November 2002 report. The Working Group’s objective to study the
existing Form 5500 requirements encompassed a review of health and welfare plans
that require an audit as well as those that don't. The goal of the Working Group
was to assess whether the current Form 5500 is a practical and useful tool for
reporting health and welfare plans. Differences between health and welfare plans
and pension plans led the Working Group to consider the possibility of a new
separate health and welfare plan Form 5500.
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The Working Group wanted to better understand
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The use of the Form 5500 information by the Department of Labor,
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The cost (in dollars) effort incurred by plan sponsors and third-party
administrators to prepare Forms 5500 and
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The value of the existing audit requirements (especially given the new
health care regulations.)
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H&W Plan: A health and welfare plan as defined in ERISA §3(1).
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Unfunded H&W Plan: A plan whereby benefits are paid from the general
assets of the employer or employee organization that sponsors the plan.
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Self-Insured H&W Plan: A plan that retains full obligation for plan
benefits.
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Fully Insured H&W Plan: A plan whereby benefits are covered by the
insurance company.
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Multi-Employer H&W Plan: A plan in which more than one employer is
required to contribute that is maintained pursuant to one or more collective
bargaining agreements.
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Trusteed H&W Plan: A plan that has assets that are held in a trust.
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In general terms, all H&W plans (e.g. medical, dental, life insurance,
apprentice training, scholarship funds, severance, disability, and multiple
employer welfare arrangement, etc.) covered by the Employee Retirement Income
Security Act of 1974 (ERISA) are required to file a Form 5500 with certain
exceptions. Plans with under 100 participants that are unfunded, fully insured
or a combination thereof are not required to file a Form 5500 and represent the
most common exception to the general rule.
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The rules result in three categories of Forms 5500 generally being filed for
H&W plans.
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A H&W plan that is unfunded completes only the three-page Form 5500.
No schedules are attached, nor is an auditor's opinion and report required.
These plans do not provide summary annual report information to covered
participants.
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A welfare plan that is insured or a combination of unfunded and insured
typically requires a three-page Form 5500 and Schedule A prepared by the
insurance carriers and a Summary Annual Report (SAR).
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A welfare plan that is funded using (typically) an IRC §501(c)(9)VEBA
trust or other type of trust requires a complete Form 5500 with an opinion and
report of the independent accountant, Schedules A, C, H, and a separate SAR.
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Mr. Joseph Piacentini, head of the Department of Labor’s (DOL or
Department) Office of Policy and Research, testified that there are
approximately 6 million ERISA covered welfare plans; of which 2.5 million
provide health benefits. The number of such plans filing Form 5500s in 2001 was
89,000 and 49,000 respectively. In each case, this represented less than 2%
percent of the total H&W plan universe.
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The Council requested that representatives from the Department of Labor
testify regarding how the Department uses the information in a health and
welfare plan’s Form 5500. Mr. Piacentini testified that The Office of Policy
and Research uses the data to develop statistics and conduct economic research
on relevant employee benefit topics. However, it was noted that H&W Forms
5500 are just one of the many data resources accessed by the DOL research staff.
Historically, the DOL staff has used Form 5500 to supplement other data sources,
rather than as a sole or primary basis for statistics or research. The uses
generally have been occasional and driven by specific data needs. The DOL views
the entire inventory of filings as a database that might be used to answer some
statistical and research questions.
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Mr. Piacentini testified that he does recognize that the DOL is only able to
obtain such information for a fraction of all welfare plans because most H&W
plans are not required to file or are required to file and mistakenly do not
file the Forms 5500. Mr. Piacentini testified that the use of this database is
additionally influenced by the nature of the policy questions that confront DOL
staff, as well as by the scope and content of alternative data sources. There
are a number of data sources well-suited to addressing such questions, some
developed at least in part for the express purpose of addressing them.
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The Office of Policy and Research from time to time has used the Form 5500
data set in conjunction with other sources to fill certain information gaps and
in conjunction with other sources for several purposes. Overall, Mr. Piacentini
testified that the Form 5500 information is only used occasionally (every year
for one purpose or another) by the Office and that they probably look at other
data sources with greater frequency and constancy. Much of the information
that's in the data set is not used very often for research or other purposes.
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Mr. Dennis Quigley from the Department of Labor’s Office of Enforcement
testified that during fiscal years 2001 through 2003, his office completed
13,940 civil investigations with monetary results of nearly $2.8 B. Of that
total number of investigations, over 30 percent related to H&W plans that
provided a broad range of welfare-type benefits. Twenty-five percent of that
total involved those plans providing medical benefits.
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Mr. Quigley noted that EBSA has traditionally always had a presence in
H&W plans, particularly in multi-employer collectively bargained plans. In
recent years, as a result of rising healthcare costs and changes to the
traditional healthcare delivery system, EBSA has increased its commitment of
enforcement resources to targeting an investigation of health benefit plans. The
agency's focus in this area is to ensure that plans are paying benefits, are
being operated prudently, and in the participant's sole interest. In addition,
EBSA looks to validate that plans that are funded are financially and
actuarially sound.
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Investigations are identified through a variety of sources, including
complaints from participants or others, media reports, referrals from the
national office or other governmental agencies, computer targeting, and reviews
of the Form 5500. Therefore, depending on the issues to be reviewed, they may or
may not use the Form 5500 as the basis for initiating an investigation. Mr.
Quigley testified that in most instances the Form 5500 is not the primary source
of identification for targeting purposes.
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Oftentimes they do not use the Form 5500 to make a decision to open an
investigation. Mr. Quigley testified that the most common abuse for H&W plans is in the area of
small unfunded medical plans that are not required to file Form 5500s that find
themselves in a position not to be able to pay benefits at some point in time,
either because of the economics of the business itself going bad or some other
reason. It is not uncommon for people to contact the DOL and complain when they
have not been receiving benefits, and that initiates the reviews.
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Since the single employer plan filing universe is not complete (because most
plans are exempted from filing), EBSA had to select a target sample for a 2001
Health Disclosure and Claims Issue (“HDCI”) project by going through a Dun
& Bradstreet listing and comparing the list with the filers, and then
calling these employers to inquire if they had a health plan. It was noted that
this was a very difficult process as it was time consuming and resource
intensive.
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Mr. Quigley testified that reviewing Form 5500 data for multi-employer plans
is particularly helpful in deciding to review their operations because the range
of potential issues is much broader than for single employer plans. In addition
to reviewing disclosure and benefit payment issues, they may also look at
investment practices, trustee expenses and specific items like insurance rebate
issues.
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In a study that the Office started in 2001, of the 1,300 investigations,
about one-fourth to one-third (approximately 400 investigations) were of
multi-employer plans. This has always been an area of concern because of the
unique nature of multi-employers plans, and the large amount of money that they
take in and pay out, and have to handle from year-to-year.
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Mr. Quigley also testified that his office gets some very substantial
information from the Schedule A about the insurance arrangements, the premiums
being paid, the commissions being paid, the agencies being used to provide the
insurance, and if there is any financial information on the backside for rate
refunds.
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The Department of Labor was also asked their thoughts regarding the
usefulness of the health and welfare audit requirement. Mr. Quigley testified
that he believes the audit requirement serves as a discipline to ensure that the
data that is filed with the DOL on the Form is reliable and accurate for the
agencies that use the data for enforcement, disclosure, or research purposes.
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There was much witness testimony regarding plan sponsor confusion surrounding
the Form 5500 requirements for health and welfare plans. ERISA §3(1) defines an
employee welfare benefit plan as a plan, fund, or program established or
maintained by an employer or employee organization to provide certain benefits
for participants or their beneficiaries.
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Plans providing the following types of health and welfare benefits, whether
insured, funded, or self-funded, are subject to ERISA:
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medical, surgical, or hospital benefits
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some employee assistance programs,
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sickness or accident benefits
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disability benefits
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death benefits
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supplemental unemployment or vacation benefits
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apprenticeship, or other training programs
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day care centers
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scholarship funds
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prepaid legal services
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severance pay
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life
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prescription drug
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vision
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Janice Wegesin, JMW Consulting Inc., testified that many employers are not
aware that their benefit program(s) constitute an ERISA plan and as a result,
Form 5500 filings are not prepared when required. Welfare plans vary greatly in
design and operation affecting the Form 5500 filing requirements. Whether or not
a plan is considered funded has significant impact on the Form 5500
requirements. There are certain DOL exceptions under technical releases and
regulations that have limited the number of plans that are considered funded.
The witness testified that many employers don’t know these rules exist and
have difficulty interpreting them and their effect on their plans.
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Ms. Wegesin also noted that many plan sponsors and administrators are unaware
that annual reporting may be required for an uninsured and non-contributory
welfare plan. Section 2520.104-20 of the Department's regulations exempts from
the annual reporting requirements those welfare plans that cover fewer than 100
participants and which provide benefits from the employer's general assets, or
from insurance contracts if certain specified conditions are met, or from both
of those sources.
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Sponsors and administrators of uninsured non-contributory plans that would
qualify for this exception, but for the fact that the plan covers 100 or more
participants, are frequently unaware of the filing obligation. Those who are
aware of the filing obligation generally question the usefulness of a report for
such plans. This is particularly the case with respect to plans that provide
benefits on an infrequent basis, such as a severance plan. The lack of awareness
of a filing obligation may be understandable.
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Mr. Jeffrey Capwell, McGuire Woods LLP, noted in his testimony, for example,
the sponsor of a typical severance plan arrangement does not generally consider
an employee to be a participant in the plan unless the employee has had a
termination of employment that would entitle him or her to receive benefits.
However, the Department's regulations defining participant status make it clear
that all employees who could qualify for severance benefits if they were
terminated must be treated as participants covered under the plan, and thus
count towards the 99 participant ceiling for the annual filing exemption.
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Another issue with which plan sponsors struggle noted by several witnesses is
determining the definition of the H&W plan. This is typically done through
the collection of the plan documents, summary plan descriptions, and Form 5500
filings for those plans. According to testimony of Ms. Wegesin a plan sponsor
typically has no difficulty presenting the documentation and filings relating to
its qualified retirement plans. However, it is frequently an entirely different
story for its welfare benefit plans. Although an IRC §125 cafeteria plan
document may exist, the documents for the medical, dental, and life insurance
plans may consist solely of the employee booklet issued by the insurance
carrier. For some benefits, the only document may be the information presented
in the employee handbook. Further complicating the identification of the H&W
plan subject to Form 5500 reporting is the ease with which welfare benefit plans
change over the years.
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A common question among sponsors and administrators is whether multiple
H&W plans can be reported on a single annual report. As one witness
testified that, prior to 2002, many advisors counseled clients that all of the
welfare plans that provided substantive benefits under an IRC §125 cafeteria
plan could be reported on a single report because the plans had a common
relationship. They were all funded, and related to, and could provide benefits
under that plan. At that time, Schedule F was used to report the information
covering a cafeteria plan.
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This approach provided little relief for plans for which there was no common
relationship. There is also no guidance or official position for the DOL that
this approach is reasonable. Thus, many plan sponsors have drafted a plan
document that acts as a “wrap” document for the purpose combining their
H&W plans into a single entity for Form 5500 reporting purposes. Mr. Capwell
testified that plan sponsors who do not have sophisticated advisors/vendors are
generally unaware of this plan-drafting technique and file separate reports for
each one of their welfare plans. This process generally takes longer than the
preparation of a single report, and can lead to more errors and omissions in the
preparation process.
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Typically, plan sponsors review the Form 500 instructions to assist in
determining the requirements, but in many cases the instructions are focused
only on pension plan information, thus, making it difficult to determine
specific H&W requirements.
