When Does an Employer Have an ERISA Plan?
Michele Aiken April 24th, 2008
Many employers might assume that an ERISA plan is not created until they actually set up a plan, write a plan document and take formalized steps to create a plan. However, this is not necessarily the case.
Employers need to be cautious when establishing an employee benefits program as they can inadvertently create an ERISA plan or find themselves in a situation where a common “ongoing administrative scheme” can be construed to be an ERISA-governed benefits plan. If this happens, the employer will then find itself with an ERISA plan that is not in compliance with ERISA requirements, one of which is a written plan document.
Currently, courts use a 3-part test to determine whether an ERISA plan exists. The factors the court will consider are: (1) whether a plan exists; (2) whether the plan falls within the Department of Labor’s (DOL) safe-harbor provision; and (3) whether the plan was established or maintained by employer with the intent to benefit employees.
This is a facts and circumstances inquiry analyzing the specific facts and circumstances surrounding the questioned plan. On of the key areas considered is a determination of whether there is an “ongoing administrative scheme” as opposed to a “one-time, lump sum payment triggered by a single event” that does not require an administrative scheme.
Additionally, courts will look at facts surrounding:
- Representations made by employers in internal documents,
- Representations made orally by the employer,
- The employer’s intent,
- Whether a fund has been established to pay benefits,
- How any benefits are paid, and
- The employee’s reasonable understanding of the program.
For example, in Moorman v. Unum Provident Corp., the court found that an employer had unintentionally created a Long-Term Disability (LTD) Plan that was governed by ERISA. In reviewing the surrounding facts and circumstances of the program’s administration, the court concluded that a reasonable employee could conclude that it was an employer-sponsored plan; therefore, despite the employer’s intent, the LTD program met the requirements that establish an ERISA benefit plan.
However, there is a safe harbor exemption from ERISA for certain types of voluntary benefits plans. In order to qualify for this exemption there must be no employer contributions, participation by employees is voluntary, the employer’s role in the plan is limited to collecting premiums through payroll deductions and remitting them to an insurer and the employer does not receive any compensation for its services other reasonable compensation for administrative services.
Unfortunately, employers can inadvertently trigger significant problems by trying to provide better benefits for their employees. Before establishing any new benefits program or changing an existing program that provides benefits to employees, employers should consult with their benefits lawyer to ensure that their attempt at providing for their employees does not have unintended consequences. Additionally, employers should periodically audit their practices to ensure that ERISA-governed plans are not inadvertently created.
Michele:
Thanks for providing this interesting article.
I am curious if there is a way to provide a plan through a VEBA, without the employer setting up an ERISA plan.
Let’s assume that, of course, participation is voluntary, and employees pay all contributions through a section 125 plan.
We know that VEBAs must have a separate and independent existence from the employer.
Thanks for any insight you can provide.
Don Levit,CLU,ChFC
Don:
Thanks for your comment. I just responded to you directly via email, but I thought I’d respond here as well, for anyone else who would be interested.
It is possible to structure a non-ERISA VEBA benefit plan but it would depend on numerous issues surrounding the specific provisions of the proposed program, taking into account things such as the facts and circumstances surrounding the implementation and the administration of the plan to see if it would fall outside the requirements for an ERISA welfare plan. Also, as with any benefit program, the employer should explore the goals they are trying to achieve by having a non-ERISA plan. There are some advantages provided by ERISA-governed plans and an employer should consider all of the factors to ensure their program is structured to reach their goals and provide the greatest advantage/protection for the employer.
Michele
Michele:
Thanks for your reply.
I agree with you that the employer needs to understand whether or not it has established an ERISA plan, and the advantages and disadvantages of doing so or not.
My complaint concerns the Texas Department of Insurance, in asserting its authority in whether or not Texas enployers have established an ERISA plan.
In my opinion, the establishing of an ERISA plan is a federal definition, and therefore it should be based on federal laws.
In The Commissioner’s bulletin issued Aug. 1, 2006, it states, “A cafetetia or Section 125 plan is an employee welfare benefit plan.”
If an employer allows pre-tax deductions through a cafeteria plan, the arrangement is an employee welfare benefit plan. Thus this arrangement “creates a small or large employer health benefit plan subject to the provusions of TIC Chapter 1501.”
Don Levit
We have a large bank client who offers an individual universal life program through our agency. It is payroll deducted. The client is very adament that the benefit not be communicated on their enrollment system or included in their new hire or annual enrollment benefit descriptions — due to fear of the plan falling under ERISA. The only communication we can do is very other year with either a paper mailing to all employees to their home and/or email alerts.
During the periodic communication campaign, the client will assist with 4 email alert “pushouts”. They are resistent to onsite meetings of any kind.
If the client included the benefit on their online enrollment system and in their paper materials, would this bring the plan under ERISA? They also offer Legal, Home/Auto, and Long Term Care under these same guidelines - infrequent “hands off” communication.
There are: no employer contributions, participation by employees is voluntary, and the employer does not receive any compensation for its services other reasonable compensation for administrative services. The key is: the employer’s role in the plan is limited to collecting premiums through payroll deductions and remitting them to an insurer. If the employer allowed a brochure with contact info to be included in the online enrollment system and iin the paper package, would this invoke ERISA? If they allowed us to send a package to new hires throughout the year, would this invoke ERISA? Do you have something I can use to reassure the client?
THanks, Diane
– If you need to publish this, I need my name removed.
Diane:
What state are you located in?
I don’t think this would be an ERISA plan according to federal law.
If you’re located in Texas, however, the departrment of insurance may think otherwise.
I have several documents I can send you to support your position.
Don Levit