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"ERISA-fication" – When Will an Individual Policy Be Governed by ERISA as Part of an Employer

"ERISA-fication" – When Will an Individual Policy Be Governed by ERISA as Part of an Employer's Plan?


DRI's ERISA Report
(January 12, 2016)

"ERISA-fication" is a made-up term describing the application of ERISA to what, on its face, would appear to be a typical individual insurance policy.

When an individual disability income insurance policy – an IDI policy – is shown to be part of an employee welfare benefit plan, as that term is defined by ERISA, and does not fall within the scope of the Department of Labor's "safe harbor" exemption, 29 C.F.R. § 2510.3–1(j), the impact on claims litigation is significant.

If the policy includes language of discretion, discovery may be limited to production of the policy and the claim file, and a deferential standard of judicial review may apply. Extra-contractual damages available under state law will be preempted by ERISA. And the case will be decided by a judge, not a jury, because jury trials are not permissible under ERISA. In fact, the case can be decided by a federal judge, pursuant to that court's federal question jurisdiction. See, e.g., 28 U.S.C. § 1331 and 29 U.S.C. § 1132(e).

The plaintiff can institute the action in federal court and assert a claim to recover benefits under 29 U.S.C. 1132 (a)(1)(B), ERISA's civil enforcement provision. Or, if the plaintiff files suit in state court and asserts state law claims to recover benefits under the Plan, the defendant can remove to federal court under 28 U.S.C. § 1441 as an action arising under federal law, even when the ERISA-related nature of the action does not appear on the face of the complaint. Metropolitan Life Ins. Co. v. Taylor, 481 U.S. 58 (1987); see also Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41 (1987). If appropriate, the defendant also can remove on the basis of the court's diversity jurisdiction pursuant to U.S.C. § 1332.

Because the consequences of "ERISA-fication" are so significant, the first major legal battle often is triggered by the plaintiff's motion to remand the case to state court.

When Is an IDI Policy Governed by ERISA?

Whether an IDI policy is part of an employee welfare benefit plan governed by ERISA is a question for the court. Stern v. Provident Life & Accident Ins. Co., 295 F. Supp. 2d 1321, 1324 (M.D. Fla. 2003). ERISA will govern a disability policy if: (1) it is part of a plan, fund or program, (2) established or maintained (3) by an employer, (4) to provide disability benefits (5) to participants or their beneficiaries. 29 U.S.C. § 1002(1); Donovan v. Dillingham, 688 F.2d 1367, 1371 (11th Cir. 1982).

With respect to the first requirement, "a ‘plan, fund, or program' under ERISA is established if from the surrounding circumstances a reasonable person can ascertain the intended benefits, a class of beneficiaries, the source of financing, and procedures for receiving benefits." Donovan, 688 F.2d at 1372.

In the context of a group disability policy, these requirements are easily satisfied. The policy identifies the intended benefits (disability benefits), the intended beneficiaries (employees eligible for coverage under the group policy), the source of financing (premiums typically paid by the employer, but sometimes withheld from the employees' pay), and the procedure to apply for and collect benefits (as outlined in the group policy). See Butero v. Royal Maccabees Life Ins. Co., 174 F.3d 1207, 1214 (11th Cir. 1999); Stefansson v. Equitable Life Assur. Soc'y of U.S., 2005 WL 2277486, at *6-8 (M.D. Ga. Sept. 19, 2005).

The mere fact that the benefits in dispute are provided under an IDI policy does not necessarily dictate a different result. "Employee welfare benefit plans can be funded through the purchase of group or individual policies." Merrick v. Northwestern Mut. Life Ins. Co., 2001 WL 34152095, at *6 (N.D. Iowa July 5, 2001); Mass. Cas. Ins. Co. v. Reynolds, 113 F.3d 1450, 1453 (6th Cir. 1997); Clark v. Unum Life Ins. Co. of Am., 95 F. Supp. 3d 1335, 1350 (M.D. Fla. 2015); Alexander v. Provident Life & Accident Ins. Co., 663 F. Supp. 2d 627, 634 (E.D. Tenn. 2009). If fact, an individual policy may be subject to ERISA "even when the premiums are paid entirely by the employee." Shipley v. Provident Life & Accident Ins. Co., 352 F. Supp. 2d 1213, 1216 (S.D. Ala. 2004).

In determining whether a "plan, fund, or program" exists, the absence of language referencing ERISA in the IDI policy is of little significance if there is other evidence that the policy was part of an employer-sponsored plan. See Shipley, 352 F. Supp. 2d at 1217 (discounting plaintiff's argument that her policy was not governed by ERISA because the policy did not mention ERISA); see also Donovan, 688 F.2d at 1372 ("ERISA ... does not require a formal written plan.").

