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Court Treats Four Standalone Key Employee Life Insurance Policies as Single ERISA Plan



Alberth v. Southern Lakes Plumbing & Heating, Inc, 2020 WL 1082775 (E.D. Wis. 2020)

The owner of a small company purchased and paid the premiums for life insurance policies on four of its key employees, allowing each to designate their chosen beneficiaries. When one of the key employees left employment, he requested payment of the cash value of his policy. Although no formal plan document outlined such a benefit, the employee asserted that the covered employees generally understood that after a certain period of time, in addition to death benefits, they would be entitled to the cash value of the policies. (Also, a cash value payment had been made upon a previous employee’s termination.) The owner claimed the former employee was not entitled to such benefit. The former employee made multiple requests for copies of policy documents, which the employer refused. Arguing that the surrounding circumstances demonstrated the existence of an ERISA plan despite the lack of a written plan document, the former employee sued the company and its owner for failure to provide information about an ERISA plan and for benefits under the plan. The company argued that the purchase of individual life insurance policies was a series of “ad hoc” decisions that did not create a plan under ERISA.

Because the term “plan” is not defined in ERISA, courts have held that a plan is an arrangement with a continuing administrative scheme and reasonably ascertainable terms. Pointing to the decades-long payment of premiums, the court concluded a continuing administrative scheme was present. To determine whether the terms were reasonably ascertainable, the court analyzed established factors: whether a reasonable person could ascertain the intended benefits, a class of beneficiaries, the source of financing, and the procedures for receiving benefits. According to the court, even though there was disagreement over the cash payment, the death benefits were ascertainable, as were the other elements. Observing that “terms need not be undisputed to be ascertainable,” the court ruled that there was an ERISA plan. The court found the plan administrator liable for a penalty for failure to provide documents upon written request, but deferred a decision on the amount. On the benefits issue, the court declined to rule in the former employee’s favor without a trial since there were disputed fact issues, allowing the case to proceed.

EBIA Comment: This serves as a reminder to employers to review informal arrangements benefiting employees to ascertain the likelihood that they may constitute an ERISA plan, keeping in mind the factors courts typically evaluate in making this determination. For more information, see EBIA’s ERISA Compliance manual at Sections VI.B (“Is There a Plan, Fund, or Program?”), VIII.B (“The Written Plan Document Requirement”), VI.C (“Is the Plan, Fund, or Program Established or Maintained by an Employer?”), XXV.A (“Participant and Beneficiary Right to Request and Examine Documents”), and XXXII.D (“Plan Document Failures”).

Contributing Editors: EBIA Staff.

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