Determining exactly which employer benefit programs are ERISA welfare benefit plans can be complicated. In general, even minimal employer involvement in a benefit program can result in the program being treated as an ERISA plan. Employers who provide employee benefit programs without following ERISA requirements (i.e., a written plan document and proper procedures) should use extreme caution as the employer may have inadvertently created an ERISA plan, subjecting it to ERISA rules.
What is ERISA?
The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that sets minimum standards for employee benefit plans maintained by private-sector employers. The Department of Labor (DOL), through its Employee Benefits Security Administration (EBSA), enforces most of ERISA’s provisions. Violating ERISA can have serious and costly consequences for employers that sponsor welfare benefit plans, either through DOL enforcement actions and penalty assessments or through participant lawsuits.
If an employee benefit plan is exempt from ERISA, the plan’s sponsor (the employer) does not have to comply with ERISA requirements that are designed to protect plan participants and ensure plan solvency. On the other hand, an ERISA exemption also means that the plan sponsor does not enjoy certain protections afforded to employers under the law. Most significantly, employers that sponsor ERISA plans are generally protected against lawsuits for punitive and other soft damages under state laws with respect to their benefit plans.
Employers should be aware that an ERISA plan exists if a benefit program is established or maintained by an employer, employee organization, or both, for the purpose of providing specified benefits to participants and their beneficiaries.
Which Employers are Subject to ERISA?
ERISA applies to virtually all private-sector employers that maintain welfare benefit plans for their employees, regardless of the size of the employer. This includes corporations, partnerships, limited liability companies, sole proprietorships, and nonprofit organizations. ERISA exempts only two types of employers:
- Plans maintained by governmental employers are exempt from ERISA’s requirements. This exemption includes plans maintained by federal, state or local (for example, a city, county or township) governments.
- Church plans are also exempt from ERISA. A church plan is any employee benefit plan established or maintained by a church or by a convention or association of churches that is exempt from tax under Section 501 of the Internal Revenue Code (Code), and that has not made an election under Code Section 410(d) to be subject to ERISA.
ERISA’s exemption for governmental plans also extends to plans established by an “agency” or “instrumentality” of a federal, state or local governmental entity. In general, the specific facts and circumstances of the relationship between the particular entity and the government will be examined to determine if the entity is a political subdivision, agency or instrumentality that is exempt from ERISA.
Which Plans are Subject to ERISA?
Many employment plans or programs that provide nonretirement benefits to employees are considered employee welfare benefit plans that are subject to ERISA. To qualify as an ERISA plan, there must be a plan, fund, or program that is established by the employer for the purpose of providing ERISA-covered benefits (through the purchase of insurance or otherwise) to participants and their beneficiaries. Certain welfare benefit plans that would otherwise fall under ERISA have been specifically exempted by DOL regulations. These exemptions include:
- A safe harbor exemption for certain payroll practices; and
- A safe harbor exemption for “voluntary plans.”
In addition to these exemptions, certain benefit arrangements do not fall under ERISA’s definition of a welfare benefit plan, such as HSAs, DCAPs, pet insurance, fitness programs, and tuition reimbursement benefits.
The DOL’s safe harbor exemption for certain voluntary insurance arrangements generally applies where the full cost of the program is paid by employees and the employer has minimal involvement. To qualify as a voluntary plan under the DOL’s safe harbor, the arrangement must satisfy the following requirements:
- The program is funded by group (or group-type) insurance;
- No contributions are made by the employer or employee organization;
- Employee participation in the program is completely voluntary;
- 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
- The employer or employee organization receives no consideration in the form of cash or other benefit 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.
The employer’s involvement with the plan is the key for determining whether the plan is exempt under the voluntary plan safe harbor. If an employer endorses the plan, it will fall outside of the safe harbor and may be subject to ERISA. Employer endorsement may include these actions:
- Selecting the insurer;
- Negotiating plan terms or linking coverage to employee status;
- Using the employer’s name or associating the plan with other employee benefits;
- Recommending the plan to employees;
- Saying that the plan is subject to ERISA;
- Doing more than making payroll deductions (for example, sending premium notices or assuming liability for premium payments due during grace periods);
- Allowing employees to pay premiums through the employer’s Section 125 plan; or
- Assisting employees with claims or disputes.
While employers often believe their voluntary benefit programs meet the safe harbor and are outside of ERISA, publication of these programs by the employer and inclusion of such voluntary programs in a benefit booklet or other employer materials is often enough to bring cause these voluntary benefit programs under ERISA.
