Employers have a lot to think about when it comes to their employee benefit programs and legal compliance. ERISA’s safe harbor exemption for a certain group or group-type insurance programs allows employees to access all kinds of benefits without their employers having to deal with ERISA compliance. Insurance programs that can fall into this exemption may provide benefits such as medical, surgical, hospital, vacation or prepaid legal services. Often referred to as “voluntary insurance plans,” these plans are characterized by employee-only paid premiums and limited employer involvement.
Most employers want their “voluntary insurance plans” to steer clear of an “ERISA Plan” designation, because exempt voluntary insurance plans are not subject to the ERISA’s extensive reporting, disclosure, and fiduciary duty requirements.
It is important to note however that employers often find themselves at odds with an insurer that concluded it to be in their best interest to argue the safe harbor exemption does not apply. Here’s why:
The voluntary plan safe harbor issue often arises in a lawsuit brought by a covered employee against the insurer. In most cases, the insurer wants to avoid the employee’s state-law claims, which may expose the insurer to higher potential damages and penalties. To avoid the state law claim, the insurer must argue that the safe harbor does not apply, subjecting the plan to ERISA, which limits remedies.
Knowing when ERISA applies is therefore an important part of developing a robust risk and compliance strategy; knowing where the ERISA line lies is crucial to understanding how best to limit your role so that you do not inadvertently convert your non-ERISA plan into an ERISA plan. The safe harbor exemption requirements are detailed below.
Voluntary Insurance Plan Exemption
Voluntary insurance plans must meet four exemption requirements. In order to qualify for the safe harbor, an employee welfare benefit plan has the following features:
- No contributions are made by an employer;
- Participation in the program is completely voluntary for employees;
- The sole functions of the employer are, without endorsing the program, to permit the insurer to publicize the program to employees, to collect premiums through payroll deductions and to remit the premiums to the insurer; and
- The employer receives no consideration in the form of cash or otherwise in connection with the program, other than reasonable compensation, excluding any profit for administrative services actually rendered in connection with payroll deductions.
Any contribution made by an employer towards insurance coverage will take the plan outside the voluntary plan safe harbor. Additionally, reimbursement of employee premium expenses is considered a “contribution,” which includes payments under tax-advantaged reimbursement arrangements like HRAs (health reimbursement accounts). In some cases, special premium group discounts negotiated by an employer may be considered contributions.
Employers should hesitate before running payroll deductions through a 125 cafeteria plan for voluntary insurance plan purposes—lest the employer will run afoul of ERISA exemption requirements. The general consensus is that this course of action is not a good idea. Several courts have concluded that pre-tax employee contributions paid under a section 125 cafeteria plan are employer contributions (and are considered to be an endorsement). Given the current legal landscape, it makes sense to require employee contributions to be paid on an after-tax basis.
The voluntariness prong requires that employee participation be completely voluntary. A plan is not voluntary if coverage is automatic and paid by the employer. Likewise, employers run afoul of this requirement if they require employees to make a decision as to coverage or tie coverage to a high level of participation. In addition, requiring attendance by employees at information meetings may be viewed as undermining the voluntariness of employee participation.
Employer’s Functions Spelled Out
An employer must limit its roles with respect to the program to those described below.
Permit the insurer to publicize the program to employees
Permitting an insurer to publicize the voluntary plans may take the form of a presentation in the workplace, providing employees with the insurance agent’s business card, or telling employees of the program’s availability and directing them to the insurer for details.
Collect premiums through payroll deductions and remit them to the insurer
The voluntary plan safe harbor permits an employer to collect premiums through payroll deductions. Upon collection of premiums, employers may remit the premiums to the insurer, including forwarding the premiums by corporate check.
Functions ancillary to the enumerated ones
While certain ancillary functions have been approved by some courts in litigation, there is some risk of losing a benefit plan’s voluntary status if performed by the employer, depending on the jurisdiction. Nevertheless, examples of such approved functions include:
- Selecting the effective date of the policy;
- Verifying the full-time employment status of employees to the insurer;
- Maintaining a list of covered employees or tracking employee eligibility status;
- Providing employee information and coverage change forms to the insurance company;
- Maintaining a file on the voluntary plan policy;
Issuing certificates to enrolled employees confirming the commencement of coverage; and
Selecting certain plan options in completing insurance application (e.g., requiring that employees that work for 30 days before reaching eligibility).
The requirement that an employer not endorse a voluntary insurance plan is the most difficult to comply with, and is the most litigated of the exemption’s requirements. Determining what employer acts constitute endorsement is highly fact-specific. Employers should avoid the following activities that have been found to be an endorsement:
- Selecting the insurer
- Negotiating plan terms/design
- Linking coverage to employee status
- Using the employer’s name or logo in connection with the plan or associating the plan with other employer plans
- Recommending the plan to an employee
- Stating that ERISA applies
- Doing more than permitted payroll deductions, such as accepting liability for premiums during grace periods or issuing premium notices
- Permitting payment of premiums with pre-tax dollars through a cafeteria plan
- Assisting employees with claims or disputes
If you now think the insurance program you thought was exempt from ERISA may not be, consult with your trusted advisors at your earliest opportunity. If you’re considering giving your employees access to these voluntary benefits, work with your advisor to ensure you know where ERISA’s safe harbor exemption lies.
Published November 4, 2019
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