Question: When is an employee-paid benefit exempt from ERISA under the voluntary plan safe harbor?
Short Answer: Although employers frequently refer to all benefits paid entirely by the employee as “voluntary,” employers must satisfy four conditions to meet the DOL’s voluntary plan safe harbor exemption from ERISA. The “no endorsement” condition is particularly difficult to meet.
General Rule: ERISA §3(1) Defines Which Benefits Qualify
The employer-sponsored health and welfare benefits that meet ERISA’s definition of an “employee welfare benefit plan” are subject to ERISA.
ERISA §3(1) defines an “employee welfare benefit plan” to include any plan, fund, or program established or maintained by an employer that provides:
- Medical, surgical, hospital benefits (e.g., medical, dental, vision, health FSA, HRA, EAP);
- Benefits in the event of sickness, accident, disability, death, or unemployment (e.g., disability, life, AD&D, severance);
- Vacation benefits;
- Apprenticeship or other training programs;
- Day care centers;
- Scholarship funds; or
- Prepaid legal services.
Although these employer-sponsored benefits are generally subject to ERISA, multiple possible exemptions may apply. Furthermore, there are common situations where benefit offerings will fall into a gray area that will require an analysis of the specific plan design, funding, eligibility, and administrative scheme to determine whether ERISA applies.
For more details on common situations where the ERISA status of a benefit can be difficult to determine, see our prior posts:
ERISA Exemption: The Voluntary Plan Safe Harbor
One potential exemption from ERISA that comes up frequently is the voluntary plan safe harbor. Employer-sponsored benefits that fall within the ERISA §3(1) scope of an “employee welfare benefit plan” are nevertheless exempt from ERISA if they satisfy the DOL’s regulatory safe harbor for voluntary plans.
To understand this safe harbor requires a more detailed analysis of how the DOL defines “voluntary”. The language here does not refer to the standard use of the term “voluntary benefit” that is colloquially used in employee benefits jargon to simply mean that the benefit is 100% employee-paid. Although that is a component of the DOL definition, there are other more subtle and difficult barriers to entry in the formal legal definition of a voluntary plan.
To qualify for the DOL’s voluntary plan safe harbor ERISA exemption, programs must meet all of the following four conditions:
- No Employer Contributions
The first condition of the voluntary plan safe harbor requires that the benefit be paid exclusively by employee contributions. Any level of an employer-share of the premium—no matter how small or nominal—would remove the benefit from the voluntary plan safe harbor.
IRS guidance in multiple contexts treats employee pre-tax salary reduction contributions through a Section 125 cafeteria plan as an employer contribution. Therefore, although not entirely clear and somewhat unintuitive, it appears that permitting employees to pay for the coverage on a pre-tax basis through the Section 125 cafeteria plan would also remove the benefit from the safe harbor.
Accordingly, employers utilizing the voluntary plan share harbor should require that employees a) pay the full amount of the premium, and b) pay such premium on an after-tax basis.
- Completely Voluntary Participation
The second and most straightforward condition of the voluntary plan safe harbor requires completely voluntary participation in the benefit. Given that the program must meet the first condition (fully employee-paid), it simply comes with the territory that participation is completely voluntary. State wage withholding laws generally require that employees authorize any payroll reduction for benefits, which will already ensure compliance with the voluntary participation condition.
- No Employer Endorsement of the Program
The third condition of the voluntary plan safe harbor is clearly the most difficult condition to satisfy—both because of its ambiguity in scope and its inconsistency with typical employer practices.
Employers commonly refer to offerings that meet the first two conditions above as a “voluntary benefit.” However, for purposes of the voluntary plan safe harbor, employers must have additional degrees of separation from the program to qualify for the ERISA exemption.
The regulations specify that the sole functions of the employer with respect to the program can be to a) permit the insurer to publicize the program to employees, and b) collect premiums through payroll deductions to remit them to the insurer. The employer cannot “endorse” the program in those limited permitted functions.
In making sure employees are aware of the program, DOL guidance states the employer “may facilitate the publicizing and marketing of the program, but only to an extent short of endorsing the program.”
What constitutes “endorsing the program”? The overarching theme from the DOL guidance is that endorsement occurs if the employer “expresses to [employees] any positive, normative judgement regarding the program,” or if it “urges or encourages member participation in the program or engages in activities that would lead a member to reasonably conclude that the program is part of a benefit arrangement established or maintained by the [employer].”
The various court cases and DOL guidance interpreting this somewhat ambiguous language generally have found the following employer practices to at least potentially constitute endorsement:
- Employer selection of a specific insurance carrier to offer the program
- Employer selection of specific types of coverage to be offered under the program
- Employer involvement in the plan design of the program
- Program design structures that are only available to employees
- Program materials that include the employer’s name, logo, or any other identifying markers
- Positive statements about the program made by the employer (e.g., a recommendation to enroll)
- Including the program in ERISA documents (e.g., wrap SPD) or filings (e.g., Form 5500)
- Stating that the benefit is subject to ERISA in program materials
- Providing claims and appeals assistance to employees
Accordingly, employers relying on the voluntary plan safe harbor exemption from ERISA will want to carefully monitor their benefit administration practices to avoid any of these forms of potential endorsement. Given how common these practices are with all other health and welfare benefits, it will likely take significant education and restraint among the HR, people operations, and benefits professionals responsible for plan administration to avoid inadvertently slipping into one of these traps for the unwary.
