When Does ERISA Apply to Voluntary Employee-Pay-All Benefits? (Benefit Minute)

Posted in: Benefit Minute, Employee Benefits

In general, any employer-sponsored plan, fund or program that provides benefits such as medical, sickness, accident, disability or death is subject to the Employee Retirement Income Security Act (ERISA).  However, there are several specific types of programs that may be exempt from ERISA, including voluntary programs that provide the benefits described above, but only if certain conditions are met.  Set forth below is a discussion of when ERISA will not apply to voluntary programs.

Requirements to be Exempt from ERISA

In order for a voluntary benefit program to be exempt from ERISA, all of the following conditions must be met:

  • there can be no employer contributions (i.e. must be an employee-pay-all program);
  • participation must be completely voluntary for employees;
  • the sole functions of the employer must be to permit the insurer to publicize the program to employees, collect premium through payroll deduction and remit premium to the insurer, and this must be done without the employer endorsing the program; and
  • the employer cannot receive any consideration in connection with the program, other than reasonable compensation, excluding any profit, for administrative services actually rendered in connection with payroll deductions.

No Employer Endorsement Permitted

If an employer promotes or endorses the voluntary benefit program in any manner, it will likely be viewed as employer-sponsored and therefore subject to ERISA. Any of the following activities may imply endorsement:

  • selection of insurer
  • negotiation of plan terms or plan design
  • use of employer’s name
  • recommendation of plan to employees
  • statement that ERISA applies
  • assistance to employee with claims or disputes

There are certain limited actions that an employer may take without being viewed as endorsing or promoting the voluntary employee-pay-all program.  An employer is allowed to have the insurer publicize the program to employees, make insurance presentations in the workplace, and provide employees with the business card of an insurance agent.

As insurance carriers market voluntary benefit programs, they often imply that there is no employer involvement and that the insurer will handle all aspects of administering the program except for payroll deductions.  However, in practice, it is often difficult for an employer to limit its role so that ERISA will not apply.  In some cases, an insurer may even take action that involves the employer and results in the program being subject to ERISA, such as putting the employer’s name or logo on program information, asking for mandatory employee meetings, requiring a waiver of participation, or asking supervisors to endorse the program. In addition, payroll deduction contributions are often made on a pre-tax basis through the employer’s cafeteria plan in order for both the employee and the employer to derive a FICA tax savings.  Finally, the insurer will generally argue that ERISA applies if litigation ensues, due to ERISA preemption as discussed below.

Use of  Cafeteria Plan Deductions

Although employers may collect premium via payroll deduction, permitting salary reduction (pre-tax) premium payments for voluntary benefits may constitute employer endorsement of the program, especially when other ERISA benefits are offered in connection with the same cafeteria plan.  The courts have been divided on this issue.  Employers that allow salary reduction should limit other activities that may imply endorsement.

In addition, based on current guidance, voluntary programs that provide coverage for specified disease or illness, and hospital indemnity and other fixed indemnity insurance will be included in the calculation for the 40% excise tax on high cost health plans (the cadillac tax) unless purchased with after-tax contributions.

Consequences of ERISA Applicability

When ERISA applies to a voluntary benefit program, the employer is subject to reporting and disclosure requirements, which include preparation of a written plan document, distribution of a Summary Plan Description, filing of a Form 5500 (generally if 100 or more participants as of the first day of the plan year) and distribution of a Summary Annual Report when a Form 5500 is filed.  In addition, plan fiduciary duties and responsibilities apply, and participants gain ERISA rights.  When these requirements are not met, the employer could be subject to ERISA’s monetary and criminal penalties, and fiduciaries may be held personally liable.

However, ERISA preempts or overrides state laws that “relate to” ERISA benefit plans.  Damages in federal court under ERISA are limited to the benefit that would otherwise have been paid, whereas, potential damages and penalties are greater in state court if ERISA does not apply.

Employee Perception Matters

Employee perceptions regarding employer involvement are important.  If an objectively reasonable employee would conclude from an employer’s actions that the employer exercises control over the voluntary program, then ERISA will likely apply.

© PSA Insurance and Financial Services. Group insurance products offered through PSA Financial, Inc. The Benefit Minute provides general information for your reference.
Please see your benefits consultant to review your specific situation.

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