ERISA Litigation Targets Voluntary Benefits: What Employers Should Know

Stephanie Vasconcellos

 Welcome to our series, Employment and Benefits Unpacked, where we dive into the many employment, benefits, and mobility issues facing organizations across jurisdictions. Each episode is hosted by a different Mayer Brown partner from our global employment and benefits group. We'll be offering fresh perspectives and insights for employers, HR professionals, and in-house counsel. You can subscribe to the series on all major platforms.

I'll be your host for this episode. My name is Stephanie Vasconcellos, a partner in our Chicago office. I'm delighted to be joined by Reg Goeke and Rick Nowak, partners in our Washington DC and Chicago offices. And today we're going to be talking about voluntary benefits. Before we make a start, if you'd like us to cover a particular topic in a future episode, please email us at unpacked@mayerbrown.com. Without further ado, let's get going and Reg, maybe I'll turn it over to you.

Reginald Goeke

Great, thanks Stephanie. for the benefit of the audience, it's Reg Goeke. I'm one of the co-leaders of our litigation group. And I wanted to talk about some ERISA claims that were filed on December 23 by the ERISA plaintiff law firm, Schlichter Bogard. These new lawsuits are making claims against companies that offer voluntary benefit programs and the brokers that help to market those policies provide just a little bit of background. Many companies offer voluntary benefit programs. These are programs offered by insurance providers for insurance, including accident, critical illness, cancer, and hospital indemnity insurance, among other programs. And it's reported that somewhere between 25 and 50 percent of companies offer insurance programs like this. Unlike the typical 401k or welfare benefit plan, employers don't typically make contributions to these programs. Rather, they permit insurers to publicize the programs to their employees, and then the employers will help facilitate the collection of premiums through the payroll deductions. Schlichter filed four cases on December 23 challenging these plans. Three of those cases were filed in Illinois and one in New York.

The cases were filed against Community Health Systems in Illinois and its broker Gallagher, Laboratory Corp of America and its broker Willis Towers Watson and United Airlines and its broker Mercer. All of those are in the Northern District of Illinois, as well as Universal Services of America and its brokers Mercer and Lockton in the Southern District of New York. The allegations of those complaints are that the company and the brokerage firms were acting as ERISA fiduciaries, that the company was essentially the planned administrator and had delegated certain duties to the broker. And that those fiduciaries breached their fiduciary duties by selecting and monitoring insurance that was too costly and failing to monitor the costs with respect to those plans. As a result, according to the complaint, the plans were invested and overpaid brokers in the range of 22 to 40 percent premiums. The complaints also allege that those transactions represented prohibited transactions with the brokers being alleged to be parties and interests and the transactions being the furnishing of goods and services between the plan and the parties and interests.

And for good measure, the complaint also alleges the knowing participation in the breach of fiduciary duty in the event that the court finds, for example, the brokers are not fiduciaries. So as will be discussed further, these claims raise a number of questions, including whether these programs are in fact ERISA welfare plans, whether the programs comply with safe harbor exemption under 29 CFR § 2510.3-1(j), , and whether, if the court does reach the substance of these claims, whether the commissions that are being paid to these brokers are really out of line with what the market would otherwise require. And so to discuss that further, I will turn it back over to Stephanie.

Stephanie Vasconcellos

Thanks. Yeah, I think the first question and the most important question that probably kicks off these cases is whether the plans at issue are actually ERISA plans. And the site that you mentioned, 29 CFR § 2510.3-1(j), includes a safe harbor for voluntary benefits that says something that might otherwise be an ERISA welfare benefit plan is not an ERISA welfare benefit plan if it fits within this safe harbor for so-called voluntary benefits. In order to fit within that safe harbor, plan or a program has to meet four conditions. Some of these are fairly straightforward when you think about applying them to voluntary benefits, and some are less so. The first is that no contributions are made by the employer.

