Applicability of ERISA to optional group term life insurance!

[Guest jrjatno]

Employer provides group term life insurance to all employees with employer paid premiums as part of ERISA employee benefit plan.

Employer provides supplemental optional group term life insurance to employees who choose the coverage, make application for the coverage and employee pays premiums through payroll deduction. Employer provides booklet called Employer's Supplemental Group Term Life Benefits which describes the terms of the optional coverage.

Employer is administrator ERISA plan with authority to interpret plan.

Insurance company is also administrator of plan.

Is the optional group term life insurance with premium paid by employee through payroll deduction governed by ERISA?

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John R

[KJohnson]

Generally yes--There is a narrow exception in DOL Reg. 2510.3-1(j) where the "sole" function of the employer, without "endorsing" the OGTLI is to permit the insurer to publicize the program to employees, collect premiums through payroll deductions and remit them to insurer.

I haven't looked into this further, but I think calling it the "Employer's Supplemental Group Term Life Insurance" might be fatal to an argument that you fall within this exception.

[pjkoehler]

I think KJohnson's cite is right on point. Paragraph (j) is one of a number of exceptions to the definition of a Title I employee welfare benefit plan set forth in Reg. 2510.3-1(B)-(k). However, your question is quite specific and refers to the insurance program as "part of a ERISA employee benefit plan." Can you explain why you think it is part of an ERISA plan. Keep in mind that a "cafeteria plan" is not an ERISA plan at all. So, merely because, employees are permitted to pay for the supplemental life insurance with pre-tax payroll deductions doesn't take it outside the paragraph (j) exception. Is there some requirement of paragraph (j) that the employer choses not to satisfy? Since death benefits are among the class of benefits that ERISA describes as a welfare benefit in ERISA Sec. 3(1), it's theoretically possible for the employer to maintain a death benefit plan, which is an ERISA "welfare benefit plan." But such plans are exceedingly rare, since the nature of the benefit almost always requires funding by the purchase of insurance and as long as the other minimal requirements of the paragraph (j) are satisfied, such an arrangement doesn't rise to the level of an ERISA Title I plan.

[This message has been edited by PJK (edited 06-09-2000).]

[KJohnson]

Group term life is generally an ERISA covered plan, but applicable regulations eliminate many of the reporting requirements for plans covering less than 100 participants (i.e 5500). However SPDs, claims and appeals procedures, written plan document, named fiduciary, and fiduciary duties in general are still applicable.

Going back to the 2510.3-1(j) exception you may want to look at DOL opinion letters 94-22A through 94-24A. I believe that DOL has stated that if an employer says something as simple as it "has arranged for a group-type insurance program" it could be viewed as an endorsement taking you outside the exception.

I think the test is if an employer expresses a "positive normative judgment" regarding the insurance (whatever that is) it will be considered to have endorsed the plan. BNA's comment on this is that labeling a plan as an "employer plan" will be viewed as sponsorship or an endorsement taking you outside the exception.

[This message has been edited by KJohnson (edited 06-09-2000).]

[KIP KRAUS]

I'm not sure what the exact point pkj is trying to make , but I would consider a Supplemental GTL plan as a plan subject to ERISA if the Supplemental GTL policy is issued to the employer, which in most true Supplemantal GTL plans thay are.

In addition, if the employee's contributions to the suplemental GTL together with company paid GTL premiums are applied to calculate any imputed income under IRS Section 79 I would consider it an ERISA plan.

I agree with KJohnson that if the employer is merely a conduit for remitting premiums to an insurer, and the policies are issued directly to the employees, the plan would most likely not be subject to ERISA.

[pjkoehler]

Well, Kip I guess it's kind of interesting to know that "[you] consider a Supplemental GTL plan as a plan subject to ERISA if the Supplemental GTL policy is issued to the employer," but that simply ignores the scope of the definition of "employee welfare benefit plan" and the statutory and regulatory exceptions to that term, e.g. DOL Reg. Sec. 2510.3-1(j). Kip, if you have any exposure to malpractice liability in dispensing advice to clients, you might want to enlighten yourself along these lines and take a look at that regulation and the official guidance and court decisions that expand on it, because your formulation of whether an employee-paid Supplemental GTL program is an ERISA welfare benefit plan doesn't mention any of the 4 exception requirements set forth in the regulation and makes the issuance of the contract to the employer dispositive, when the regulation doesn't even refer to that as a material factor.

