Alerts

Overview

Recent lawsuits filed in Illinois and New York by the class action plaintiffs' firm Schlichter Bogard raise questions regarding traditional views of voluntary benefits and ERISA. The cases were filed against the following employers and their brokers:

1. CHS Community Health Systems Inc. / Gallagher

2. Laboratory Corp. of America Holdings / WTW

3. Universal Services of America LP. / Mercer & Lockton

4. United Airlines, Inc. / Mercer

The claim in the cases is that the voluntary benefits were ERISA plans (some were actually treated as such by the employers while others were treated as non-ERISA plans under an exception). As such, the employers (and their advisors) owed a fiduciary duty to the plans and the participants to exercise their judgment and diligence in the management of the plans and their failure to do so caused the plan participants to overpay for the coverage for the benefits in those plans (including accident, critical illness, hospital indemnity, and cancer insurance, among others) and that the employers and the brokers engaged in self-dealing with respect to the plans are liable for disgorgement of any payments to them as well as being responsible for any losses suffered by the plans. 

What Are the Details?

The filings attack a central thesis underlying many employer attitudes towards voluntary benefits - that since the employees were paying for the benefits, that the employers were relieved from their fiduciary duties towards those plans. In addition, for those that were not included as ERISA plans, the Department of Labor ("DOL") exception to ERISA coverage for these types of benefits provides a convenient and cost-free option (to the employers) to expand the benefit offerings for the employees who find them valuable. The exception to ERISA does not require, and indeed prohibits, employer contributions to the plans. That exception permits the avoidance of ERISA administrative obligations. However, employers may want to reconsider the value of that exception, as the avoidance of the ERISA administrative obligations might have been a blind spot for employers and their advisors if the plaintiffs are successful. 

The plaintiffs contend that the voluntary benefit programs are ERISA plans despite the plans and employers taking steps to avoid ERISA coverage. As such, the contention in the lawsuits is that the employers and the benefits brokers are plan fiduciaries as they did not fully comply with the requirements for the DOL exception. Specifically, the plaintiffs contend that the mere availability of the benefits was an endorsement of the benefits, which would void the DOL exception to ERISA coverage (this is the plaintiffs' theory, but whether courts will agree is unresolved at this stage). 

The conditions for the exception are:

(1) No contributions are made by an employer or employee organization;

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

(3) The sole functions of the employer or employee organization 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 or employee organization 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.

Since the employers, at least tacitly, endorsed the program, the plaintiffs claim that they (and their advisors) accepted that the plan was covered by ERISA. Then, since all employers are fiduciaries of their ERISA plans, that would mean the employers are fiduciaries (and the plaintiffs contend advisors were also fiduciaries due to their roles). Therefore, the plaintiffs' claim is that both parties violated their duties with respect to the management and administration of the voluntary benefit plans, which would require them to monitor, negotiate, and ensure prudent and reasonable selection of insurance carriers for the benefits. They also allegedly failed to ensure prudent and reasonable broker commissions, insurance loss ratios, and premiums for the voluntary benefits. This all led to higher-than-necessary costs for the plan participants. Finally, there is an assertion that the employers and their brokers engaged in ERISA prohibited transactions and knowingly participated in the other's violation of the prohibited transaction rules. Therefore, the lawsuits seek to make the employers, their brokers, and other plan fiduciaries personally liable for all plan losses (although the losses, as such, were largely due to the claim that the participants overpaid for the product). 

Are Voluntary Benefits ERISA Plans?

In these lawsuits, plaintiffs allege that just offering the benefits, which cost the employer nothing, since the employees pay the full costs, is an endorsement of the benefits. Moreover, since the employers can offer more benefits at no cost to the employee, the employer gains since the benefits package looks more attractive to employees and can fill in some gaps in coverage that might arise with the other offerings of the employer. Both of these allegations apply primarily to those benefits that were intended to avoid ERISA. They are less applicable to those that were included by the employers as ERISA plans. 

