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Discounted Premiums on Individual Disability Policies Do Not Create ERISA Plan



Shrago v. UNUM Life Ins. Co. of Am., 2021 WL 3188320 (D. Md. 2021)

Three coworkers purchased individual disability coverage through an insurance broker. At the broker’s suggestion, the coworkers agreed to have their separate policy premiums billed on a single annual invoice in exchange for a premium discount. After one of the three became disabled, the insurer approved only limited benefits. (Separately, a subsidiary of the same insurer approved the individual’s claim under his employer-provided group disability coverage.) The individual sued, and the insurer asserted that the state-law claims were preempted because the policy was purchased through an ERISA-covered plan. To determine whether the arrangement was covered by ERISA, the court examined the DOL’s voluntary plan safe harbor, which exempts certain insurance arrangements from ERISA if participation is completely voluntary, the employer makes no contributions, and the employer has only minimal involvement and provides no endorsement.

While it was clear that the employer paid no portion of the policy premiums, the insurer argued that the premium discount was effectively a company contribution. But the court rejected this contention, explaining that discounted premiums are not considered employer contributions unless the employer negotiated or was otherwise involved with the discount (see our Checkpoint article). Here, the employer played no part in negotiating, processing, or facilitating the discount. Nor was employer involvement signified by the fact that, for a time, the employer’s name was included in the billing address for the policies. The court also found no support in analogous rules under COBRA regarding the effect of premium discounts because there was no evidence the employer arranged for the discount. As for other elements of the safe harbor, the court determined that the individual clearly applied for the policy on his own, and there was no evidence that the employer even knew about the arrangement (much less endorsed it) or received any compensation relating to the policies. Finding no other indication that the employer had established or maintained the arrangement, the court concluded that the individual’s state-law claims were not preempted by ERISA.

EBIA Comment: This is a common scenario involving the voluntary plan safe harbor: an insurer claiming preemption to avoid state-law claims, which typically carry higher potential damages and penalties than those that may be available under ERISA. Here, it was clear that the employer was not involved with the policies. But the case is a reminder that employers should limit their involvement with voluntary benefits to avoid unwittingly subjecting the arrangement to ERISA and its many compliance obligations. For more information, see EBIA’s ERISA Compliance manual at Sections VII.C (“Detailed Review of Voluntary Plan Safe Harbor”) and XXXIX.B (“ERISA Preemption in a Nutshell”). See also EBIA’s Fringe Benefits manual at Section II.A.4 (“Voluntary Benefits”). You may also be interested in our upcoming webinar, “Learning the Ropes: An Introduction to ERISA Compliance for Group Health Plans(live on 8/26/2021).

Contributing Editors: EBIA Staff.

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