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Court Finds Employee-Paid LTD Policy Was Part of Employer’s ERISA Plan

by | Aug 24, 2022 |

A federal district court in the Middle District of Tennessee has held, in Insurance Company of America, that a long-term disability (“LTD”) policy offered under an employer’s group health plan was subject to ERISA despite the fact that the premiums for the LTD coverage were entirely employee-funded.

Law.  ERISA generally applies to welfare benefit programs, whether they are fully insured or self-insured.  However, certain voluntary group or individual insurance plans, in which participants pay all of the cost, and the employer’s role is limited to withholding premiums through payroll deduction and remitting them to an insurer, may be exempt from ERISA—depending on the extent of employer involvement.

A plan qualifies as exempt under the Department of Labor’s (“DOL’s”) Voluntary Plan Safe Harbor if:

  • it is funded by group or group-type insurance;
  • it is completely voluntary;
  • there are no employer contributions; and
  • the employer does not endorse the plan.

Even minimal “sponsorship or endorsement” (e.g., a company’s name being included on the brochures) by the employer may eviscerate this exemption. The following activities have previously been found to constitute endorsement, resulting in loss of the DOL’s Voluntary Plan Safe Harbor:

  • Selecting the insurer and coverages;
  • Negotiating plan terms/linking coverage to employee status;
  • Using employer’s name/associating plan with other employee plans;
  • Recommending plan to employees;
  • Saying ERISA applies;
  • Doing more than permitted payroll deductions;
  • Allowing use of employer cafeteria plan; and
  • Assisting employee with claims or disputes.

However, courts have determined that the following activities do NOT constitute employer endorsement:

  • Permitting insurer to publicize the plan;
  • Collecting premiums by payroll deduction; and
  • Remitting premiums to insurer.

Background.  In Duncan, the employer’s group benefits plan offered coverage under four separate insurance policies issued by the same insurer: basic life, voluntary life, short-term disability, and the LTD coverage.  While the employer paid the premiums for the basic life coverage, premiums for the other types of coverage were employee-funded.

The plaintiff in Duncan sued the plan’s insurer in state court after it denied portions of his claim for LTD benefits under the employer’s plan.  By asserting ERISA preemption, the insurer removed the case to federal court.

In federal court, the plaintiff requested a jury trial for the matter.  Because there is typically no right to a jury trial for ERISA lawsuits, the federal court needed to determine whether the LTD plan at issue was subject to ERISA.  To make this determination, the court analyzed whether the LTD policy was part of an employer-sponsored ERISA plan or whether it fell within the DOL’s Voluntary Plan Safe Harbor.

The plaintiff argued that the employer’s LTD policy should be severed from the plan’s other benefit programs and evaluated separately under the DOL’s Voluntary Plan Safe Harbor to determine whether ERISA applied “because it required the insured to pay the cost of coverage.”  In contrast, the insurer asserted that the LTD policy was covered by ERISA and failed to meet the requirements of the DOL safe harbor because: (i) it was a component of the entire group health plan to which the employer contributed (through the basic life policy); and (ii) it was endorsed by the employer.

District Court.  In reviewing the matter, the court agreed with the insurer, finding that the four “policies were jointly offered ‘as part of the [employer’s] employee benefits program,’ which implicates ERISA regardless of the lack of employer contribution to the LTD portion of the overall plan.”  As part of this determination, the court noted that the employer had obtained the coverages under the plan from the same insurer.

The court further noted that “employee funded disability benefits are not severable from employer-funded insurance plans” in cases where the employer “actively engaged in selecting both the employer-funded and employee funded policies that comprise a benefits package.”  Here, the court observed that the evidence in the record showed that the employer: (i) applied for the coverage; (ii) actively selected the types of coverage that would be included under the plan; and (iii) retained the right to amend, modify or terminate the plan.  Accordingly, the court found that these actions reflected endorsement by the employer and that the DOL’s Voluntary Plan Safe Harbor did not apply to the benefit plan in the matter, including the LTD coverage in question.

Therefore, the court ruled that the plaintiff was not entitled to a trial by jury because his claims to LTD benefits were subject to ERISA preemption.