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Employers Should Avoid Going Beyond the Voluntary Plan Safe Harbor
by Rich Glass, JD

Several land mines are lurking just outside a voluntary plans’ ERISA safe harbor. Making contact with an ERISA land mine can result in the end of voluntary safe harbor protection for your client.

A popular way to round out an employer’s benefits package is to offer voluntary benefits. Advantages include little or no employer involvement and cost, freedom from ERISA rules, and the ability to address gaps in the traditional medical/dental/vision offering. Examples include policies covering accidental death and dismemberment, long-term disability, hospital indemnity, disease-specific and term life insurance. Some small employers even choose the voluntary plan route for dental or medical coverage.

Why would an employer want to avoid ERISA? The simple answer is that ERISA rarely walks alone. It brings along friends like COBRA, HIPAA, and USERRA and has reporting and disclosure obligations, mandated claims procedures, fiduciary duties, and other requirements for which an employer is responsible.
A benefit is considered a voluntary plan if it satisfies the four major criteria in the Department of Labor’s Welfare Plan Regulations (29 CFR §2510.3-1):
1 The employer makes no contributions.
2. Participation is completely voluntary.
3. Employer functions are limited to allowing the insurance carrier to publicize the benefit, collecting premiums, and remitting premiums to the carrier.
4. The employer receives no compensation, except reimbursement, for any related administrative costs.

The employer’s key to staying in the safe harbor is to ensure it does not endorse the voluntary plan. Troubled waters typically arise when an employee has a claim dispute with the carrier, sues the carrier under state law, and the carrier claims that the voluntary plan actually was an ERISA plan. Damage recovery is typically more limited under ERISA than under state law. This can have the additional result of dragging the well meaning employer into the lawsuit. Finally, an ERISA plan is subject to disclosure requirements for which there are daily penalties.

What constitutes endorsement depends on various factors and actions. However, there are five major endorsement mistakes employers should avoid if they want to remain free of ERISA headaches.

1. Initiating the selection. The natural tendency is for an employer to be proactive in completing the benefits package. This might include selecting and assessing different carriers, negotiating plan terms and rates, and determining eligibility requirements. These actions are likely to be considered an endorsement.
Practical Pointer: It is better if someone else brings the carrier to the employer (for example, the employees or an insurance agent). Once selected, the employer should simply take the standard offering and not negotiate any special terms.
2. Overly positive publicity. The carrier needs to be in charge of this function. At open enrollment meetings, a carrier representative should tout the benefits of the program, not the HR or benefits employee. Having employees give personal testimonies about the program may also constitute endorsement. Employers may provide the carrier’s materials and contact information.
Practical Pointer: Like Jack Webb’s Joe Friday, employers should take a “just-the-facts-ma’am” approach. Leave the complicated questions to the carrier.
3. Use of employer’s name. In describing the voluntary benefit, you will sometimes see a reference to the effect that the employer merely “arranged” the plan. Perhaps the insurance contract is in the employer’s name or maybe the voluntary benefit is listed in a summary along with other ERISA benefits. These facts could indicate that the voluntary benefit is part of the employer-sponsored program and could constitute endorsement.
Practical Pointer: Review all benefit materials from an employee’s perspective and make sure that voluntary benefits are separate from employer-sponsored benefits. Also, include a disclaimer, which clarifies that it is a carrier benefit, not an employer benefit. The disclaimer might include the safe harbor criteria listed above.
4. Lending a helping hand. An employee comes to the HR manager with a problem related to a claim not being paid properly or in a timely manner or simply being denied. The HR manager kicks into gear, makes a few phone calls, and gets the insurance gears moving. Problem solved? Perhaps it is a problem created. The Dept. of Labor (DOL) and the courts routinely view such assistance as evidence of endorsement, especially if the assistance leads to a reversal of a claims decision.
Practical Pointer: Employers should avoid the temptation to help in this instance. They should refer the employee to the carrier or an insurance agent.
5. Running benefits through a cafeteria plan. This is perhaps the most troubling endorsement area. While the DOL has not stated that paying for benefits on a pre-tax basis is endorsement, several court cases have done so. The rationale is that the employment relationship nets the employee a reduced premium over non-employees. A benefit that is tied to the employment relationship can constitute endorsement. In addition, the employer benefits from the arrangement because of FICA savings.

Practical Pointer: If possible, offer voluntary benefits on a post-tax basis or be prepared for ERISA application, especially when employer-endorsed benefits would constitute a group health plan that is subject to COBRA and HIPAA.
A California case is instructive on several of the above points. In Welch v. New York Life Insurance, an employee sued the carrier claiming that he was denied benefits under his long-term disability policy. He alleged various causes of action under state law, which allowed him to potentially receive compensatory and punitive damages. The carrier said these claims were preempted under ERISA because the plan was an ERISA plan. The carrier’s evidence of endorsement focused on four facts:
1. The employer distributed brochures and other materials to employees and provided the carrier with employee data and job descriptions.
2. The employer actively participated in the policy design.
3. The employer, not the carrier, communicated at least one policy change to employees.
4. The employer formed a committee that assisted in the claims appeal process.
As a result, the court easily found endorsement that transformed the voluntary plan into an ERISA plan. This was good news for the carrier. However, another result not addressed by the court was that the employer now had another ERISA plan on its hands.

Navigating the voluntary safe harbor is not easy. Employers should exercise caution in their actions around voluntary plans so that they do not stray beyond the safe harbor into ERISA waters.
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Rich Glass is chief compliance officer for Infinisource Inc, a benefits educator and administrator serving more than 15,000 clients nationwide in the areas of COBRA, HIPAA and flexible benefits, including premium reimbursement accounts and HSAs. He is a licensed attorney with more than 15 years of legal expertise, specializing in benefits, Human Resources and related regulatory compliance issues.