Many HRs and CFOs discover that ERISA compliance is not the responsibility of insurance carriers when receiving a DOL audit notice or an employee lawsuit. The Summary Plan Description (SPD) is one of the documents employers are required to provide to their employees, and a missing or inaccurate SPD can expose employers to penalties.
This article provides an overview of the summary plan description, ERISA requirements for an SPD, and the risks associated with a non-compliant SPD.
What is a Summary Plan Description (SPD)?
A Summary Plan Description (SPD) is a summary of the employee’s benefits plans. It outlines the plan’s benefits for employees and their beneficiaries, including the rules, eligibility, benefit calculation, and claim procedures.
Beyond compliance with the Employee Retirement Income Security Act (ERISA), a well-drafted SPD offers advantages such as:
- Transparency: SPDs provide employees with a clear view of how the plan is managed and how operations are carried out.
- Information Access: Employees receive clear, concise information about their plan and related details.
- Future Planning: It helps employees make informed decisions and plan their retirement effectively.
- Conflict Resolution: SPD gives beneficiaries a clear roadmap for resolving benefit disputes through formal appeals.
- Employee Retention: Offering well-communicated benefits and compensation makes employees more likely to stay long term.
What is the Purpose of a Summary Plan Description?
An ERISA summary plan description is a vital tool for both employees and employers seeking to maximize their insurance benefits.
Let’s break it down:
- Employee Guide: A well-structured SPD provides employees with an in-depth understanding of how the plan works and serves as an operational manual for using the benefits available to them. An SPD outlines the steps for submitting a claim, meeting eligibility criteria, and naming a beneficiary for a 401(k) plan.
- Legal Compliance: Plan administrators of ERISA-covered employee benefit plans are legally required to furnish participants with an SPD under the Employee Retirement Income Security Act (ERISA) of 1974. Failure to which may result in costly lawsuits.
- Establishes Fiduciary Duty: Supports Fiduciary Accountability: The SPD documents plan terms in writing, helping plan fiduciaries demonstrate compliance with ERISA disclosure obligations.
- Defines Plan Limitations: In addition to stating what the plan entails, ERISA summary plan descriptions also state what the plan will not do. It outlines the exclusions, limitations, and restrictions of a benefit plan. This ensures the insurance fund remains financially healthy by not paying for claims it didn’t promise to cover.
Who is Required to Provide a Summary Plan Description?
Under ERISA, every plan administrator of an ERISA-covered employee benefit plan must provide copies of the Summary Plan Description to each plan participant.
In most cases, the employer sponsoring the plan serves as the plan administrator unless another entity is formally designated in the plan document.
The plan administrator distributes the document to plan participants through:
- Mailed Hard Copies: SPDs can be delivered directly to participants’ homes through the mail.
- Electronic Distribution: Plan administrators may distribute them electronically, such as via email.
- Plan Website: SPDs may be distributed electronically in compliance with Department of Labor electronic disclosure rules, which require appropriate notice and access safeguards.
However, SPDs are not required in benefit programs provided by churches and government institutions.
Summary Plan Description Requirements
Employers have strict legal obligations when creating and distributing SPDs.
Some of the ERISA SPD requirements include:
- Plan Name: ERISA summary plan description should clearly indicate the name of the insurance plan being issued.
- Plan Number: Summary Plan Descriptions clearly show the assigned plan number, e.g., 502 for health and 001 for 401(k).
- Plan Sponsor: The SPD identifies the sponsor’s name, address, and contact details.
- Employer Identification Number (EIN): The ERISA SPD captures the 9-digit IRS number on the Form 5500.
- Type of Administration: The plan must indicate whether it is managed by a third party or by the employer.
- Eligibility Requirements: SPDs specify the criteria for qualifying applicants for insurance coverage.
- Enrollment Process: SPDs provide clear explanations of the steps employees can take to become a beneficiary of the health or retirement insurance.
- Claims Procedure: SPDs must include a sections that show the steps to follow when filing a claim.
- COBRA and ERISA Rights: The SPD must include a paragraph informing employees of their right to review plan documents and to sue for benefits if coverage is not continued after leaving the company.
- Simple Language: ERISA requires SPDs to be written clearly so the average participant can understand them.
- Timing: SPDs should be distributed to employees or beneficiaries within 90 days of enrollment, or within 120 days for new retirement or health benefit programs.
How to Create a Summary Plan Description
Writing a summary plan description is a non-negotiable requirement of running an ERISA-covered benefits programme, and failing to meet the ERISA compliance checklist can put your business at risk.
Let’s look at how you can create an SPD that ticks all the compliance boxes in 5 simple steps.
1. Gather Essential Documents
Before you start writing, collect your formal plan document, service agreements, legal contracts, and insurance certificate. An ERISA SPD is a summary of all these documents, so ensure they are organised and up to date to have a smooth creation process.
2. Understand Employee Needs
Next, ensure you understand your employees’ needs, expectations, and preferred communication styles. You can do this by conducting surveys and leveraging participation data from previous benefit programs to know what works and what doesn’t.
3. Draft The First Copy
Draft the first SPD to ensure it accurately reflects the official plan document. Pay close attention to eligibility definitions, benefits limits, and exclusions. Remember to include all ERISA requirements mentioned earlier to ensure your SPD is compliant.
