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Reprinted with permission from the July 14, 2025, edition of The Legal Intelligencer © 2025 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.

Most employers are aware that retirement plans require written plan documents and summary plan descriptions. However, many employers do not realize that welfare plans also require written plan documents and are shocked when they learn that their welfare benefit plans are not in compliance with the Internal Revenue Code and Employee Retirement Income Security Act (ERISA) because they have failed to adopt proper written plan documents.

Welfare plan documentation requirements

Welfare plans generally include medical, dental, vision, disability, life insurance benefits, and medical flexible spending accounts, among other benefits.

They must have a plan document and a summary plan description. In addition, if the employer allows employees to contribute to the cost of welfare plans on a pretax basis, the employer must also establish a cafeteria plan.

Cafeteria plans

If an employer withholds benefit premiums from employees’ wages on a pretax basis, the employer must establish a “cafeteria plan.” Cafeteria plans, also known as Section 125 plans, are governed by Section 125 of the Internal Revenue Code.

In order for an employer to withhold premiums from an employee’s wages pretax, the employer must adopt a written plan that contains:

• A specific description of each of the benefits available through the plan
• The plan’s rules governing participation
• The procedures governing employees’ elections
• The manner in which employer contributions may be made under the plan
• The maximum amount of employer contributions available to any employee
• The plan year

(See Prop. Reg. 1.125-1(c))

If the employer does not adopt a written plan or the plan does not contain the required language, then the amount of the premiums for the benefits chosen by the employee will be considered taxable income to the employee. Prop. Reg. 1.125-1(c)(6).

For example, if the employee pays $300 a month for health coverage and the employer does not have a cafeteria plan, the $300 should be taxable income to the employee and not withheld on a pretax basis.

If the employer does not have a cafeteria plan and treats the premium payments on a pretax basis, then the employer could be liable for failure to withhold income taxes and filing incorrect returns, including filing incorrect Form 941s and providing incorrect W-2s to its employees.

ERISA plans

In addition to having a cafeteria plan that allows employees to pay for benefits on a pretax basis, welfare plans must be governed by a written plan document. ERISA Section 402 requires that every employee benefit plan be established and maintained pursuant to a written instrument.

Employers frequently confuse benefits booklets and certificates of coverage provided by insurers as the required plan documents. Although these documents may be incorporated into the employee benefit plan ERISA plan document and provide valuable information regarding the benefits, they typically do not contain the required information necessary to satisfy the requirements of ERISA to be the “official” plan document.

ERISA requires that the “official” plan document provide a procedure for establishing and carrying out a funding policy, establish a procedure for allocating responsibilities, provide a procedure for amending the plan, and specify the basis upon which payments are made to and from the plan. 29 U.S.C. Section 1102.

In addition to having a written plan document, welfare plans must have a summary plan description, which contains basic plan information (a summary of the plan), such as the plan name, number, named fiduciaries, eligibility requirements, and claims procedures. The plan document and summary plan description may be combined into one document, but the document must identify itself as intending to satisfy the requirements of both the plan document and summary plan description.

There is no specific penalty for failing to have a plan document, except in cases where the Department of Labor (DOL) or a participant requests the document and the employer fails to provide it within 30 days of the request. In that case, the penalty is $110 per day.

Equally important is that a failure to have a plan document exposes the employer to litigation risks. Employees may argue that the plan, as administered, provided a benefit that was not intended. In addition, plan fiduciaries are required to administer an employee benefit plan according to its plan documents. If there is no plan document, it is more difficult for plan fiduciaries to argue that they are complying with their fiduciary duty.

WRAP plans

Instead of establishing a separate employee benefit plan for each benefit offered, such as one plan for medical, one for dental, and one for vision, employers can establish a “wrap plan.” A wrap plan “wraps” multiple employee benefits into one plan with one plan document and one summary plan description.

The wrap plan generally includes information regarding COBRA, funding, plan administration, and other notices required by ERISA and incorporates the component benefits’ specific information regarding eligibility and benefits provided by reference.

Wrap plans are frequently used as they allow employers to file one Form 5500 for the wrap plan, which incorporates each employee benefit offered into the one Form 5500. If the employer does not establish a wrap plan, then the employer should be filing a Form 5500 for each employee benefit for which a Form 5500 would be required, meaning a Form 5500 for the medical plan, a Form 5500 for the dental plan, and other applicable plans.

Flexible Spending Arrangement (AKA Flexible Spending Accounts)

Frequently, employers wish to offer their employees the ability to participate in a flexible spending arrangement/account (FSA), which allows them to save and pay on a pretax basis for certain medical expenses (medical FSA) or dependent care expenses (dependent care FSA); however, simply listing it in a benefits booklet is not sufficient to establish one.

FSAs may be included as part of a cafeteria plan or a wrap plan; if it is not, they should have their own plan document. In order to establish either a medical or a dependent care FSA, there should be a written document that provides information regarding participation, which expenses can be reimbursed, the procedure for reimbursement, carryover policies, and COBRA information for medical FSAs.

If a written document does not exist, the employer should not have withheld amounts from the employees’ wages pretax. As previously mentioned, the employer could be liable for failure to withhold income taxes and filing incorrect returns, including filing incorrect Form 941s and providing incorrect W-2s to its employees.

In addition, medical FSAs are ERISA plans and must comply with ERISA’s requirements on plan documents and summary plan descriptions discussed above.

Compliance and risk management

Failing to have plan documents and a cafeteria plan exposes employers to several risks, including the risk of IRS and DOL penalties and the risk of having no supporting documents during litigation from participants. Employers should use the rest of 2025 to ensure that their welfare plans are compliant and that their documents, if they do have them, comply with the requirements of the Internal Revenue Code and ERISA.