That's pretty easy. These are programs that normally contributions aren't made by the employer, like critical illness and accident benefits. Unlike medical, maybe dental/vision, you don't normally see a portion of the premiums paid by an employer. The second is that participation in the plan or program must be totally voluntary for the employees. Again, I think that condition is normally pretty straightforward to satisfy.

I'm going jump to the fourth one because this is another one that's a little more straightforward. The employer can't receive any consideration in the form of cash or anything else other than reasonable compensation for administrative services that it renders in connection with payroll deductions or something like that. So, in other words, they're not getting paid to publicize or to offer this program to their employees. That's usually not an issue.

The one component that I think we see that is an issue in this case and is the most complicated component of the Safe Harbor to satisfy are that the employer has to have pretty limited functions with respect to the plan. And the Safe Harbor specifically says that the functions of the employer should be limited to, without endorsing the program, permitting the insurer to publicize the program to employees, collecting premiums through payroll deductions or dues checkoffs and remitting those premiums to the insurer. Now, case law has expanded some of these a little bit. It says employers can do things like maintain a register of who's in the plan. They might provide information in other ways, but there are a lot of questions with respect to voluntary plans about, you know, what does it mean to permit the insurer to publicize the program? Can you put the materials in with your open enrollment materials? What happens if, you know, your name is on the same brochure when you're passing it out to people? I think there's a lot of questions about under the voluntary plan safe harbor, to what extent does an employer endorse a program and does that actually pull the program out of the voluntary plan safe harbor?

Rick, I can see that you have thoughts here. I think you want to jump in.

Rick Nowak

Thanks Stephanie. So everyone knows my name is Rick Nowak. I'm one of the co-chairs of the risk litigation practice in Chicago. These cases raise all sorts of unique issues and it's sort of par for the course for Schlichter Bogard and some of the other risk of class actions we've seen as of late, which are using litigation as a way to try to amend the fiduciary responsibilities under a risk and sort of expand the obligations of both employers as well as their service providers. And this sort of follows on some other recent cases we've seen taking that similar approach. As Stephanie mentioned, you know, talking through the safe harbor, that safe harbor regulation was finalized back in 1975, so 50 years ago. And so the world we live in today is very different than the one we lived in in 1975 with the way plans are run and operated. And that's why Stephanie mentioned what's written actually in the safe harbor was on what was the status then, which is everything's hard copy paper, everything's by mail, whereas now we live in an electronic world. I think one of the, as we take a step back and look at these cases, one of the things to think about is we actually have to look at again, or risk a §3(1), which defines what an employee welfare benefit plan is, because the case is focused on the safe harbor, but there needs to be an ERISA plan in the first place. And so the safe harbor is meant to say, as Stephanie mentioned, certain types of group insurance programs are not employee welfare benefit plans, but that doesn't mean that every program that doesn't qualify for the safe harbor is an ERISA plan. And so part of this litigation is gonna actually be focused on a section of ERISA, again, the definition of employee welfare benefit plan that we normally don't think about in ERISA class actions because it's often not an issue.

But here it raises lots of unique questions because the plaintiffs are going to want to argue that you as a plant sponsor, employer, or the brokers have the burden of proof to show the safe harbor applies. But they're the ones seeking to invoke federal jurisdiction over these cases by saying ERISA applies, which would suggest they need to establish through their allegations that there is an ERISA plan at issue under ERISA §3.

And so it raises lots of unique sort of pleading questions that are going to have to be dealt with in these cases. The other thing about these is the safe harbor itself, it really suggests if you want to qualify for the safe harbor, you as an employer need to take a very hands-off approach. You can't put your thumb on the scale with respect to negotiating the voluntary benefit programs. You can't be making contributions. It has to be entirely voluntary. And you can't be receiving consideration.

These lawsuits try to sort of thread the needle to say, your employer took enough steps to fall outside of the safe harbor. You did something, whether it was you helped negotiate which insurer you were going to use, you made contributions. They try to look for a way to say you did enough to fall outside of the safe harbor, but at the same time, because that triggers ERISA's fiduciary obligations, you then didn't do enough to satisfy your ERISA fiduciary obligations.