Moreover, "the test is not whether an employer intended the plan to be governed by ERISA, but ... whether an employer intended to establish or maintain a plan to provide benefits to its employees as part of the employment relationship." Shipley, 352 F. Supp. 2d at 1217; see also Anderson v. UnumProvident Corp., 369 F.3d 1257, 1263-64 (11th Cor. 2004). "Generally speaking, cases turn on the role of the employer in providing the benefit. If the employer has a role in obtaining and providing the benefit, plan status will likely be found." Moorman v. UnumProvident Corp., 2005 WL 6074572, at *15 (N.D. Ga. Feb. 17, 2005), quoting Ronald J. Cooke, ERISA Practice & Procedure, § 2.6 (2d ed. 2004); see also Butero, 174 F.3d at 1214 (enumerating non-exclusive list of factors suggesting that employer established or maintained a plan).

For a discussion of factors to be considered in determining whether an IDI policy may be governed by ERISA, see "ERISA-fication of Worksite and Voluntary Insurance Products" by Eric P. Mathisen and John A. Sharp (2016 DRI Life, Health, Disability and ERISA Seminar, Program Materials).

IDI Policies That Supplement Employer's Group LTD Coverage

A persuasive argument can be made that IDI policies are part of an ERISA plan if they are offered to certain employees to supplement their disability coverage under a group long-term disability policy issued to their employer.

In Bender v. Unum Group, 2016 WL 5420156 (N.D. Cal. Sept. 28, 2016), Unum removed to federal court a case in which the plaintiff sought to recover disability benefits under an IDI policy. Unum argued that the IDI policies issued to plaintiff and other employees, together with the employer's group disability policy, were part of a single disability benefit program. The plaintiff moved to remand, arguing the employer's only connection to her IDI policy was that her premiums were paid through payroll deduction.

Unum demonstrated through contemporaneous documents that the IDI policy was part of a "Supplemental Disability Plan" under which additional disability coverage was made available to highly compensated partners and employees. Unum also showed that personalized enrollment packets bearing the employer's name were distributed to eligible partners and employees, that a 25% premium discount was offered, that all IDI policies issued under the plan were assigned the same "risk number," and that coverage under the IDI policies was intended to "coordinate" with coverage under the group policy.

The district court denied the plaintiff's motion to remand, finding her IDI policy "was part of the larger Supplemental Disability Plan that was established by [the employer]," and that "[b]ecause [her] IDI policy was issued pursuant to the [employer's] Plan, it is part of a program that provides disability benefits." 2016 WL 5420156, *5.

The court next held that the Department of Labor's "safe harbor" regulation did not apply, because the employer did not "remain neutral," but endorsed the plan, including the IDI policies. The employer "‘negotiate[d] the terms of the policy' and participated in its creation and selection." Id. at *6, citing Thompson v. Am. Home Assur. Co., 95 F.3d 429, 436 (6th Cir. 1996).

Overcoming the Safe Harbor Argument

The usual argument that an IDI policy is not part of an ERISA-governed plan is based on the safe harbor regulation. That regulation clarifies for employers that certain common "group or group-type insurance program[s]" are not employee welfare benefit plans governed by ERISA. Anderson, 369 F.3d at 1263 n.2. To qualify for the safe harbor exemption, four criteria must be satisfied:

(1) No contributions are made by an employer …;

(2) Participation [in] the program is completely voluntary for employees…;

(3) The sole functions of the employer … with respect to the program are, without endorsing the program, to permit the insurer to publicize the program to employees or members, to collect premiums through payroll deductions or dues checkoffs and to remit them to the insurer; and

(4) 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 or dues checkoffs.

See 29 C.F.R. § 2510.3–1(j). The failure to meet even one of these regulatory requirements keeps a plan out of the safe harbor. See, e.g., Sgro v. Danone Waters of N. Am., Inc., 532 F.3d 940 (9th Cir. 2008); Shipley, 352 F. Supp. 2d at 1216.

When the safe harbor regulation is invoked, the defendant usually cannot dispute that the second and fourth elements of the regulation are satisfied (i.e., that participation was voluntary and that the employer received no consideration). But see Chamblin v. Reliance Standard Life Ins. Co., 168 F. Supp. 2d 1168, 1171 (N.D. Cal. 2001 (finding "plan was not completely voluntary because the employer guaranteed [the insurer] a minimum participation rate of 75 percent of the company's managers at the time of contracting for the policy, and the company met that level of participation").

The applicability of the safe harbor exemption typically hinges on the first and third elements – whether the IDI coverage involved some "contribution" by the employer and whether the employer's involvement exceeded that permitted by the regulation.

In considering whether the first element of the safe harbor regulation has been satisfied, courts are split as to whether the necessary "contribution" is the employer's payment of premiums for the employee's IDI policy.