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Another issue is the question regarding covered participants on the Form 5500
specifically as it related to health and welfare plans. Many witnesses testified
that sponsors and administrators of H&W plans are frequently confused by the
instructions for completing the questions regarding number of participants and
there is little specific guidance for H&W plans. Reporting “participant
count” is offered as an example of areas in which clarity is needed and for
which confusion exists. The Form 5500 instructions go into great detail about
the kind of information that pension plans (defined benefit, defined
contribution, etc.) need to report. In contrast, H&W plan sponsors are instructed to review the
regulations to determine which employees qualify as participants and are
required for inclusion on the Form 5500.
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Collection of Schedule A data is another significant problem for the plan
sponsor. Insurance companies are required to provide Schedule A data to plan
sponsors under ERISA, but this rule does not appeared to be enforced. Plan
sponsors that are unable to obtain Schedule A data are being left to decide what
information to provide and directed by Form 5500 instructions to note on
Schedule A any refusal on the part of the insurance company to provide the data.
It is unclear how you note that on the form given its current format and the way
in which you have to prepare that filing. Ms. Janice Wegesin testified that
clients tell her that Schedule A is not being sent to them automatically and
that it takes multiple calls and follow-up with the vendors to receive this
information.
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Often, participant counts or other data are missing. Schedule information is
sometimes mistakenly forwarded to the broker involved in the sale of the
insurance and it is the broker’s failure to forward that information to the
plan sponsor that causes the gap in data collection. One witness testified that
their client had attempted to collect approximately 160 Schedules A from the
various insurance carriers. Collecting all of the required Schedules A can be
quite labor intensive and costly. Many carriers will not provide Schedule A if
that portion of the plan covers less than 100 participants. ERISA requires
insurers to provide the plan administrator with the information required to be
reported on the Schedule A, to certify its accuracy within 120 days of the close
of the plan year, and requires plan administrators to attach the insurer's
statement to Form 5500.
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Ms. Bauserman, Mercer Consulting, testified that the process doesn't really
track what the statute seems to require. The Schedule A does not include a place
for the insurer to attest to the accuracy of the information on the form and, in
fact, the insurers typically don't actually complete a form Schedule A and send
it to their clients. Instead, they send the information that they think the
employer needs to report using their own format. Witnesses testified that in
certain instances information that's not needed on the Schedule A is sent,
information in the pre-1999 format is sent or improper/inadequate information is
sent. Some insurers do not meet the 120-day deadline or never report the
information at all.
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The preparation of Form 5500s for H&W plans can be costly for plan
sponsors with multiple plans, taking away from precious monies to fund health
care benefits. Ms. Wegesin testified that costs for Form 5500 filings generally
start at $500, with higher fees being charged depending upon the complexity of
the arrangement and the number of Schedules A required to be filed. Internal
costs, including time spent gathering and organizing information needed to
prepare information including the financial statements and time associated with
the administration of an audit, if applicable, can be quite high.
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Many of the issues affecting plan sponsors also affect service providers who
are preparing the Forms. Service providers who are knowledgeable regarding
H&W plan Form 5500 requirements spend a significant amount of time educating
plan sponsors on the requirements. One witness testified that often times
service providers find themselves struggling to validate the need to file or
defending the value of filing other than replying “it’s the law.” They
also must discuss the risk of not filing including explaining the IRS Voluntary
Compliance Programs and other amnesty-type programs. Service providers who are
not knowledgeable struggle with the requirements just like the plan sponsors.
Many tax form preparers do not have the skills necessary to properly advise the
plan sponsor about welfare plan reporting, so merely continue to prepare only
those Form 5500 filings that the sponsor has historically filed.
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The Schedule A issue also affects the service providers in that the
practitioner preparing Form 5500 usually has little or no influence with either
the broker or the insurance company and must rely on the plan sponsor to obtain
the Schedule A data.
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The difficulty aggregating the financial information for the H&W plan is
exacerbated, as one witness testified, because the H&W plan itself is an “unnatural
reporting entity.” Financial information is not available from a single source
nor accumulated in a single place, such as the employer’s general ledger
(which accumulates the employer’s records for the financial statements). This
results from the various forms of H&W programs within a plan (e.g. funded
versus unfunded, insured versus self-insured) and the multiple service providers
being used. This is contrary to the typical defined benefit pension or defined
contribution plan that uses an outside trustee/recordkeeper to process all
transactions and maintains a de facto “general ledger” for the plan.
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Ms. Alice Wunderlich, AICPA, testified and it is the sense of the Working
Group that participants find little use for the Form 5500 or financial
statements for H&W plans. Such filings provide no information regarding the
plans’ ability to pay benefits when due, because the plans are not required to
be funded, nor are plan sponsors required to fund or maintain benefits (unless
required under a collective bargaining agreement).
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In a single-employer defined benefit H&W plan, both participants and the
plan sponsor often contribute to the plan. Usually a set dollar amount is
withheld from a participant’s paycheck for employee and dependent coverage.
This employee withholding plus the plan sponsor contribution are used to
purchase insurance coverage or otherwise pay for benefits. Any shortfall is paid
by the plan sponsor. In a single-employer corporate-sponsored plan, the plan’s
financial statements may not necessarily be an indication of the future
probability of the plan’s ability to pay benefits because the plan sponsor
eliminates the deficit for plan costs in excess of plan assets, including
participant contributions and sponsor contributions previously made to the plan.
The plan’s financial statements may well show a deficit position when, it is
in fact, a financially healthy plan.
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As further noted by Ms. Wunderlich, since the ultimate obligation to pay
benefits rests with the corporate plan sponsor, it is the financial health of
the plan sponsor, not the funded status of the plan itself, that determines the
likelihood of participants receiving benefits they were promised. Thus, the
representation by the financial statements of a single-employer
corporate-sponsored plan, while reflecting plan liabilities and obligations and
contributions made by the sponsor and employees, may not be fully meaningful in
assessing whether the plan has the ability to pay current and future benefits.
Unlike audited financial statements for defined contribution or defined benefit
pension plans (which provide important information on investment returns or
funding levels for benefits), decisions of health benefit elections involve
information that is not included in the statements, such as benefit coverages,
deductibles, preexisting condition limitations, etc.. Neither participants nor
plan sponsors particularly care about the investment returns in the H&W plan
context.
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These funded H&W plans must provide an SAR to covered participants.
However, as noted above, the information does not really provide data that
affects participants' benefit choices or assures them of continued coverage.
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Ms. Wunderlich further commented that often times for single employers,
several different plans are used to provide different kinds of welfare benefits
to employees. For example, medical benefits may be provided from one H&W
plan while dental benefits are provided by another. One H&W plan may be
funded and require an audit while the other is not. While each H&W plan has
its own separate ERISA reporting requirement, employees may view their health
and welfare benefits as all part of the same menu of employee benefits, even
though they may in fact be participating in 4 or 5 different H&W plans. This
disaggregating arrangement is rare in 401(k) savings plans and defined benefit
pension plans, where an employee typically does not participate in more than one
401(k) plan or pension plan during employment by one employer. A participant
would need to look at the financial statements of all the H&W plans to get
the full financial picture of the collective H&W plans in which all of the
different health and welfare benefits are being provided to the participants.
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In multi-employer plans, H&W plan financial statements indicate the
plan's ability to provide benefits to participants. Payments of current and
future benefits depend on the amount of the plan's net assets and obligation
(e.g. funded status) and on the ability of the plan to bill and collect future
employer contributions. Because multi-employer plans have assets against which
plan obligations may be measured, they provide an indication of the plan's
ability to pay benefits when due. As such, the financial statements of
multi-employer plans provide exceptional value to readers and users of the
H&W plan’s financial statements.
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Ms. Bauserman, Ms. Wunderlich and Ms. Wegesin all commented on numerous
difficulties in performing the audit of the health and welfare plans. Most
single employer defined benefit H&W plans are unfunded and do not require
audits. However, there are a number of such plans that are funded by the sponsor
or the employees or both and do require an audit. The common way a single
employer may become subject to the ERISA audit requirement is by using a voluntary employees beneficiary
association IRC §501(c)(9) trust, (“VEBA trust”) or another type of trust
as a funding vehicle for some or all of its H&W benefits. A typical use of a
VEBA trust is to pre-fund benefits and then deduct the pre-funding amount on the
company's tax return, thereby gaining an accelerated tax deduction. Often there
are few assets in a VEBA trust because of the limitations on such accelerated
deductions. Funded plans also include multi-employer plans, sometimes referred
to as union plans, in which more than one employer is required to contribute to
the plan pursuant to one or more collective bargaining agreements. There are
many issues with respect to the audit that are unique to H&W plans.
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The audit requirement is for the H&W plan not the trust. However, this
requirement is often times misinterpreted by the plan sponsor and/or auditor and
they inappropriately produce a report for the trust, rather than the H&W
plan, or do not reflect activity that may have occurred outside of the trust.
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Also, many of the H&W plans under audit have activity that does not flow
through the tax-exempt trust. A significant portion of audit time is spent
determining that activity and in most cases auditing it. One auditor reported
that in many cases, H&W plan audit work involves transactions and issues
that are not related to the tax-exempt trust, which is the reason that they have
the audit.
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Preparing the financial statements is time-consuming. It requires a thorough
understanding of the H&W plan, its insurance arrangements, claim payment
process and the resulting accounting, and collection of data for many outside
service providers, as well as sources within the plan sponsor. Because the
financial statements are complex and there is generally a lack of readily
available information, and the preparation requires significant accounting
knowledge, the auditor is often relied on to prepare the financial statements.
Even when the plan sponsor drafts the statements, in many cases the auditor
spends a considerable amount of time assisting the plan sponsor in the drafting.
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In some situations, companies use the VEBA trust or another type of trust as
a conduit to make benefit payments, which triggers an audit requirement. But, in
fact, those companies maintain nominal or zero assets in the trust nor do they
establish a portfolio strategy because of the limitations on accelerated tax
deductions. It is not uncommon to see only cash or a short-term investment
instruments in the VEBA trust while the plan is being funded on a pay-as-you-go
basis without accumulating assets. In these situations, witnesses testified and
it is the sense of the Working Group that the audit does not provide any value
in protecting participant contributions or benefits.
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It is clear that an audit itself requires a significant amount of time and
resources. Because of the complex nature and constant changes to our U.S.
medical delivery and insurance programs, auditing medical expenses incurred by a
plan participant is a complicated process that requires specialized knowledge of
various payment and accounting systems, and medical information.
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When detailed health information such as provider invoices, data from the
administrator, and explanation of benefits is provided to the audit team, the
auditors rarely receive sufficient corresponding descriptions with which to
interpret that information, making it extremely difficult to verify the
correctness of the information. For example, auditors have limited capacity to
recognize procedural codes on an outpatient service, determine the propriety of the
pricing of the service codes given the geographical location of the provider,
and ensure adequate network discounts were provided to the plan sponsor.
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The Health Insurance Portability & Accountability Act of 1996 (“HIPAA”)
also significantly affects H&W plan audits. Audits of medical plans
necessitate auditor access to protected health information, such as support for
paid claims. Outside service providers require the auditor and the plan sponsor
to sign confidentiality agreements. The plan sponsor is also required to sign a
business associates agreement with the auditor. Several different accounting
firms reported that it often takes months for the attorneys of the service
provider, auditor, and plan sponsor to agree on the wording of these agreements.
The service providers often withhold needed claims information from the
auditors, claiming HIPAA restrictions. There is significant negotiation among
the parties before reaching agreement on what information is to be made
available to the auditors. Witnesses testified that as much as 30% of the cost
of the audit can be a result of negotiating these agreements.
