A common question our clients often ask is whether the Employee Retirement Income Security Act – ERISA – applies to employer group insurance plans where the employees pay 100% of the premium. ERISA is the federal employee benefit law that applies to pension and insurance benefits offered by private (non-government or church) employers. It governs employer-sponsored plans, and has very few exceptions. So, what happens if employees pay the premium for their group disability insurance, life insurance, or other ERISA insurance plan benefits? Nothing. They are still ERISA plans. Read on to find out why.
The only real exception to ERISA – Safe Harbor Plans
The Department of Labor issues the regulations that apply to ERISA. For plans which are not truly benefit plans sponsored by an employer, the Secretary of Labor created ERISA’s “Safe Harbor” regulation, 29 C.F.R.§ 2510.3-1(j). It provides the following:
(j) Certain group or group-type insurance programs.
For purposes of title I of the Act and this chapter, the terms ‘employee welfare benefit plan’ and ‘welfare plan’ shall not include a group or group-type insurance program offered by an insurer to employees or members of an employee organization, under which
(1) No contributions are made by an employer or employee organization;
(2) Participation 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.
They key to this regulation is the word “and” that appears between sub-sections (1) through (4). For a plan to be a Safe Harbor plan, EACH of the sub-sections must apply. Miss one and Safe Harbor status does not apply.
No contributions by an employer or employee organization
When employees pay the entire premium, it is clear that their employer or an employee organization (i.e., a union) is not making a contribution to the cost. As a result, sub-section (1) is satisfied.
If all we know is that employees pay all of the premiums, we do not know if participation is voluntary or not. This is key, because if participation is mandatory, then the plan will not be a Safe Harbor plan and ERISA will apply.
No employer endorsement allowing insurer to publicize the program
Again, we do not know if the employer is endorsing the plan or not if all we know is that employees paid the premium. An employer can certainly endorse a plan even when the employees pay the entire cost. As an example, an employer may organize meetings, create marketing materials, and encourage employees to buy insurance. This is particulary true if they make it mandatory.
No employer consideration
This means that the employer is not getting a kickback, rebate or finders fee of some type from the insurance company. This is not very common, but it does happen. We have to know if this is occurring before we can conclude that the plan is a Safe Harbor Plan.
Court holds that employees paying premiums is not enough to avoid ERISA coverage
Last year, in Wong v. Reliastar Life Insurance Company, No. 15 C 8785, 2016 WL 4366596 (N.D. Ill. Aug. 6, 2016), an Illinois federal court considered an employee’s claim that employees at her company paid the entire premiums for a Supplement Insurance Policy, and that fact caused the policy to fall within ERISA’s Safe Harbor provision. The court disagreed, finding that both the employer’s Basic and Supplemental Policies feel within the coverage of ERISA and not the ERISA Safe Harbor provisions.
A key fact for the court was that both the Basic Policy and Supplemental Policy were part of the
same Group Plan. The insurer acknowledges that the Group Plan was governed by ERISA, and employees were provided with a notice of their ERISA rights when joining the Group Plan. Further, the employer controls the terms and conditions of the Group Plan and administers the Plan.
The court cited to an appeals court decision from the Seventh Circuit, Postma v. Paul Revere Life Ins. Co., 223 F.3d 533, 537 (7th Cir. 2000) which stated, “An employer who creates by contract with an insurance company a group insurance plan and designates which employees are eligible to enroll in it is outside the safe harbor created by the Department of Labor regulation.”
Usually, a group plan will be subject to ERISA. Just because employees pay the premium for insurance does not remove the insurance from ERISA’s coverage. Usually, other circumstances will show it is a a group plan covered by ERISA, not a Safe Harbor Plan.