This is a great article worth reading from CFO.com discussing the pitfalls of offering voluntary benefit programs–“The Doubt of the Benefit: Voluntary benefits may seem like a win-win. Here’s why they could be a lose-lose“:
Corporate benefits packages may be shrinking, but voluntary benefits are skyrocketing. According to a recent survey, 6 of every 10 companies now offer at least one voluntary, or supplemental, benefit. Employees buy such products—most often some form of life, health, disability, or dental insurance—directly from vendors, usually through a payroll deduction. It’s easy to see the appeal of voluntary benefits: they cost employers next to nothing, yet boost employee morale.
(Thanks to Benefitslink.com for the pointer to this article.)
The article quotes Joseph Belth, professor emeritus of insurance at Indiana University, as stating that employees are “being taken to the cleaners” on these policies:
[S]ome critics claim insurers are more inclined to dispute claims made on group policies purchased at work than those bought by customers on their own. Says Indiana University’s Belth: “It’s quite clear that an insurer is more likely to deny a claim if it’s ERISA than if it’s not under ERISA.” Few workers know this. Neither are they aware that if they sue, and their policy is deemed to fall under ERISA, the odds are stacked in favor of the insurers.
The article mentions how one insurance company allegedly noted in a memorandum that out of 12 claim situations in which the insurer had settled for $7.8 million in the aggregate, if the 12 cases had been covered by ERISA, total liability would have been no more than $500,000. (Read more about the denial of coverage problem in an article at Workforce Management called “Nasty Business.” )
Particularly inciteful in the CFO.com article are the ERISA-avoidance techniques compiled on the last page of the article here. (Scroll down to the bottom of the page.) However, the article correctly notes that if coverage is denied by an insurer, and the employee later brings suit, the employer could be at risk for liability under state law if the plan is deemed to be a non-ERISA plan. So, while trying to be a non-ERISA plan could achieve better results for the employee, this could, in the end, be a Catch 22 for the employer if things go sour.
(By way of reminder, generally “employee welfare benefit plans” are covered under ERISA. An “employee welfare benefit plan” is defined as a “plan, fund, or program” whose purpose is to provide its participants or their beneficiaries with certain nonpension benefits, or “welfare” benefits. “Welfare” benefits are defined under ERISA to include medical, surgical, or hospital care benefits, or benefits in the event of sickness, accident, disability, death, or unemployment, or vacation benefits, apprenticeship or other training programs, day care centers, scholarship funds, or prepaid legal services, holiday, severance, or similar benefits, or financial assistance for employee housing. The benefits may be provided for by the purchase of insurance or otherwise.
DOL regulation section 2510.3-1(j) provides an exception from ERISA for certain group or group-type insurance programs if, under the program, four conditions are met: (1) no contributions are made by the employer; (2) participation is completely voluntary for employees; (3) the sole functions of the employer with regard to the insurance program are—without endorsing the program—to permit the insurer to publicize the arrangement to the employees and to collect premiums from the employees through payroll deductions and remit them to the insurance carrier; and (4) the employer receives no consideration in connection with the program except reasonable expenses.)
Generally, these voluntary benefit plans are ERISA plans, unless they fall within the exception of DOL regulation section 2510.3-1(j) (just described), and it is this exception under ERISA, and the interpretation of the term “employer endorsement,” around which this whole controversy lies.
In closing, it does appear that these types of programs offer a great deal of risk to employers and employees, and that if employers do decide to offer them, it is better (although not foolproof) to structure them as non-ERISA plans with profuse “buy-at-your-own-risk” and “we-are-not-endorsing-this-program”-type disclaimers figured prominently in the offering.