Category: ERISA

Don’t Assume All Employer-Adjacent Insurance is ERISA-governed, Says Ninth Circuit

There’s often an erroneous assumption that any insurance a person buys in connection with their employment is automatically subject to ERISA. But ERISA does not regulate all employer-adjacent insurance. ERISA only applies to employee benefit “plans.” Whether an ERISA “plan” exists can be complex, but without one, an insurance policy will not be subject to ERISA even if an employer was involved in its purchase.

A recent Ninth Circuit decision is a good reminder of this. In Steiglemann v. Symetra Life Ins. Co., the appellate court determined that an insurance policy purchased in connection with the plaintiff’s employment was not subject to ERISA because the requirements for an employee benefit “plan” were not met. The decision is unpublished, meaning it may be persuasive to lower courts but is not binding.

Jill Steiglemann bought a disability insurance policy from Symetra Life Insurance Company. She had access to the policy through her membership in a trade association for insurance agents. Her company paid for the insurance. The lower court held that the policy was part of an employee benefit plan and subject to ERISA.

The Ninth Circuit Court of Appeals reversed the lower court and held that the policy was not governed by ERISA. Even though Steiglemann’s employer arranged for the option for her to buy coverage and paid premiums, this was not enough to show the employer established an ERISA plan.

The employer never contracted to provide for coverage. It never promised to act as an administrator for the insurance. And it never took the steps necessary to maintain an ERISA plan, like recordkeeping and filing returns with the Department of Labor.

Steiglemann’s trade association also did not do the things necessary to create an ERISA plan. The association did not function for the main purpose of representing employees against their employer.

There was therefore no evidence that Steiglemann’s insurance policy was part of an employee benefit plan. And without a plan, the policy was not subject to ERISA.

This decision is a helpful reminder not to assume that ERISA applies to all employer-adjacent insurance.

Insurers Still Breaking Mental Health Coverage Rules Says Department of Labor

The 2022 report to Congress from the Department of Labor (DoL) on compliance by group health plans with the federal mental health parity laws identifies numerous instances of continued discrimination in coverage for treatment of mental health diagnoses.

Federal law generally prohibits insurers from discriminating against people who need coverage for treatment of mental health conditions. Basically, health insurers cannot have limitations that are more restrictive of treatment for a mental health condition than for other conditions. These rules have only become more important since the COVID-19 pandemic contributed to mental health issues for many Americans; for instance, the CDC noted a 30% increase of overdose deaths since the pandemic.

In large part for this reason, DoL has made enforcement of the mental health parity rules a priority in recent years. One new enforcement tool is a 2021 rule passed by Congress requiring health plans to provide DoL with a comparative analysis of treatment limitations for mental health conditions to help DoL ensure these practices follow the law.

DoL’s report identified many problems with health plans’ reporting about mental health parity. For instance:

  • Failure to document comparisons of treatment limitations for mental health limitations before implementing those limitations;
  • Lack of evidence or explanation for their assertions; and
  • Failure to identify the specific benefits affected by mental health limitations.

DoL also noted that enforcing these reporting rules had led to the removal of several widespread insurer practices that violated the mental health parity rules.

For example, one major insurer was found to routinely deny certain behavioral health treatment for children with Autism Spectrum Disorder. This resulted in denying early intervention that could have lifelong results for autistic children. DoL found over 18,000 insureds affected by this exclusion.

Another example involved the systemic denial of treatment used in combatting the opioid epidemic. New research has found that combining therapy with medication can be more effective for treating opioid addiction than medication alone. DoL found a large health plan excluded coverage for this therapy in violation of the mental health parity rules.

Other treatments DoL’s report identified as being denied on a widespread basis in violation of the law included counseling to treat eating disorders, drug testing to treat addiction, and burdensome pre-certification requirements for mental health benefits.

DoL’s report is a reminder that discrimination on the basis of mental health related disabilities remains a part of the insurance business despite years of federal legislation to the contrary.

SCOTUS to Employers: ERISA Doesn’t Let You Sit On Your Hands While Your 401(K) Participants Get Price-Gouged

The United States Supreme Court’s first ERISA ruling since 2020 was a unanimous win for employees. In Hughes, et al. v. Northwestern University, the Court held that ERISA gives employees the right to sue their employer for overcharges on investments in the company’s retirement plan. This ruling means employers who offer their employees overpriced retirement plan investment options may violate their duties to their employees under ERISA. It is also a fascinating peek at how ordinary investors can get price-gouged with the assistance of the very fiduciaries who are supposed to be protecting them.

