August 15, 2022

Volume XII, Number 227

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August 12, 2022

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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.

© 2022 Poyner Spruill LLP. All rights reserved.National Law Review, Volume , Number 334
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About this Author

David L. Woodard, Employment Litigation Attorney, Poyner Spruill, Law firm
Partner

David practices in the area of employment litigation.  He regularly advises and defends clients in race, age, disability and sex discrimination and harassment cases; reviews handbooks and termination issues; and provides compliance advice on matters of employment law.

Representative Experience

McNeil v. Scotland County - Obtained summary judgment for employer where plaintiff alleged race discrimination and retaliation in violation of Title VII of the Civil Rights Act as well as violation of the Americans...

919-783-2854
Hugh W. Davis II, Employee Benefits Attorney, Poyner Spruill Law Firm Raleigh, NC
Partner

Hugh practices in the area of Employee Benefits.  He is currently representing corporations and other entities in the design and operation of retirement and welfare benefit plans and executive compensation packages, including matters concerning ERISA and Internal Revenue Code compliance. In his experience, Hugh has represented qualified plan sponsors in restating their plans to comply with the EGTRRA and other changes in tax law, represented sponsors of employee stock ownership plans in connection with plan purchases of employer securities, including leveraged...

919-783-2908
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