Does the Tail Know What the Head is Doing? – The Importance of Internal Communication Between Management and Employee Benefits Personnel

Dickinson Wright

Dickinson Wright

Employers who sponsor employee benefits plans are used to providing ongoing communication to plan participants.  The communications range from legally required disclosures (e.g., summary plan descriptions) to legally required notices (e.g., COBRA notices) to information voluntarily provided to participants (e.g., the importance of saving for retirement).  However, regular internal communication between employer management and employees responsible for benefit plan administration and compliance (“benefits staff”) is also vital to the effective operation of an employee benefits program.  A lack of effective communication between an employer’s management and benefits staff can result in costly, yet avoidable, compliance violations, employee relations issues, and other problems.

Here are four examples of the importance of effective internal communication between employer management and benefits staff.

  1. Change in Employer Aggregation Group Members

Employers regularly purchase or sell entities that are required to be aggregated with the employer and treated as a single employer with it under the controlled group, trades or businesses under common control, and/or affiliated service group rules.  By way of example, some form of employer aggregation applies for purposes of:

  • Non-discrimination rules that apply to qualified retirement plans
  • Non-discrimination rules that apply to cafeteria plans and dependent care spending account plans
  • The applicable large employer rules under the Affordable Care Act’s employer shared responsibility rules
  • The small-employer exception to COBRA
  • The comparable health savings account contribution rules
  • Determining who is the service recipient under the deferred compensation rules of Internal Revenue Code (“Code”) Section 409A
  • Determining what entities constitute the employer subject to joint and several liability under the multiemployer withdrawal liability rules.

Sometimes management closes a sale or acquisition transaction but does not inform benefits staff or only does so months or years later.  This may occur for a variety of reasons, such as the acquired business maintaining its own benefits programs that will not be integrated with the acquirer’s benefit plans; the transaction being conducted overseas and primarily involving foreign entities with a U.S. entity being a small portion of the transaction; or a perceived need for confidentiality before and after the transaction.  A common theme in many of these situations is management not being familiar with the employer aggregation rules or their importance for benefit plan compliance.

Fortunately, not recognizing the employer aggregation impact of a transaction does not always result in a compliance violation.  For example,  Code Section 410(b) includes a transition period during which a qualified retirement plan is treated as continuing to comply with the Code’s minimum coverage rules for a period of time after a transaction, provided the plan complied immediately prior to the transaction, and certain other conditions are satisfied. However, other rules, such as the cafeteria plan rules, do not include any transition relief.

It is important for employer management to understand the employer aggregation rules and to communicate early with benefits staff so that they can help management structure transactions to maximize compliance with the employer aggregation rules.

  1. Change in Ownership Percentages Without Change in Employer Aggregation Group Members

Sometimes even a sale or acquisition of a small percentage of a business that results in no change to an employer aggregation group can impact benefits compliance.  For example, an employer that maintains a multiple employer welfare arrangement (“MEWA”) (generally an employee welfare plan that provides benefits to employees of two or more employer groups) is not required to file with the Department of Labor an annual Form M-1 Report for the MEWA as long as the employers participating in the plan share a common control interest of 25% or more during the plan year.  For a common control group slightly above the 25% threshold, the filing exemption can be lost due to a small percentage ownership change that has no impact on employer aggregation (though there is limited transition relief from immediate Form M-1 filing responsibility).  Again, communication between employer management and benefits staff about even a small transaction can avoid costly and complicated legal compliance violations down the road.

  1. Special Benefit Promises

An important time for management to consult with benefits staff is when the employer is considering making special benefit promises to an employee.  This can occur in connection with an employee termination when an employer agrees to continue the terminated employee’s benefits for a few months post-termination generally or as part of a separation agreement.  Management may not know that some benefits, such as insured long-term disability and life insurance, may not simply be continued for a former employee, risking the employer having to self-fund disability or death benefits in the event of an uninsured claim.  Another situation in which advance communication can prevent a violation is with verbal promises of deferred compensation to an employee.  Code Section 409A requires deferred compensation agreements to be in writing and include certain provisions such as the manner and timing of payment.  A brief consultation with benefits staff when special benefit terms are being considered could prevent potentially costly liability.

  1. Decisions to Change Benefits Made at Board Meetings or in Collective Bargaining

The decision to revise the terms of an employee benefits program can occur in a variety of ways.  For example, decisions may be made at a board of directors meeting or as a result of collective bargaining.  Compliance violations can occur when there is a delay between when these benefit change decisions are made and when benefits staff is informed of the changes, and the longer the delay, the greater the risk.  For example, some benefit changes cannot have a retroactive effective date (reductions in plan required employer non-elective contributions to a defined contribution plan where no minimum service requirement applies) or can only be effective as of the first day of a plan year (e.g., certain changes to the terms of safe harbor 401(k) plan).  Other changes require a specific advance notice period before the change can be effective (certain changes in group health plan terms).  In addition, third-party service providers typically require some minimum advance notice so they can adjust their benefit administration systems.  When management does not promptly advise benefits staff of agreed-to changes to plan terms, it puts benefits staff in the unenviable position of having to let management know their decisions cannot be implemented as planned.  It can also result in an employer’s financial cost and union/employee relations problems.


The importance of effective internal communication between employer management and benefits staff cannot be overstated.  Benefits staff are an employer’s front line for knowledge of employee benefit plan terms and conditions, requirements under third-party service provider contracts, and compliance with the many laws that impact an employee benefits program.  Optimally, employer management will consult with benefits staff prior to making business decisions, such as the acquisition or sale of a business entity, which may affect their employee benefit plans’ terms or ability to comply with the law.  If that is not possible, employers should inform benefits staff of decisions promptly after they are made, so benefits staff can take the steps necessary to implement the decision, keep the plans legally compliant, and protect the employer from potentially costly and disruptive liability.  In the employee benefits world, the old saying “the head doesn’t know what the tail is doing” is reversed.  The benefits staff tail needs to know what the management head is doing.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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