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Can the health insurance policy serve as the small business employee benefit plan document?

by Tony Novak, CPA, MBA, MT
revised 7/11/2014

Small businesses, typically those with less than about 20 employees who do not have in-house personnel to handle employee benefits, often allow the insurance policy document and the insurance company's certificates of coverage issued to employees to serve as the written documentation of the employer's employee benefit plan. This is not a good practice.

Even the smallest companies with only one common law employee (a person other than the owner(s)) should use a separate written employee benefit plan because:

1. The insurance policy does not contain all of the necessary information to document an employee benefit plan.
2. Insurance policy documents are not issues to employees who are not enrolled, therefore do not serve to communicate the employer's benefits information to these employees.
3. The insurance policy will leave the employee with unanswered questions.
4. Using the insurance policy exposes the employer to legal risk in the event of a dispute over an unwritten part of the employer's employee benefits.

The insurance policy documents do not contain all of the information and employer disclosures required under the Affordable Care Act. This specific requirement became effective January 2014 and applies to employers with more than $500,000 gross annual sales. Insurance company documents do not meet these new disclosure requirements. Although there is currently no fine for employers who fail to provide these required employee notices, there are considerable legal implications and risks for failure to comply with this section of the health reform law.

The failure to notify employees of coverage options outside of the current insurance, for example, may expose the employer to liability for the employee's future uncovered medical expenses that might have been covered if the employee had been aware of the full range of coverage options.

The simple solution is to provide separate written documentation to employees that are available free of charge and can be delivered electronically to each employee.

Other related questions are covered in separate articles:

Are small businesses required to have written employee benefit plan documents?

What are the risks if I do not have an employee benefit plan documents?

How do employee benefit plan documents help me?

How can I get sample employee benefit plan documents for my small business?

Related topics:

Reporting and Disclosure Guide for Employee Benefit Plans

DOL Guidance on the Notice to Employees of Coverage Options under Fair Labor Standards Act §18B and Updated Model Election Notice under the Consolidated Omnibus Budget Reconciliation Act of 1985

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