Some courts have concluded that "[w]here an employer provides its employees benefits they cannot receive as individuals, it has contributed to an ERISA Plan" within the meaning of the safe harbor regulation. Brown v. Paul Revere Life Ins. Co., 2002 WL 1019021, at *7 (E.D. Pa. May 20, 2002) (employer contributed to policy, because employee received discounted premiums by virtue of his employment); Alexander, 663 F. Supp. 2d 633 (same); Kuehl v. Provident Life & Accident Ins. Co., 2000 U.S. Dist. LEXIS 21625 (E.D. Wis. Apr. 20, 2000) (same); see also Halprin v. Equitable Life Assurance Soc'y of the U.S., 267 F. Supp. 2d 1030, 1037 (D. Colo. 2003) (employer made significant contribution "by negotiating the terms and discounted rates" of the policies); Tannenbaum v. Unum Life Ins. Co. of Am., 2006 U.S. Dist. LEXIS 66623 (E.D. Pa. Sept. 15, 2006) (employer contributed to plan where employee would not have received 15% discount or interest-free loans had he not been an employee").

Other courts, however, have suggested that the term "contribution" refers only to a financial contribution. See, e.g., Letner v. Unum Life Ins. Co., 203 F. Supp. 2d 1291, 1301 (N.D. Fla. 2001) (citing cases). Those courts have concluded that an employee's receipt of a discount does not amount to an employer contribution. Id.

The third element of the regulation "explicitly obliges the employer who seeks its safe harbor to refrain from any functions other than permitting the insurer to publicize the program and collecting premiums." Butero, 174 F.3d at 1213 (emphasis in original). According to the Department of Labor:

An employee organization will be considered to have endorsed a group or group-type insurance program if the employee organization expresses to its members any positive, normative judgment regarding the program. An employer or employee organization may, in the course of permitting an insurer, insurance agent, or insurance broker to market a group or group-type insurance program to its employees or members, facilitate the publicizing and marketing of the program, but only to an extent short of endorsing the program. An endorsement within the meaning of § 2510.3-1(j)(3) occurs if the employee organization urges or encourages member participation in the program or engages in activities that would lead a member reasonably to conclude that the program is part of a benefit arrangement established or maintained by the employee organization.

Dept. of Labor Op. No. 94-23A at 7-8 (July 1, 1994); 94-26A at 7-8 (July 11, 1994) (emphasis added).

The kind of employer involvement that will defeat a safe harbor argument may include the employer's selection of the insurer from which the IDI policies will be purchased, the employer's negotiation of the terms of the policies, the employer's identification of the employees eligible to receive the IDI policies, the employer's communications to the eligible employees encouraging them to apply for and maintain coverage under the IDI policies, and the employer's entry into a "salary allotment agreement" with the insurer, under which the insurer bills the employer for all premiums and the employer collects the premiums by payroll deduction and pays them in a lump sum to the insurer. See, e.g., Bender, 2016 WL 5420156, at *6 (employer "‘negotiate[ed] the terms of the policy' and participated in its creation and selection"); Butero, 174 F.3d at 1214 (finding implementation of plan where employer "consulted an insurance agent, selected the terms of the group policy it wished to purchase for its employees, completed an application form for the policy, solicited enrollments from its employees, collected money through payroll deductions, and remitted premium checks to" the insurer); see also Donovan, 688 F.2d at 1373 ("[T]he purchase of … multiple policies covering a class of employees offers substantial evidence that a plan, fund, or program has been established."); Alexander, 663 F. Supp. 2d at 634-35 (employer established and maintained plan by entering into Salary Allotment Agreement with insurer, establishing a "risk number" for group billing, and paying a portion of the premiums each pay cycle); In re Duffin, 50 F.3d 14, 14 (9th Cir. 1995) (list bill is demonstrative of the establishment of an ERISA plan). IDI policies that are sufficiently endorsed by the employer will not be excluded from coverage under ERISA by the safe harbor exclusion.

Conclusion

The ERISA-fication of an IDI policy will result in substantive and procedural benefits to the insurer. Therefore, an insurer must consider whether a state law claim for benefits under an IDI policy can be governed by ERISA. The most critical factor both in establishing the existence of a "plan, fund, or program" under ERISA and in negating the applicability of the safe harbor exclusion is the employer's involvement in procuring and in maintaining the IDI policy.

Evidence of the employer's involvement may be derived from the IDI policy itself, the insurer's application and underwriting files pertaining to the insured, the premium payment history, and the records of the agent who sold the IDI policy.

The insurer also should determine whether it provided group coverage to the employer or additional IDI policies to other employees, because all of that evidence, taken together, may establish the employer's intent to establish or maintain a plan to provide benefits to its employees as part of the employment relationship and, thus, the applicability of ERISA to a particular IDI policy.

Copyright 2017, DRI's ERISA Report. Reprint permission granted.

Authors
H. Sanders Carter
T (404) 962-1015
F (404) 962-1220
Andrea K. Cataland
T (404) 962-1045
F (404) 962-1255
Associated Attorneys
Associated Industries
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