7 Compliance Requirements for Small Businesses

For Illinois employers with fewer than 20 employees who offer fully-insured coverage.

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1. Premium Only Plan Document (POP Document)

The only way for an employer to provide certain benefits tax-free to its employees, such as health, dental or vision insurance, is through a Cafeteria Plan, as defined under Section 125 of the Internal Revenue Code.  The only way for an employer to have a Cafeteria Plan is by preparing a written plan document which meets the requirements of Code Section 125.  Failure to have a written document, or failure to operate a Cafeteria Plan in accordance with the terms of Code Section 125, disqualifies the plan as a Cafeteria Plan and results in gross income to the participants.  In other words, any participant in the plan will lose the tax favorable status of the benefits that he or should would have otherwise received. 

As a comparison, think about an employer who offers a tax-preferred retirement account, such as a 401(k).  To have a 401(k), the employer must have a written plan document that explains information about the plan.  For example, who is eligible, when can contributions be changed, what happens after employment is terminated, can loans be taken from the plan, etc.  A similar, but different type of plan document is required when it comes to providing tax-free benefits for health, dental, vision, life, disability and other qualified group insurance products. 

Please note that a Premium Only Plan (POP) can generally be defined as a type of Cafeteria Plan where the only pre-tax benefits available to participants are for those of insurance premiums.  If the Cafeteria Plan also provides for other pre-tax benefits, such as a Health FSA or Dependent Care FSA, additional plan documents are required. 

Because Code Section 125 is complex, it generally requires a third party who is familiar with the tax code to prepare a plan document which meets the Cafeteria Plan requirements. 

2. Non-Discrimination Testing

Employers who offer tax-free insurance benefits to employees must be sure the benefits are not discriminating in favor of highly compensated individuals (HCIs).  For purposes of the POP plan, a HCI is a person who earns $120,000, an officer of the company, a shareholder with more than 5% of the voting power, or a spouse or dependent of any of the preceding.

For those employers with a POP plan in place, there is only one non-discrimination test relating to eligibility that must be satisfied. 

There’s a total of three different non-discrimination tests that must be passed relating to

  1. eligibility
  2. actual contributions and benefits, and
  3. key employee concentration.

These are rather sophisticated and complex tests that need to be performed, and employers usually rely on a third-party to conduct the testing.

But there's good news for POP plans! Employers will get an automatic pass of the three non-discrimination tests if they can satisfy one simple requirement. If the ratio of non-highly compensated employees participating in the POP plan compared to the ratio of highly compensated participating in the POP plan is 50% or greater, the employer will be treated as passing all the non-discrimination tests. 

Okay, maybe that sounds complicated, but it’s easy to understand once you’ve seen an example. XYZ Company has:

  • 100 non-highly compensated employees
    • 60 participate in the POP plan (60 / 100 = 60%)
  • 30 highly compensated employees
    • 25 participate in the POP plan (25 / 30 = 83.33%)

60% / 83.33% = 72.03%

72.03% is greater than 50% so XYZ Company automatically passes the three non-discrimination tests. It would probably be more appropriate to say XYZ Company does not have to conduct the tests relating to contributions and benefits or key employee concentration because the IRS is comfortable that enough non-highly compensated employees are eligible and participating in the POP plan.
 
Employers that satisfy the 50% ratio are considered to have met the POP plan “safe harbor test for eligibility.” If the ratio is less than 50%, the employer doesn’t necessarily fail the non-discrimination testing. They might even be able to pass this test with a ratio that is less than 50%. The ratio to pass gets smaller as the concentration of non-highly employees participating in the POP plan increases. However, at a high level, understand that a ratio of 50% or greater will guarantee a pass for any employer.  

The consequences of failing the test means that some or all the HCIs lose the tax favorable status of the benefits that he or should would have otherwise received.  Additional non-discrimination testing also applies if an employer provides for other pre-tax benefits, such as a Health FSA or Dependent Care FSA.

3. ERISA Wrap Plan Document

The Employee Retirement Income Security Act of 1974 (ERISA) sets forth certain requirements for employers who offer health and welfare benefits to its employees, such as health, dental, vision, life, disability and other insurance plans.  The ERISA law has certain rules in place to protect plan participants and beneficiaries, such as covered employees and their spouses and children. 

The ERISA law indicates that a written summary plan description (SPD) must be provided to plan participants at certain times, such as within 90 days of becoming covered by one or more insurance plans offered by the employer.  Although SPDs are provided by insurance companies for distribution to plan participants, the SPDs fail to provide all the required written disclosures under the ERISA law.  For example, the SPD provided by an insurance company does not address the circumstances under which the employer might modify or terminate a plan during the year, but the ERISA law requires that type of information to be disclosed in writing and provided to participants.