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To comply with HIPAA privacy provisions, auditors are required to maintain
the privacy of any protected health information in their working papers. This
means identifying every work paper, both electronic and hard copy, that contains
protected health information, and implementing and monitoring restrictions on
access to those working papers for as long as those working papers are retained,
generally five years. The auditing firm must have firm-wide policies and
procedures in place to meet compliance requirements, which can be quite
burdensome.
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All of these issues are multiplied by the number of service providers
involved. Outside service providers change frequently requiring the agreements
to be renegotiated each year.
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Costs for a health and welfare audit, as one witness testified based on their
survey costs for audits, range from $8,000 up to $50,000. One accounting firm
noted that their auditing fees for H&W plans are three to four times that of
401(k) plans and that these fees have increased dramatically the past several
years. The witness testified that one of her clients reported the annual cost
relating to its welfare plans is approximately $30,000 for one audited welfare
plan and 9 insured arrangements. Each of those insured arrangements has no more
than three Schedule As and perhaps only one for most of them. That $30,000 cost
does not include any time attributable to employees of the plan sponsor who are
involved in compiling data or working through the issues during the audit. It
also did not cover the actuarial costs that are associated with developing the
other benefit obligation information.
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Fees have dramatically increased over the past several years because of
changes in our U.S. health care system delivery and payment systems, and the
impact of HIPAA. Factors affecting the audit fee include the size of the plan,
the number of participants, the types of benefits offered in the plan, the
number of outside service providers, quality of plan record-keeper, and the plan
sponsor's ability to prepare the financial statements.
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The Working Group discussed the objective of the Form 5500 in the context of
witness testimony.
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Mr. Canary of the DOL testified that the objective of the information
provided on the Form 5500 has multiple purposes for consistency of meeting the
requirements in Title I of ERISA.
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The first is information collection, where that information is collected for
enforcement purposes, research purposes, and public disclosure purposes. Mr.
Canary also commented that the Form 5500 is an annual report that serves as a
discipline in terms of plan management where, as part of the statute, commits
the H&W plan administrators and other parties involved at least annually to
prepare this report and do the work that would be necessary to prepare the
report, which imposes sort of an annual discipline to manage the plan, keep the
plan's data, and be able to put that into an annual report. The Working Group
noted that it did not appear that the objectives were being met since only 2% of
health and welfare plans were filing Form 5500s.
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Based on testimony from the Department of Labor, it is currently not clear
that the information gathered from H&W Form 5500 filings is used in an
extensive manner. Some of the information is used in a limited manner to fill
gaps in research information or to target plans for enforcement purposes.
However, it was noted by Mr. Piacentini of the DOL that the gaps in research
information could be filled by other means. It was also noted by Mr. Quigley of
the DOL that most of the targeting of H&W plans originates from participant
complaints, not from using Form 5500 as a reference tool. The question arises
whether or not the limited use by the Department of Labor justifies the cost of
preparation of the Form. One witness testified that the cost of filing these
Forms is a minimum of $500 per Form. Based on approximately 90,000 filings per
year, it appears plan sponsors may be spending an estimated amount of a least
$45,000,000 each year to file these Forms. It is likely that this estimate is
conservative as there are many plans with Form 5500 fees in excess of $500 due
to multiple Schedule As and other plan complexities. In addition, there are
in-house costs incurred by plan sponsors to pull together information for the
Form 5500s and costs incurred by the DOL to support the process.
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It was unanimously agreed by the Working Group that the Form 5500
requirements for H&W plans need some type of revision.
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The Working Group explored the following three alternatives:
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Starting from scratch and completely overhauling the Form 5500
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Revising the Form 5500 in its current state or
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Eliminating the Form 5500 requirement completely.
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Complete Overhaul Of Form 5500 - The Working Group noted from an “information collection” standpoint, the
best alternative would be for the DOL to start from scratch and completely
reinvent the Form based on comments and guidance received from the end users,
i.e., Department of Labor, plan sponsors and participants. If the Form is going
to be revised extensively to include additional information regarding benefits
and plan design, then plan sponsors, participants and the DOL would be
interested in this kind of information. In order to obtain the best data, all
H&W plans would need to be required to file. This alternative while
providing the most information would be costly for the Department of Labor to
implement especially given the constraints of the existing EFAST software. It
would also be costly for service providers who would have to completely revamp
their systems for reporting purposes. Plan sponsors would also incur a great
burden as the percent of health and welfare plans required to file Form 5500s
would increase from 2% to 100%. The Department of Labor would have to ensure
that the benefits outweighed the costs prior to considering this alternative.
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Revising Form 5500 - Revising Form 5500 would be a band-aid approach to fixing some of the items
that cause the most confusion and cost to plan sponsors and service providers.
For example, expanding areas in the instructions to provide specific guidance
for completing questions for health and welfare plans such as the number of
participants. The Working Group agreed that while this would reduce some of the
confusion experienced by H&W plans on a short-term basis, a longer-term
approach was still necessary. An area of concern commented on by all witnesses
was the Form 5500 Schedule A requirement. There are a number of short-term
approaches that could be considered to streamline the Schedule A process to make
it less burdensome for plan sponsors and third party administrators preparing
Form 5500s.
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Eliminating Form 5500 Completely - The Working Group also discussed the possibility of completely eliminating
the Form for all H&W plans if the information is not being used extensively
by the Department of Labor. The cost savings on behalf of plan sponsors could be
used to provide more health and welfare benefits. Also, as several witnesses
testified there are other existing avenues right now where that information
could be obtained rather than adding to the 5500, or revising the 5500. However,
most of the information is shared on a voluntary basis and it is not
comprehensive.
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Audit Requirements - Lastly the Working Group discussed the audit requirement for H&W plans.
Unlike audited financial statements of multi-employer H&W plans, defined
contribution plans such as a 401(k) savings plans or defined benefit pension
plans in which the investment returns funding levels are relevant to a
participant's benefit, single employer H&W plan financial statements do not
provide all the information necessary upon which participants may predict the
likelihood that they will receive current and future benefits.
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Four Short-Term Recommendations
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Enhance the existing Form 5500 instructions to provide more specific
guidance on health and welfare requirements (e.g. definition of a plan,
definition of a participant, etc.). Consider publishing health and welfare
Q&As or FAQ’s to be included on the Department of Labor web site to
provide further clarification and examples.
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Consider revising Form 5500 and Summary Annual Report to include such
questions to allow the DOL to continue to meet its goal of protecting plan
participants. One witness suggested that a separate health and welfare schedule
should be created that would specifically capture H&W plan data focusing
solely on H&W plans.
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A suggestion is made to review Form M-1, for multi-employer welfare plans
(“MEWAs”) for a series of questions about compliance with the mandates that
apply to health plans.
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Review new requirements under the Medicare modernization act to prevent
duplicative reporting.
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Enforce existing requirements requiring insurance companies to provide
Form 5500 Schedule A to plan sponsors within 120 days after year-end. The
Department's reporting regulations require the administrator of a plan to
include in an annual report the insurance contract information which carriers
are required to provide pursuant to ERISA §103(a)(2). Consider providing
mechanism for direct filing of Schedule A information with DOL by insurance
company keeping in mind limitations of existing EFAST system.
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Consider providing formal guidance on reporting multiple welfare plans on
a single Form 5500. The DOL should indicate when and under what circumstances
multiple welfare plans can be filed on a single report. Specifically, formalize
the position on this issue in guidance that would generally be available to plan
sponsors and administrators.
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One Long-Term Recommendation
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Form a Department of Labor Advisory Group to research the costs/benefits of
completely revamping or eliminating the existing H&W plan Form 5500
requirements.
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Actively seek guidance from end users (participants, plan sponsors and
DOL)
to determine the specific information (and population of plans) which would be
useful to be included on the Form.
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Coordinate with the plan sponsors and service providers regarding the
burdens of system revisions.
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Consider “negotiated rule making” as part of the process.
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Consider a one-time filing similar to a top-hat plan whereby an updated
filing is only required for plan changes if it is determined that all H&W
plans must file.
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Re-examine the SAR format in light of participant concerns and
consideration given to providing more useful data to participants in H&W
plans.
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Maintain existing audit requirements for multi-employer health and welfare
plans.
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Evaluate whether the current financial reporting and audit requirements
for single employer defined benefit health and welfare plans cost effectively
meets the needs of DOL participant protection and the needs of other potential
users of plan financial statements.
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It is important for the DOL to fulfill its responsibilities under Tile I of
ERISA and its obligation to protect plan participants by collecting data about
health and welfare plans. However, the DOL should consider identifying the data
that is useful and meaningful specifically relating to health and welfare plans
and weigh the cost/benefits of collecting that data, as well as alternative
sources. The current requirement that results in Form 5500 filings being
prepared for a small percentage of the population with limited data appears to
be more bothersome and costly to plan sponsors and the information does not
appear to be particularly useful to participants, plan sponsors and to some
extent regulatory agencies.
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Summary of Testimony of Joseph Piacentini
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Mr. Piacentini testified that there are three main functions of the Office of
Policy and Research. First, in the satisfaction of a statutory mandate contained
in ERISA Section 513, the Office of Policy and Research develops statistics and
conducts economic research on policy relevant employee benefit topics. Second,
the office supports the Assistant Secretary and other agency and administration
officials in pension and health benefits policy formulation, and legislative
activity. Third, the office lends economic perspective to the formulation of
agency regulations in order to promote economically beneficial policies.
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The witness further testified that in order to carry out these functions
successfully, the office requires access to detailed data on employee benefit
programs. Form 5500 filings are just one of the many data sources that are
tapped. Historically, they have used the filings to supplement other data
sources, rather than as a sole or primary basis for statistics or research. The
uses generally have been occasional and driven by specific data needs. The
Office of Policy and Research uses data to develop statistics and conduct
economic research. They focus their attention not so much on individual filings,
as on large compilations of filings that represent large classes or populations
of welfare plans viewing the entire inventory of filings as a database that
might be used to answer some statistical and research questions.
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Mr. Piacentini testified that the use of this database is influenced by its
scope. Small welfare plans, meaning those with fewer than 100 participants that
are fully insured or unfunded are not required to file Form 5500s. As a result,
filers represent only a fraction of all welfare plans. He estimated that there
are approximately 6 million ERISA covered welfare plans; two and a half million
of which provide health benefits. The number of such plans filing 5500s in 2001
were 89,000 and 49,000 respectively. In each case, less than 2 percent of the
total.
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He further testified that the use of this database is additionally influenced
by the nature of the policy questions as well as by the scope and content of
alternative data sources. For example, policy questions often pertain
exclusively to health benefits, to the exclusion of other welfare benefits. They
often involve the circumstances and choices of plan sponsors, employees, or
both. There are a number of data sources well-suited to addressing such
questions, some developed at least in part for the express purpose of addressing
them. These include surveys of employers, such as the Medical Expenditure Panel
Survey Insurance component which is carried out by the Census Bureau in
collaboration with the Agency for Healthcare Research and Quality. Also, the
National Compensation Survey, carried out by the Bureau of Labor Statistics. The
surveys also include household surveys, such as the Census Bureau's Current
Population Survey, and Survey of Income and Program Participation. While these
and other survey data sets provide detailed information about employers,
households, and their health insurance choices, welfare plan Form 5500 filings
provide information on the internal financial operations of welfare plans.
