Thursday, March 9, 2023

Volunteering for Trouble

The Compliance Traps, Administrative Nightmares, Subtle Discrediting & Employee Frustration Voluntary Benefits Often Bring

Special guest column by Dagny Taggart | March 2023

As a wee lass, my grandmother used to admonish, “don’t go borrowing trouble.”

I only fully internalized or “grokked,” as the kids say, that message once installing voluntary benefit plans.

In the eyes of the ginormous corporations that have devoured nearly all the insurance brokerage market, I’m reasonably sure this makes me a bad broker. Because, you see, once you are publicly traded, your stock prices and your national VP’s job are tied inextricably to the holy grail of growth.  Client retention is nice and may even earn you a pat on the head or some other form of little doggie treat, but growth, my lass, well, that shall set ye free! 

I’ll never forget a conversation with a notoriously unscrupulous brokerage owner in the San Francisco Bay Area. We were at some stuffy, pompous, self-congratulatory industry meeting where brokers take a temporary leave from the golf course to discuss how to best grow revenue (your premium).

The greasy, slick-haired, dark pinstripe-suited, mafioso-looking founder told our CEO, “I’ll never understand why you put so much stock in retention. Once a client has identified that you cannot service them as promised, it will still take them nine to eighteen months to leave for a new broker. You can sell a handful more groups in that time!”

Even though that was nearly 25 years ago, very early in my career, I always remembered the message.

And I hated it increasingly each year I practiced. 

As a brokerage office is purchased by a bank, merged with another bank, and repacked to a private equity firm like every other financialized product in our country, brokers are inevitably hounded with the mantra of growth. New sales conquest lists are circulated monthly, sometimes weekly, to prod already organically competitive salespeople to climb over each other to push more premium dollars through their P&Ls. One company I worked with even created a gameshow-like point system to maximize salesy behavior. Referrals to decision-makers, cold calls made, meetings attended, and spam sent all earned various forms of atta-boys from the official brass. Meanwhile, 20-plus-year veterans who consistently renewed multi-million-dollar books of stable clients were regarded as an annoying relic to a bygone era in American Business: a time when steady service, professionalism, and integrity hindered the mantra of G-R-O-W-T-H.

 Enter Voluntary Benefits

Voluntary benefits offer a quick fix for a stagnant book of steady, satisfied clients. It is the cocaine bump from the countertop in the club bathroom when a partier doesn’t have the energy or personality to peacock with the amplified type-As. With voluntary benefits, an employer can roll out additional life, disability, accident, cancer, critical illness, pet, home, auto, gap, dental, vision, or hospital insurance at no cost to the employer and only for those employees who want to purchase it. As the pitch goes, it rounds out your offering, maximizes choice, and gives people more opportunity to cover what is important to them. Who could be against that?

And I must admit, as a budding, libertarian-minded little brokerita, I bought into the concept. Voluntary benefits were, after all, voluntary and offered commission to the brokerage of an additional 15 percent to 55 percent, depending on the line of insurance offered. Employees win, the employer wins, and the broker wins!

Alas, there is no free lunch. Imagine a product that is half commission. How can an insurer afford to sell you something that is half commission?

Hint: it is not by undercharging for the product.

 What’s the Real Message?

As much as every broker and I want them to be, your employees are not benefit experts. Let’s be frank: your HR team probably isn’t either – at least most aren’t. In fact, your employees hate dealing with benefits, particularly the insurance side, so much that they spend an average of eighteen minutes making open enrollment decisions. By contrast, they will spend four hours on the decision to buy a cell phone. Priorities.

No array of glossy brochures, automated video open enrollment meetings, or highly entertaining broker personalities [ahem] will drastically change that. A fantastic broker and presentation package might get their attention for forty-five minutes. And I know because I regularly do [smiling].

When we add V.D. (what I call voluntary dental) to your plan, as an example, we will divert attention away from where eighty percent of your benefits budget goes – toward medical. Why would we do that? Of course, if all you offer is medical and V.D., that is not a problem. But most employers offer employer-paid medical, life, dental, vision, employee assistance programs, and disability. Communicating that to employees takes the entire forty-five minutes. If we attempt to add the laundry list of other items from earlier in the article, we confuse and frustrate your audience.

