ERISA Requirements – A Closer Look at Participant Disclosures

ERISA imposes certain requirements on employers (who also usually act as plan sponsors and plan administrators) that offer health and benefit plans to employees. There are several distinct areas of ERISA compliance, which include maintaining compliant plan documents and corresponding operations, adhering to fiduciary obligations, meeting fidelity bonding requirements, submitting annual Department of Labor (DOL) reporting and providing participant disclosures.

Participant disclosures that are required for ERISA plans include the Summary Plan Description (SPD), the Summary of Material Modifications (SMM), the Summary Annual Report (SAR) for funded plans with Form 5500 filing requirements, and the Summary of Benefits and Coverage (SBC) for plans that are also a group health plan. 

What is a Summary Plan Description and what does it contain?

An SPD is a comprehensive document that outlines the plan’s provisions, benefits, and responsibilities under the plan. It is meant to be easily understood by plan participants so it should be written in non-technical language. DOL regulations outline what an SPD must contain, such as plan and employer identification, eligibility and benefit requirements, claim procedures, and ERISA rights.

When and to whom must the SPD be given?

The SPD must be distributed to all covered participants within 120 days of adopting a new plan. This means that for new 2023 calendar year plans the deadline for delivery of the first SPD is May 1, 2023.   

After the initial distribution of the SPD, the employer must then distribute the document to newly eligible participants within 90 days of them becoming covered under the plan. 

If there have been changes to the plan, an updated SPD must be issued at least every five years. If the plan has not had any changes, an updated SPD must be issued at least every 10 years.

The SPD is only required to be given to covered participants (this would not just be limited to employees but would also include COBRA qualified beneficiaries and retirees), but certain other individuals have the right to be provided with an SPD upon request, including covered spouses and children of the plan participants. 

When must changes to an SPD be communicated to participants?

Changes to a plan that affect the SPD can be communicated with a summary of material modification (SMM). An SMM is a summary of any amendment change made to the plan provisions, features, or operation, also meant to be easily understood by plan participants.

An SMM or an updated SPD must be distributed 210 days after the end of the plan year during which the change was adopted. However, if there is any modification or change to a group health plan that is considered to be a material reduction in covered services or benefits that change must be disclosed no later than 60 days after the date of the change.  

What is a Summary Annual Report and what does it contain?

An SAR is a summary of the annual Form 5500 reporting information for the plan. The DOL has specified the required content of the SAR, including funding and insurance information, basic financial information, and a statement that indicates the individual has a right to request a full copy of the annual report. 

When and to whom must the SAR be given?

The SAR must be furnished to covered participants, and may be requested by certain other individuals, like the covered spouse and dependents of the participant. 

The SAR must generally be furnished within 9 months of the close of the plan year. 

However, plans that are not required to file the Form 5500, and unfunded plans (regardless of size) are not required to provide an SAR.   

What is a Summary of Benefits and Coverage and what does it contain?

The SBC provides an overview of a health plan’s costs, benefits, and covered healthcare services. It is designed to help individuals compare the costs and coverages of different health plans. The SBC must follow certain appearance, format, language, and content requirements that have been specified by the DOL, IRS and HHS. The content of the SBC must also be communicated in a culturally and linguistically appropriate manner that is easy for individuals to understand.  

When and to whom must the SBC be given?

The SBC must be provided to plan participants and beneficiaries prior to initial enrollment in the plan, and then subsequently at each re-enrollment. 

At initial enrollment the SBC should be provided with the other benefit materials (but no later than the first date the participant is eligible to enroll in coverage). For subsequent enrollments, the SBC should generally be provided with other open enrollment materials, but requirements can vary depending on the method of re-enrollment that is utilized. 

SBCs must also be provided upon request to participants and beneficiaries. The requirement to also provide the SBC to beneficiaries is different from other participant disclosure requirements, but regulations permit one SBC to be provided to a family unless any beneficiaries are known to reside at a different address. 

