Question: Where and how should employers define employee eligibility for the health and welfare benefit plan?

Short Answer: Employers will generally look to the wrap SPD as the main source to define plan eligibility, but there are multiple considerations and other potential options of which employers should be aware.

Executive Summary

Employers will typically define the plan’s eligibility terms in one of the following types of documents:

1. The Wrap SPD

2. The Insurance Carrier and TPA Documents

3. New Hire and Open Enrollment Materials

4. Employer’s Benefit Guide/Booklet

5. Employee Handbook

While there are advantages and disadvantages to each, as well as additional nuances for particular types of eligibility to consider, the wrap SPD generally provides the best option.

General Rule: ERISA Requirements to Follow Plan Terms

ERISA requires that employers administer and maintain the plan pursuant to its written terms. The plan document serves as the formal legal document governing plan benefits. There is no specific requirement that the plan document include eligibility terms, but the plan document should address conditions for participation.

The summary plan description (SPD) is the employee-facing summary of the written plan document that is required by ERISA. The SPD must be written in a manner calculated to be understood by the average plan participant, sufficiently accurate and comprehensive to reasonably apprise employees of their rights and obligations under the plan, and distributed to employees within specific timeframes. There is no required format for the SPD, but ERISA does require that specific provisions and information be included.

• For more details: Newfront ERISA for Employers Guide

The SPD content rules require that the SPD provide information describing “the plan’s provisions related to eligibility to participate in the plan.” For health and welfare plans, this includes a statement of the conditions pertaining to eligibility to receive benefits and the circumstances which may result in loss of eligibility.

Given the sparse guidance addressing specifically where and how to define plan eligibility, employers have adopted a wide variety of approaches in documenting and disclosing this information. While there is no “right” answer in this area, there are multiple considerations and potential pitfalls of which employers should be aware.

Where to Define Plan Eligibility Option #1: The Wrap SPD

Employers typically will use a wrap plan document and wrap SPD to work in tandem with the underlying insurance carrier and third-party administrator (TPA) materials (e.g., EOCs, policies, certificates of coverage, benefit summaries, etc.) for the health and welfare plan. The wrap plan document and wrap SPD approach serves multiple useful functions for employers.

• For more details: Why Have a Wrap Plan Document and Wrap SPD?

Advantages of Relying on the Wrap SPD

For employers that maintain a wrap plan document and SPD—which should be the vast majority—the wrap documents provide the most obvious place to begin the analysis. As a general rule, this is the best place to define health plan eligibility because it is consistent with ERISA’s intent and employee expectations. Nonetheless, how to define it, what to include, and the best way to incorporate other materials without gaps or conflicts creates multiple nuances to consider.

Disadvantages of Relying on the Wrap SPD

These documents are always at risk of gathering (digital) dust and becoming long forgotten by key personnel responsible for maintaining the health and welfare plan. The terms are typically boilerplate in appearance, and only a relatively few areas (e.g., plan eligibility terms, plan options) are custom to the specific plan benefits offered. There is therefore always the danger that if the wrap SPD has become an oversight to the relevant parties, any changes to the employer’s plan eligibility terms will not be appropriately reflected the document.

How to Define Health Plan Eligibility in the Wrap SPD

A common and reasonable approach is to provide a general reference to the applicable hours threshold for eligibility (e.g., averaging 30 hours of service week), the types of dependents who are eligible (e.g., spouse, domestic partner, children to age 26), any conditions for eligibility and waiting periods that apply prior to coverage being effective (e.g., coverage effective first of the month following 30 days of employment), and when coverage will terminate (e.g., date of termination of employment or end of the month following).

Most employers maintain an umbrella “mega” wrap plan that houses all of the ERISA health and welfare plan benefits under one wrap plan document and SPD. It therefore makes sense to break out eligibility along each benefit package option available under the wrap plan.

Avoiding Conflicts with Insurance Carriers, TPAs, and Stop-Loss Providers

Most employers will offer at least one of the plan options through an insurance policy. For fully insured plans, the employer needs to be cautious to avoid any conflicts with the underlying insurance policies. A wrap SPD that expands eligibility beyond the parameters of the insurance policy could expose the employer to liability for self-funding claims if the carrier exercised its right to deny coverage for an employee or dependent class not included in the terms of the applicable insurance policy. Any language clarifying that the wrap SPD is merely a summary—and to rely on the underlying insurance carrier documents in the event of a conflict—can be useful to ameliorate such concerns.

