Legal Compliance Risks Faced by Sponsors of Employee Benefit Plans

The following are examples of the types of legal compliance risks that should be addressed in the overall risk management strategy of those companies sponsoring employee benefit plans covering employees in the United States. The list is not intended to be exhaustive. Sample scenarios on how these risks may arise are provided at the end of the list.  As with the risks that are noted, these scenarios are not exhaustive. They are merely intended to demonstrate why employers should develop a risk management strategy to minimize or eliminate their exposure to unnecessary taxes, penalties, liabilities and other risks in this area.


  • Tax penalties (from imputed taxable income, delinquent payroll taxes, excise taxes, and the associated interest charges)
  • Civil penalties (“per violation” fines, “per diem” delinquency penalties)
  • Criminal penalties (much larger fines and/or imprisonment)
  • Investigations & litigation (attorney fees, unintended benefit payments, lost time of staff and executives)
  • Removal from fiduciary positions (and possible need to outsource fiduciary functions)
  • Personal fiduciary liability
  • Damage to reputation (employees, union, public, investors)
  • Lost opportunity to reinforce positive workforce messages


  • Plan Documents & SPDs
    ERISA (the Employee Retirement Income Security Act of 1974) requires specific types of information to be included in formal benefit plan documents and summary plan descriptions. Failure to have the required documents with the necessary information can result in civil penalties ($110/day for failure to provide them on request to participants), statutory penalties for breach of fiduciary duty, and criminal penalties, as well as litigation. Benefits may have to be paid when unintended if the required details and disclosures are not included in the documentation.
  • Ineligible Dependents
    Federal and state laws affecting health coverage of dependents have changed in recent years. Coupled with changes in the concept of “family” and rising health care costs, many employers find that they have ineligible dependents enrolled in their health plan. This raises the potential for violation of payroll tax requirements and breach of fiduciary duties, beyond the obvious adverse financial impact and potential for morale problems for anyone perceived of as obtaining unfair coverage. Many employers have experienced significant savings after establishing a dependent eligibility verification program.
  • Notification Failures
    Employers are faced with numerous notification requirements under COBRA, USERRA, HIPAA, 401(k), Medicare, FMLA and other regulations, many of which can lead to civil penalties of $110/day and excise taxes of $100/day, and potential damages and criminal penalties if not properly implemented.
  • Cafeteria Plan Change in Status Elections
    As employers modify medical and other benefits, and employees continue to experience job and family changes, proper implementation of procedures allowing for changes in benefit elections becomes more critical. A violation of the restrictions and mandates for election changes can lead to adverse tax impacts as well as difficult claims and appeals issues.
  • Nondiscrimination Testing
    Federal tax law imposes several types of nondiscrimination rules on retirement and welfare plans to ensure that each plan benefits a broad range of employees rather than just the highly compensated. Employers tend to rely on outside vendors to conduct the various discrimination tests. Because testing failures can have significant adverse tax consequences and raise employee relations concerns, periodic review of the testing procedures is advisable for the employer sponsoring the particular plans to ensure that the testing is taking place and being conducted properly.

Again, the foregoing are merely examples of the numerous situations where legal compliance risks may arise with respect to benefit plan sponsors. This information is not intended and should not be used to design a risk management program to address the risks of any particular employer. Risk management programs should be developed in consultation with those responsible for plan design and administration, as well as with legal counsel.