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Mr. Piacentini said that the Office of Policy and Research has used the Form
5500 data set in conjunction with other sources to fill certain information
gaps. In one example, when EBSA undertook a project recently to measure health
plans compliance with certain provisions of ERISA, it was necessary to identify
a representative sample of all plans to study. The Form 5500 data set provided
an effective basis to draw a sample of multi-employer plans. Additionally, in
the past they have relied on the Form 5500 data set in conjunction with other
sources for several purposes. In one such example, the Regulatory Flexibility
Act requires federal agencies to analyze the economic impact of its regulatory
actions on small entities. EBSA defines small entities as employee benefit plans
with fewer than 100 participants. There is no single data source that directly
identifies small health or welfare benefit plans. They have used the Form 5500
data set to characterize the large plan universe, and thereby back-out from
other data sources measurements of the small plan universe.
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In another example, they have used the Form 5500 data set together with
employer survey data to help assess the incidence of insured and self-insured
health benefits, a distinction with implications for the applicability of state
law. In a third example, they have used the data set together with 10-K filings
with the Securities and Exchange Commission, and other sources, to examine
welfare benefit plan cost trends in certain stressed and declining industries.
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Summary of Testimony of Dennis Quigley
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Mr. Quigley testified that the Office of Enforcement oversees the
investigative operations of 15 field offices across the country. The staff is
responsible for ensuring by oversight that field offices are being consistent in
application of the statute, and following policies and procedures, and to
provide some national guidance in establishing national enforcement priorities.
EBSA is responsible for administering the provisions of ERISA as they relate to
nearly 730,000 pension and 6 million welfare plans, principally those that are
providing medical benefits. And EBSA conducts investigations of plans through
its 10 regional offices, and 5 district offices located in major cities around
the country.
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The witness said that during fiscal years 2001 through 2003, EBSA completed
13,940 civil investigations with monetary results of nearly 2.8 billion dollars.
Of that total number of investigations, over 30 percent related to Health and
Welfare plans. Twenty-five percent of that total involved those providing
medical benefits. EBSA leverages its enforcement resources by emphasizing
efficient targeting, and protection of at-risk populations. Targeting allows
EBSA to focus its resources on issues and individuals where the most serious
potential for ERISA violations exist, and on situations that present the
greatest potential for harm.
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Mr. Quigley said that EBSA has traditionally always had a presence in health
and welfare plans, particularly in multi-employer collectively bargained plans.
And in recent years, as a result of rising healthcare costs and changes to the
traditional healthcare delivery system, EBSA has increased its commitment of
enforcement resources to targeting an investigation of health benefit plans. The
agency's focus is to ensure that plans are paying benefits are being operated
prudently, and in the participant's sole interest. They also look to see that
plans that are funded are financially and actuarially sound.
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EBSA's role in the healthcare area has also expanded as a result of the
enactment of legislation that included regulatory and enforcement requirements
to be implemented by EBSA. A new Part 7 was added to ERISA in `96, and included
the Health Insurance Portability and Accountability Act, the Mental Health
Parity Act I, the Newborn and Mothers Health Protection Act and the Women's
Health and Cancer Rights Act.
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In fiscal year 2001, EBSA initiated a special project focusing on health
disclosure and claims issues, called the HDCI project to establish a
statistically valid baseline of compliance with the new requirements under Part
7. During this project, EBSA regional offices conducted nearly 1,300
investigations, and the results of these investigations have provided us with a
clearer picture of the state of overall compliance with the new Part 7
requirements, as well as providing us with specific information about areas that
need special enforcement and compliance assistance attention.
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Mr. Quigley testified that investigations are identified through a variety of
sources, including complaints from participants or others, media reports,
referrals from the national office, or other governmental agencies, computer
targeting, and reviews of the Form 5500.
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The requirements for health and welfare plans to file 5500s differ depending
on the size of the plan, and its funding status. The majority of small under 100
participant plans file nothing at all, and the larger plans file only limited
information if they are unfunded or fully insured. Plans that are funded and
provide benefits through a trust mechanism file substantial financial
information that is used to make decisions to investigate or not. Therefore,
depending on the issues to be reviewed, the agency may or may not use the 5500
as the basis for initiating an investigation.
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When they began the HDCI project in 2001, they selected the sample by going
through a Dun & Bradstreet listing, and then comparing that with the filers,
and then calling them and asking them if they had a health plan, a very hard
process; time consuming and resource intensive.
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Reviewing 5500 data for multi-employer plans is particularly helpful in
deciding to review their operations because of the range of potential issues is
much broader than for single employer plans. In addition to reviewing disclosure
and benefit payment issues, they may also look at investment practices, trustee
expenses and specific items like insurance rebate issues.
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Many EBSA offices have also conducted reviews of insured single employer
plans based on data in the 5500 Schedule A to determine if they were handled
properly.
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The witness testified they oftentimes do not use the 5500 to make a decision
to open up an investigation. They find that people will come in and complain
when they have not been getting benefits paid, and that initiates our reviews.
They select plans for review sometimes because of the nature of their investment
holdings, for instance, to make sure that they are prudently being operated.
They also take a look at with whom the plan is dealing, particularly in the
insurance world, to make sure they don't have prohibited transactions arise.
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Summary of Testimony of Scott Albert
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Mr. Albert testified that the responsibility of the Division of Reporting
Compliance is simply to do what they can to affect the ERISA database to make
sure the required data required exists and that it is timely, complete and
accurate. There are various programs to make sure that this mission is achieved.
The ERISA database is built primarily on the information that comes off of the
Form 5500.
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Mr. Albert further testified that the mission of the Division of Accounting
Services is to make sure that audits are performed in accordance with generally
accepted auditing standards and the financial statements are prepared in
accordance with the applicable requirements.
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The witness testified that there were 105 cases of welfare benefit plans that
have filed late for this past year. The total plans that participated in the
Delinquent Filer Voluntary Compliance Program were a bit over 25,000, 38 percent
of which or roughly 9,600 of welfare benefit plans. A lot of the administrators
don't know they have a welfare benefit plan filing requirement, particularly
when they cross that 100th participant threshold or milestone. Funded plans file
late due to complications in the audit. There are complications in the audit
because the auditor has difficulty in getting information, doing some test work,
coming up with questions that have to be answered.
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Mr. Albert said that one big difficulty in filings that plan administrators
complain about is getting the Schedule information from the insurance companies.
A lot of insurers will generate a Schedule A or at least the information to be
included on it for policies that cover 100 lives or more but not for policies
with fewer than 100 lives. Some of these welfare benefit plans are a
conglomerate of different types of coverages or multiple policies. They're not
getting information on all of the policies contained within that plan. If they
have multiple policies, life, dental, disability, and health, in the XYZ
employee benefit plan and they want to prepare and consolidate the filing for
the whole thing, they sometimes have trouble getting Schedule A information from
the insurance company because the insurance company simply says, "We don't
do that for policies that have fewer than 100 lives."
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The health and welfare filings appear to be simple and oftentimes have just a
5500 and a Schedule A. If they're funded, there aren't a lot of assets or there
are assets, but they are not all that complicated. The multi-employer plans are
more complicated.
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Most of the plan administrators that participate in the DFVC program are
viewing each contract as a separate plan, rather than considering them all as
one plan. The advantage that some of them have argued, at least with the DFVC
program or any filing to reduce filing costs is if the plan is unfunded, fully
insured, you won't kick off an audit requirement on all the components. If you
consolidate it, it's all one filing, instead of ten different filings. Providing
that there is no plan document that says this is one huge plan, they can
disaggregate.
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Mr. Albert testified that his division just makes sure whatever should be
there is there. If there is supposed to be a statement or a footnote on
post-retirement, post-employment benefits, then it had better be there. And the
accountant's opinion had better be written correctly.
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If there is anything that suggests there is a problem with a plan, the
division would make a referral to the Office of Enforcement. And with the
welfare plans, there hadn't been all that many to have an audit.A lot of the focus in the division has been on pension plans, only because
with the new EFAST system, they have been enhancing the targeting practice and
the way they casework to take advantage of all of the technology that is
available.
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The division scans the footnotes of the financial statements for anything
that suggests there is a problem in the plan operationally that may or may not
be reflected in the 5500.
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The chief accountant has often spoken at conferences about the value of
looking at claim payments and that there could be an opportunity for fraud
because there are a lot of people and providers involved.
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Of the 88,000 plans that file, 11 percent reported having assets.
Approximately 90 percent of the health and welfare plans are not audited because
they don't have assets. There could be abuses in plans that don’t file Form
5500s or have audits such as cafeteria flex arrangements with employee
contributions.
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Summary of Testimony of Janice Wegesin
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Janice Wegesin is President of JMW Consulting, Inc. in Palatine, Illinois.
Her firm specializes in compliance work associated with qualified retirement
plans and welfare benefit arrangements. She is author of the Form 5500
Preparer's Manual and is a member of the American Society of Pension Actuaries.
Ms. Wegesin presented the views and experiences of ASPA members.
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Ms. Wegesin listed a number of problems that an employer faces. Sometimes,
employers do not know whether a given benefit program constitutes an ERISA plan,
nor do they know enough to ask that question. As a result, Form 5500 filings are
not prepared when needed.
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She gave examples from her professional experience. She stated that the
documents for the medical, dental, and life plans may consist solely of the
employee booklet issued by the insurance carrier. For some benefits, the only
document may be the information presented in the employee handbook.
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She stated that many tax form preparers do not have the skills necessary to
properly advise the plan sponsor about welfare plan reporting, so merely
continue to prepare only those Form 5500 filings that the sponsor has
historically filed. They follow the “SALY” (same as last year) principle. No
thought is given to changing circumstances and benefit structures and the impact
on Form 5500 reporting.
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She has found that an employer whose business begins to expand doesn't
realize that there is a Form 5500 filing requirement. Ms Wegesin did emphasize
that it is rare that employers are purposely avoiding filing Form 5500 for their
welfare plans.
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Ms. Wegesin described that bundled products offered by a single insurance
carrier 10 years ago required only a single Form 5500 filing. If the employer
subsequently added other benefits through a separate carrier, the employer may
have just expanded the reporting on the Form 5500 for the new benefit. If all
H&W benefits were unbundled in the past and are now offered by multiple
separate insurance carriers and perhaps operate on different policy years,
separate plans filings are required.
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In preparing for this hearing, ASPA members were surveyed, who are routinely
involved in Form 5500 preparation for welfare plans. It was unanimously agreed
that these types of filings should be eliminated if, in fact, it is shown that
none of the data being collected is being analyzed for any purpose.
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She stated that the insured welfare plan often presents data collection
problems. For example, one employer has a welfare plan that covers more than
41,000 employees nationwide. The plan is a combination of insured and unfunded
and attempted to collect approximately 160 Schedules A from the various
insurance carriers but could only account for 147 Schedules A.
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Ms. Wegesin spoke on the difficulties in securing Schedule A and noted that
DOL is aware of the problem from many discussions with ASPA that there is no
apparent enforcement of this rule. ASPA has been told by members that Schedule A
is not being sent to them automatically, that it takes multiple calls and
follow-up with the vendors to receive this information. And often, participant
counts or other data are missing or Schedule A information is forwarded to the
broker involved in the sale of the insurance.
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When discussing costs, the ASPA survey shows preparer costs for Form 5500
filings in those first two categories of unfunded or insured and unfunded
generally start at $500. Higher fees will be charged depending upon the
complexity of the arrangement and the number of Schedules A required to be
filed. The cost also depends on whether it is the responsibility of the employer
or the preparer to collect Schedule A data.
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Large plans requiring an audit have costs ranging from $8,000 to $50,000. One
accounting firm noted that their fees for health and welfare plans are three to
four times that of 401(k) plans and that fees have increased dramatically the
past several years. Additional costs result from the time attributable to
employees of the plan sponsor who are involved in compiling data or working
through the issues during the audit and the consulting costs that are associated
with developing actuarial benefit obligation information.
