Benefits of Using a Wrap Plan By: John Wirtshafter
If an employee walked into the human resources department of your company and asked for a copy of your company’s dental plan or for a copy of the medical plan’s summary plan description, would you be able to provide her with one?  What if you received an audit letter from the Department of Labor asking you for copies of your plan documents and summary plan descriptions for your company’s medical, dental, vision, group life or other plans?  Would you be able to provide the necessary documents?  When I ask companies these types of questions, too often the answer is “no” or “I’m not sure.”  If any of this potentially applies to your company, you should consider using a Wrap Plan.

Now, it’s possible a few of you reading this article are anticipating it will provide you with helpful tips on gift giving for the coming holiday season.  If so, I’m sorry to disappoint you.  A Wrap Plan is a document/strategy that companies can use to better ensure they’re in compliance with the Employee Retirement Income Security Act of 1974 (ERISA) and to reduce their potential exposure relating to, and costs involved in, the administration of the various health and welfare benefit plans they provide to their employees.  As such, for those who can take advantage of a Wrap Plan, I suppose it could be considered a gift. 

What is a Wrap Plan?

For the most part, and with few exceptions, employer-sponsored medical, dental, vision, prescription drug, accidental death and dismemberment, cafeteria, employee assistance programs, short-term and long-term disability insurance, group term life insurance, and certain other employee welfare benefits are covered under ERISA as “employee welfare benefit plans.”  With respect to each employee welfare benefit plan, in addition to certain claims procedures, governance rules and fiduciary and administrative responsibilities, ERISA imposes reporting and disclosure obligations on the employer that sponsors such plan.  

These requirements include the obligation to have a written plan document specifying the terms of the program and containing certain required language and provisions; the requirement, unless otherwise exempted, to file annual returns with the IRS; and the obligation to provide participants and beneficiaries in such plan with a “summary plan description,” again containing certain specified information and provisions and explaining the significant terms of the plan in generally understandable language.  

ERISA also provides certain uniform rules and protections employers can implement and rely upon to help them in the administration of such plans to their benefit.  These requirements are complicated, and the simple fact is many employee welfare benefit plans, particularly those sponsored by smaller or middle market companies, are not in full compliance with the requirements imposed under ERISA.

Unfortunately, many employers don’t create individual plan documents and summary plan descriptions for each of their employee welfare benefit plans.  Instead, they rely upon pamphlets or booklets created by their insurance company or benefit provider describing the various terms of the program, or they treat the actual insurance contract as the plan’s document and summary plan description.  These insurance and service provider documents are generally drafted to protect the interests of the insurance company and/or benefits provider.  However, they often don’t provide the company with the maximum amount of flexibility to administer the program afforded under ERISA and rarely contain all of the language and provisions required to be included in a plan document or summary plan description under ERISA.  These failures can be costly.

A Wrap Plan is a written plan document drafted to meet these ERISA-imposed requirements and take advantage of the protections afforded an employer under ERISA.  A properly designed Wrap Plan acts to combine or “wrap” all of the various welfare benefit programs offered by an employer, which on their own would each be separate, individual ERISA employee welfare benefit plans, into one consolidated plan document.  The consolidated plan document incorporates the various booklets and pamphlets describing the various programs into the Wrap Plan and supplements such material with the helpful and necessary provisions required by ERISA.  By doing so, the Wrap Plan ensures that each of the underlying programs are in compliance with ERISA.

Why would an employer want/need a Wrap Plan?

As mentioned above, many employers have not fully complied with the written plan document and summary plan description requirements for each of their employee welfare benefit plans.  New participants are supposed to receive a copy of the plan’s summary plan description within 90 days of them becoming eligible to participate in such a plan.   Participants and beneficiaries may also request a copy of the plan documents (at a reasonable fee) or summary plan descriptions at any time.  Updates to the summary plan description, either in the form of a restated summary plan description or a summary of material modifications, are required to be provided to participants and beneficiaries by no later than 210 days following the end of the plan fiscal year in which such modifications were enacted.  Failing to meet the requirement to provide a copy of the plan document or the summary plan description of the employee welfare benefit plan upon request or as required under ERISA can be very costly.    

