ERISA May Govern Individual Insurance Policies!

A recent case decided in Tennessee serves as a reminder that an insurance arrangement does not have to be group insurance in order for ERISA to apply. In Alexander v. Provident Life and Accident Insurance Co., No. 1:09-CV-27 (E.D. Tenn. Oct. 16, 2009), the court held that individual disability insurance contracts for physician employees constituted an ERISA plan. According to the court’s analysis, an employer will be deemed to have created an ERISA plan if a group of employees acquires individual insurance contracts and obtains a benefit (e.g., a discount or subsidy) the group would not have received but for the employment relationship.

Many employers allow employees to purchase “voluntary” insurance where the coverage is provided through individual contracts issued to employees. Voluntary arrangements such as this will not be subject to ERISA so long as they meet all of the following conditions stated in DOL regulations:

• The employer must not contribute to the policy;
• Employee participation must be completely voluntary;
• The employer must not endorse the coverage in any way;
• The employer’s sole functions must be limited to permitting the insurer to publicize the coverage to employees, collecting premiums by payroll deduction, and remitting the premiums to the insurer; and
• The employer must not receive any consideration other than reasonable compensation for administrative services actually rendered in connection with payroll deduction.

Unfortunately, it is easy for an employer to cross the line unintentionally with individual insurance contracts, so that such contracts become subject to ERISA. In the Alexander case, the policies were treated as an ERISA plan because the employer paid a portion of the premiums.

An employer that inadvertently maintains an ERISA plan with individual insurance contracts might face a number of ERISA compliance problems, including penalties. For example, if the contracts provide medical coverage the employer might have to comply with COBRA. COBRA compliance would probably be a serious challenge because the individual policies would not provide for COBRA rights. If the employer fails to comply with COBRA, it would be subject to penalties.

The Alexander case demonstrates that employers need to be very careful with any arrangement where the employer is involved in any way with employee purchases of individual insurance policies.