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She has seen that some accountants inappropriately produce a report for the
trust, rather than the plan, or do not reflect activity that may have occurred
outside of the trust. Many of the health plans under audit have activity that
does not flow through the tax-exempt trust, and a significant portion of audit
time is spent determining that activity and in most cases auditing it.
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Ms. Wegesin reports that she frequently sees companies use the VEBA trust as a
conduit for payments and collection of premiums, triggering an audit requirement
even though they maintain very little or no assets in the trust. In these
situations, she stated that the audit does not provide any value in protecting
participant contributions or benefits.
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Audits of medical plans necessitate auditor access to protected health
information, such as support for paid claims. Outside service providers require
the auditor and the plan sponsor to sign confidentiality agreements. In order to
comply with HIPAA provisions, plan sponsors also require the auditor to sign a
business associates agreement. Several different accounting firms reported that
it often takes months for the attorneys of the service provider, auditor, and
plan sponsor to agree on the wording of these agreements.
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She observes that outside service providers change frequently resulting in
the protocol established in one year not necessarily applying in the following
year. In addition, there is high turnover in staff at many of the outside
service providers, which adds time for the auditors and the plan sponsor.
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Many health and welfare plans have obligations associated with them, such as
the incurred but not reported (IBNR) claims or post-retirement benefit or
post-employment benefits. The financial accounting for these obligations is
required under SOP 01-2, but it is not consistent with the Form 5500 reporting.
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ASPA states that the utility of the audited financial statements is limited.
Unlike audited financial statements for defined contribution or defined benefit
pension plans, which provide important information on investment returns or
funding levels for benefits, decisions of health benefit elections involve
information that is not included in the statements, such as benefit coverages,
deductibles, preexisting condition limitations, et cetera. Neither participants
nor plan sponsors particularly care about the investment returns in the welfare
plan context.
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This litany of issues illustrates a variety of factors that should be
considered by the working group. One ASPA recommendation is to consider a lesser
reporting requirement and auditor scrutiny to welfare plans that are funded but
which really have no assets than to plans that maintain substantial assets and
push the funding limits under the Internal Revenue Code.
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ASPA members have noted that sponsors of self-insured plans generally assume
compliance with the regulations without any mechanism in place for monitoring
application of the employee contributions to paid claims. In short, employers
assume the plan is not funded for reporting purposes and that no audit is
required.
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The ASPA survey also netted multiple comments about the confusion surrounding
Form 5500 reporting for cafeteria plans. In notice 2002-24, IRS formally
suspended the filing of Schedule F for fringe benefit plans, including cafeteria
plans, educational assistance plans, and adoption assistance plans. However,
welfare features of cafeteria plans must still continue to be reported on Form
5500. Many people who read the notice understood it to say that Form 5500
filings for cafeteria plans were eliminated. Several years have now passed, and
employers and practitioners are starting to realize they may have read the
notice too broadly and are faced with a gap in Form 5500 filings.
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To make more efficient use of data time and other resources, ASPA requests
the following should be considered. The Form 5500 is primarily designed to
collect information about the activity of retirement plans. If specific data is
needed for analysis by the DOL, perhaps the creation of a Schedule W that
specifically captures welfare plan data would be more appropriate than filing a
square peg, the welfare plan, in a round hole, a retirement plan-oriented
filing.
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Data currently provided on multiple Schedules A could be condensed to a few
lines of summary data on “Schedule W”. And more pertinent questions could be
included, such as whether the coverage is in force and premiums are current or
if the application of employee contributions meets the requirements of the plan
asset regulations.
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Further, the Summary Annual Report (SAR) format should be reexamined in light
of participant concerns and consideration given to providing more useful data to
participants in both welfare benefit and retirement plans.
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Since welfare plans are more volatile in terms of plan design, Ms. Wegesin
stated that it is important to communicate meaningful information about the
state of the welfare plan to the participants, rather than a recitation of
global facts and figures that cannot be translated into significant information
for the individual.
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Regarding the DOL interest in seeking ways to promote electronic filing of
Form 5500, ASPA made recommendations on September 20th, 2002 submitted comments
in response to the RFC on the proposal dubbed EFAST-2. Part of the RFC presented
the possibility of billing capabilities for EFAST to accept Schedule A directly
from carriers. It is highly doubtful the direct filing of Schedule A is in any
way feasible. E-filing, however, is more attractive if simplified and
consolidated information streamlines the collection of data, shrinks the number
of filings required, and reduces the preparation time.
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Ms. Wegesin concluded by noting that it is important to collect the data
about welfare plans that enables the DOL to meet its obligation to protect plan
participants. It is also important to consider the differences between the
information needs and concerns of welfare plan participants and retirement plan
participants and to address those differences by providing them with truly
meaningful information.
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Summary of Testimony of Judy Bauserman
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Judy Bauserman is a senior consultant heading up the healthcare and group
benefits team at Mercer, human resource consultant in Washington. They have
about 35 legal professionals who assist Mercer's consultants and clients and
meet their health and welfare group benefit retirement and other human resource
objectives within the legal parameters. Mercer Consulting has more than 4500
employees, serving about 5,000 employers and other organizations.
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Ms. Bauserman’s comments focused on three broad areas: the mismatch between
the important features of health and welfare plans and the more pension-focused
information that is requested on the Form 5500; the administrative challenges in
gathering from insurers the data needed to be reported on the Schedule A; and
the value of the financial information and the auditors report that it's
required to be reported and included in the report for funded health and welfare
plans.
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Ms. Bauserman recommended that the DOL should consider creating a separate
schedule for the Form 5500 focused solely on health and welfare plans, revising
the Schedule A filing procedure considerably, and eliminating or limiting the
financial audit and financial information reporting for a large number of health
and welfare plans.
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The main challenge for health and welfare plans preparing the 5500 is that
the form has historically been focused primarily on pension plans, and the
instructions are focused on pension plan information, and it's difficult for
health and welfare plan sponsors to figure out what information the Department
is really seeking. For instance, for the participant count the instructions to
the form go into great detail about the kind of information that pension plans
need to report. But with respect to health and welfare plans they instruct the
user to go look at the regulations, whereas, there are about five paragraphs of
description for pension plans.
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In addition, there are pieces of information that are requested on the
Schedule H, which must be filed only for funded health and welfare plans, and,
as a result, only funded plans respond. But some of this information could be
useful for unfunded health and welfare plans. One example is a question on the
Schedule H that asks whether the employer, if the employer failed to transmit
participant contributions on a timely basis.
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And, similarly, the Schedule H asks about plan mergers, and that information
could be relevant to unfunded health and welfare plans. Employers often
consolidate several types of benefit programs under a single ERISA plan, and
they have historically had multiple separate ERISA plans and merged them
together. The department might like to know that. They stopped filing for the
plans that get merged in, and the Department only learns that if there was a
funded arrangement as part of the mix.
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Ms. Bauserman recommended that one way to resolve this might be to move some
of those questions off of the Schedule H onto the main 5500. Another way might
be to just create a separate schedule that would be focused solely on health and
welfare plans where the instructions might be a little bit more elaborate with
regard to the information requested and make it easier for the plan sponsors and
plan administrators to actually report the information.
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Ms. Bauserman further testified that another challenge for many health and
welfare plans is getting the information that they need from their insurance
carriers to report the required information on the Schedule A. The reporting
requirement necessitates attaching a Schedule A for each insurer that provides
coverage under the plan, and many plans have numerous insurers, and there are
some clients that have in excess of a hundred Schedule A's that must be attached
to their Form 5500.
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ERISA requires the insurers to provide the plan administrator with the
information required to be reported on the Schedule A and to certify its
accuracy within 120 days of the close of the plan year. It also requires the
plan administrators to attach the insurer's statement to the Form 5500. However,
the process doesn't really track what the statute seems to require. The Schedule
A does not include a place for the insurer to attest to the accuracy of the
information on the form and, in fact, the insurers typically don't actually
complete a form Schedule A and send it to their clients. Instead, they send the
information that they think the employer needs to report and using their own
format, sometimes including information that's not needed on the Schedule A but
perhaps was in the pre-1999 version and sometimes not reporting the information
that is needed. Some insurers do not meet the 120-day deadline and some, in
fact, never report the information to their clients at all.
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In addition, plan sponsors and administrators on the Form 5500 must attest to
the accuracy of the form and all of the schedules that are attached. However,
this is difficult if insurance companies don’t report accurately.
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Ms. Baurserman testified that one recommendation could be that if the insurer
fails to provide the Schedule A on a timely basis, the plan sponsor could simply
check that they have not attached it because they have not received it. But the
DOL would be aware that the insurer did provide benefits under the plan, and if
they wanted to pursue enforcement of the ERISA requirement, they would have the
information to be able to do that. And the Schedule A could then include a place
for the insurer to attest to the accuracy of the form and allow that
responsibility to lie with the insurer, where ERISA seems to place it.
Electronic filing of the schedule A could alleviate some of the issues.
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She also testified that plan sponsors and administrators face considerable
challenges in properly reporting financial information on a Schedule H and
getting an auditor's report to be able to attach it on a timely basis. Many of
these challenges result from the unique funding arrangements of health and
welfare plans, and the Department of Labor recognized these unique arrangements
when they created the non-enforcement policy providing relief from certain
reporting requirements, as well as the trust requirement in technical releases
88-1 and 92-01. And if the relief that that non-enforcement policy applies were
carried all the way through the reporting requirement to encompass also the
financial reporting and audit requirements, the process would be simplified
considerably and less costly for plan sponsors.
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However, in some cases, plan sponsors create a trust to hold some of the
funds associated with the plan for reasons completely unrelated to ERISA. There
may be trust holding part of the assets of the plan and other assets related to
the plan are not held in trust. Many auditors take the view that the entire
plan, not just the benefits being paid out of the trust, must be audited. And so
in these cases, the auditor is obligated to review not just the assets in the
trust but also the benefits that are provided outside the trust if they are part
of the same ERISA plan. And this broad scope of the audit makes the process more
complicated than it might be, for example, in the pension arena, where assets
that belong to the plan are all held in the trust, so all of the money flows to
one place, and the records that the auditors have to review are generally easier
to get at than when some of the money is in the trust and some if it is not.
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The financial information, from my perspective, that participants receive
from the Schedule A is of little value to them because, for welfare plans, the
benefits provided generally are not dependent upon the sufficiency of assets in
the trust. Instead, the benefits are defined by the terms of the plan, and the
employer is responsible for providing those benefits under the terms of the
plan, regardless of whether the trust exists or has sufficient assets to do so.
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ERISA gives the Department of Labor the authority to exempt any welfare plan
from all or part of the reporting and disclosure requirements in Title I. The
agency could exercise this authority to state that the non-enforcement of the
financial and audit reporting requirements contained in the non-enforcement
policy would extend to apply to all plans that otherwise would be eligible to
rely on the release, even if they have, in fact, established a trust to hold
some or all of the assets.
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Alternatively, the Department of Labor could narrow the financial and audit
reporting requirements to encompass only the components of the plan that are
funded by the trust. This would reduce the time and expense associated with the
broader scope audit that occurs now.
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Mercer's fees for assisting clients to prepare these forms and the associated
summary annual report vary considerably, depending upon the number of Schedule
A's to be attached and whether the plan must report financial information and
attach an auditor's report. An unfunded plan with very few Schedule A's, the
cost can be less than a thousand dollars, whereas we have one employer that has
18 different plans, some of which have in excess of a hundred Schedule A's and a
few of which have must report financial information and attach an auditor's
report. The fees in that case are in excess of $100,000, so there's a very broad
range of fees.