If the summary plan description does not contain the required provision to meet the requirements of ERISA or an employer fails to provide a participant or beneficiary with the summary plan description or plan document within a reasonable period of time following a request for such, a court can impose civil penalties against the employer of up to $114 per day for each failure. Imagine the total potential penalty if the employer failed to meet such requirement for five plans or with respect to 200 of its participants?

Furthermore, employee welfare benefit plans that are “funded” or cover more than 100 participants are required to file an IRS Form 5500 annual report each year.  Failure to timely file a Form 5500 can result in the imposition of penalties of as high as $2,140 per day for each day that the applicable return is late.  Thus, if a company failed to file a required Form 5500 for one of its plans for a full year, the maximum penalty could be as high as $781,100.  Now, imagine if the company had five or 10 such plans or the company failed to file the return for five or 10 years?  Again, the potential penalty is staggering.  

Fortunately, if the company discovers the problem, rather than the IRS or Department of Labor, there are usually relatively affordable correction programs available to correct the noncompliance.  However, if the IRS or Department of Labor starts looking for them, some of these options are unavailable and it may be too late to avoid significant penalties and costs.  Therefore, it makes a lot of sense for companies to examine their own practices and address these types of issues now.  

How can a Wrap Plan help?  

By combining all of its welfare benefit programs into one plan, an employer accomplishes several objectives.  First, it ensures all of the employee welfare benefit plans are in writing and contain the appropriate provisions required by ERISA.  It also better ensures each program has a compliant summary plan description.  Besides these benefits, a properly drafted Wrap Plan provides the advantage of some of the protections afforded by ERISA. Lastly, utilizing a Wrap Plan consolidates the number of employee welfare benefit plans offered by the company to one plan. This reduces the number of annual reports required to be filed by the company for its welfare plans to only one annual report (IRS Form 5500); thus, saving the company the time and cost of preparing multiple Form 5500s.   

Still not convinced?  Consider the possibility that using a WRAP Plan could increase the value of your company in a future transaction.  I spend a good portion of my time serving as employee benefit and executive compensation counsel for companies that are buying other companies.  One of the first steps we take when we get involved in a merger and acquisition transaction on behalf of a buyer is to perform due diligence on the employee benefit, severance, equity, and other incentive compensation programs and obligations provided by the target company.  

Due diligence helps a buyer better understand the value and scope of these various programs, how they compare to the programs offered by buyer to its employees, transitional changes and opportunities, how the ongoing culture (of the combined entity) will be impacted by the transaction.  This type of analysis is required for a buyer to understand for financial analysis, cultural fit, and a number of other important reasons. Unless these costs and issues are properly assessed and considered, the buyer may not be able to determine the true value of the target, determine the impact the transaction may have on the employees of the target or the employees of the acquirer, or get an accurate understanding of the expenses and profitability of the ongoing business following the completion of the transaction.

Thus, among many other requests, we ask the target company to answer the types of questions posed at the beginning of this article: Do you have written plan documents and summary plan descriptions for each of your plans?   Can you provide us with IRS Form 5500s for each plan?  Unfortunately, too often the responses we receive indicate the target company has failed to comply with all of these ERISA requirements.

As noted above, some of these risks can be substantial, and since a seller is usually required to provide various representations and warranties and to provide indemnification for such noncompliance, this can ultimately result in reduction in the proceeds received by the seller.  Furthermore, if we discover significant noncompliance in meeting the requirements of ERISA or the Internal Revenue Code, it suggests there may be other important legal compliance risks and exposures.  The fact is that target companies demonstrating a culture of legal compliance will be valued more highly by a buyer and will be able to negotiate preferential transaction terms than a similar company demonstrating more of a laissez-faire attitude towards legal compliance.  

Does this sound at all like your company?  If it does, you should review your compliance with these ERISA requirements and consider utilizing a Wrap Plan. 

John M. Wirtshafter is a Member of McDonald Hopkins LLC, a corporate law firm with offices in Cleveland, Chicago, Detroit, Columbus, West Palm Beach and Miami. His practice focuses include executive compensation and governance, employee benefits and ERISA, and taxation. He can be reached at (216) 348-5833 or at jwirtshafter@mcdonaldhopkins.com.
John Wirtshafter

John Wirtshafter is an attorney at McDonald Hopkins LLC, a business advisory and advocacy law firm. As a Member in the Tax and Benefits Department, he has extensive experience assisting mid-sized and Fortune 500 companies with employee benefits and executive compensation issues and opportunities, including...

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