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Minimal Employer Involvement May Create ERISA Plan

Yet another recent federal court opinion reminds us that ERISA plans – and thus ERISA obligations – may be created even when they are not intended. While an Ohio court was construing the “payroll practices” exemption from ERISA in the Langley case (see “What is in a Name? Not an ERISA Plan”), a court in Texas construed a similar exemption for “voluntary insurance arrangements,” and found it unavailable. Yet another recent federal court opinion reminds us that ERISA plans – and thus ERISA obligations – may be created even when they are not intended. While an Ohio court was construing the “payroll practices” exemption from ERISA in the Langley case (see “What is in a Name? Not an ERISA Plan”), a court in Texas construed a similar exemption for “voluntary insurance arrangements,” and found it unavailable.

In Burgess v. CIGNA Life Insurance, a former Salomon Smith Barney employee brought state law claims against CIGNA for its denial of his claims for disability benefits under CIGNA’s disability insurance policy. The court held that ERISA preempted the employee’s claims even though his employer did not contribute any money toward his individual policy premiums.

That result might seem strange, but it is actually consistent with established ERISA jurisprudence. ERISA – a federal law – preempts claims that are based upon state law whenever those claims “relate to” an ERISA plan. Any claim for benefits from an ERISA plan must “relate to” that plan. Thus, the only issue facing the Burgess court was whether the plan at issue was an ERISA plan.

The district court concluded that it was. The disability policy was an employee benefit plan because it had been established by an employer to provide welfare benefits to its employees. The real issue, the court said, was whether the plan fell within the regulatory exemption from ERISA for voluntary insurance arrangements.

The regulations provide that an insurance program is not an ERISA welfare plan if: (1) no contributions are made by an employer or employee organization; (2) participation is voluntary; (3) the employer’s or employee organization’s sole function is to collect premiums and permit the insurer to publicize the program; and (4) the employer or employee organization receives no consideration from the program, other than for administrative services.

CIGNA conceded that participation in the disability program was voluntary and that the employer received no consideration. The plaintiff argued that no contributions were made by his employer because the employer paid only the premiums of employees making less than $50,000 a year. The plaintiff had a higher salary, and paid 100 percent of the premiums himself.

The court rejected that argument. The relevant inquiry, the court held, was whether the employer made contributions to the plan, not whether it made a contribution on behalf of a specific individual. Because the employer paid the premiums of some participants, the plan did not meet the exemption criteria, and thus was subject to ERISA.

The court also found the employer’s involvement with the program sufficient to constitute an “endorsement” of it, thus taking it out of the exemption for voluntary insurance arrangements. In this case, the employer did more than merely collect premiums and permit the insurer to publicize the program. According to the court, the employer’s creation of the plan and its designation of its own plan administration committee as plan administrator was sufficient to establish in the mind of a reasonable employee that this was an employer-sponsored plan that was governed by ERISA.