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In terms of timeliness of audits, this is an area where plan sponsors have a
lot of difficulty trying to get the auditor's report in time to file their Form
5500s. The audit process is quite difficult due to the broad range of
information that must be reviewed, and so it's hard on everybody involved, both
the plan sponsors and the auditors to gather all of the necessary information to
get access to all of the information in order to complete the reports. And so
this is often a reason employers have to file their forms late or are down to
the last day and frantically trying to get all of the information in.
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The HIPPA privacy rules have had an impact in the area of the plan audit. For
the auditors to perform their tasks, they must review certain health information
that is protected by the privacy rules in order to verify that the plan payments
are being used in accordance with the plan. The auditor signs a business
associate contract agreeing to protect the information but these contracts are
difficult to negotiate and sometime claims processors are still unwilling to
share protected health information with the auditors. The privacy rules have
made it difficult for auditors to perform health and welfare audits.
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Ms. Bauserman concluded that its not clear how the Department of Labor uses
much of the information that's collected on the Form 5500 for health and welfare
plans, and by revising the form to tailor it more to health and welfare plans,
they could enable their plan sponsors to focus their very limited resources on
providing benefits to participants and beneficiaries rather than on filling out
extensive forms that do not necessarily lead to any information of value for the
Department of Labor.
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Summary of Testimony of Peter Kelly
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Peter Kelly is the Chief Employee Benefits Counsel for Blue Cross Blue Shield
Association. Peter has recently gone in-house after 30 years in private
practice, and he's currently chair of the ABA Committee on Employee Benefits.
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Mr. Kelly testified that the Form 5500 is a process that takes an awfully lot
of activity on the part of many different people over a relatively lengthy
period of time. And where there are impediments in that process, each
impediment, since it appears to be a sequential process, is going to both slow
down the process and make it more expensive.
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Mr. Kelly further testified reporting standards are a serious and important
part of ERISA. ERISA is designed to ensure that there's some oversight, some
opportunity for plan participants and the independent auditors who are their
representatives in financial matters to have reliable and timely information
about the financial affairs of the plan. It's a serious obligation.
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That obligation has a subset that runs directly to the insurer. There is, in
Section 103, direct obligation on insurers to provide certain information.
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Mr. Kelly testified that there was a disconnect between what has evolved in
the compensation practices for brokers and agents and what's required by
Schedule A. A single Schedule A can get quite difficult. If you go through the
interpretations that have come from the Department and you read carefully
through the rules and instructions, it's pretty clear that each and every agent
or fee recipient from the insurer has to be individually listed.
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What essentially happens at that very earliest stage of this process, where
you need quick turnaround of 120 days, an insurer has to aggregate all these
different service arrangements that arguably fall within this bucket they have
to report on Schedule A, and they have to aggregate them all and then somehow
disaggregate them all among the different accounts. The slicing and dicing
problem becomes extremely difficult.
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Mr. Kelly suggested that where there is a clear and direct connection to the
particular plan, what Schedule A now requires should be done, which is an
individual, single listing of that broker or agent. But there should be a way
where it's possible within the 120 days to come up with a group listing with
some kind of a bottom-line allocation to the plan, as opposed to an
item-by-item, line-by-line slicing and dicing of the various services.
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You get into all kinds of problems in terms of the fee arrangements and the
compensation arrangements that are made with brokers and agents in a modern
context where they don't relate to a particular employer plan. They may relate
to a group or a line of business, they may not relate to a group or line of
business. The service they may provide may cross many lines, and it creates a
problem in allocating to individual plans.
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There may be contracted service providers who are not providing original
placement brokerage or retention brokerage. They're not doing brokerage at all.
They're doing something that, traditionally, the insurer has done with its own
employees, or they're doing some special purpose support to the insurers
activities that really is kind of a core insuring function that one always
thinks of as something that's provided for the premium, in return for the
premium. And they don't quite fit under the general agent category. In some
states, that category really isn't even used in the health context at all. So
that exception doesn't apply in some states because you don't have a general
agent for health coverage. It's for other property and casualty.
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Mr. Kelly said that getting the stakeholders in the room in a negotiated
rulemaking for a re-design of the 5500 makes a lot of sense. Similar examples
include the reportable events negotiating rulemaking over at the PBGC was a
classic example of reporting that benefited from this; the MEWA rulemaking; the
qualified child support order rulemaking that took place here within the
Department are examples where that worked. This may be a good example where
negotiated rulemaking can see if there's some way to be true to the statutory
requirement of disclosure, to be transparent.
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Mr. Kelly concluded that reporting is an important part of
ERISA, and we
should preserve that. But we should do it in a way where we don't frustrate each
other or make it difficult for one another.
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Summary of Testimony of Jeffrey Capwell
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Jeffrey is a partner with the law firm of McGuire Woods and leads the
employee benefits practice for the firm's Charlotte, North Carolina, office.
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Mr. Capwell testified that he noticed a number of recurring difficulties
which sponsors and plan administrators face in understanding and meeting their
reporting responsibilities. These difficulties arise from the current structure
of the Department of Labor's annual reporting requirements for welfare plans and
from certain specific information requirements contained on Form 5500 and its
related schedules.
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Mr. Capwell said that the issues with respect to plan reporting fall into two
general categories. The first category relates to the general structure of the
department's reporting regime for welfare plans as set forth in Subparts C, D,
and E, of the department's rules and regulations for reporting and disclosure
under ERISA. These issues concern the extent and scope of the reporting
obligations imposed on plans by those regulations. The second category of issues
are those created by the specific requirements of the form itself. The specific
requirements of the form and the manner in which the form is structured present
certain difficulties and burdens for plan sponsors and administrators that, in
my opinion, should be considered and addressed.
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First, problems with the annual reporting requirements. The first category
here is annual reporting for uninsured non-contributory welfare plans. Many plan
sponsors and administrators are unaware that annual reporting may be required
for an uninsured and non-contributory welfare plan.
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Confusion about filing and concerns with its usefulness is also caused by the
fact that there is very little information relating to such plans, and because
the information that is provided on the form typically does not change from year
to year. Finally, the Internal Revenue Service's decision in 2002 to abandon
reporting for fringe benefit plans has lulled some sponsors and plan
administrators into an erroneous belief that uninsured non-contributory
arrangements are exempt from all annual reporting requirements.
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The second issue is one concerning combined plan filings. A common question
among sponsors and administrators is whether multiple welfare plans can be
reported on a single annual report. Prior to 2002, many advisors counseled
clients that all of the welfare plans that provided substantive benefits under
an Internal Revenue Code Section 125 cafeteria plan could be reported on a
single report because the plans had a common relationship. They were all funded,
and related to, and could provide benefits under that plan, and because
information covering a cafeteria plan was otherwise required to be provided on
the form, specifically Schedule F as then in use. This approach provided little
comfort, however, with respect to plans for which there was no common
relationship. Although there was anecdotal evidence that the department would
allow multiple welfare plans to be reported on a single report, there's
apparently no official statement of this position in any published guidance, and
many advisors question whether such an approach is permissible. As a result,
many sponsors have taken steps to create a plan document for the sole purpose of
unifying the reporting of their welfare plans. These plans, which are typically
referred to "wrap" plan documents, are generally nothing more than a
shell document which incorporates by reference the plan documents for the plans
that provide the substantive welfare benefits. While wrap documents may serve
the purpose of combining plan documents into a single place and thus facilitate
plan administration, they are for practical purposes merely a device to
facilitate a single Form 5500 filing. Employers who do not have sophisticated
advisors are generally unaware of this plan-drafting technique and file separate
reports for each one of their welfare plans. This process generally takes longer
than the preparation of a single report, and can lead to more errors and
omissions in the preparation process.
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Completing Schedule A continues to be one of the most nettlesome issues in
annual reporting for welfare plans. Despite the official estimate that the
schedule should take approximately two hours to complete for a small plan and
eight hours to complete for a large plan, plan administrators may spend
significantly greater amounts of time in attempting to obtain the information
necessary to complete the form. The problem lies in the fact that the
information requested on the form is not readily available to the plan
administrator, but must be requested from insurance carriers and then
transcribed onto the schedule. Although some carriers are diligent about
providing this information to their customers, others are slow, and a smaller
number are uncooperative. Information that is received is sometimes incomplete,
thus requiring successive attempts to follow up with carriers for the missing
information. In addition, the plan sponsor or plan administrator sometimes may
inadvertently transcribe erroneous information from the carrier onto the
schedule. Finally, the instructions to the form provide no guidance to plan
administrators of what they should do if they are unable to obtain from a
carrier all the information requested on the form with respect to a policy.
Instead, the instructions indicate that any refusal by a carrier to provide
information should be noted. There are many circumstances in which all of the
information cannot be provided because of a reason other than a refusal by a
carrier to provide such information, such as the delivery of only partial
information, or the inability to locate persons with a carrier who are capable
of responding to inquiries regarding Schedule A.
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Second issue on Schedule A deals with a confusion over covered contracts.
Administrators and sponsors of self-insured health benefit plans are frequently
confused about whether information relating to a stop-loss policy should be
reported on the form. Although the instructions on the form attempt to clarify
the issue by noting that only those stop-loss policies which are assets of the
plan must be reported -- that's specifically in the instructions for Line 7 of
Schedule A -- plan sponsors and administrators routinely misunderstand this rule
and provide information about such policies where none is technically required
under the schedule.
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Third item, Form 5500 itself, the questions regarding covered participants.
Sponsors and administrators of welfare plans are frequently confused by the
instructions for completing the questions regarding number of participants. See
Page 16 of the 2003 instructions. The instructions to the form, which reflect a
general bias toward reporting of pension benefit plan information, provide
little guidance on how these questions should be answered for welfare plans. For
example, Line 7(c) of the form regarding retired or separated participants
entitled to future benefits seems to have little relevance to a welfare plan,
and frequently generates confusion and questions from those who complete the
form.
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In addition, Mr. Capwell noted the following list of recommendations for the
Working Group to consider.
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Consider expanding the filing exemption for uninsured non-contributory
welfare plans.
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Consider whether the exemption for small plans should be limited to plans
with less than 100 participants
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Consider providing formal guidance on reporting multiple welfare plans on
a single Form 5500. The department should indicate when and under what
circumstances multiple welfare plans can be filed on a single report.
Specifically, the department should consider formalizing its position on this
issue in guidance that would generally be available to plan sponsors and
administrators. For example, it may be appropriate for such guidance to be added
in some fashion to the instructions to Form 5500.
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Consider requiring direct reporting by carriers of information requested
on Schedule A
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Consider revising the following questions on the Form 5500 itself:
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Clarify questions and instructions relating to “stop-loss policies”
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Clarify questions and instructions relating to “number of participants”
questions on Form 5500 as they relate to health and welfare plans. This is Line
6 and 7 specifically of the main 5500 form.
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Summary of Testimony of Phyllis Borzi
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Phyllis Borzi is a Research Professor in the Department of Health Policy in
the School of Public Health and Health Services at the George Washington
University Medical Center. She is also an attorney with O’Donoghue & O’Donoghue,
LLP, in Washington, DC. However, Ms. Borzi addressed the Working Group as an
individual with extensive experience with ERISA and its reporting and disclosure
requirements and with group health plans and health care issues, and as a health
care consumer.
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Consistent with other witnesses, Ms. Borzi testified that the current Form
5500 requirements for health and welfare plans are useless and provide no useful
information to plan participants, plan sponsors, consultants, advisors, or the
Department of Labor, even though studies show employees view group health care
as the most important benefit an employer can offer its employees. However, in
contrast to other witnesses, Ms. Borzi recommended that the Form 5500 reporting
requirements for health and welfare plans not be reduced or eliminated, but
rather that the Working Group take a closer look at what information might be
valuable and would make the Form 5500 useful.