Even for self-insured plan options, typically the third-party administrator (TPA) will have materials summarizing the plan benefits. In some cases, those materials will also include an eligibility section, which should be consistent with the wrap documents. Regardless, if there is stop-loss coverage in place, the employer will have the same concerns to avoid potential conflicts as with insurance policies for fully insured plans. For example, any employer policy to extend active coverage during a non-protected leave (see below for details) would need to be consistent with the stop-loss provider’s recognition of such coverage. Employers should ensure that the eligibility definitions in the wrap docs do not expand beyond those recognized by the stop-loss provider to prevent the potential liability of self-funding claims without the protection of stop-loss.

Four Eligibility-Related Areas Typically Addressed Outside Wrap SPD

There are a few areas that deserve additional attention when determining if and how to address eligibility in the wrap SPD:

1. ACA Employer Mandate
   
   Applicable Large Employers (ALEs) need to offer minimum essential coverage that is affordable and provides minimum value to full-time employees (and their children to age 26) to avoid potential ACA employer mandate penalties. There are two different measurement methods available to determine whether employees are full-time (i.e., averaging a least 30 hours of service per week) for purposes of the ACA: the monthly measurement method and the look-back measurement method.
   
   For more details: Newfront ACA Employer Mandate & ACA Reporting Guide
   
   The ACA full-time status determination methodology is unendingly complex, particularly with respect to the look-back measurement method. Attempting to fully explain the many intricate details of the measurement, administrative, and stability periods, for example, would be so lengthy that it would likely overwhelm all other content in the wrap SPD.
   
   For more details: The ACA Look-Back Measurement Method
   
   Accordingly, best practice will typically be to include a “fail safe” type provision in the wrap SPD addressing the employer’s ALE status and that certain aspects of the applicable measurement method may qualify the employee for eligibility. Employers wishing to provide a more comprehensive description of the ACA full-time employee definition should generally refer to a separate company policy that is not restricted by the confines and multiple competing objectives of the wrap SPD.

2. Domestic Partners
   
   Employers frequently offer health plan dependent eligibility for an employee’s domestic partner, whether as required to satisfy state law (e.g., registered domestic partners pursuant to a state insurance mandate applicable to fully insured plans sitused in that state), or pursuant to the employer’s policy to expand domestic partner eligibility more broadly (e.g., company-defined domestic partner eligibility).
   
   For more details: Registered Domestic Partners and Company-Defined Domestic Partners
   
   There are many layers of complexity with respect to the types of domestic partners (and their children) who may qualify for coverage and the tax consequences of such coverage. Accordingly, employers often have supplemental documentation addressing whether an individual qualifies as a domestic partner under the plan (e.g., company-defined domestic partner affidavit) and whether the domestic partner’s coverage creates imputed income for the employee (e.g., tax-dependent status certification).
   
   For more details: Newfront Health Benefits for Domestic Partners Guide
   
   Accordingly, best practice will typically involve a reference to domestic partner eligibility in the wrap SPD, with more details available in separate documentation specifically designed to address the issues related to domestic partner coverage and taxation.

3. Temps and Interns
   
   Prior to the ACA employer mandate, employers often excluded from eligibility members of the contingent workforce such as temporary employees and interns. However, because these employees in many cases work full-time and therefore must be offered coverage to avoid potential penalties, that is no longer the case. Nonetheless, employers will in many cases impose separate eligibility conditions for contingent workforce such as temporary employees and interns.
   
   For example, employers will often impose a longer eligibility condition/waiting period (e.g., offering coverage as of the first day of the fourth full calendar month of employment), limit the medical plan options available (e.g., making available only lower cost plan options), exclude temps and interns from non-medical plan benefits such as dental and vision (which are not required to satisfy the ACA employer mandate), or in some cases exclude spouses (also not required to satisfy the ACA employer mandate).
   
   For more details: Health Coverage for Temps and Interns
   
   Whether to include in the wrap SPD any such eligibility provisions specific to temps and interns is one of the more difficult questions in this arena. Typically, employers leave those terms for materials outside of the wrap SPD, such as new hire materials designed specifically for temps and interns. The primary advantages of this approach are that a) employers are more likely to review those materials more frequently to ensure they are consistent with current practices, b) it provides more flexibility to employers to modify the terms given that temp/intern approaches change more frequently than regular full-time employees, and c) it increases the likelihood that temps and interns review the terms.

4. Non-Protected Leave Policies
   
   Many employers have a policy to continue active health coverage even where not required because the leave is not protected by FMLA or a state equivalent. For example, some employers extend active coverage for a period of up to six months before terminating active coverage (and offering COBRA).
   