- Employer Receives No Compensation from the Insurance Carrier
The fourth and final condition of the voluntary plan safe harbor prohibits employers from receiving any form of compensation from the insurance carrier (cash or otherwise) in connection with the voluntary program.
The Voluntary Plan Safe Harbor: Is it Worth It?
The “be careful what you wish for” idiom is always at play when considering whether to meet an ERISA exemption. Although employers frequently view ERISA as an administrative burden, there are also significant advantages to ERISA status.
The following is a short overview of the general pros and cons of avoiding ERISA status through the voluntary plan safe harbor:
Main Advantages of Exemption from ERISA
- Not subject to ERISA plan document requirements
- Not subject to ERISA SPD disclosure requirements
- Not subject to Form 5500 reporting requirements
- Not subject to ERISA claims and appeals requirements
- Not subject to ERISA fiduciary duties
Main Disadvantages of Exemption from ERISA
- No ERISA preemption of state laws that relate to benefits
- Program-related lawsuits litigated in state court under less predictable and potentially less employer-friendly state law (including potential jury trial, punitive damages, consequential damages, pain and suffering damages, etc.)
- No Firestone arbitrary and capricious standard of review for appeals (potentially resulting in appeals reviewed under the “de novo” standard that does not defer to the employer’s discretion)
- No ability to assist employees in claims and appeals disputes
- No ability to select the best plan design, plan terms, or carriers to benefit employees
- Potential for an employer’s mistake to inadvertently cause the program to lose voluntary plan status
Best Practice: Err on the Side of ERISA Status
Meeting the ERISA voluntary plan safe harbor exemption for employee-paid programs such as hospital and other fixed indemnity, cancer or other specific disease coverage, critical illness, or supplemental disability or life policies is quite difficult. In many (if not most) cases, employers engage in at least one of the activities that could potentially be viewed by the DOL or a court as an endorsement of the program that may cause the program to lose its exemption.
Because these employer practices are so commonplace, a court may find that the limited employer interaction under one or two of the items described above may not be sufficient to cause the program to become subject to ERISA. However, any employee or DOL challenge that leads to a court proceeding would be costly and burdensome regardless of the ultimate outcome. There’s a common rule of thumb that judicial process in many cases is itself the punishment, and avoiding that process should be the goal.
Furthermore, an adverse outcome to any such proceeding could add insult to injury. The result could cause penalties for failure to timely/correctly file a Form 5500 covering the benefit (up to $2,400/day), failure to have a wrap plan document and SPD in place governing the benefit (up to $110/day upon written request), loss of the Firestone arbitrary and capricious standard of review for appeals (resulting in “de novo” review that does not defer to the employer’s discretion), failure to provide information requested by a DOL investigator (up to $171/day, $1,713/request).
Accordingly, the best practice approach for any situation where a benefit offering is in the gray borderline area of meeting the voluntary plan safe harbor is simply to treat the benefit as subject to ERISA. It is relatively easy to include the benefit in the wrap plan document and SPD, and to reflect its incorporation in the Form 5500 by requesting the Schedule A and adding the correct benefit code in Line 8b.
In other words, it may be more trouble than it’s worth for employers to contort their practices to meet the ERISA voluntary plan safe harbor for their hospital and other fixed indemnity, cancer or other specific disease coverage, critical illness, supplemental disability or life policies, and any other programs that might qualify.
(1) The terms “employee welfare benefit plan” and “welfare plan” mean any plan, fund, or program which was heretofore or is hereafter established or maintained by an employer or by an employee organization, or by both, to the extent that such plan, fund, or program was established or is maintained for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise, (A) medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, death or unemployment, or vacation benefits, apprenticeship or other training programs, or day care centers, scholarship funds, or prepaid legal services, or (B) any benefit described in section 302(c) of the Labor Management Relations Act, 1947 [29 USC §186(c)] (other than pensions on retirement or death, and insurance to provide such pensions).
29 CFR §2510.3-1(j):
(j) Certain group or group-type insurance programs.
For purposes of Title I of the Act and this chapter, the terms “employee welfare benefit plan” and “welfare plan” shall not include a group or group-type insurance program offered by an insurer to employees or members of an employee organization, under which—
(1) No contributions are made by an employer or employee organization;
(2) Participation in the program is completely voluntary for employees or members;
(3) The sole functions of the employer or employee organization with respect to the program are, without endorsing the program, to permit the insurer to publicize the program to employees or members, to collect premiums through payroll deductions or dues checkoffs and to remit them to the insurer; and
(4) The employer or employee organization receives no consideration in the form of cash or otherwise in connection with the program, other than reasonable compensation, excluding any profit, for administrative services actually rendered in connection with payroll deductions or dues checkoffs.
DOL Advisory Opinion 1994-23A:
An employee organization will be considered to have endorsed a group or group-type insurance program if the employee organization expresses to its members any positive, normative judgment regarding the program. An employer or employee organization may, in the course of permitting an insurer, insurance agent, or insurance broker to market a group or group-type insurance program to its employees or members, facilitate the publicizing and marketing of the program, but only to an extent short of endorsing the program. An endorsement within the meaning of section 2510.3-1(j)(3) occurs if the employee organization urges or encourages member participation in the program or engages in activities that would lead a member reasonably to conclude that the program is part of a benefit arrangement established or maintained by the employee organization.
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