And so they're trying to go through that line. And so it raises lots of questions, particularly for employers who their goal was to qualify for the safe harbor. And now are they going to be second guests for every little thing to try to argue they fall outside of the safe harbor? Because if you don't satisfy one of the four requirements, you fall outside of it. It's sort of an all-or-nothing type test. And so that can make it difficult for employers. And so actually—

Stephanie Vasconcellos

Yeah.

Rick Nowak

Turning it to you, Reg, for a second, as we look through these cases, we do anticipate there are going to be motions to dismiss that will be filed, certainly, because these raise lots of unique issues. But in your perspective, as you've sort of looked at these cases, what are some of the arguments you think will be made, and how should we be thinking about those?

Reginald Goeke

Yeah, thanks Rick. You know, if you look at the case law that has been developed over time in this space, it has typically been insurance carriers defending against claims under state law seeking to invoke the protection of ERISA and the preemption of ERISA. And the arguments that they were making there are going to be turned on their head here.

In those instances, there is a particular willingness of the courts to make sure that they have federal jurisdiction for or whether they need to remand and therefore to look at beyond the scope of the pleadings themselves, whether all of the requirements of the safe harbor have been met. The question here is gonna be, will the court pierce through what are really very superficial allegations? This is an ERISA plan. There's really no allegations around any of the four elements that Stephanie just laid out with respect to whether or not the safe harbor applies or even many of the elements with respect to whether there's a welfare plan. And so a court should, to your point, Rick, force the plaintiffs to allege sufficient facts to ensure that there is in fact subject matter jurisdiction here. And if they have failed to plead those facts, that should be sufficient for the court to kick them out. And I think that is where the plaintiffs are gonna meet some difficulties because it is not clear that they're going to be able to meet those standards or that they have the facts to get there. So I think that's gonna be the first and most challenging hurdle. And the question will be where the court ultimately puts the burden of proof on that. But I do think for the reason you stated, subject matter jurisdiction, the burden should be on the plaintiffs to show it.

Rick Nowak

The one thing I'll add on there, there's sort of these threshold questions, which is, does ERISA apply? And if so, are fiduciary obligations triggered? And then who are the fiduciaries? So as you mentioned, discussing the cases, they're actually targeting the plan sponsors and sort of the plan administrators who are the typical targets in ERISA class actions, but they're targeting the brokers here as well and trying to argue that they're acting in a fiduciary capacity because they have discretionary authority with respect to the assets in the plan. I fully expect there will be a lot of briefing on motions to dismiss over those sorts of allegations because they're pretty cursory in the complaints themselves. The other thing about this whole, as we think through this whole argument, it really goes to, you know, how are they framing these claims? Because, again, they wanna argue there are these fiduciary obligations in place and then therefore once they're triggered, you then breached your fiduciary duties with respect to the administering of these programs. And so I think you're gonna see, as you see the briefing of these cases, sort of you have these threshold arguments, should this be in court at all? And then you get to the more traditional §12(b)(6) type arguments to say you failed to state a claim. The other thing I'll mention about that, I think, when you think of these cases, there's precedent to some of the claims Jerry Schlichter is bringing, not in the sense of challenging voluntary benefit programs, but in terms of challenges to indirect compensation. That's been a focus of his for a long time, as well as this new theory he's brought up of a knowing participation theory. So one of the things he's also putting in this complaint is, even if the brokers were not fiduciaries, they can be liable for knowingly participating in the fiduciary breaches of the employers. That's a theory that he's been pushing really strong in the Carfora case, which is also pending in the Southern District of New York. And the whole goal there is to, again, expand the scope of potential fiduciary liability under ERISA to sort of pull in everyone, even entities that are not acting in a fiduciary capacity. And so that's something we really want to watch and is sort of a theory that's, you know, we need to see how it plays out because they did get past the pleading stage in the Carfora case, that case is in discovery, but there's been no sort of final ruling on whether that's a viable theory under ERISA. Stephanie, in your view, sort of seeing these cases, how would you advise plan sponsors if they want to, you know, offer these sort of voluntary benefit programs and, you know, what should they be thinking about them?

