Monday, October 1, 2012

The Hidden Risks of Voluntary Benefits

Unfortunately, most employers are only ever told one side of the story regarding voluntary (worksite) benefits.  They are told the benefits are free to the employer and make the employer offering look more robust while satisfying an employees' irrational need to avoid all forms of perceived risk against anything from pet calamities to cancer. 

I will never forget sitting in a meeting where a shameless voluntary salesman urged the crowd to purchase his cancer and critical illness policies by explaining that once skin cancer was found on his nose, he bought a new van with his worksite payout.  

Delightful.  We've now taken employee benefits the a new level of sophistication.

Aside from the never-ending administrative challenges of voluntary benefits (incorrect billing, only partial approvals for life amounts, and constantly changing premiums that blow up your payroll deductions), there are rock-solid legal reasons to avoid (or minimize) the prevalence of worksite benefits in your organization.

The conundrum an HR department faces is their natural instinct to make sure that voluntary benefits are vetted thoroughly, and rolled out to employees in a smooth, organized and controlled fashion just like the rest of your benefits.  However, it is precisely these instincts that will turn your voluntary benefits program into an ERISA Plan and embroil you in a compliance nightmare.  

If a voluntary plan is deemed to be an ERISA Plan, the employer must create a written Plan Document and distribute SPDs to its Participants. If the Plan has 100 or more Participants on the first day of the plan year, the employer must also file a Form 5500 with the DOL and provide a summary of it, called a Summary Annual Report (SAR), to its Participants.  

Once deemed and ERISA Plan, you vouch for the validity of your voluntary program as a plan fiduciary.  Be prepared to then get sucked into legal disputes between your employees and their voluntary provider, who likely sold the policy via a 1099 agent who is nowhere to be found years down the road when things hit the fan.

This is from: HR Benefits Alert:
For most firms, voluntary benefits are a win-win arrangement. But be careful. 
On the positive side, voluntary benefits cost employers next to nothing, yet boost employees’ morale and benefits satisfaction. An Aon survey found 77% of organizations offer at least one voluntary benefit. 
What happens if there’s a legal dispute between one or more of your employees and the vendor?  In some cases, employers unwittingly get dragged into court. The vendor could potentially argue that the plan is covered by ERISA, and the employee’s lawsuit should instead be filed against his or her employer. 
If the court agrees, the legal burden would shift to the employer.  Some courts have, in fact, ruled that a voluntary benefits may be covered under ERISA, even if it wasn’t an employer’s intention to formally “sponsor” the plan. 
If push comes to shove, vendors will protect themselves. In fact, some attorneys warn that a voluntary plan insurer’s first move if sued by one of your employees will be to try to get the legal burden shifted from itself to you. 
Two seemingly innocent things that can be turned against you in court:
  • the written announcement to tell employees about the new voluntary benefit, and
  • getting involved if there’s a dispute between an employee and the plan vendor.
Be careful with announcements 
When you offer a new voluntary benefit, the natural tendency is to try to get employees pumped up to participate. But you can get in trouble if people get the impression the firm endorses the plan. Helpful practices:
  • Don’t put the announcement on organizational letterhead
  • Put a disclaimer on the description
  •  either exclude your voluntary offerings from employees’ benefits manuals or list them separately, and
  • hold open enrollment at a different time than for ERISA plans (401(k), main health plan, etc.).
Also, if the vendor offering the voluntary plan has competitors, you may want to remind employees the vendor of the voluntary plan isn’t the only game in town. Some firms pass along lists of competing vendors. 
Avoid involvement in disputes 
As with your ERISA plans, chances are employees will come to you when they have a problem with a voluntary plan. Your first inclination is to help. 
But many experts warn it’s better to stay out. Reason: Courts see this as the action of a plan sponsor. But you can steer someone in the right direction (e.g., giving a contact name to call) while remaining neutral in the dispute. 
Good intentions gone bad  
From an ERISA standpoint, the most dangerous voluntary plan design is one that is partially paid by the company, even if employees pay the bulk of the cost. 
In a major ruling a few years ago (Burgess v. Cigna Life Insurance), a U.S. district court ruled against an employer with a voluntary supplemental disability plan in which the firm paid a portion of premiums on behalf of its lower-paid employees. 
While most employees paid the entire premium — and firm made clear to  people the plan was a voluntary benefit –the court said it didn’t matter. The act of contributing to some employees’ premiums made it an ERISA plan.