Employer’s Endorsement of Long-Term Disability Policy Creates ERISA Plan

A former employee sued a long-term disability insurer under state law and ERISA after the insurer denied his claims for benefits under a policy purchased through his employer. The insurer moved to dismiss the state-law claims, arguing that they were preempted by ERISA. The employee alleged that the claims were viable because the plan was exempt from ERISA under the DOL’s regulatory safe harbor for voluntary benefits meeting certain requirements. The employee argued that the plan fell within the safe harbor because the premiums were paid entirely by the employee with no contribution from the employer; participation in the program was voluntary; the employer’s sole functions were to permit the insurer to advertise the program and to collect premiums through payroll deductions and remit them to the insurer; and the employer received no consideration for the program other than reasonable compensation for payroll deduction services. Notably, the employee failed to allege that the employer did not endorse the program—a required element of the safe harbor.

Noting that a plan cannot be excluded from ERISA if it fails any part of the DOL’s voluntary plan safe harbor, the court ruled that the employer had “endorsed” the program because the insurance contract and certificate of coverage named the employer as the plan sponsor, plan administrator, and agent for service of process and included an SPD “at the employer’s request.” Moreover, the SPD said the plan was governed by ERISA. Thus, the court concluded that ERISA applied, and the employee’s state-law claims were preempted.

EBIA Comment: As with many similar cases, this insurer sought to avoid state-law claims, which typically involve higher potential damages and penalties—the employer was not a party to the lawsuit. Accordingly, the court did not address whether the employer believed its program qualified for the voluntary plan safe harbor or complied with ERISA. Nevertheless, the case serves as a warning to employers seeking to avoid the application of ERISA to these types of arrangements (and the compliance obligations that come with being an ERISA plan). They should avoid including statements as to ERISA’s application in plan documentation, correspondence, or communications with employees and should not say they sponsor or administer the plan. Because such statements may be included inadvertently (for example, in “canned” plan documents provided by the insurer), employers should review all plan documentation to eliminate unintended references to ERISA. For more information, see EBIA’s ERISA Compliance manual at Section VII.C (“Detailed Review of Voluntary Plan Safe Harbor”). You may also be interested in our recorded webinar “Learning the Ropes: An Introduction to ERISA Compliance for Group Health Plans” (recorded 2/21/18).

Contributing Editors: EBIA Staff.