Bommarito v. Nw. Mut. Life Ins. Co., 2018 WL 3537118 (E.D. Cal. 2018)
A court has ruled that ERISA applies to a long-term disability insurance policy purchased by the owner of a physical therapy business. She became disabled and collected benefits under the policy, but eventually, the insurance company learned that the individual was practicing physical therapy while collecting benefits. After concluding that she was not disabled, the insurer canceled the policy. The individual sued the insurer for breach of contract and other state-law claims; in response, the insurer argued that ERISA preempted the claims.
The court analyzed the facts and circumstances to determine whether the elements of an ERISA plan were present. While the individual argued that she intended merely to purchase a policy for herself, not establish a plan for employees of the business (who obtained coverage through separate individual policies), application materials indicated employer involvement. Among other things, a form signed by the employer specified the eligible class of employees and stated that the employer would pay all or part of the premium and recommend the program to eligible employees through an “endorsement letter.” According to the court, a plan existed—even though there were multiple individual policies—because a reasonable person could ascertain the intended benefits, class of beneficiaries, source of financing, and procedure for receiving benefits. The other ERISA plan elements were also present, as the business was clearly an employer and the plan provided ERISA-listed benefits to participants and beneficiaries. Rejecting the individual’s argument that the coverage was excluded from ERISA under the safe harbor for certain voluntary employee-pay-all insurance arrangements, the court noted that it had already determined that the employer endorsed the plan. And while there was dispute over whether the employer paid employees’ premiums, the court explained that the employer need not have paid premiums to have contributed to the coverage. Rather, the employer contributed to the program by facilitating discounted premiums because the discount would not have been available absent the employer’s involvement. Due to the employer contribution, the plan did not fall within the safe harbor and was an ERISA plan. As a result, the court held that ERISA preempted the individual’s state-law claims relating to the denial of benefits.
EBIA Comment: Unlike this court, other courts have concluded that premium discounts do not constitute an employer contribution for purposes of the safe harbor. Key distinguishing elements seem to be the extent of the employer’s involvement in negotiating the discount and the presence of other factors indicating employer endorsement (see our Checkpoint article). In this case, the business owner might not have understood the implications of employer involvement in the insurance arrangement—or foreseen ERISA’s effect on her own situation. For more information, see EBIA’s ERISA Compliance manual at Sections VI.A.4 (“Identifying ERISA Benefits”) and VII.C (“Detailed Review of Voluntary Plan Safe Harbor”).
Contributing Editors: EBIA Staff.