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Ropes & Gray attorneys provide timely analysis on legal developments, court decisions and changes in legislation and regulations.
Kendall Dacey: Hello, and thank you for joining us for this Ropes & Gray podcast. Today, we will be continuing our long-running series on emerging issues for fiduciaries of ERISA-covered plans to consider as part of their litigation risk management strategy. I’m Kendall Dacey, a senior associate in the employment practice group with a focus on ERISA litigation, and I’m joined by my fellow Boston-based colleagues, David Kirchner and Harvey Cotton, who are both principals in our benefits consulting group. Welcome, David and Harvey. Given your decades of experience designing and administering health and welfare plans for clients, I look forward to hearing your insights about today’s topic where we will be discussing the emergence of class action lawsuits targeting voluntary benefit plans.
To set the stage, in late December, four new ERISA class actions were filed by the ERISA plaintiffs’ firm, Schlichter Bogard, targeting major employers and their brokers in connection with offering benefits like accident insurance, critical illness coverage, and hospital indemnity benefits. For background and a summary of these complaints, listeners can find a hyperlink to our recent client alert in the transcript to today’s podcast (Voluntary Benefits Under Scrutiny: Multiple Plan Sponsors and Consultants Sued for Alleged ERISA Breaches).
David, why are these new lawsuits such a significant development among benefits professionals?
David Kirchner: Kendall, the fact that Schlichter Bogard filed these suits is notable because this is the firm that pioneered the 401(k) and 403(b) excessive fee litigation that has continued to evolve and expand, and has generated hundreds of lawsuits and millions of dollars in settlements over the past two decades. They may view these voluntary benefit programs as their next frontier.
These lawsuits allege fiduciary breaches and prohibited transactions by employers, and notably, their brokers and consultants—which appears to be an attempt to expand the typical reach of ERISA liability. These are claims not just against employers, but against the large benefits brokers and consultants who advised the employers about their voluntary benefit programs.
Furthermore, I would add that these cases are going to force courts to wade into the largely uncharted waters as to whether voluntary benefit plans offered by employers meet the U.S. Department of Labor’s (DOL) safe harbor to avoid triggering ERISA fiduciary obligations. The outcomes of these cases could fundamentally change how employers and their advisors approach these popular benefit offerings.
Kendall Dacey: Thanks so much for that color, David. In my introduction, I mentioned a few examples of voluntary benefit plans. Harvey, can you provide our listeners with some additional context for how these arrangements work?
Harvey Cotton: Of course, Kendall. As you noted, voluntary benefits are supplemental insurance products such as accident insurance, critical illness coverage, and hospital indemnity benefits. They also include pet insurance, auto insurance, and other similar offerings, although these latter arrangements are never subject to ERISA. Our focus, and the focus of the litigation, is on the voluntary benefits that provide medical and accident coverage. This group of benefits would be subject to ERISA unless they qualify for the DOL’s safe harbor.
Note that these products are offered by employers on a strictly voluntary basis and are fully paid by employees, typically through voluntary payroll deductions.
They are appealing to employers and employees alike because:
• For the employees, they can be an additional perk of employment, providing access to products that employees may not otherwise seek out on their own, helping fill real or perceived gaps in coverage, and offering the advantage of discounted group pricing; and
• For employers, these products can be listed as additional benefits of employment, allowing employers to distinguish themselves among their peers at no cost, since employees pay the full cost of voluntary benefits.
Where it gets interesting is the conventional wisdom has been that because employers don’t subsidize premiums or administer the programs, they fall safely within the DOL’s safe harbor exemption from ERISA’s fiduciary requirements. However, these new lawsuits challenge that assumption head-on. The plaintiffs argue that the way these programs are actually operated—positing employer endorsement and broker involvement—takes them outside of the safe harbor and subjects them to ERISA’s panoply of requirements.
Kendall Dacey: I think a key gating question is whether the safe harbor exemption applies or if these plans are covered by ERISA, which carries those fiduciary obligations. Harvey, can you shed a little more light here?
Harvey Cotton: Sure—allow me to break this down a bit. ERISA governs any “employee welfare benefit plan,” which is defined as “any plan, fund, or program … established or maintained by an employer … for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise, medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, and disability.”
However, ERISA states that the definition of an “employee welfare benefit plan” does not include insurance programs that are voluntary benefit plans. The DOL has established a safe harbor for these voluntary benefit plans that, if met, ensures a voluntary benefit plan will be exempt from ERISA.
To rely on the safe harbor, four conditions must be satisfied:
1. The employer does not pay or contribute to the payment of premiums;
2. The employer does not receive any compensation other than reasonable administrative cost reimbursement;
3. Employee participation is completely voluntary; and
4. The employer does not endorse the program beyond allowing payroll deductions and allowing the insurance carrier or broker to advertise the availability of the benefit to employees.
In these recent complaints, the plaintiffs assert how not only did the employers’ actions subject the voluntary benefit plans to ERISA’s requirements/fiduciary duties, but that the employers conceded in their publicly filed Form 5500s that the plans were subject to ERISA.
Kendall Dacey: Thanks, Harvey. It seems as if the plaintiffs are successful, that could trigger a flood of similar lawsuits. Industry observers are comparing this to the early days of the 401(k) excessive litigation. David, can you explain how the plaintiffs are seeking to bring these voluntary benefit plans under ERISA’s ambit?