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Ms. Borzi stated that, as long as employer-sponsored health plans comprise
the network through which a majority of people get their health care coverage,
it is important to plan sponsors, workers and retirees and their families,
policymakers, the Department and other federal agencies, and academics and
researchers to have important information about these plans, including:
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number and types of plans offered;
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plan structure (including benefit design features such as covered
benefits, co-insurance, cost sharing features);
-
who is responsible for paying claims (i.e., is the plan fully insured,
self-insured, or both, and with or without stop loss or other reinsurance);
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financing methods; and
-
solvency protections.
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This information would assist the Department with its responsibility to make
sure that benefits promised are actually provided. This information would also
be useful to participants in understanding what their plan benefits are and
whether they are going to receive the benefits that have been promised. This
information is not currently on the Form 5500 and portions of it are not
currently required to be disclosed in the plan’s summary plan description.
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Ms. Borzi made three specific recommendations. First, all health and welfare
plans should be required to annually file at least a simple report with the
Department providing basic information about:
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the plan sponsor (e.g., industry, location);
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employee information (e.g., number of full-time employees and part-time
employees);
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participant information (e.g., number of active participants and retiree
participants);
-
benefit information (e.g., the types of benefits provided); and
-
funding method for each benefit (e.g., fully insured and name of insurer,
self-insured and with or without stop loss or other reinsurance, assets held in
a trust, or any combination of these).
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Because of regulatory exemptions, Form 5500 is currently only required to be
filed by welfare plans with more than 100 participants. As a result, the
Department does not even know how many of these plans exist. An annual filing
requirement for all plans will assist the Department in understanding the
universe of plans and enable policymakers to evaluate legislative and regulatory
proposals using actual plan data.
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In addition, Ms. Borzi testified that an annual filing by all welfare plans
will assist the Department in its enforcement activities. Specifically, Ms.
Borzi stated that she has observed a disconnect in the marketplace between the
ERISA-compliant insured products employers think they are buying and the
insurance product the insurance carriers are selling. The most obvious
shortfalls are in the areas of summary plan descriptions and fiduciary
responsibility.
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The brochures, booklets, and certificates provided by insurance carriers
rarely include all of the information required by the Labor Regulations to meet
the requirements for summary plan descriptions, including the statement of ERISA
rights. However, employers are not aware of this deficiency. Similarly,
insurance carriers generally only accept fiduciary responsibility for making
claims decisions. The employer retains all other fiduciary responsibility and
plan administrator responsibilities, even if the employer is unaware of this.
The Department cannot effectively assist these employers with complying with the
applicable ERISA requirements because the Department doesn’t know these plans
exist in the absence of an annual reporting requirement.
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Ms. Borzi’s second recommendation is to redesign the Form 5500 used by
welfare plans to focus the information on the plan sponsor and the plan itself.
The revised Form 5500 should require the plan sponsor to disclose:
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the benefit choices available to participants;
-
the participants to whom benefits are offered;
-
the plan’s eligibility requirements;
-
whether the same options offered to all employees;
-
the specific options available to different groups of employees;
-
the number of employees in each type of plan; and
-
the types of covered benefits offered (perhaps in a checklist form).
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Additional questions regarding the funding of benefits should also be
included, some of which are already on the existing Form 5500.
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Finally, Ms. Borzi’s third recommendation is for the Department to
establish a regular procedure or working group that monitors the reporting and
disclosure requirements imposed on ERISA plans by other federal agencies and
coordinate those requirements wherever possible. For example, an employer who
wants to apply for the subsidy available under the Medicare Part D prescription
drug benefit must submit an annual certification describing the employer’s
retiree prescription drug benefit. Schedule B of Form 5500 could be revised to
provide a uniform reporting requirement that discloses plan benefit information
for participants and satisfies the Medicare Part D certification requirement.
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Ms. Borzi noted that the biggest challenge to revising Form 5500 is balancing
the need to collect information that is user-friendly to participants and other
end users with the burdens imposed on plan sponsors in filling out form. Ms.
Borzi suggested that separate schedules for the Form 5500 could be designed that
would be required to completed by a plan’s various third-party service
providers, including administrators and insurers, instead of by the plan
sponsor. Both plan sponsors and service providers would incur start-up costs
associated with reporting on a revised Form 5500.
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If all welfare benefit plans are required to file a revised Form 5500 on an
annual basis, the Department could compile more comprehensive and accurate data
on these plans. Currently the only available data on these plans is based on
information only gathered by researchers from entities that provide it on a
voluntary basis. Employers may be interested in cumulative or summary
information that the Department could compile from revised Form 5500, to gain a
better understanding of the benefit marketplace. To that end, Ms. Borzi
suggested that information compiled by the Department from the revised Forms
5500 should be made available to the public.
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Summary of Testimony of John J. Canary
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Joe Canary is in the Office of Regulations and
Interpretations, Division of Coverage, Reporting and Disclosure, EBSA, U.S.
Department of Labor.
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The Employee Benefits Security Administration is
responsible for advisory opinions, developing regulations, and provides
other guidance on coverage reporting and disclosure under ERISA.
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The Division of Coverage, Reporting and Disclosure is
responsible for interpretive and regulatory matters relating to coverage,
5500 reporting, disclosure, suspension of benefits, claims procedures,
multiple employer welfare arrangements, COBRA, and other provisions in Parts
1, 2, 5, and 6 of Title I of ERISA.
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Under Part 1 of Title I of ERISA, administrators of
pension and welfare benefit plans subject to Title I are required to file
reports annually concerning among other things their financial condition,
investments in operations of the employee benefit plan. ERISA Section 101
sets forth the general reporting requirement. Section 103, which I'll talk
about in a little bit more detail, contains the content requirements for the
annual report, and Section 104 describes the timing and manner of filing
requirements.
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Section 103 of ERISA lists the following. As required
contents of an annual report of a welfare plan. The section speaks both to
pension and welfare plans, and these provisions are the ones that really
address the required contents of an annual report for a welfare plan. First,
there has to be financial statements and supplemental schedules. The
financial statements include the asset and liabilities, income and expenses,
and related financial information. The supplemental schedules focus on
particular subjects like party in interest transactions, loans, fixed income
obligations, and leases in default or determined to be uncollectible, and
reportable transactions, which reportable generally is based on the amount
or percentage of plan assets involved in a transaction or series of
transactions. Right now that threshold is at about five percent.
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The second part is a report and opinion of an independent
qualified public accountant. The accountant's report requirements are really
governed by GAAS, Generally Accepted Auditing Standards, and GAAP, Generally
Accepted Accounting Principles. The statute specifically requires that the
opinion include notes that focus on the description of the plan, major
changes to the plan, material leased and other commitments, contingent
liabilities, tax status of the arrangements, and other matters. The third is
information on the number of employees covered by the plan, the name and
address of plan fiduciaries, information on service providers who received
compensation from the plan during the reporting year, and explanation of any
reason for the change in appointment of trustees, administrators,
accountants, insurance carriers and certain other listed service providers,
information regarding insurance contract used to provide plan benefits,
including information on fees and other commissions associated with those
insurance contracts. And then a catch-all item, which is other financial and
actuarial information the department may find necessary or appropriate.
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In addition to setting forth the content requirements,
the statute also provides the Department of Labor with authority to issue
regulations exempting welfare plans from some or all of the annual reporting
requirements, as well as creating simplified methods of reporting for small
plans.
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In the case of welfare plans, that authority is in
Section 104(a)(3) of ERISA, which authorizes the department to issue
regulations establishing exemptions and simplified reporting. Those
exemptions and simplified reporting requirements require that they make a
finding that the otherwise applicable statutory reporting requirement is
inappropriate as applied to welfare benefit plans. Section 505 of ERISA also
gives the department general authority to issue regulations necessary and
appropriate to carry out ERISA's provisions.
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The department has exercised the authority in the statute
to grant exemptions from the annual reporting requirements for various
classes of welfare plans. Those exemptions are codified in the Code of
Federal Regulations at Title XXIX starting at Sections 2520.104-2, and
following.
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The Form 5500 was developed by the Department of Labor as
a mechanism whereby plans could satisfy their annual reporting requirements,
meeting the conditions of the exemptions. The form is developed jointly with
the IRS and the PBGC. The objective was to simplify the annual reporting
process by allowing one form to be used by plan administrators to meet their
annual reporting obligations under Title I of ERISA for the DOL, under Title
IV of ERISA for the PBGC, and under the Internal Revenue Code for the IRS.
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The Form 5500 series has thus become a primary source of
information concerning the operation, funding, assets, and investments of
pension plans, as well as a source of information for other employee benefit
plans in the welfare plan area with a significant group of that population
being either exempt from the annual reporting requirement, or being eligible
for limited exemptions from the audit and financial reporting requirements.
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The form is also a compliance and research tool for the
department. It's a source of information and data used by other federal
agencies, Congress, and the private sector in assessing employee benefit
plan issues and trends. The current form, which is largely unchanged since
the 1999 plan year form, includes a basic document which they refer to as
the Form 5500 itself, and 12 schedules focused on particular subjects or
filing requirements.
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Changes to the Form 5500 or our reporting regulations
generally require that they engage in what is called a rulemaking. The
provisions of the Administrative Procedure Act, the APA, are the central
provisions governing federal agency rulemaking. Congress has enacted other
specific administrative law statutes with mandated rulemaking and other
procedures that supplement the APA's procedures. The Department of Labor has
its own internal clearance procedures that are used to manage the agency's
regulatory agenda. These various procedural and rulemaking requirements are
designed to improve the quality of agency decision-making and to further
policy goals set forth in the federal statutes. One of the overarching
themes of those various statutes is getting public input and public comments
on agency-proposed rules and rulemakings as a way of making sure that they
have considered impacts on the regulated community as they are making
decisions on implementing and modifying regulations.
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There typically is a catalyst or some reason to start the
process of considering a change to the Form 5500. That can take a variety of
different forms. In some cases it's a statutory requirement that they are
required to either change the form itself or are required to collect
information. And the 5500 is then considered as a vehicle to meet that
statutory requirement. Other things can be reports and recommendations from
groups like the ERISA Advisory Council, the General Accounting Office, or
other sources that may recommend changes or modifications to the Form 5500.
EBSA also does its own annual review of the Form 5500 as part of the process
where they republish the form and the instructions every year. They do get
public input throughout the course of the year with people either asking
questions about the form, or suggesting areas where they can improve the
instructions. And those are taken into account as part of this annual
process of reevaluating the form. So those would be examples of catalysts.
And there could be a variety of others.
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After something, an initiating event where they are now
in the process of considering a change to the 5500 or our regs, the second
step is obviously our development internally of the proposed change and
deciding on the form of rulemaking that will be used. The normal rulemaking
approach is through what's called a Notice of Proposed Rulemaking.
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So the third step would be to go through our approval
process at the department level, and also through the Office of Management
and Budget.
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After they go through the process of submitting and
getting clearance from the department and OMB, the fourth step would be
publishing the proposed change in the Federal Register for public comment.
After they publish and solicit public comments, the next step is then to
evaluate and review the public data, comments, and arguments that are
submitted in response to that solicitation and go through the clearance
process.
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The next step would then be to publish that change in the
Federal Register as a final rule or a final change to the Form 5500. As part
of that process, they have to be sensitive to the disruption to plans and
various service providers involved in data collection and preparation of the
form.
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The process to change the Form 5500 can take anywhere
from 12 to 24 months depending on the nature of the changes. There may be
circumstances where the department goes through a more expedited process
like Interim Final Rulemaking.
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If they are changing an element of the form which is
really a three-agency or two-agency form, the other agencies may have to go
through their own administrative process to make that change.
