An issue that never seems to go away is where courts should draw the line between an employee benefit plan and insurance coverage purchased by an individual through an arrangement made available by an employer. The distinction is crucial, because in the former case, ERISA is implicated, while in the latter situation, claimants are guaranteed the full panoply of rights and remedies afforded by state law. Although federal judges are usually very narrow-minded when it comes to the scope of their jurisdiction, when it comes to ERISA, the courts seem to find an ever-growing basis for finding ERISA pre-emption. Such an expansive view was predicted by Jeff McCall of the Provident Life and Accident Insurance Co., who authored a memo in October 1995 in which he recounted:

“A task force has recently been established to promote the identification of policies covered by ERISA and to initiate active measures to get new and existing policies covered by ERISA. The advantages of ERISA coverage in litigious circumstances are enormous: State law is pre-empted by federal law, there are no jury trials, there is no compensatory or punitive damages, relief is usually limited to the amount of the benefit in question and claims administrators may receive a deferential standard of review.”

A recent case involving the same insurance company illustrates how McCall’s efforts have borne fruit. Harding v. Provident Life and Accident Ins.Co., 2011 U.S.Dist.LEXIS 93622 (W.D.Pa. August 19, 2011) addressed the question of whether an individual who purchases individual disability coverage but receives a premium discount because the policies are made available through a common employer is subject to ERISA. Provident’s parent company, Unum, has aggressively asserted with considerable success that such billing arrangements establish employee benefit plans that cause any disputes under those policies to fall within the scope of ERISA pre-emption. This ruling marks another Unum win on that issue.

The plaintiff, Theresa Harding, was employed as the controller for Secon Corp., a real estate company based in Pittsburgh. An insurance agent sold Secon a group short-term disability plan underwritten by Provident; he also made available voluntary individual long-term Provident disability income policies that paid benefits for a maximum period of five years. Many employees declined that coverage, but those who participated paid their premiums through a payroll deduction, which was then remitted by Secon to Provident. In turn, the participating employees, who each obtained individual policies, received a small discount based on the premium payment arrangement. Neither Harding nor her successor, who were responsible for managing Secon’s employee benefits programs, understood the long-term disability policies to be part of an ERISA plan, nor did they file an IRS Form 5500 for the plan as required of all employee benefit plans, even though they did so with respect to the health insurance plan and the short-term disability coverage. In addition, when Harding applied for her coverage, she was individually underwritten and she also voluntarily elected additional optional residual disability coverage.

In 2005, Harding became disabled and received five years of total disability benefits under the policy, which was paid through July 30, 2010. Before the benefits expired, though, she submitted a claim for additional residual disability benefits. Unum denied the claim, advising that the maximum benefit period for all disability benefits was five years and that no further benefits were due. Harding maintained, though, that under her reading of the policy, she could receive an additional two years of benefits under the residual disability rider. Unum disagreed, maintaining that no further benefits were due after five years and the denial letter stated Harding had the right to appeal the denial under the ERISA regulations. Instead of appealing, though, Harding brought suit in state court, which was removed to federal court. Shortly thereafter, the defendants filed a motion to dismiss the complaint on grounds of ERISA pre-emption.

The court converted the motion to dismiss to a motion for summary judgment and then granted the motion. The court ruled that from an objective standard, the policy qualified as an ERISA plan, citing Tannenbaum v. Unum Life Ins. Co. of America, 2006 WL 2671405, at * 3 (W.D.Pa. Sept. 15, 2006) which raised the same issue. Because the policy identified the applicable beneficiary, the plan’s funding source and the specific benefits, the court found the basic requisites of an employee benefit plan were established. The court also ruled the plain was established and maintained by the employer. The receipt of premium notices and payment by the employer was a key factor in the court’s determination.

The plaintiff maintained, however, that the coverage was exempt in accordance with the ERISA safe harbor regulation, 29 C.F.R. § 2510.3-1(j) (2011). That regulation exempts plans that might otherwise qualify as ERISA plans but meet the following requisites:

1. No contributions are made by an employer or employee organization;

2. Participation (in) the program is completely voluntary for employees or members;

3. 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

4. The employer or employee organization receives no consideration in the form of cash or otherwise 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.

Although the arrangement under which Harding purchased her voluntary coverage appeared to fit precisely within the terms of the regulation, the court found the discount Harding received sufficient to constitute a contribution paid by the employer (citing Tannenbaum and Brown v. The Paul Revere Life Ins. Co. No. Civ.A. 01-1931, 2002 WL 1019021, at *7 (E.D. Pa. May 20, 2002) (“[w]here an employer provides its employees benefits they can not [sic] receive as individuals, it has contributed to an ERISA plan.”).

Once the court concluded that ERISA applied, the court then examined whether the claims asserted by the plaintiff were pre-empted by ERISA and found they were. The claims at issue were bad faith claims plead under Pennsylvania law and the court found the weight of authority expressly pre-empted those claims under ERISA. The court determined that the ERISA savings clause does not save from pre-emption any law that supplements the enumerated ERISA remedies.

Finally, the court dismissed the lawsuit altogether. Because ERISA imposes a court-created requirement that pre-litigation claim appeals must be exhausted prior to bringing a lawsuit, the insurer successfully argued that Harding failed to exhaust her appeals prior to bringing suit. Seeing no evidence that the plaintiff made any effort to appeal the benefit denial despite being invited to do so, the court invoked the exhaustion doctrine and dismissed the suit.

The leading contrary ruling is Schwartz v. Provident Life & Accid.Ins.Co., 280 F.Supp.2d 937 (D.Ariz. 2003). There, the court said, “The dispositive question is whether [the employer] actually absorbed any portion of the cost of those premiums, which by itself would be sufficient to bring the insurance policy outside of the safe harbor or whether [the employer] was merely a conduit for premium payments actually made by the insureds, which is conduct which would meet the requirement of the first safe harbor factor.” 280 F.Supp.2d at 941. The court was persuaded that the employer served merely as a “conduit” for the payment of premiums and did not incur any of its own cost. No court of appeals has ruled on this issue, though, so whether Harding or Schwartz is the correct interpretation of the ERISA safe harbor regulation remains to be determined.

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