A federal district court, in Stolebarger v. Prudential Insurance Company of America, ruled that long-term disability (“LTD”) benefits were covered by ERISA because the employer had “endorsed” the coverage.
Law. ERISA preempts most state laws that relate to ERISA-covered employee benefit plans except for state laws that regulate insurance, banking, or securities.
Notwithstanding the above, under ERISA’s safe harbor provision, an insurance policy will not be considered ERISA-covered if the policy satisfies the following four criteria:
- No contributions are made by the employer or employee organization.
- Participation in the program is voluntary.
- 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 collect premiums through payroll deduction, and to remit them to the insurer.
- The employer receives no consideration in connection with the policy other than reasonable compensation for administrative costs it incurs.
Background. An employee was diagnosed with depression and began to experience serious anxiety attacks that prevented him from performing his work. With medication and treatment, the employee resumed some administrative work, but after attempting to resume work in his regular occupation, it was clear that he could not continue.
The employee was placed on disability leave and filed a claim with the insurer for LTD benefits. The employee had obtained LTD coverage under a policy offered by the insurer through his employer.
The insurer denied the employee’s claim for LTD benefits because it determined he was able to perform his job functions. The employee then sued under both ERISA and state law (which provided greater penalties than ERISA). In response, the insurer asked the court to dismiss the employee’s state law claims saying they were preempted by ERISA.
District Court. Upon reviewing the matter, the district court noted that an employee benefit plan is not exempt from ERISA coverage if it fails any part of ERISA’s safe harbor provision. Here, the court found that the employer had endorsed the LTD plan because the insurance contract and certificate of coverage identified the employer as the plan sponsor, plan administrator and agent for service of process. Moreover, the court observed that the summary plan description defined the plan as the “[Employer’s] Long Term Disability Plan” and stated that the LTD plan was governed by ERISA. Accordingly, the court determined that ERISA applied to the LTD plan and, in turn, dismissed the employee’s state law claims.
Employer Takeaway. In view of Stolebarger, employers seeking to avoid the application of ERISA to similar arrangements are advised to refrain from: (i) including statements as to ERISA’s application in plan documentation, correspondence, or communications with employees; and (ii) saying that they sponsor or administer the plan, or indicating that the plan is part of the employer’s benefit package.