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Another element which is very important is the E-FAST
processing system. It's a computerized system where a private contractor is
the agent of the agencies that receives and processes the form. When the
department consider changes to the form, they have to consider that
processing system and make sure that whatever changes they would adopt to
the form, that computerized processing system then is modified if necessary
and is really ready and able to deal with those form changes when they start
to be filed by the public. E-FAST needs adequate time to adjust to changes.
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The department does an annual review of the form for both
welfare and pension plans. The last two major revisions to the Form 5500
occurred in 1999. That was a multi-year exercise that the agencies went
through that culminated in those publications in late 1999 and early 2000 of
the final form changes and the final reg changes. Prior to that, the 1988
forms were the major revision of the forms that occurred, and again there
was a multi-year process in advance of those form changes being finalized in
1988.
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The objective of the health and welfare Form 5500 has
multiple purposes that it's designed to serve as described in Title I of
ERISA. One is information collection, where that information is collected
for enforcement purposes, research purposes, and public disclosure purposes.
The Form 5500 as an annual report also serves a discipline in terms of plan
management where as part of the statute the plan administrators and other
parties involved then are required at least annually to prepare this report
and do the work that would be necessary to prepare the report, which imposes
sort of an annual discipline to manage the plan, keep the plan's data, and
be able to put that into an annual report. Plans that are subject to the
audit requirement are also part of that discipline that the annual report
serves. The audit requirement serves as a way of trying to make sure that
the data that is filed with us on the form is reliable such that the
agencies that use the data for enforcement, disclosure, or research purposes
can put some faith in the fact that the data that they have there is data
they can rely upon as being accurate.
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Health and welfare plan exemptions were originally
created to the extent that the information collection wasn’t relevant. The
status focused on plan assets and financial transactions. For example, an
unfunded or insured program is not going to have plan assets with an
investment pool. The statute seems to focus on plan assets, financial
transactions.
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There was some thinking that went into the burden
associated with filing the information for small employers versus large
employers, and that the relative burden on the larger plan of making that
filing is probably much smaller. And the value of having a report that at
least identifies the plan as being in existence, and gives us some basic
information was seen as worthwhile as compared to the relative burden on
what would be a not small business filing a Form 5500 where you may expect
that once you reach that size, they are going to have other sorts of filing
obligations, and this is really not going to be terribly burdensome.
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The department used negotiated rulemaking as part of our
MEWA regulation dealing with the definition of what would be a plan
maintained pursuant to collective bargaining for purposes of certain
preemptory provisions in the statute. There are some issues in negotiated
rulemaking whether a particular subject matter is appropriate for negotiated
rulemaking.
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After 1988, the DOL would periodically look at the issue
of is the 100 life standard the appropriate one. But I don't think there's
been a move at this point to shift away from that.
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Summary of Testimony of Alice Wunderlich
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Ms. Alice Wunderlich is a member of the Employee Benefit Plans Expert Panel
at the American Institute of Certified Public Accountants and is Deloitte &
Touche's national employee benefit plan industry professional practice director,
serving as the firm's national accounting and auditing technical resource for
employee benefit plans.
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She stated that central to the accounting profession's mission is to help
ensure meaningful financial reporting to protect ERISA plan participants, the
investing public, and other financial statement users. In doing so, she
considers that it is important to consider the financial information needs of
the various users of the plan financial statements, and also to evaluate the
effort and the cost to the plans in preparing the financial statements. The
benefits to financial statement users should outweigh the administration burden
of the plan financial reporting.
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She distinguished between two types of health and welfare plans under Title I
of ERISA: defined benefit and defined contribution. An example of a defined
benefit health and welfare plan is a medical plan where the benefit to be
provided is defined as certain medical procedures or care as covered by the
plan. A defined contribution plan is one where the contribution amount for
funding an individual participant account is defined, and the benefits are
limited to the available funds in that participant's account.
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She stated that there is no requirement for health and welfare plans to be
funded, nor establish a trust. A company may choose to pay health benefits on a
pay-as-you-go basis directly from the general assets of the corporation in which
case the plan is considered to be unfunded.
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Speaking briefly about multi-employer plans, she stated that funded
multi-employer plans, sometimes referred to as union plans, exist where more
than one employer is required to contribute to the plan pursuant to one or more
collective bargaining agreements. In multi-employer plans, the plan financial
statements indicate the plan's ability to provide benefits to participants.
Payments of current and future benefits depend on the amount of the plan's net
assets and obligation. As such, Ms. Wunderlich believes that the financial
statements of multi-employer plans provide values to users of those financial
statements.
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She described how, often, both participants and the corporate sponsors
contribute to the plan. Set dollar amounts are withheld from the participant's
paycheck for employee/dependent coverage. This withholding plus the sponsor
contributions are used to purchase insurance coverage or otherwise to pay
benefits and to fund any shortfall.
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She stated that the plan's financial statements may not necessarily be an
indication of the future probability of a participant's getting benefits because
the corporate funds the plan shortfall. The plan's financial statements may well
show a deficit funding position when in fact it is a financially healthy plan.
Since the ultimate obligation to pay benefits rests with the corporate plan
sponsor, it's the financial health of the plan sponsor, not the funded status of
the plan itself that determines the likelihood of participants receiving
benefits they were promised. The financial statements, while reflecting plan
assets and liabilities in contributions made by the plan sponsor and employees,
may not be fully meaningful in assessing whether the plan has the ability to pay
current and future benefits.
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She mentioned that for some single employer health and welfare plans, several
different plans are used to provide different benefits to employees. While each
plan has its own separate ERISA reporting requirement, at least those that are
funded, employees may view their health and welfare benefits as all part of the
same package, even though they may in fact be participating in many different
health and welfare plans.
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In contrast, she stated that this disaggregating arrangement is rare for a
401(k) plan or a pension plan, where typically an employee would participate in
only one 401(k) plan, or only one pension plan.
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She stated that there is a disconnect between those financial statements and
the Form 5500 reporting. Many health and welfare plans have obligations, such as
incurred but not reported claims (IBNR), post retirement benefits, and post
employment benefits, that are required by GAAP to be reported on the audited
financial statements but are not reported on the 5500. Consequently, there are
often numerous and substantial dollar differences between the amounts reported
on the 5500 submitted to the department and the audited financial statements
that accompany the Form 5500. The auditor frequently spends significant time
auditing this GAAP obligation information that is neither reported to the
department on the Form 5500 nor in most cases funded by the plan sponsor through
the trust at the reporting date.As a recommendation, she stated that the DOL may wish to consider whether
this additional GAAP information would be useful on the Form 5500, or for other
department reporting purposes.
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She observed that the information in the financial statements is not
available from a single source because all of the plan's activity does not flow
through the trust, nor are all of the plan's transactions accumulated in a
single place such as a general ledger. The plan's financial statements are
typically prepared once a year, only for ERISA reporting purposes, and to her
knowledge are not routinely used for other purposes.
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Because the financial statements are complex and there is generally a lack of
readily available information, and the preparation requires significant
accounting knowledge, the auditor is often relied on to prepare the financial
statements. Even when the plan sponsor drafts the statements, in many cases the
auditor spends a lot of time helping him in that process.
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Regarding costs, Ms. Wunderlich explained that plan sponsors incur two types
of cost in relation to the audit of their health and welfare plans: internal
costs and then the fees that they pay to their external auditors. Internal
costs, including time spent gathering and organizing information needed to
prepare the financial statements and time associated with the administration of
an audit can be quite high. Fees have dramatically increased over the past
several years because of changes in the health care system delivery and payment
systems, and the impact of HIPAA. Factors affecting the audit fee include the
size of the plan, the number of participants, the types of benefits offered in
the plan, the number of outside service providers, quality of plan
record-keeper, and the plan sponsor's ability to prepare the financial
statements.
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The HIPAA regulations have significantly affected the audit of health and
welfare plan financial statements in several ways. In most audits of health and
welfare medical plans, it's necessary for the auditor to access protected health
information, such as information regarding claim payments. A significant amount
of administrative time, as much as 30 percent of the total audit hours incurred,
can be spent obtaining legal documentation that permits access to health care
claim data.
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AICPA encourages the EBSA to evaluate whether the current financial reporting
and audit requirements for single employer defined benefit health and welfare
plans cost effectively meets the needs of the department participant protection
and the needs of other potential users of plan financial statements.
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AICPA also encourages consideration to be given to alternative types of
independent audit assurances that could provide for more cost effective
protection to plan participants and provide the department with the information
that it needs.
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Regarding VEBA trusts, Ms. Wunderlich stated that the existence of a VEBA
trust triggers audits for H&W plans. So a VEBA trust may be structured as
having many different plans that are providing different benefits (medical
benefits, dental benefits, long-term disability, short-term disability,
vacation) in some way using this VEBA trust, but most of the payments are coming
directly from the corporate sponsor. The use of that VEBA in any way, even for
one day, putting any money into it triggers an audit requirement for each of
those six plans.
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Ms. Wunderlich stated that she often suggests to clients that they evaluate
what they're using a VEBA trust for, suggesting that they make it inactive if
appropriate. She’s found that clients many times are very reluctant to close
down those trusts because of the effort it takes to establish trusts. And if
administrators of the plans don't have a very good understanding of why the VEBA
exists, it prevents many of the clients from discontinuing use of those trusts
and incurring an audit requirement.
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She stated that there is always a struggle with the definition of “plan.”
She believes that it's unclear if there is a plan document, exactly what
benefits it covers, and what benefits are covered by another plan. Sometimes if
it's been misinterpreted, it causes the auditor to have to restate prior year
financial statements, which is a costly thing to do.
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She stated that it would seem to make a lot of sense for the DOL to take a
fresh look and understand what is meaningful to the participants in the plans
and the other stakeholders in the process, and develop a reporting based on that
information. And if any of that information -- they believe that it requires
some sort of verification, then design some directed procedures at verifying the
information that they believe is important. She agreed with other witnesses in
recommending a full revamp or reevaluation of all of the information in the 5500
and the audited financial statements as to whether they are useful to
participants and they help protect their benefits and rights.
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August 3, 2004 Meeting
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Agenda
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Working Group Statement of Description and Goals, List of Witness
Questions
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Official Transcript
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Statement by Janice M. Wegesin, JMW Consulting Inc., Palatine, IL
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September 22, 2004 Meeting
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Agenda
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Official Transcript
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Statement by Judy Bauserman, Mercer Human Resource Consulting
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Statement by Peter Kelly, Chief Employee Benefit Consultant, Blue Cross
Blue Shield Association
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Statement by Jeffrey Capwell, McGuire Woods LLP
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Statement by Phyllis Borzi, Research Professor, School of Public Health
and Health Services, George Washington University Medical Center
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Statement by Alice A. Wunderlich, AICPA and Audit Director, Deloitte &
Touche LLP, Assurance and Advisory Services
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October 29, 2004 Conference Call
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November 9, 2004 Meeting
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Agenda
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Official Transcript
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November 10, 2004 Presentation
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PowerPoint Slides
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Official Transcript
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Transcripts for the Council's full meetings and working group sessions are availabe at a cost through the Department of Labor's contracted court reporting service, which is Neal R. Gross and Co., Inc. 1323 Rhode Island Avenue, NW, Washington, DC 20005-3701 at 202.234.4433 or www.nealgross.com.
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- Michele M. Weldon, Chair
- Charles J. Clark, Vice Chair
- David L. Wray, ex-officio, Chair of the ERISA Advisory Council
- R. Todd Gardenhire, ex-officio, Vice-Chair of the ERISA Advisory Council
- C. Mark Bongard
- Lynn L. Franzoi
- Neil Gladstein
- Dana Muir
- Thomas C. Nyhan
- Antoinette Pilzner
- John J. Szczur
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