Can you explain the first and third paragraphs of your comment Kip? On the one hand, you argue that a GTL contract is an ERISA welfare benefit plan if it is issued to the employer. In the third paragraph, you assert that a GTL contract is not an ERISA welfare benefit plan, "if the employer is merely a conduit for remitting premiums to an insurer, and the policies are issued directly to the employees. . . ." What if the policy is issued to the employer, but the employer is still merely a conduit? Your second paragraph somehow links the tax treatment of employer-paid GTL coverage under IRC Sec. 79 to the determination of whether an employee-paid supplemental GTL program is an ERISA Title I Plan? Kind of a stretch don't you think?

We know that the supplemental GTL is 100% employee-paid and participation is voluntary because the initial question specifies this. We can probably assume that the employer is not receiving any consideration from the insurance company. Accordingly, we've met 3 of the 4 exception requirements of Reg. 2510.3-1(j) outright. As KJohnson points out the focus is on the 4th requirement which considers whether the employer is endorsing the program. We need clarification, but it also sounds like the employer has compromised its ability to claim the exception by taking the position that this is an "ERISA welfare benefit plan." But it's certainly worth looking at a little more closely.

[This message has been edited by PJK (edited 06-11-2000).]

[KIP KRAUS]

I haven’t ignored the scope of any provisions of DOL Reg. Sec. 2510.3-(j). Because in my experience, when someone tells me they have a GTL contract, I assume they have a GTL contract, and by definition, a true GTL contract can only be issued to an employer, employer group or similar sponsoring “group”. That being the case, the employer or other group would be the sponsor. I would suggest checking the definition of GTL under the state where the contract is being issued to determine the status of the contract. Of the GTL contracts I have seen, they all have similar characteristics, the contracts were issued to a “group”(employers, in most cases), the group determined eligibility, the group signed the application for coverage, the group was responsible for submitting premiums to the insurer (whether contributory or non-contributory), the group issued certificates of insurance to participants, and otherwise met all of the requisite characteristics of group insurance set out in state regulations.

There are, of course, other life insurance programs marketed as group insurance that may or may not qualify as GTL plans by various state laws such as group universal life, group variable life, group variable universal life, group permanent life, group paid-up life and credit insurance and others where the policies are actually issued to employees and may stay with the employees when their employment terminates. These type of programs typically require the employer to remit premiums payroll deducted from employees, and in the absence of the employer not meeting all of the exceptions of paragraph (j) I would not consider these plans employer sponsor as a general rule. If an employer wishes to pay the premiums for these types of programs, even though it’s not required, I would call them a sponsor and assume the plan is subject to ERISA.

In fact paragraph (j), (3), in my judgement, applies more to these kinds of non-GTL plans.

I have no idea what the DOL means with regard in (j), (4) when they talk about the employer or employer organization receiving no consideration in the form of cash or otherwise. In most states this would be illegal anyway in the form of kickbacks.

I can’t imagine the DOL reviewing a true GTL plan and not finding that it is sponsored by the group that purchased it as was part of their determination in the Opinion letter 94-22A sited by KJohnson.

PJK, I don’t think IRC Section 79 is a stretch since it does apply to GTL. My job is not client based with regard to dispensing advice, so I don’t need malpractice insurance. However, if it were I wouldn’t advise a client who had a GTL plan that it wasn’t subject to ERISA.

[pjkoehler]

Kip, it seems you aren't distinguishing between (1) basic or automatic GTL coverage that is employer-paid and (2) supplemental or voluntary GTL coverage that is 100% paid with employee after-tax contributions, which is the type of program at issue here. IRC Sec. 79(a)(1) on its face applies only to the cost of employer-paid GTL coverage in excess of $50,000, not the sort of program we're discussing.

Voluntary, supplemental GTL contracts are issued to the employer, or are added by rider to an existing GTL policy issued to th employer, because from an underwriting standpoint it is necessary to qualify for the group premium rates. Typically, the employer restricts its involvement to processing after-tax payroll deductions and the distribution of insurance company forms and information about the coverage options, which is the sort of plan that the DOL Reg. mentioned by KJohnson exempts from the definition of "employee welfare benefit plan." The first sentence of Reg. 2510.3-1(j) specifically exempts certain "group or group-type insurance programs," which covers GTL policies. Now, GTL policies in which the coverage is employer-paid are going to be knocked out of the exception, because such programs don't satisfy the first exception requirement. But voluntary, employee-paid GTL policies may yet survive if the employer can satisfy the 3rd and 4th requirements.

Sometimes employers communicate their GTL basic and supplemental coverages as if they were the benefits provided by one plan. This can screw up the option to bring the supplemental plan within the regulatory exception. ERISA coverage is not all bad from the employer's perspective (limitations on damages, ERISA preemptions, etc.), so some employers may make a conscious decision to bring their supplemental GTL program within the scope of the ERISA definition of "welfare benefit plan." Other employers wish to avoid the admininstrative expense of filing Form 5500 and the other costs of operating ERISA Title I Plans. Those employers potentially can take advantage of the regulatory exception if they are scrupulous in complying with the exception requirements, which really aren't that difficult to satisfy.