Stephanie Vasconcellos

I was going to say, know, seeing any case, it's always a good time to refresh your compliance procedures, right? It's a good reminder that if you're offering voluntary benefits, it's not that the benefit itself is a voluntary benefit just because it's critical illness, just because it's accident coverage. You actually need to ensure that it's falling within the safe harbor if you intend it to be not an ERISA plan.

So I think now is a fine time to kind of pull up that checklist and make sure that you as a company and as a plan sponsor are falling within the safe harbor if you intend to. Some employers go in and intend to structure it as an ERISA plan, but others don't and then may not kind of be paying attention to that along the way during the lifespan of the benefit. But I do think, and I'm curious for your thoughts, Rick and Reg, I'm concerned this will have a chilling effect on employers offering voluntary benefits because, unlike I think medical, retirement, dental lawsuits in those areas, I think, don't tend to chill the offering of those benefits. They may tend to develop how the benefits are offered, but people are still offering medical and dental. As Reg noted, voluntary benefits are a little less offered, and I think there's something that are offered because they're helpful to employees, because a plan sponsor is looking to go a little above and beyond. And I'm worried that if this is an area that they're—it looks like there's going be litigation and liability, the plan sponsors are going to step away from that and say, you know what, we're just not going to offer this if we're going to get in the heat patrol.

Reginald Goeke

Yeah, and really in many respects, this is a service that the sponsors are simply trying to make available to their employees. It's an ability to provide them with some insurance that saves them from having to do some shopping and allows insurers to come in and make some presentations. There's really no benefit to the employer other than this is something that could be convenient for employees. And if you're going to be held liable for it, it's one of the first things that you could quickly just say, we're not letting anyone come in anymore. And if employers, employees want to get access to it, they can find it on the market. And that would be an unfortunate development. And it is consistent with the kinds of things that we've seen from the Schlichter firm over time. They have pushed the envelope on these issues and it puts a lot of pressure on employers who are offering these benefit programs to really consider how much they want to continue to offer them and how they apply. So I think these in particular, since they are not offered by many plans and many companies, may be the first to fall if they are subject to significant litigation.

Rick Nowak

Yeah, and the only thing I'll add to that, I agree 100 percent is if we think of ERISA's core purpose, it's designed to protect participants’ covered benefits. But at the same time, when Congress enacted ERISA, the desire was to encourage employers to offer benefit plans by not imposing such onerous obligations that it would discourage them from doing so. And so with respect to these sorts of voluntary benefit programs, if the plaintiffs get their way and they sort of want to establish these heightened fiduciary obligations with respect to these programs, as Stephanie, you mentioned, I think the reality is going to be you're going to see employers not offer them because they don't have to offer them. And if they're going to have such an administrative burden, a potential significant, you know, potential liability on a retroactive basis, you'd really have to question, do I want to get, go down that road and actually, you know, stir that up or should I just not offer it and let employees go on the private marketplace and try to get this insurance themselves.

Stephanie Vasconcellos

Well, Rick and Reg, I think that's a good note on which to end the episode. Thank you both so much for joining me today to shed some light on the challenges that really apply to voluntary benefits in this new kind of litigation landscape. For our viewers and listeners, there are more episodes to come. Please check out our Employment and Benefits Unpacked page on the Mayer Brown website or on any of your preferred streaming platforms. If you'd like to discuss any of the issues we have covered today, please get in touch and if you have any suggestions for our future episodes as mentioned, please send them to unpacked@mayerbrown.com. Until next time, thank you for joining us.