David Kirchner: It would appear the plaintiffs are focused on the “non-endorsement requirement” of these programs. This would seem to be the most vulnerable of the safe harbor requirements because there’s no bright-line definition of what constitutes an “endorsement.”
Over the years, the DOL and some courts have provided limited guidance as to what this notion encompasses:
• For instance, in a 1994 advisory opinion, the DOL explained that “[a]n [employer] will be considered to have endorsed a group or group-type insurance program if the [employer] expresses … any positive, normative judgment regarding the program.”
• Examples of activities that could appear to be an endorsement include:
o using the employer’s name and logo on the insurer’s promotional materials;
o saying the employer arranged the program;
o negotiating specific coverage terms seeking out a specific insurer;
o actively assisting employees with enrollment or claims; and
o distributing information that directly links the voluntary benefits with other ERISA benefits.
• The DOL has opined that even describing the employer as “enthusiastic” about a program may constitute an endorsement. This seems to be a relatively low bar that employers could unknowingly cross in their benefit communications.
Not surprisingly, it’s a facts and circumstances judgment; however, if more of these potential endorsement attributes are present, the more likely it is the employer could be perceived to have crossed the line. And frankly, if an employer’s promoting these benefits through open enrollment materials, benefit portals, and employer communications, it’s possible that the courts could see these actions as amounting to potential endorsement of these benefits.
Kendall Dacey: Harvey, assuming the courts agree with the plaintiffs’ baseline assertion that these arrangements are ERISA-covered plans, can you explain their theories of liability?
Harvey Cotton: The plaintiffs allege that the employers are ERISA fiduciaries because they have discretionary authority in the administration of the voluntary benefit plans. As a result, the employers have a duty to (i) select the voluntary benefit insurance carriers with care, and (ii) diligently and prudently choose the brokers and administrators of these programs. Moreover, the plaintiffs allege that employers have a duty to monitor the compensation of all plan service providers to ensure those service providers are receiving only “reasonable compensation” for the services they render to the plan.
Accordingly, the employers have a duty to ensure that fees paid to third-party service providers—for example, the brokers/consultants administering these plans, and the carriers that provide the coverage—are not excessive by reviewing benefits, premiums and commissions, and comparing the fees to what are reasonable fees in the market.
As to the brokers’ liability, the plaintiffs allege that the brokers and consultants exercise discretion over these benefit arrangements—thereby rendering them ERISA fiduciaries—by curating which options the employers see and offer, and they allegedly withheld information about potentially lower-cost alternatives in order to maximize their own commissions. According to the plaintiffs, these actions breached the brokers’ fiduciary duties to act in the best interest of the participants and to refrain from entering into prohibited transactions. The plaintiffs paint a picture of the consultants acting as gatekeepers who prioritized their own compensation over plan participants’ interests.
Kendall Dacey: To sum up, the complaints allege the fiduciaries violated their ERISA duties by “failing to monitor, negotiate, and ensure prudent and reasonable carrier selection, broker commissions, and loss ratios.” They assert that employers had no process in place to select or monitor the insurance carriers and brokers, or to ensure that the brokers’ commissions were reasonable. They also allege that the employers and brokers engaged in prohibited transactions by causing the brokers to collect excessive commissions from plan assets.
The plaintiffs claim they suffered financial harm by overpaying for voluntary benefits and are now seeking substantial remedies including disgorgement of profits, removal of breaching fiduciaries and remuneration for all plan losses.
Given that voluntary benefits programs can involve millions of dollars in premiums across large employers, the potential exposure here could be substantial.
David, in light of these new lawsuits, what should employers be doing now?
David Kirchner: As a preliminary measure, employers may want to review the voluntary benefit plans available to their employees and assess whether they satisfy the requirements of the DOL safe harbor.
If it seems like you will not be able to meet the safe harbor’s requirements, you may want to consider modifications in your administration of these benefits so you can fall within the safe harbor.
This could mean modifying your enrollment materials and procedures for these programs in order to remove the perception that you are reviewing or negotiating specific coverage terms.
Because reasonable people could disagree about whether an employer has satisfied the safe harbor criteria, employers also may consider adopting a formal process to monitor voluntary benefit programs—including reviewing broker commissions, loss ratios, and comparing fees to market benchmarks.
Kendall Dacey: David and Harvey, thank you so much for sharing all of these insights. We think the key takeaways for our listeners are the following:
1. These lawsuits represent a potentially significant expansion of ERISA litigation into an area that was previously considered low risk.
2. The Department of Labor’s safe harbor is narrower than many employers realize, particularly the endorsement requirement.
3. Brokers and consultants are now squarely in the crosshairs, not just employers.
4. Proactive review and documentation is the best defense—whether you’re an employer or a benefits advisor.
We will be monitoring these cases closely as they develop. We also intend to host a webinar for our clients that will be further exploring the issues raised by these lawsuits and providing additional guidance as to what employers can do to mitigate potential risk. So, stay tuned.
For more information, please reach out to any of us or our other colleagues in our benefits consulting group as well as our ERISA fiduciary practice. You can also subscribe and listen to other Ropes & Gray podcasts wherever you listen to podcasts, including on Apple and Spotify. Thank you again for listening.