Cafeteria Plan Did Not Convert Life Insurance Coverage Into Non-ERISA Benefit

A deceased employee’s beneficiary sued the employer for benefits under the employer’s life insurance program, which consisted of employer-paid basic coverage and additional voluntary employee-paid coverage. The program provided short-term continuation for employees who were unable to work due to sickness or injury, premium waivers for employees who became totally disabled before age 60, and policy conversion privileges. The employee had both coverages when he suffered a stroke and was unable to return to work. He was too old to qualify for a premium waiver and failed to convert either of the policies prior to his death. The employee’s son was his sole beneficiary and sought benefits, but the claim was denied. After a court upheld the insurer’s denial of benefits, the beneficiary next sued the employer in state court for breach of contract. When the employer removed the case to federal court, the beneficiary sought to return it to state court, arguing among other things that the program was not subject to ERISA.

The court held that the program was subject to ERISA, rejecting the beneficiary’s argument that the coverages were not ERISA plans because they were offered through the “premium only” portion of the employer’s cafeteria plan, which stated that this portion of the cafeteria plan was not subject to ERISA. The court agreed with the employer that the policies constituted a separate ERISA plan, holding that the policies’ characteristics dictated whether ERISA applies, and that it was possible for the premium-only portion of a cafeteria plan to be excluded from ERISA even though the programs paid for through the plan were ERISA plans. The court declined to send the case back to state court and went on to enter judgment in the employer’s favor on the merits of the case.

EBIA Comment: The result in this case is not surprising, but it highlights some fundamental issues. While in general, a cafeteria plan is not itself an ERISA plan, the benefits paid for through a cafeteria plan may be subject to ERISA, and ERISA considerations can arise when a cafeteria plan is used as a funding mechanism for ERISA benefits. The decision also reminds us that labels given to benefit plans or arrangements are not controlling—calling an arrangement an ERISA plan does not make it one. For more information, see EBIA’s ERISA Compliance manual at Sections VI.A (“Overview of Arrangements Subject to ERISA”), VI.K.3 (“Other Special Issues for Particular Types of Plans or Benefits: Cafeteria Plans”), and VI.L (“Table: ERISA Status of Common Fringe Benefits”). See also EBIA’s Fringe Benefits manual at Section XIV.B (“Defining Group-Term Life Insurance and Other Key Terms”) and EBIA’s Cafeteria Plans manual at Section VII.G (“How Having a Cafeteria Plan May Impact ERISA Requirements”).

You may also be interested in our upcoming webinar “Learning the Ropes: An Introduction to ERISA Compliance for Group Health Plans“ (live on July 15, 2020).

Contributing Editors: EBIA Staff