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In a new wave of ERISA lawsuits, four employers were sued during the holiday season for allegedly breaching ERISA fiduciary duties regarding their voluntary benefits insurance offerings. The voluntary benefits at issue are accident insurance, critical illness insurance, cancer insurance, and hospital indemnity insurance. The four putative class action lawsuits generally allege that the employers and their benefits brokers breached their ERISA fiduciary duties and caused the participants to pay excessive premiums because they (i) failed to engage in a prudent process when selecting the insurance offerings; (ii) failed to monitor the commissions received by the benefits brokers; and (iii) failed to monitor the loss ratios on the various insurance policies.
These lawsuits are just the latest example of how plaintiffs' litigators are knocking at the door of welfare plan administration, attempting to establish a foothold for ERISA fiduciary damages, building on their success in the 401(k) retirement plan industry. These latest cases are somewhat surprising because many employers that offer these types of voluntary benefits treat the offerings as being exempt from ERISA. The exemption for voluntary plans is found in DOL ERISA Regulation Section 2510.3-1(j), and includes requirements such as employees paying the full cost of the premium, and employers avoiding promotion of the programs. The complaints that were filed allege that the named employers do not rely on the exemption and instead operate their voluntary benefit programs as subject to ERISA. Whether this allegation is true or not, it serves as a reminder to employers who do wish to avoid ERISA that the exemption for voluntary benefits is not automatic.
In addition to ensuring that voluntary benefit programs are either exempt from or subject to ERISA, as intended, in light of these new lawsuits, employers may want to evaluate their voluntary benefit offerings in general. Employers should know:
- What contracts exist with brokers, insurers, or other vendors for these programs?
- How are the brokers, insurers, and vendors compensated?
- Who selects the voluntary benefits, and what alternatives are available?
- Is it possible to determine whether the premiums charged to employees are competitive?
- What are the loss ratios for the voluntary benefits insurance offerings?
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