Is a self-funded group health plan with more than 100 participants required to have an annual audit? There seems to be a difference of opinion among professionals on this question. Let’s start with the rules on group health plans and other “welfare plans.”
Most larger group health plans are self-funded, which means the employer, not an insurer, is primarily responsible for paying benefits. These plans also are likely to require employee contributions towards the cost of benefits, and those contributions typically are paid to the employer (not a trust) on a pre-tax basis through a cafeteria (Section 125) plan.
Department of Labor Audit “Relief”
The applicable Department of Labor regulations provide certain welfare plans “relief” from the annual audit requirement. The instructions for the annual report (Form 5500) refer to DOL Technical Release 1992-01 for clarification of the exemption.
That release bases the availability of relief from the audit requirement for welfare plans with more than 100 participants on whether or not the contributory plan provides benefits “solely from the general assets of the employer.”
If employee contributions are used for any purpose other than paying group health or HMO premiums, then benefits are not deemed to be paid solely from the employer’s general assets – and the audit requirement would apply. This is set out in the following extract from the DOL release:
In accordance with the terms of the regulations, the relief afforded by [the regulations] is not available to any welfare plan with respect to which benefits or premiums are paid from a trust. Moreover, even in the absence of a trust…the exemptive relief would, in the absence of additional relief, be available only to those contributory welfare plans which apply participant contributions toward the payment of premiums in accordance with the terms of the regulations.
For example, a welfare plan that applies participant contributions directly to the payment of benefits (or indirectly by way of reimbursement to the employer) would not qualify for exemptive relief because the benefits under such a plan could not be considered as paid solely from the general assets of the employer.
What the CPAs Think About It
Despite the above authority, the accounting community has focused on whether or not the subject welfare plan funds benefits through a trust. Of course, if there is a trust, the audit requirement clearly applies as stated in the first sentence of the above extract. However, the above text goes on to deal with the applicability of the exemption to contributory welfare plans that do not use a trust.
So it seems clear that the audit requirement does not turn entirely on the question of whether or not the plan is funded through a trust. But note Q&A 18 published by the American Institute of Certified Public Accountants which states that relief from the audit requirement for contributory self-funded welfare plans with more than 100 participants is based on whether or not the plan is funded through a trust:
Q: Assume a partially insured H&W plan where the employer pays claims to a certain level and then reinsurance assumes the liability. There are over 100 participants, and the employer and employees each pay a portion of the premiums. The employee share is paid on a pretax basis through a section 125 plan. There is no trust established, but at year end there may be a minimal payable to the third party administrator for regular monthly charges and a small reinsurance receivable, depending on timing. Does this plan require an audit?
A: No, the plan does not require an audit. According to the fact pattern described, no separate trust exists to hold the assets of this plan, and therefore it is not a funded plan for ERISA purposes. ERISA exempts unfunded plans from the requirement to perform an annual audit. Participant contributions made through a section 125 cafeteria plan are not required to be held in trust per DOL Technical Release 92-1, and as long as no trust is being utilized, no audit requirement exists. (Source: AICPA Audit and Accounting Guide, Employee Benefit Plans, March 2004, Appendix A paragraphs A.25 and A.28.)
So, are the accountants right in saying that self-funded group health plans with more than 100 participants – and no trust – are always exempt from the annual audit requirement? Can that conclusion be sustained by the technical release quoted above?
For sponsors of larger self-funded group health plans, the answer spells the difference between ERISA compliance and non-compliance. Remember, any plan annual report that is filed without a required plan audit is not complete and triggers a Department of Labor non-filing penalty of up to $2,063 per day.
Well, should you trust the accountants on this one? We are open minded, but we’re betting that the larger self-funded group health plans with employee contributions are required to have annual plan audits.
Andrew S. Williams has practiced in the employee benefits and ERISA arena since ERISA was passed in 1974. He has been recognized by his peers through a survey conducted by Leading Lawyers Network as among the top 5 percent of Illinois lawyers in Small, Closely and Privately Held Business Law and Employee Benefit Law. He maintains a website, Benefits Law Group of Chicago with additional updates, commentary and analysis on benefits and employment topics.
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