   For more details:
   Newfront Health Benefits While on Leave Guide
   Health Benefits During Protected and Non-Protected Leaves
   
   These policies are often located outside of the wrap SPD, such as in leave materials or the employee handbook. In some cases, they are simply administrative practices applied consistently to similarly situated employees without any formal documentation—but ideally these terms would be outlined in one of these documents to ensure clear communication and consistent application.

Where to Define Plan Eligibility Option #2: The Insurance Carrier and TPA Documents

Another approach to defining health plan eligibility is to simply refer to the benefit materials provided by insurance carriers (fully insured plans) or TPAs (self-insured plans). This approach thereby relies entirely on materials outside the wrap documents to define and communicate plan eligibility. For example, the wrap SPD eligibility section might say something to the effect of “Please refer to the evidence of coverage, insurance policies, certificates of coverage, benefit summaries, and other benefit descriptions for eligibility terms and conditions applicable to each benefit package option under the plan.”

Advantages of Relying on Carrier/TPA Documents

The best argument in favor of this approach is that most employers rely on a wrap plan document and wrap SPD that already works in tandem with these underlying carrier/TPA materials (e.g., EOCs, policies, certificates of coverage, benefit summaries, etc.) by wrapping around those materials and incorporating them by reference.

Extending this same approach to plan eligibility allows the employer to a) rely on the specific eligibility terms already outlined by the carriers/TPAs without the need to restate them in the wrap documents, and b) avoid conflicts between the wrap documents and the carrier/TPA materials. These are significant advantages.

Disadvantages of Relying on Carrier/TPA Documents

This approach used to be much more common, but it has somewhat fallen out of favor in recent years. The primary flaw with the approach is that the underlying carrier/TPA documents increasingly do not actually define eligibility. In other words, these documents often now refer back to the employer’s policy when referencing plan eligibility. This can be an unpleasant surprise for employers and a frustrating situation for employees who end up having to track multiple layers of deflection to ultimately find a specific eligibility definition.

For example, if the wrap SPD relies entirely on the carrier/TPA documents for plan eligibility, employees may find that those materials refer back to the employer with provisions such as: “For specific information about your employer’s eligibility rules for coverage, please contact your Human Resources or Benefits Department,” or “You must meet your Group’s eligibility requirements, such as the minimum number of hours that employees must work. Your Group is required to inform Subscribers of its eligibility requirements.”

The result in this situation is the employee is sent on a journey to find the applicable eligibility terms without an easy answer. This carrier/TPA approach to defer back to the employer—although likely with good motivations to avoid conflicts—has created something of a vacuum for wrap SPDs referring to nonexistent carrier/TPA plan eligibility terms.

Even in situations where the carrier/TPA documents do address plan eligibility, it can prove difficult for employers to monitor those documents as they change and the carriers/TPAs utilized by the plan change, potentially to new documents that no longer specify eligibility, which may occur unbeknownst to the employer.

To be clear, all is not lost in these scenarios. The employee can follow the chain all the way through to the employer, who can then refer the employee to the additional materials that describe plan eligibility (such as the new hire and open enrollment materials discussed below). But clearly this derivative approach is not an ideal situation for any party, nor would it seem to be fully consistent with the intent of the ERISA SPD content requirement to describe the plan’s eligibility provisions.

Where to Define Plan Eligibility Option #3: New Hire and Open Enrollment Materials

Where the wrap SPD and the applicable insurance carrier/TPA documents do not specify plan eligibility, often the only materials addressing the matter are those provided to new hires during the recruiting and/or onboarding process, and the materials distributed to ongoing employees at open enrollment.

Advantages of Relying on New Hire/Open Enrollment Materials

These documents are less likely to have been the victim of neglect than traditional ERISA materials such as the wrap SPD because the People Operations team will be reviewing and utilizing these documents for multiple practical purposes. As new personnel fill the People Operations roles over time without a strong sense of the institutional history, they may be unfamiliar with the terms of a wrap SPD that has not been updated during their tenure or the source of much attention. Given their more informal nature, new hire and open enrollment materials are also relatively easy to modify as circumstances change.

Disadvantages of Relying on New Hire/Open Enrollment Materials

These documents are often drafted in a casual, conversational style that is more appropriate for quick summary overview language than a formal plan eligibility definition. It is possible that the author of the materials would not have recognized that there is no other formal location for the plan eligibility terms, and therefore would not be as careful and specific in clearly outlining all applicable terms and conditions.

In an ideal structure, these new hire/open enrollment materials could remain a simple, succinct summary of the more fully defined eligibility conditions addressed elsewhere, such as the wrap SPD or insurance carrier/TPA materials. Hoisting the weight of the ERISA plan’s full eligibility determinations on a substantively flimsy communication piece for new hires or open enrollment participants can tip the scales beyond what those documents are intended handle.