The plaintiffs worked for Northwestern University. Like many Americans, they had the option to invest pre-tax wages into a retirement account maintained by their employer (e.g., a 401(k)). Northwestern chose which funds the employees could invest in, but the employees were free to choose whichever investments they preferred from this “menu” prepared by Northwestern.

The plaintiffs sued Northwestern alleging some of these investment options were needlessly overpriced. In investment parlance, the funds had an unnecessarily high “expense ratio” because Northwestern offered the employees “retail” shares rather than the cheaper “institutional” shares.

This particular allegation is a big deal. Large employers like Northwestern have the leverage to offer their employees funds that are extra cheap. This is because you can get a better deal from a fund if you’re buying on behalf of a thousand investors rather than just yourself. Many mutual funds or ETFs are available to retail investors in the regular “retail” class with the typical expense ratio, but also available in the special “institutional” class with a much cheaper fee.

For a huge employer like Northwestern to say “hey Mr. Mutual Fund, we know we could get our employees the cheap funds because we’re a big bad university with lots of leverage, but go ahead and charge our employees extra” would be egregious. It’s like buying a thousand cars at the sticker price rather than negotiating a volume discount.

The lower courts had dismissed the case. Northwestern’s “menu” of investments included reasonably priced funds in addition to the overpriced funds. On the basis that the employees were free to choose not to be price-gouged on their investments (assuming they could figure out they were being overcharged), the lower courts reasoned that this amounted to “no harm, no foul”.

The Supreme Court disagreed. It criticized the lower courts for failing to consider Northwestern’s duty under ERISA to “monitor all plan investments and remove any imprudent ones.” ERISA requires that employers managing retirement plans act with “care, skill, prudence, and diligence” when handling their employees’ benefits. This basically means employers should treat their workers’ money with the same degree of care the employer would treat their own money.

Obviously, no prudent person would pay the retail price over the volume discount–unless they were paying with somebody else’s money.

The Hughes case is a good reminder that ERISA doesn’t let employers off the hook for price-gouging their workers’ retirement savings merely because the workers might have figured out that they were being price-gouged and chosen the cheaper investments.

Is Washington’s New Long Term Care Insurance Law Preempted by ERISA?

Washington State recently passed the Long Term Care Trust Act. The Act, approved by the legislature in 2019, sets up a state fund to pay for future long term care expenses like home nursing care, memory care, transportation, etc. The legislature passed the act to try to stave off a future crisis in which elderly or disabled folks in Washington won’t be able to afford these services. Currently, uninsured folks needing long term care typically fall back on state Medicaid benefits. There is concern that this will become unsustainable, particularly as more and more elderly folks need this care but can’t afford it.

The Long Term Care Act tries to cushion this blow by providing an employee-funded benefit to pay for future long term care. Starting January 1, 2022, employees in Washington State will pay a .58% payroll tax into the state long term care fund. Employers will be responsible for processing the tax and remitting the money to the fund.

This will probably lead to lawsuits challenging the Act as preempted by ERISA. ERISA generally prevents states from making their own laws regarding employee benefit plans. Whether this provision–known as “preemption”–applies to the Long Term Care Act will likely be whether the Act requires enough involvement by employers for courts to treat it as an employee benefit plan.

The Act’s critics say it obviously does. It can’t be disputed that long-term care insurance is an employee benefit that can be subject to ERISA if provided through an employee benefit plan. How, the critics say, could a law requiring employers to process payroll deductions for the purpose of providing benefits the employees only get because they’re working be anything but an employee benefit plan?

The answer might not be so simple. The U.S. Supreme Court has repeatedly held that ERISA does not preempt state laws requiring employers to provide benefits to their workers unless the law requires the employer to operate a so-called “administrative scheme.” For example, in the 1987 case Fort Halifax Packing Co. v. Coyne, the Supreme Court ruled that a Maine law mandating severance pay for workers fired during plant closures was not preempted by ERISA because it didn’t require the employer to do much more than write a check in an amount determined by the state. That decision explains that Congress’ purpose in stopping states from passing laws regulating employee benefit plans is to protect employers from burdensome state-law requirements that might discourage them from offering benefit plans to their employees. The Maine law didn’t do this because it didn’t require the employer to set up any kind of “administrative” scheme for the severance benefit but simply write a check when laying off workers: “To do little more than write a check hardly constitutes the operation of a benefit plan.”