4. Review for Consistency
Before finalizing the document, have a benefits consultant or an attorney review the summary plan description to ensure it’s accurate, complete, and compliant.
5. Distribute on Time
Lastly, ensure you distribute the SPD to your employees via their preferred communication channels within the ERISA-set time limits. Distribution should be done within 120 days of establishing an ERISA-covered plan or within 90 days of enrolling new participants.
For employers and HR teams, staying on top of SPD accuracy can feel burdensome when managing benefits enrollment, eligibility audits, and employee communications. That’s where a benefits advisor comes in.
At Ethos Benefits, we are fiduciary-driven employee benefits consultants that help you optimize your health plans and simplify your ERISA compliance.
Schedule a discovery call to ensure your SPDs are accurate and ERISA-compliant!
Summary Plan Description Example
While every SPD is unique to the specific plan it covers, a legally defensible SPD follows a strict structure.
Here’s a health insurance plan example that follows the gold standard SPD structure:
- Cover Page: Formally identifies Sinai Health System Choice Plan. It also lists the Sinai School of Medicine as the Plan Sponsor and provides the specific EIN and Plan Number: 502 for the health insurance plan.
- Eligibility and Participation: Clearly states that full-time employees working at least 30 hours per week are eligible, effective the day of hire.
- Finances: This section uses a tiered table that shows tier 1 (MT Sinai providers) has $0 in deductibles, whereas tier 4 (out-of-network providers) requires a $10,000 deductible.
- Scope of coverage: The next section highlights that the plan only covers necessary inpatient care, and it doesn’t cover non-emergency treatment outside the US or elective cosmetic procedures.
- Claims Section: Contains a formal appeal process with contact details for regional DOL offices in the Empire State Building.
- Rights Section: The final section outlines ERISA rights, including the right to access plan documents and the right to appeal denied claims.
What Happens If an SPD is Missing or Inaccurate?
When an SPD is missing, inaccurate, or outdated, it could expose the employer to legal and financial risks. Some of the consequences of a missing or inaccurate SPD include:
- Daily Penalty: If a participant requests a copy of the SPD in writing and you fail to provide it within 30 days, the participant may bring a claim in court. This may result in a $110 fine for each day exceeded after the grace period.
- Legal Vulnerability: Courts may interpret ambiguities in plan communications unfavorably to the employer, particularly when discrepancies exist between the SPD and the formal plan document.
- Government Fines: Failure to furnish an SPD upon written request may result in statutory penalties under ERISA.
- Loss of Trust: An inaccurate SPD is a major red flag for the Department of Labour and can trigger audits.
Frequently Asked Questions (FAQs)
Explore the answers to the most commonly asked questions about summary plan descriptions below:
What’s the Difference: Summary Plan Description vs. Summary of Benefits and Coverage?
While both documents are necessary for your summary plan description of health insurance, they differ significantly in purpose and content.
Here’s a breakdown:
| Feature | Summary Plan Description (SPD) | Summary of Benefits and Coverage (SBC) |
|---|---|---|
| Purpose | A legal document that explains the rights, rules, and benefits of a plan to employees. | Standardized comparison tool for costs and deductibles across different plans. |
| Distribution Frequency | Every 5 years (if changed) or every 10 years if there are no major changes. | Every year during open enrollment. |
| Governing Law | Department of Labour (DOL) | Affordable Care Act (ACA) |
Does an SPD Need to Be Signed by Employees?
No. Employees are not required to sign SPDs. However, you should have proof of distribution in case an employee claims they did not receive a copy.
You can:
- Keep receipts of mailed SPDs.
- Maintain delivery confirmations for emailed SPDs.
- Record distribution dates in your benefits administration system.
Are Summary Plan Descriptions Required for Voluntary Benefits?
It depends on whether your voluntary benefits program is subject to ERISA coverage. If a plan qualifies for voluntary safe harbor, then it doesn’t trigger ERISA coverage, and there is no need for a summary plan description.
The conditions are:
- Employees join voluntarily.
- The employer doesn’t earn profit from the plan.
- The benefit sponsor doesn’t endorse or promote the plan.
- The employer makes no contributions to the benefits programme.
How Long Must Employers Retain Old Summary Plan Descriptions?
Most ERISA Wrap documents are subject to the 6-year rule, which requires employers to retain them for at least 6 years after filing Form 5500.
However, it’s always safe to keep SPDs in a permanent, searchable archive in case issues arise after the 6-year period.
Can Employers Use AI Tools to Draft an SPD?
AI tools are effective for simplifying legal jargon into plain language, translating SPD into other languages for non-English speakers, and checking for clarity and readability.
However, a qualified benefits consultant is needed to review the AI-generated content.
Conclusion
A well-written, accurate, and compliant SPD protects your organization from potential lawsuits and DOL audits that could result in penalties. ERISA summary plan descriptions also help employees understand the benefits and limitations of retirement and health benefit plans.
A specialized benefits consultant can help you stay compliant with ever-changing federal ERISA laws, transforming your benefits package from a potential liability into a secure, strategic asset.
At Ethos Benefits, we apply fiduciary best practices to help plan sponsors strengthen compliance. We also eliminate administration burden and help you meet ERISA compliance obligations. Our flat-fee model means our guidance is not tied to plan costs.
Schedule a discovery call, and let’s discuss how we can simplify your health plans and ensure ERISA compliance is effortless.
