Are Your “Voluntary” Benefit Plans Subject to ERISA?

Most employee benefit plans offered through an employer are subject to ERISA. There is a safe harbor exemption from ERISA for certain voluntary plans. Traditionally, the types of programs that may qualify as voluntary include life, vision, dental, disability, critical-illness and accident insurance plans. However, these benefit programs can be subject to ERISA if the employer fails to meet the stringent requirements of the voluntary plan safe harbor.

Generally, there are four requirements of the voluntary plan safe harbor. The first two requirements are fairly straightforward. The benefit plan must be completely voluntary and employee paid, with no employer contributions made in any form for any employees. Salary contributions made on a pre-tax basis through a Cafeteria/Section 125 plan are employer contributions, so all employee contributions must be after-tax to meet the safe harbor.

Next, the employer must not endorse the plan. In simple terms if you endorse it, you own it (for purposes of ERISA). So what does it mean to endorse a benefit plan? Actions taken by an employer to endorse a plan can include selecting the insurer, negotiating the terms of the plan, limiting coverage to select groups or classification of employees, and assisting your employees with making claims for benefits. For purposes of the safe harbor, endorsement does not include making the plan available to your employees or publicizing the availability of the plan, collecting premiums through payroll, and submitting the premium payments to the insurer. Finally, under the safe harbor, employers are prohibited from receiving any compensation that exceeds reasonable reimbursement for collecting and remitting premium payments.

While meeting the safe harbor is not the only way for a plan to be voluntary, it is the only way an employer can ensure the plan is not subject to ERISA. So what does it mean if the plan is subject to ERISA? Depending on the type of plan and benefits offered, there may be substantial compliance obligations. These compliance requirement may include, but are not limited to, preparing and operating the plan according to a written plan document, providing employees with a summary plan description and summary of material modifications when there any are substantial changes made to the plan, annual reporting requirements and other obligations under COBRA, HIPAA, and other laws and regulations governing employee benefit plans.

In addition to these burdensome compliance issues, employers may get roped into litigation as the alleged plan sponsor and/or fiduciary. When sued for benefits, insurers of voluntary plan benefits may want to avoid state law claims, which often expose the insurance company to a wider range of claims and potentially larger awards of damages. A strategy employed by insurers to avoid state law claims is to argue that the employer did not satisfy the requirements of the voluntary plan safe harbor and the claimants’ exclusive remedies are limited to ERISA. If successful, this may require the employer to get involved in expensive litigation as the plan sponsor and even a plan fiduciary.

For these reasons, among others, it’s important for employers to stay diligent if they want their “voluntary” plans to be actually considered voluntary. To avoid any unexpected and unwanted surprises confer with qualified counsel to be sure that voluntary plans are not subject to ERISA.