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Employee-Paid LTD Policy Cannot Be Severed From Employer’s ERISA Plan



Duncan v. Unum Life Ins. Co. of Am., 2022 WL 2812659 (M.D. Tenn. 2022)

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An individual sued an insurer in state court after it denied portions of his claim for long-term disability (LTD) benefits. Seeking the protection of ERISA preemption, the insurer successfully removed the case to federal court. In connection with the individual’s request for a jury trial, the federal court needed to determine whether the LTD policy was subject to ERISA. (In general, there is no right to a jury trial for ERISA lawsuits.) To do this, the court analyzed whether the LTD policy was part of an employer-sponsored ERISA plan or whether it fell within the DOL’s regulatory safe harbor exempting certain “voluntary” insurance arrangements from ERISA if employees pay the full premium and the employer makes no contributions and does not endorse the arrangement.

The employer offered a variety of benefits, with coverage provided under four separate policies obtained from the same insurer and presented as a group benefits plan for employees—basic life, voluntary life, short-term disability, and the LTD coverage. The employer paid the premiums for the basic life coverage, while premiums for the other types of coverage were employee-funded. The court agreed with the insurer that the LTD policy was a component of the employer’s overall plan and was endorsed by the employer, making the safe harbor inapplicable. It rejected the individual’s contention that the LTD policy should be severed from the employer’s other benefits and analyzed separately under the safe harbor. Distinguishing a case the individual cited in support of severing the LTD policy from the others, the court noted that, among other things, the policies in that case were issued by different insurers, whereas here the employer procured all of the policies from the same insurer at the same time. The court explained that “employee-funded disability benefits are not severable from employer-funded insurance plans” for purposes of evaluating ERISA’s applicability—particularly when the employer “actively engaged in selecting both the employer-funded and employee-funded policies that comprise a benefits package.” There was evidence here that the employer applied for the coverage, selected the types of coverage that would be included in the plan, and retained the right to amend, modify, or terminate the plan—actions that reflected endorsement. Since the LTD policy was part of the overall ERISA plan, the individual was not entitled to a jury trial.

EBIA Comment: Because state-law claims typically carry higher potential damages and penalties than those available under ERISA, individuals often seek to use the voluntary plan safe harbor to avoid ERISA’s application, while insurers take the opposite stance (see, e.g., our Checkpoint article). For employers, misunderstanding the safe harbor’s parameters—believing that the safe harbor applies when in fact it does not—can lead to ERISA compliance failures. Given the facts identified by the court, however, it appears that this employer intended all components to be part of its ERISA benefits program. For more information, see EBIA’s ERISA Compliance manual at Sections VII.C (“Detailed Review of Voluntary Plan Safe Harbor”) and XXXVI.J.2 (“Is There a Right to Jury Trial Under ERISA?”).

Contributing Editors: EBIA Staff.