SBCs are only required to be provided when the plan is also a group health plan. For fully insured plans, the plan administrator must still ensure that SBCs are provided, whether the plan administrator delivers the SBC, or contracts with the insurer to provide it.   

Can participant disclosures be delivered electronically?

Delivery of the SPD, SMM and SAR must be done in a way that is “reasonably calculated to ensure receipt of the material”. The most common ways for delivering to meet this requirement are by first class mail and electronically. Hand delivery is also permitted, but the guidance on how to ensure receipt if using this method is limited, and it is more difficult for an employer to document hand delivery. Also, leaving copies of the SPD out for participants in a location that employees have access to (like a table in a break room) is not considered to be an acceptable method of delivery.   

Regulations incorporate safe harbor guidelines for the electronic delivery of SPDs, SMMs and SARs. Safe harbor guidelines are met if

  • the employer reasonably ensures that the electronic delivery system results in actual receipt by participants of transmitted documents;
  • electronically delivered documents are prepared and provided according to DOL regulations;
  • notice is provided to each participant, either electronically or in paper form, informing the participant of the electronically delivered documents, the significance of such documents, and the participant’s right to request and receive, free of charge, a paper copy of each of the electronic documents; and
  • the employer provides a paper copy—without charge—of any document originally delivered to the participant through electronic means if the participant requests it.

SBCs may be provided in paper or electronic format. The delivery of the SBC to the participant will be sufficient to cover delivery to beneficiaries unless the plan administrator is aware that a beneficiary has a different address.  

Separate regulations provide safe harbor guidelines for the electronic delivery of SBCs. Safe harbor guidelines are met if

  • the SBC is provided in connection with an online enrollment or renewal of coverage;
  • and the individual can request a paper form.

If the SBC is not being provided in connection with an online enrollment or renewal, then the safe harbor guidelines are met if

  • the format is readily accessible;
  • the SBC is provided in paper form free of charge upon request; and
  • in the case in which the electronic form is an internet posting, the plan timely notifies the individual in paper form or email that the document is available on the internet, provides the internet address and notifies the individual that the documents are available in paper form upon request.

What are the consequences of not having or providing participant disclosures?

There are no specific penalties under ERISA for a plan that fails to have an SPD (or SMM), but there are some consequences an employer could face.

  • If a participant or others potentially entitled to an SPD or SMM requests an SPD or SMM, the employer must provide it within 30 days. Otherwise, an employer could be subject to a DOL penalty of up to $110 per day.
  • If a plan is going through audit, the DOL most likely will ask for a copy of the plan document and the SPD. An employer that cannot respond to the DOL’s request may trigger additional document requests and DOL enforcement actions. The DOL may also charge a plan a penalty of $159 per day (capped at $1,594 per request) for not providing this document.
  • Not having an SPD also allows participants to use other evidence or employer representations to support benefit claims or lawsuits against the employer.
  • Not providing an SMM can affect the validity of a plan amendment and cause the unamended version of the plan to be enforceable if participants had relied on that version of the plan’s terms when incurring expenses. 

Failure to provide SARs can also result in DOL penalties. 

  • If a participant, or others potentially entitled to an SAR, requests a SAR, the employer must provide it within 30 days. Otherwise, an employer could be subject to a DOL penalty of up to $110 per day.

Failure to provide SBCs can result in DOL and Internal Revenue Code penalties.

  • The DOL may assess a penalty of $1,362 per failure per day if there is a willful failure to provide the SBC. It is important to note that each participant or beneficiary who is not provided with an SBC would be an individual failure, so the maximum daily rate would be multiplied by the number of individuals that did not get copies of the SBC.
  • Internal Revenue Code excise taxes of $100 per day for noncompliance may also apply.

And generally, penalties of up to $100,000 and/or 10 years imprisonment can apply if there is a willful violation of an ERISA disclosure requirement.