Voluntary benefit programs face increased ERISA fiduciary scrutiny: Top points

In recent weeks, a plaintiffs’ law firm has filed several claims against employers, brokers, and benefits consultants regarding voluntary benefit programs, including accident, critical illness, cancer, and hospital indemnity insurance.

The lawsuits allege breaches of fiduciary duty under the Employee Retirement Income Security Act of 1974 (ERISA), as well as prohibited transactions, arising from an alleged failure to monitor premiums and broker commissions for voluntary benefit programs. If the claims succeed, they could result in exposure for employers, plan fiduciaries, benefits consultants, and brokers.

Our alert summarizes the lawsuits and outlines key considerations for reducing litigation risk.

What the lawsuits allege

To date, four class action lawsuits have been filed against well-known employers, their brokers, and benefits consulting firms, alleging breaches of ERISA fiduciary duty in connection with voluntary benefit programs.

The lawsuits assert that the employers, as plan fiduciaries, permitted engaged brokers to prioritize their own commissions over employees’ interests, resulting in employees allegedly overpaying for coverage. Specifically, these suits claim that the employers failed to 1) monitor premiums, 2) negotiate contracts, and 3) oversee broker commissions, resulting in prohibited self-dealing in violation of ERISA’s fiduciary obligations. The lawsuits also claim that these alleged failures resulted in excess costs for plan participants.

What’s at stake

This litigation reflects an evolving enforcement landscape that seeks to extend similar arguments from breaches of ERISA’s fiduciary standards in the retirement space into the voluntary benefits space. If successful, these suits could expand litigation risk. In one suit alone, plaintiffs allege USD33 million in excess broker commissions. Similar litigation in the retirement plan context has influenced how employers monitor administrative fees in 401(k) plans.

Plaintiffs’ firms have attempted to apply similar arguments to lawsuits involving health and welfare plans. However, because employers bear the majority of the cost in traditional health plans, courts have been reluctant to find standing in certain cases. By contrast, because employees typically pay the full cost of many voluntary benefit programs, plaintiffs’ firms may seek to establish standing in voluntary benefit program lawsuits.

Voluntary benefit program safe harbor exemption

ERISA exempts certain benefit plans and programs from its coverage under the Department of Labor’s (DOL) voluntary program safe harbor exemption.

To qualify for the safe harbor exemption, a plan must satisfy all four of the following conditions:

1. No employer contributions are made (i.e., the benefit is paid exclusively by the employee)
2. Participation in the program is completely voluntary for employees (i.e., there is no direct or indirect requirement that employees participate)
3. The employer receives no consideration, cash or otherwise, regarding the program (subject to limited exceptions) from the insurance carrier
4. The employer does not endorse the program and performs only limited, specific functions with respect to the program

Plans that do not satisfy all elements of the safe harbor exemption are subject to ERISA’s compliance requirements, including its fiduciary obligations.

Considerations for reducing litigation risk

These lawsuits highlight growing scrutiny over employer-sponsored benefit plans and ERISA fiduciary duties. If successful, they could influence how employers, brokers, and benefits consultants structure and oversee voluntary benefit programs .

To help minimize litigation risk, employers may wish to consider assessing benefit plans offered or made available to employees, including voluntary benefit programs, to determine whether they comply with the requirements of the DOL safe harbor exemption or are subject to ERISA’s fiduciary obligations. Assessment considerations may include reviewing plan design, premium structures, carrier terms, broker compensation, ERISA documentation, and participant disclosures to help detect excessive premiums, conflicts of interest, or prohibited transactions.

Brokers and benefits consultants may also wish to evaluate premium and compensation structures – including revenue sharing, revenue offsets, incentives, benefit accounts, and broker compensation – in light of the allegations raised in the lawsuits, and may consider strategies to mitigate risk for plans that are, or could be, subject to ERISA.

Learn more

For assistance in reviewing and evaluating litigation risk associated with health and welfare plans – including voluntary benefit programs made available to employees – or for questions about commissions or the potential impact of the voluntary benefit program litigation on your business or benefit offerings, please contact the authors or a member of DLA Piper’s Employee Benefits and Executive Compensation team.