Where to Define Plan Eligibility Option #4: Employer’s Benefit Guide/Booklet

A common trend in recent years has been for employers to prepare and distribute a benefits guide or booklet that provides quick summary information for the various offerings in an attractively designed manner.

This makes sense given that the wrap SPD generally does not contain particularly useful content for most employee day-to-day inquiries, it is not designed through a marketing or communications lens for visual appeal, and employers also have benefit programs that extend more broadly than the contours of ERISA (e.g., commuter, HSA, pet insurance, LSA, identity theft protection) that would not be contained in the wrap SPD. This guide or booklet approach can therefore be very useful as a one-stop-shop for recruiting and common employee questions about the benefits available to them and their basic terms.

This guide/booklet phenomenon has provided yet another location where plan eligibility terms are outlined. However, the same advantages and disadvantages will apply to the guide/booklet as with the other new hire and open enrollment materials described above. Although they are more likely to receive consistent attention and can be easily modified, they generally would not be intended to be relied upon as the definitive source of the plan’s eligibility (or any other) terms. These guides/booklets are typically intended to be a short summary overview of the plan’s benefits, which would make a quick summary of eligibility terms more appropriate than the formal plan definition relied upon for official ERISA purposes.

Where to Define Plan Eligibility Option #5: Employee Handbook

Now this is what it’s like when worlds collide. The foundation of employment matters meets the foundation of employee benefits. While having the wrap SPD refer to the employee handbook for plan eligibility terms is a marriage proposal that may draw some whispers among concerned family members, it still can work.

Advantages of Relying on Employee Handbook

The document has a degree of formality and seriousness that establishes its bona fides much more clearly than, for example, new hire/open enrollment materials or a benefits guide/booklet. The handbook will therefore generally have a thorough internal and legal review to ensure that the terms are consistent with the employer’s intent and actual practices. While the handbook is not necessarily meant to carry the load of formal ERISA terms, it at least brings to bear the muscles to accommodate such weighty topics with sufficient sophistication and attention.

Disadvantages of Relying on Employee Handbook

Employee handbooks are generally the domain of employment and HR specialists, designed primarily to address those employment and HR matters. To the extent that employers have legal input to establish and maintain its terms, it is more likely to be employment counsel that does not have a particular expertise in employee benefit matters. The fact that the handbook is not traditionally thought of as an employee benefits resource document can also hamstring its effectiveness in being a clear plan eligibility communication channel.

Summary

With an ever-expanding array of documents overlapping in many areas of employee benefit descriptions and communications, it’s not always clear which document should be responsible for which aspect of those benefit programs. It generally makes sense to look first to the wrap SPD as the primary source of truth with respect to plan eligibility. Nonetheless, there are many levels of consideration that add nuance to the analysis.

Ultimately, the goal should be to ensure that both the employer and employee are clear as to where the plan eligibility terms are maintained and what those terms and conditions are for being able to participate in the plan. Employers should have a system in place that is designed to best meet those goals—whether it involves the wrap documents, insurance carrier/TPA materials, new hire and open enrollment materials, benefit guides/booklets, employee handbooks, other specific employer policy documents, or some combination of those resources depending on the context—and that involves a periodic review to ensure continuing accuracy.

Relevant Cites:

29 CFR §2520.102-3:

(j) The plan's requirements respecting eligibility for participation and for benefits. The summary plan description shall describe the plan's provisions relating to eligibility to participate in the plan and the information identified in paragraphs (j)(1), (2) and (3) of this section, as appropriate.

…

(2) For employee welfare benefit plans, it shall also include a statement of the conditions pertaining to eligibility to receive benefits, and a description or summary of the benefits. In the case of a welfare plan providing extensive schedules of benefits (a group health plan, for example), only a general description of such benefits is required if reference is made to detailed schedules of benefits which are available without cost to any participant or beneficiary who so requests. In addition, the summary plan description shall include a description of the procedures governing qualified medical child support order (QMCSO) determinations or a statement indicating that participants and beneficiaries can obtain, without charge, a copy of such procedures from the plan administrator.

Disclaimer: The intent of this analysis is to provide the recipient with general information regarding the status of, and/or potential concerns related to, the recipient’s current employee benefits issues. This analysis does not necessarily fully address the recipient’s specific issue, and it should not be construed as, nor is it intended to provide, legal advice. Furthermore, this message does not establish an attorney-client relationship. Questions regarding specific issues should be addressed to the person(s) who provide legal advice to the recipient regarding employee benefits issues (e.g., the recipient’s general counsel or an attorney hired by the recipient who specializes in employee benefits law).