[This message has been edited by PJK (edited 06-12-2000).]

[KIP KRAUS]

I didn’t get the impression from jrjatno’s original post that he was talking about a separate supplemental GTL contract. It appeared to me that he was talking about an ad-on to the original GTL contract. Feel free to jump in any time jrjatno with any more details/clarification.

PJK, I still say that a GTL contract is a GTL contract, whether for supplemental or basic coverage, and is always issued to the group and therefore sponsored by the group. My contention is that the employer cannot satisfy the 3rd and 4th subparagraphs of paragraph (j) if in fact they have entered into a true group term life arrangement with an insurer. Maybe I am missing something, but if an employer wishes to have an attractive Supp. GTL plan, they will say who is eligible,and negotiate the plan provisions and benefits, which does not limit their involvement by statute. Just by the very nature of GTL, the employer is involved as other than a premium conduit. On the other hand, if an insurer comes in and says they will allow employees to purchase “Group Universal Life”(not a true GTL plan) and the employer need only allow them access to employees and be the conduit for sending in payroll deducted premiums, I’d say it would be relatively easy for the employer to satisfy paragraph (j).

I personally do not have faith that the DOL knows the difference between true group and quasi group insurance, but given all of the information pertaining to true group insurance, I feel sure they would have no choice but to find it an ERISA plan, and not exempt under par. (j).

In the case of Section 79 and imputed income I have always been under the impression that if an employer purchased basic GTL on behalf of the employee and the employee elected to pay for supp GTL that the total of basic and Spp. Life were added together and then run through the imputed income calculation, where employee premiums were taken into consideration in offsetting imputed income. Payroll services have been calculating it this way for years. Maybe someone has been doing it wrong, but if so, plenty of employers are in trouble.

[pjkoehler]

I'm sure we're beating this to death, but the devil is in the details with this stuff. Kip, you are arguing that the insurance company's mere issuance of the GTL policy to the employer automatically takes the program outside the exception described in Reg. Sec. 2510.3-1(j). You somehow align the term "sponsor" (which for ERISA purposes has no defined meaning), policyholder (which only describes a contractual relationship under state law) and the "employer" maintaining an "employee welfare benefit plan," for ERISA Title I purposes to which no exception apply. If you read ERISA Op. Ltr. 94-22A closely you'll notice that the "employee organization" seeking to come under the exception was the policyholder of the GTL contract. The logic of your position is that issuance of the policy to the "employee organization" was automatically fatal to its claim. But, the Department raised no such argument. It went down the laundry list of exception requirements and concluded that because the "employee organization" engaged in activities that amounted to an endorsement of the program and made employer contributions under the policy, it didn't come within the exception. But, if, as you argue, any GTL policy issued to an "employer" (or in that case "employee organization")is outside the exception, that should have ended the Department's inquiry. No need to apply all this tortured reasoning about what activities rise to the level of "endorsing" the program. It could have said, but it didn't, that by virtue of being the policyholder the "employee organization" was unavoidably engaging in "endorsement" activities. The issuance of the GTL policy to the "employee organization" was not mentioned by the Department as in any way material to its conclusion. Under a fair reading of the letter, it may be inferred that had the "employee organization" not endorsed the contract by making "positive, normative jdugments" to the employees and not made contributions, the program would have been within the exception, it's status as policyholder of the GTL contract notwithstanding.

[This message has been edited by PJK (edited 06-12-2000).]

[KIP KRAUS]

PJK,

I agree that all of your points have merit. I also agree that the DOL’s opinion letter was verbose, which one might expect from a government organization regardless of how they arrive at their conclusions. And I still contend that the DOL doesn’t understand the nature of a true group term life plan, and even if they did they would be remiss if they didn’t point out each area in which the employee organization did not meet the exceptions of the Regs.

Yes we are beating this to death, and it is clear that you I still agree on this issue. However, I still contend that by the mere nature of GTL an organization who purchases such a contract cannot meet the exceptions of Reg. Sec. 2510.3-1(j).

I will agree that while the term “sponsor” in and of itself has no definition in ERISA the term “plan sponsor” does in Section 3,16 (B). So when I refer to sponsor I mean this is what I am referring to.

[KJohnson]

Interesting recent decision on this issue:

http://www.ebia.com/weekly/articles/2001/E...lchNewYork.html