EBIA Weekly Newsletter

Group Discount Does Not Take Individual LTD Policy Outside ERISA’s Voluntary Plans Safe Harbor

   June 16, 2016

Gooden v. Unum Life Ins. Co. of America and Unum Group Corp., 2016 WL 3059752 (E.D. Tenn. 2016)

When this individual sued after his long-term disability insurance claim was denied, the insurer sought to move the lawsuit from state to federal court by arguing that the policy was part of an ERISA plan. The individual had purchased the policy following meetings with the insurer at his workplace, and his employer collected premiums through payroll deduction and remitted them to the insurer. Because several other employees paid their premiums in this manner, the insurer provided a group discount of approximately 15%. To determine whether the arrangement was subject to ERISA, the court examined the regulatory safe harbor exempting certain voluntary insurance arrangements from ERISA if employees pay the full premium and the employer has minimal involvement—in particular, making no contributions and providing no endorsement.

The insurer argued that the discount was effectively an employer contribution because it would not have been available without the employer facilitating the premium payments. The court declined to draw parallels between the safe harbor and the COBRA rules, under which coverage that would not be available at the same cost absent the employment relationship is considered maintained by an employer. It distinguished other cases where a discount was found to be an employer contribution (see, for example, our Checkpoint article), noting that in many of those cases the employer negotiated the discount, or other factors contributed to the court’s finding. The court concluded that the combination of a non-negotiated discount with premium payment through payroll deductions (which is expressly allowed under the safe harbor) does not remove the policy from the safe harbor. With respect to employer endorsement, the court focused on the employee’s perspective, asking whether an employee could reasonably conclude that the employer had endorsed the arrangement. The court found no evidence that the employer provided any materials mentioning ERISA or suggesting that it endorsed the policy. While the employer had completed a claim form and engaged in limited correspondence with the insurer (for example, to provide updated salary information and notify the insurer that one individual had left the organization), in the court’s view these were minor ministerial tasks that did not show substantial employer involvement. And the employer’s limited action in allowing the insurer to publicize the arrangement is expressly permitted under the safe harbor. Because there was no ERISA plan, the case was returned to state court.

EBIA Comment: Cases involving the voluntary plans safe harbor often arise because an insurer wants to avoid state-law claims, which typically carry higher potential damages and penalties than may be available under ERISA. Employers wishing to avoid ERISA’s application to voluntary insurance arrangements (along with the associated compliance obligations) should make sure to limit their actions to those permitted under the safe harbor. For more information, see EBIA’s ERISA Compliance manual at Sections VII.C (“Detailed Review of Voluntary Plan Safe Harbor”) and XXXVI.J.1 (“Where Can ERISA Suits Be Filed?”).

Contributing Editors: EBIA Staff.