Often employees are offered individual disability policies at a discounted rate if purchased with other employees. The employee may deal directly with a broker or the insurance company to purchase the policy, with the only employer connection a payroll deduction for premiums. The employees expect they have purchased an individual disability policy that is not part of an employer benefit plan. Only when their claim is denied or they are forced into litigation against the insurer due to a denial of benefits does the employee learn that the litigation may be governed under ERISA and not state law.
The recent case of McCann v. Unum Provident, 2013 U.S. Dist. LEXIS 13132 (D.N.J. Jan. 31, 2013), illustrates this situation, and how courts in the Third Circuit apply the safe harbor provision of ERISA. In McCann, a medical fellow purchased a policy that was offered to him at a discount through his employment. McCann paid the premiums directly. The policy took effect when his fellowship had ended. Benefits were denied and Unum argued that ERISA applied. The court ultimately agreed with Unum and held that the policy in question fell under ERISA and the “safe harbor provision” did not apply.
The safe harbor provision of ERISA removes a disability insurance plan from ERISA coverage if:
(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.
In the Third Circuit, an action by the employer other than permitting an insurer to publicize a plan or collecting premiums through payroll deductions, displays “such a degree of control over a plan that an objectively reasonable employee would consider it part and parcel of the company’s own benefits package.” See McCann, at *33. This additional action signifies endorsement by the employer which defeats the safe harbor provision of ERISA. The actions of the employer could be simple, such as in McCann, where the hospital indicated that it would provide disability insurance as part of its standard benefits package, and the broker’s marketing material indicated that the hospital selected the insurer to provide disability insurance benefits.
Third Circuit courts have also held that when an employee receives a group discount in purchasing a disability insurance policy, that discount is considered an employer contribution because the employee could not have received that benefit if not for the employer, and that contribution also assists in defeating the safe harbor provision. See McCann, at *29. This view however is not shared by all of the Circuits as courts in the Eleventh Circuit have determined that a discount on premiums offered only due to employment with the specific employer did not constitute a contribution. See Letner v. Unum Life Ins. Co., 203 F. Supp. 2d 1291, 1301 (N.D. Fla. 2001) (Discount provided to employee due to his payment of premiums being deducted from his paycheck did not constitute a contribution by the employer.).
Contrary to McCann, another scenario arises when an employer purchases and “list bills” an individual policy for its key employees, paying all of the premiums. When one of those employees leaves his company and begins paying premiums for his policy ERISA no longer applies. In a recent decision, the court in Weinrauch v. N.Y. Life Ins. Co., 2013 U.S. Dist. LEXIS 8105 (S.D. N.Y. Jan. 15, 2013) determined that ERISA does not apply to a policy when an employee insured under an individual policy leaves his company and assumes the payment of premiums. The policy is no longer under ERISA control because the employer as in the other cases cited above, “has no role in the administration or maintenance” of the employee’s current policies. Id. at *22. Individual policies commonly permit the policy holder to make changes related to the premium payments, riders on the policy, and the amount of benefits. The Weinrauch court analyzed the policy and determined since it allowed changes to be made which Mr. Weinrauch took advantage of, it is an individual policy and is not subject to ERISA. Id. at *20.
While each situation is different and the application of the safe harbor provision is on a case by case basis, it is important to remain cognizant that your individual disability policy could be governed by ERISA and not state law. We at Bonny G. Rafel can help you evaluate your policy to determine if it would be considered an ERISA plan or not. We have extensive experience dealing with the safe harbor provision of ERISA and can advise you of your rights even if you have not been denied benefits or even applied for benefits yet.
–By Alexander C. Schaffel, Esq.