Voluntary Benefits and Safe Harbor

Generally speaking, voluntary benefits, such as supplemental life or critical illness insurance, are individually elected benefits for which employees pay 100% of the premium. However, when the employer (plan sponsor) endorses these benefits, this brings them under their group health and welfare plan. They are then subject to the applicable federal requirements under ERISA, including reporting obligations such as filing Form 5500. Many plan sponsors endorse voluntary benefits unintentionally and find out after the fact that a Form 5500 was due and subsequently late.

Determining whether a voluntary benefit is endorsed, and therefore subject to ERISA, can be challenging. Absent judicial review or guidance from an ERISA attorney, it can be difficult for a plan sponsor to reach an absolute conclusion.

To assess whether a benefit is not endorsed and therefore qualifies for the ERISA safe harbor, courts have examined several factors. One commonly cited framework is the five-factor test outlined in Booth v. Life Insurance Company of North America, 2006 WL 3306846 (W.D. Ky. 2006):

1. Has the employer played an active role in determining employee eligibility for coverage or in negotiating the terms of the policy or benefits?
2. Is the employer named as the plan administrator?
3. Has the employer provided a plan description that expressly references ERISA or states that the plan is governed by ERISA?
4. Has the employer distributed materials to employees that suggest the employer has endorsed the plan?
5. Does the employer participate in the claims administration process?

Another key factor in endorsement is the use of a Section 125 plan—pretax dollars—to cover the premium of the voluntary benefit. This action alone equates to endorsing the benefit.

The Department of Labor further explains that endorsement occurs when an employer or employee organization “urges or encourages participation in the program or engages in activities that would lead a reasonable person to conclude that the program is part of a benefit arrangement established or maintained by the employer or employee organization.”

ERISA Safe Harbor Criteria

To fall within the ERISA voluntary plan safe harbor, the following conditions must be met:

1. No contributions are made by the employer or an employee organization.
2. Participation in the program is completely voluntary for employees or members.
3. The employer’s or employee organization’s sole functions with respect to the program, without endorsing it, are limited to:
   a. Permitting the insurer to publicize the program to employees or members;
   b. Collecting premiums through payroll deductions or dues checkoffs (excluding the use of pretax dollars through a Section 125 cafeteria plan); and
   c. Remitting those premiums to the insurer.
4. The employer or employee organization receives no consideration, whether cash or otherwise, in connection with the program other than reasonable compensation (excluding profit) for administrative services actually performed in connection with payroll deductions or dues checkoffs.

Consequences of Misclassification

If a plan sponsor incorrectly assumes a voluntary benefit is not endorsed when, in fact, ERISA applies, significant compliance issues and penalties may result. Examples of potential ERISA penalties include those associated with failing to file a required Form 5500.

If you are interested in receiving more information on this subject, please reach out to Ann McAdam at info@wrangle5500.com.