The general rule under ERISA is that any employee benefit is covered by ERISA and the attendant obligations under ERISA. Those obligations include maintaining a written plan document and summary plan description, filing annual Form 5500 with the Department of Labor (if the plan has 100 or more participants), communicating any changes in the plan (typically via a summary of material modifications), certain disclosures with respect to advisor compensation, and maintaining defined appeals processes in the plan. In addition, the employer is always a plan fiduciary with respect to ERISA plans. That requires a heightened standard of care from the employer with respect to the plan and expressly requires that the employer is obligated to maintain the plan for the sole purpose of providing benefits under the plan to the participants and their beneficiaries. It also prohibits the fiduciary from any actions "on behalf of the plan that benefit parties related to the plan, such as other fiduciaries, service providers, or the plan sponsor [i.e., the employer]."

The Department of Labor laid out the conditions set forth above as an express exception to ERISA. If the plans meet those requirements, then the plans are exempt from ERISA, including the fiduciary obligations with respect to those plans. Many employers, therefore, seeking to avoid the strictures of ERISA, try to maintain the voluntary benefits in such a way as to avoid those obligations. 

Note, the avoidance of ERISA should be considered with a view to the risk/benefit of ERISA coverage. Yes, there are obligations and responsibilities with ERISA coverage. However, ERISA also has some protections for employers — they are only liable for the benefits under the plan, they cannot be sued for punitive damages; the plan can only be sued in federal court and not in state courts (which is where the bulk of outsized plaintiffs' awards come from); and bringing suit, the participants have to follow the plan administrative procedures and all claims appeals. So, there are benefits to consider before assuming avoidance of ERISA is the optimal choice.

The assertions in the lawsuit are that these employers failed to do so and, therefore, the ERISA fiduciary obligations still applied. Of course, even without a fiduciary obligation to do so, most conscientious employers do not want their employees to overpay for benefits, so they exercise due care even if the plan is not covered by ERISA. However, there are steps that employers can take to mitigate issues raised by these lawsuits.

Employer Actions

Given the heightened use and visibility of voluntary benefits, employers should take meaningful steps to ensure that they are not caught unaware of the potential ERISA and fiduciary issues that might be raised. 

1. Employers should thoughtfully consider whether the risk/reward equation for voluntary benefits is such that they should avoid ERISA coverage. It is likely that the employer is mostly complying with ERISA for its other employee benefit plans, including all the health & welfare plans and its retirement plans. Therefore, the platform and practices are in place to utilize the same processes for the voluntary benefits. It could be to the advantage of the employer to follow those same processes.

2. Whether the voluntary benefits are technically ERISA benefits, employers can still take the necessary steps to administer the voluntary benefits with an eye to potential fiduciary standards (even if the employer is not technically a fiduciary). Those steps include:

• Documentation of all the processes and consideration of the voluntary benefits determination, including the process the employer used to research, review, monitor, and benchmark different proposals, their relative costs, and vendor performance. This is likely the #1 crucial detail for all plans. Showing that the fiduciaries have followed a process and documented that process will go a long way to demonstrate that they met their due diligence requirements, even if a different party might have determined another option was "better."
• If the employer desires to avoid ERISA, ensure that the regulatory components for the exception apply. 
• As a part of the review process, consider all service and other vendor agreements, including service and fee disclosures from health plan brokers and consultants. 
• Review and document the analysis regarding the brokers' and consultants' compensation, whether it is reasonable, and if there are any conflicts of interest. 
• Periodically review and benchmark information for all benefits and vendors and compare the current and prospective arrangements or proposals. 

3. One additional option for employers is to seek lower-cost or more effective options in the marketplace. Given the high profitability of some voluntary benefit programs, new vendors have arisen that provide the same benefits with significantly lower cost than the traditional insured products. Employers should discuss those options with their brokers and consultants. As noted above, even if the decision is made to use a traditional insurance carrier, documenting the research will provide an additional layer of protection for the employer.

Conclusion

The plaintiffs' bar is constantly seeking to find new opportunities to sue employers and their plans on behalf of the plan participants. Most of the negative consequences can be avoided, or at least mitigated, if the employer goes through a process to consider the various options available and set out the factors for its final determination. If that documentation is retained, most employers will be able to defend their actions and be a less attractive target for lawsuits.

This Legal Update is not intended to be exhaustive, nor should any discussion or opinion be construed as legal advice. Readers should contact legal counsel for legal advice. All rights reserved.