Click here to download a list of things that are commonly excluded from an SPD provided by an insurance company but are required to be disclosed in writing to participants.

To comply with the SPD requirements under ERISA, employers must prepare a supplemental document, which is commonly referred to as a Wrap Document.  The Wrap Document provides all the required written disclosures under the ERISA law, and it applies to all health and welfare benefits offered by the employer.  It “wraps” up all the SPDs provided by insurance companies for health, dental, vision, life, disability and other insurance plans.

Failure to provide an adequate SPD to a participant within 30 days of request can result in a financial penalty of $110/day.  In addition, the ERISA law provides participants and beneficiaries with the right to file a civil action lawsuit against an employer who does not comply with the ERISA law.  The Wrap Document will help an employer reduce the probability of a civil action lawsuit by providing all the written disclosures as required under the ERISA law.

Because the ERISA SPD requirements are complex, it generally requires a third party who is familiar with the law to prepare a plan document which meets the SPD requirements.    

4. Summary of Benefits and Coverage (SBC)

The Summary of Benefits and Coverage (SBC) is another type of plan document that must be provided to participants and beneficiaries at certain times.  The SBC is generally only something required for health insurance plans, but in some instances, it may be required for other group health plans.

The good news is that the SBC will be prepared by the insurance company.  The challenging part for an employer is knowing when the SBC must be distributed to employees.  Failure to provide an SBC, or failure to provide an SBC within the required time frame can result in a penalty of $1,128 for each occurrence.  The bullet points below describe when the SBC must be distributed.

Upon application or enrollment, the SBC must be provided no later than the first day the participant is eligible to sign up for coverage.

If there is any change in the information required to be in the SBC that was provided upon application and before the first day of coverage, you must provide the updated SBC no later than the first day of coverage.

Employees who sign up for coverage during a special enrollment period must be provided an SBC within 90 days of enrolling in coverage.

During your annual renewal (open enrollment period), the SBC should be provided with all other enrollment materials.

Upon request, the SBC must be provided with 7 business days.

If you are making a material modification to your health insurance plan during the middle of the plan year which would change the content in the SBC, you must provide an updated SBC at least 60 days prior to making the material modification.

5. Marketplace Notification

If you are subject to the Fair Labor Standards Act (FLSA), you must provide a notification to all new hires with information on the Health Insurance Marketplace (Marketplace).  Generally, any employer with annual sales of at least $500,000 is subject to the FLSA. 

Please be advised that the notification must be provided to all new hires within 14 calendar days of their start date.  The notice should be provided regardless of whether you offer health insurance, and if you do offer health insurance, it should be provided to all employees, even those who are not eligible for coverage.  A model template notice can be found here.

6. Medicare Part D Notification and Reporting

Medicare Part D is the prescription drug program available to those individuals who are enrolled in Medicare Part A and/or B.  Upon becoming eligible for Medicare, everyone has the option to sign up for a Part D plan.  If a person delays enrollment in Part D they will be charged a late enrollment penalty of 1% of the “national base beneficiary premium” multiplied by the number of months not enrolled in a Part D plan.  However, if a person delays enrollment in Part D and is enrolled in a plan from their employer which includes prescription drug coverage, they will most likely have that penalty waived if they sign up for Part D on a later date. 

The Medicare rules provide that employers must do two things:

  1. Provide any Medicare eligible individuals with a notice annually prior to October 15th.  The notice indicates whether the drug coverage you offer is at least as good as the standard Part D plan option, referred to as the creditable coverage notice.  There is a non-creditable coverage notice if the drug coverage isn’t at least as good as the standard Part D plan option.  The notice should also be provided at other times, such as when a person first joins the plan or if creditable coverage status changes.  The best practice is to give this notice to all eligible employees since you may not be aware if they and/or their dependents are eligible for Medicare.
  2. You must report information about your drug coverage and its creditable or non-creditable status to the Centers for Medicare and Medicaid Services (CMS) within 60 days of the start of each plan year.  You must also report to CMS within 30 days after termination of a plan with prescription drug coverage or a change in the plan’s creditable coverage status. 

Model notices and access to the online site to complete the reporting can be found here.

7. Illinois State Continuation

The state of Illinois requires employers of any size with a fully insured health insurance plan or HMO to provide employees, their spouses and their dependents with the right to continue coverage after certain events occur, such as termination of employment.  You should familiarize with the rules to understand when someone may be permitted to continue coverage on your health insurance plan in certain situations, such as when they are no longer an employee of your company.  A summary of the continuation rules can be found here.