If writing a check to your employee for an amount the state tells you isn’t an administrative scheme, it wouldn’t be hard for a court to rule that deducting money from their paychecks in an amount determined by the state isn’t one either.

It’s been a while since the U.S. Supreme Court has weighed in on a similar issue, so the Ninth Circuit Court of Appeals (the federal appellate court where any challenge to the Long Term Care Act is likely to wind up), will probably follow the Fort Halifax case. That’s what the Ninth Circuit did in deciding challenges to similar laws over the last few years.

For instance, in 2008, the Ninth Circuit found ERISA did not preempt a San Francisco ordinance requiring employers to pay for employee health care in Golden Gate Restaurant Association v. City and County of San Francisco. The court relied on the Fort Halifax case to determine the ordinance did not require employers to create an employee benefit plan. The court emphasized that an ERISA plan is not created by legislation that merely requires employers to pay money based on the number of hours worked by their employees.

More recently, earlier in 2021, the Ninth Circuit applied the same reasoning to hold a Seattle ordinance requiring employers to pay for employee health care was not preempted by ERISA in ERISA Industry Committee v. City of Seattle. The court relied on Fort Halifax as well as Golden Gate Restaurant Association. That decision was short, terse, and unpublished (meaning it lacks precedential value, an indication the court considered the issue largely settled by prior caselaw and not deserving of significant thought).

This suggests the courts will probably consider the Washington Long Term Care Trust Act along similar lines. Applying the Fort Halifax and Golden Gate Restaurant Association tests may make challenges to the Act difficult. After all, these cases arguably say Washington State could require employers to pay directly for employee benefits so long as the state is doing the math on the amount of the contributions. The main difference between these laws and the Act is that it’s the employees paying for the benefits provided by the Act rather than the employers. Since the employers just have to collect the money from their employees, it will be easy for a court to apply the Supreme Court’s reasoning from the Fort Halifax case that “To do little more than write a check hardly constitutes the operation of a benefit plan.”

How do I know if the insurance policy I got through my employer is subject to ERISA?

ERISA governs most insurance employees receive through their employers. But there are exceptions. Determining whether insurance a person gets through their employer is governed by ERISA can be complicated.

This is important because whether ERISA applies to an insurance policy determines the insured’s rights and the insurer’s obligations. If ERISA applies, the insurer must follow specific rules requiring the insurer to promptly decide claims, fairly consider all the evidence, perform a reasonable investigation, and communicate transparently with the claimant. Similarly, ERISA imposes important duties on the claimant, including the obligation to go through the insurer’s informal administrative process before bringing a lawsuit to recover insurance benefits if a claim is denied.

In general, ERISA applies to insurance an employer provides for its employees through an employee benefit plan. Factors that might show the insurance is part of an ERISA plan include: the employer pays for the benefits, the employer investigates claims, the employer decides which claims to pay, or the employer requires all employees to participate.

But employers often arrange for their employees to obtain insurance outside of an ERISA plan. This exception to ERISA coverage exists because, in passing ERISA, Congress wanted employers to be free to offer their employees insurance without creating an ERISA plan and subjecting themselves to ERISA’s complicated rules. One of the goals of ERISA is to increase the benefits available to employees by making it easier to offer employees benefits.

Accordingly, ERISA allows employers to offer their employees attractive insurance coverage without making the insurance part of an ERISA plan as long as the employer limits its involvement in the policy. Congress reasoned that if the employer’s involvement is limited, ERISA’s concern with protecting employee benefits from employers’ mismanagement or embezzlement is not in play.

Insurance that falls within this exception often has these attributes:

  • the insurance is advertised separately from the employer’s benefit plan;
  • the employee pays for the insurance (often through deductions from their paycheck);
  • the employer leaves it up to the employee to decide whether to buy the insurance;
  • the employee can take the coverage with them when they leave the employer; and
  • the employer isn’t involved in claims under the policy.

As with everything insurance-related, whether ERISA applies to a particular policy is complicated and depends on the details. Consult a qualified attorney if you have questions about whether specific benefits are governed by ERISA.