Ninth Circuit Court of Appeals has ruled, in Steigleman vs. Symetra Life, that neither an employer nor its trade association created an ERISA-covered plan merely because the employer paid for long term disability (“LTD”) coverage or because the association chose the LTD insurance policy.
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 is not subject to ERISA if it meets the following criteria:
- The employer or employee organization does not make contributions to the insurance policy.
- Participation in the insurance policy is voluntary for employees.
- The sole functions of the employer with respect to the insurance policy are, without “endorsing” it, to allow the insurer to publicize the policy, to collect premiums through payroll deduction, and to remit them to the insurer.
- The employer receives no consideration in connection with the insurance policy other than reasonable compensation for the related administrative costs.
Facts. An employee/owner of a limited partnership offered employees LTD coverage through an insurance policy purchased through a trade association to which the limited partnership belonged. As employer for the limited partnership, she paid the LTD insurance policy premiums for both herself and her employees. After making a claim for LTD benefits which was denied by the insurer, she sued under state law claiming breach of contract and bad faith. The insurer responded that the LTD policy was part of an ERISA-covered plan and, therefore, the state law actions were preempted. The lower court ruled in favor of the insurer and dismissed the employer’s claims.
Court of Appeals. The Court of Appeals began its analysis by noting that prior cases had ruled that in determining whether a plan, fund or program is ERISA-covered, a court must determine whether, from the surrounding circumstances, a reasonable person could ascertain the intended benefits, beneficiaries, source of financing, and procedures for receiving benefits. “Some essentials of a plan, fund, or program can be adopted, explicitly or implicitly, from sources outside the plan, fund, or program—e.g., an insurance company’s procedure for processing claims—but no single act in itself necessarily constitutes the establishment of the plan, fund, or program.” For example, the purchase of insurance does not conclusively establish a plan, fund, or program.
It then ruled that the lower court erred in holding that the limited partnership’s LTD policy was part of an employer-sponsored, ERISA-covered plan. In the instant case, employees gained access to group-type disability insurance coverage through the partnership’s membership in the trade association, and the partnership paid the employees’ premiums. However while these factors are evidence that the partnership may have “established or maintained” an ERISA-covered plan, they are not, by themselves, sufficient. The “bare purchase of insurance… does not by itself constitute an ERISA plan… [W]hile an employer can establish an ERISA plan even if [the employer] ‘does no more than arrange for a group-type insurance program,’ […] the record does not show that [the partnership] specifically contracted with [the trade association] to extend disability coverage to [its] employees or otherwise ‘arranged for’ that coverage.” The Court further noted that the partnership neither agreed to act as the plan administrator nor undertook the administrative tasks associated with the maintenance of an ERISA plan.
The insurer also argued that the trade association qualified as an “employee organization” capable of establishing or maintaining an ERISA plan. However, the Court ruled that an organization must exist “for the purpose, in whole or in part, of dealing with employers concerning an employee benefit plan, or other matters incidental to employment relationships. The trade association’s by-laws state that it does not engage on typical issues incidental to employment relationships, such as salary negotiation, labor conditions, or collective bargaining….” Therefore, the Court determined that it could not conclude from this record that the trade association “has any meaningful engagement… regarding an employee benefit plan or other matters incidental to employment relationships. [The insurer’s] alternative argument for finding that an ERISA plan was established therefore fails.”
Consequently, the Court ruled that because the employer’s LTD policy was not part of an ERISA-covered plan, her state law claims against the insurer were not preempted by ERISA.