Shielding Voluntary Benefits from ERISA Compliance Requirements | Practical Law

Shielding Voluntary Benefits from ERISA Compliance Requirements | Practical Law

An overview of some aspects of the Department of Labor's (DOL) safe harbor from the Employee Retirement Income Security Act's (ERISA) definition of welfare benefit plan for voluntary benefits, and how employers can satisfy these requirements.

Shielding Voluntary Benefits from ERISA Compliance Requirements

Practical Law Legal Update 2-522-5324 (Approx. 4 pages)

Shielding Voluntary Benefits from ERISA Compliance Requirements

by PLC Employee Benefits & Executive Compensation
Published on 04 Dec 2012 • USA (National/Federal)
An overview of some aspects of the Department of Labor's (DOL) safe harbor from the Employee Retirement Income Security Act's (ERISA) definition of welfare benefit plan for voluntary benefits, and how employers can satisfy these requirements.
In light of rapidly increasing health care costs, some employers have considered alternative benefit arrangements (commonly referred to as voluntary or supplemental benefits) to replace or supplement traditional group health plan coverage. Coverage through individual health policies is one such alternative that has recently gained popularity. The DOL provides that if certain group-type arrangements satisfy a set of safe harbor conditions, the arrangements are exempt from ERISA. The safe harbor requires that the arrangements be voluntary, involve a limited employer role and satisfy other rules. In recent years, however, a steady stream of litigation has addressed whether employer involvement with these voluntary arrangements oversteps the limits of the DOL's safe harbor, which may make the arrangements subject to ERISA compliance requirements.

DOL Safe Harbor Requirements

The DOL safe harbor for voluntary benefits is satisfied if:
  • No contributions are made by an employer or employee organization.
  • Participation in the program is completely voluntary for employees or members.
  • The employer or employee organization receives no consideration, in the form of cash or otherwise, in relation to the program, subject to limited exceptions.
  • The sole functions of the employer or employee organization, without endorsing the program (see No Employer Endorsement), are:
    • permitting an insurer to publicize the program to employees or members, for example, by providing an employee the business card for the program's insurance agent;
    • collecting premiums through payroll deductions or dues checkoffs; and
    • remitting the premiums to the insurer.
All four of the safe harbor requirements must be satisfied for an employer to avoid ERISA.

Employers Can Perform Certain Limited, Administrative Activities

The courts permit employers to engage in certain administrative activities that are incidental to those allowed under the DOL safe harbor, without compromising employer neutrality, including:
  • Designating a policy's effective date.
  • Confirming to the insurer whether individuals are the employer's full-time employees.
  • Issuing certificates to enrolled employees confirming the commencement of coverage.
  • Maintaining a list of insured persons for the employer's own records.

No Employer Endorsement

An employer must perform the activities permitted under the DOL safe harbor without endorsing the program. A court may conclude that an employer has impermissibly endorsed a program if the employer:
  • Leads employees to think that the program is part of the employer's overall benefit offerings (for example, providing a brochure, handbook or enrollment forms to employees that characterize the program as sponsored by the employer).
  • Chooses or negotiates with the program's insurers.
  • Assists individuals with claims, maintaining claims forms or facilitating appeals.
  • Is named as, or serves as, plan administrator and agent for service of legal process for the program.
  • Makes suggestions to the insurer on plan design and structure.

A Typical Case Involving the DOL Safe Harbor

In a recent example of litigation involving the DOL safe harbor, the insurer of a supplemental life insurance policy under which a beneficiary was attempting to recover benefits argued that the safe harbor was not satisfied because the employer made impermissible contributions to the program and also endorsed it (see Turner v. Liberty Nat'l Life Ins. Co., (E.D. Tenn. 2012)). Strategically, if the court accepted the insurer's argument, it would mean that the case could remain in federal court, where the insurer could take advantage of ERISA's preemption rule to shield itself from state-law claims. However, the court disagreed with the insurer and concluded that:
  • The employer did not make a contribution for purposes of the DOL's safe harbor by allowing employees to pay for their insurance on a pre-tax basis.
  • Including the life insurance policy within the employer's cafeteria plan was not evidence of endorsement for purposes of the DOL safe harbor.
Unfortunately, not all courts agree as to which employer activities do and do not constitute employer endorsement under the DOL safe harbor, which means that the best approach for cautious employers is to closely limit their involvement with voluntary arrangements to those activities expressly stated in the DOL's safe harbor. For a complete analysis of the DOL's safe harbor for voluntary arrangements, see Practice Note, Voluntary Benefits.