Employers are increasingly facing lawsuits under the Employee Retirement Income Security Act (ERISA) for their voluntary benefit plans, which include products such as accident, critical illness, hospital indemnity, and cancer insurance. Since coverage is voluntary, employees pay most or all of the policy premiums, although employers deduct the premiums from their paychecks.
Filed just before Christmas, the suits have targeted Community Health Systems, Laboratory Corporation of America, United Airlines, and Universal Services of America in federal district courts in Illinois and New York. Plaintiffs claim the employers have chosen insurance companies with loss ratios, or the ratios of benefits payments to premiums, that are too low, and broker commissions and premiums that are too high.
Consumer groups have questioned the products sold in voluntary benefits programs due to the high broker commissions and low loss ratios. In response, advocates argue that premiums are very low for these products, and the fixed costs of offering any insurance product do not vary depending on whether it is a low- or high-premium product.
However, ERISA imposes a fiduciary duty on employer plan sponsors to always put the interests of plan participants first. This fiduciary obligation has given rise to a range of legal claims arising from various activities.
To avoid legal claims and other issues arising from ERISA fiduciary duties, employers can use a “safe harbor” provision. However, the plaintiffs in the recent voluntary benefits suits claim that the employers took certain actions outside the safe harbor that subjected them to ERISA fiduciary requirements. For instance, the plaintiffs allege that employers who placed their logos on communications materials and assisted in marketing the products to employees assumed fiduciary duties under ERISA regarding the benefits.
The attorneys for the plaintiffs point out that, at least in one suit, the amounts that a current employee pays for certain voluntary insurance policies are over twice what a former employee pays for the same coverage. Furthermore, broker commissions accounted for about 39% of the premiums employees paid for these plans, compared with 2–8% for comparable plans at other companies. The employees also receive, on average, less than 50 cents per $1 of premiums paid.
In another suit, the broker received over $2 million in commissions over five years in connection with the voluntary benefits policies, which consumed about 28% of the premiums employees paid to maintain coverage.
HBL has experience in all areas of benefits and employment law, offering a comprehensive solution to all your business benefits and HR/employment needs. We help ensure you are in compliance with the complex requirements of ERISA and the IRS code, as well as those laws that impact you and your employees. Together, we reduce your exposure to potential legal or financial penalties. Learn more by calling 470-571-1007.
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