A recent decision by a Utah federal court serves as a reminder that fully insured welfare plans actually achieve their goal of transferring an employer’s risk to an insurer only if the employer meets its fiduciary obligations during the enrollment process.
This decision (Atwood v. Swire Coca-Cola, USA) grew out of an employee’s attempt to enroll in his employer’s long-term disability plan. Although the LTD plan was fully insured, the employer served as the plan administrator and handled the enrollment process. Through a series of events that the court characterized as “unfinished paper work, a lack of follow-up, and the passage of time,” the employee had not been properly enrolled by the date he incurred a disability.
The problem started when the employee both elected coverage on the front page of the employer’s enrollment form and signed a “Waiver of Insurance” on the back side of that form. To further confuse matters, the employee also checked a box that said he was not waiving insurance coverage. He returned the form to his supervisor.
Before the plan’s 120-day eligibility waiting period had expired, the employee attended a new-employee orientation meeting at which his enrollment form was returned to him. He asked one of the presenters how to select coverage that did not include health insurance (which he had through his wife’s employment), while retaining other coverage, including LTD benefits. He made the changes suggested by the presenter and again returned the form.
The employee did not return a separate LTD enrollment card, which the employer later contended was necessary for its payroll department to start the appropriate payroll deductions and notify the insurer of the employee’s enrollment. (The employee contended that he would have signed and returned such a card had it been provided to him.) The missing enrollment card was not noted until the employee met with the employer’s benefits administrator, two days after the employee incurred a disabling injury. Though the benefits administrator then attempted to enroll the employee in the LTD plan, he still failed to follow all of the procedures required by the insurer. Not surprisingly, the insurer later denied the employee’s claim for LTD benefits.
The employee sued the employer under ERISA, seeking the equitable remedy of “instatement” in the LTD plan. The court held that the employer’s actions fell short of satisfying its fiduciary duties under ERISA:
“[The employee] was in an eligible employee class, and he submitted a confusing and incomplete Insurance Enrollment form that nevertheless indicated he had selected coverage for long term disability. There is no evidence that [the employer] audited [the employee’s] Insurance Enrollment form or contacted him at any point during the 120-day waiting period when the apparent problems could be resolved without consequence.”
The court therefore granted the employee the relief he had requested – instatement in the LTD plan as of the date he was first eligible.
The court gave short shrift to the employer’s argument that such relief was impossible because the plan’s insurer was not a party to the action. Noted the court, “What [the insurer] may do after being informed by [the employer] that [the employee] is, as a matter of law, deemed enrolled in the Plan as of December 26, 2000, is not for the court to address. … If it is ultimately determined that [the employee] is disabled and benefits are due to him, it is between [the employer] and [the insurer] to determine what course of action to take.”
Given the insurer’s apparent lack of culpability (hence, its absence from the litigation), it is not hard to imagine what course of action will eventually transpire. The employer will almost certainly be on the hook for any LTD benefits that would have been payable by the insurer had the employer timely enrolled the employee in the plan.
Employers that want to avoid such liability for otherwise-insured benefits should heed the lesson taught by this decision. Each enrollment form should be carefully reviewed for completeness and possible inconsistencies. Any deficiencies should be promptly resolved by contacting the employee who submitted the form and seeking appropriate clarifications.