But what else are we effectively saying?

Our benefits are not good enough to cover you and your loved ones should tragedy befall you or your family. Sure, we offer you a few employer-sponsored items, but you probably need to buy all the other items this pushy salesperson is here to deliver. There is a watering-down effect, and you taint the vital quality plans like group disability and medical with the lottery-esque nature of cancer or accident policies. It’s what my 20-year-old daughter would call a “low-key dis.”

Pro Tip: Brokers don’t buy the laundry list of benefits. Brokers buy medical, disability, and life if we have dependents and are in a phase of life without enough assets to cover mortgages and college tuition. Everything else is superfluous. One of the best things we can do as insurance and human resources professionals is to help educate our employees on the real need for insurance. Insurance is for the huge risks we cannot plan for or save for: death, disability, and serious medical issues. We can and should be able to save and plan for dental, vision, accidents, pet issues, etc. If one can’t, then they just aren’t trying. If you set aside the money you’d pay in premium toward your dental, vision, etc., you will have that money when the need arises; and you will not have to hand over 15% to 50% in commission and another 10% for carrier profit.

Administrative Hell

Much like third-party administrators and human resources information systems, voluntary benefit providers systematically over-promise and under-deliver. Here is a partial list of what every employer should expect when installing new voluntary benefit plans:

  • The carrier will not enroll all of your employees correctly. There will be some with misspelled names, incorrect dates of birth, wrong benefit plans, and incorrect family tiers. Some may be dropped from enrollment entirely for no good reason.
  • This will increase the HR department's workload and hours will be spent on the transition. It will also cause disruptions to the organization due to meetings, forms that need to be completed, and the inevitable discontent from some employees.
  • If a company is going to add voluntaries, the CEO or other high-ranking executive should announce the change - and the business reason why - before the meetings.
  • Depending on the type of product you offer, you may have to meet minimum participation levels. This means, for example, if 20% of your employees don’t elect to buy additional life insurance, you will not be able to offer it to any of them. And you may have just had 15% of them sign up. Now you get to go back and tell those 15%, “nevermind.”
  • The first bill will not be accurate. The client must audit the first bill immediately upon receiving it and notify the carrier of changes. A binder check for the first month's premium is required with the master group application and will be credited on the first or second billing cycle. Therefore, your first few bills are not likely to be accurate.

And that list assumes you already boast a savvy and robust HR team. If you have new or inexperienced folks on the team or if you experience regular turnover in HR, these matters can grow unruly in a hurry.

One Midwestern company I worked with churned through three different benefit managers in eighteen months. HR was responsible for sending an evidence of insurability form to employees who applied for more than the voluntary life’s $100,000 guaranteed issue amount. That crucial detail was lost in the shuffle. So, tensions rose when the employer experienced the death of an employee who thought he’d purchased $300,000 of life insurance, and the carrier asked the employer where the evidence of insurability was. I’ll shortcut to the answer: to make the deceased widow whole, the employer had to self-fund the additional $200,000 in life benefits, and the Director of Human Resources lost his job. A forgotten form from a benefit manager on a voluntary life plan ended a career and cost this employer $200,000.

If you are reading this and unsure what an evidence of insurability is, do not offer voluntary benefits. That risk is too significant for you and your organization at this time. If you are going to provide voluntary life or disability, make darn sure that your broker explains these potential nightmares to you.  

 Compliance Nightmares

Beyond the previous chilling story, a whole other compliance issue can arise with voluntaries. Suppose there happens to be a legal dispute between one of your employees and your voluntary vendor. In that case, that vendor will almost certainly argue that the plan is covered by Employee Retirement Income Security Act (ERISA) and that the employee’s lawsuit should be filed against the employer instead of the insurer. If the court agrees, the legal burden shifts to the employer. And in case you were wondering, yes, this one also gets HR folks fired. Courts regularly rule that a voluntary plan is an ERISA plan, even if the employer never intended to sponsor the plan formally.

And if that happens, and the plaintiff’s attorney is worth his salt, they’ll also file claims against the employer for all the ERISA reporting, disclosure, and fiduciary requirements that weren’t followed.  Two of those penalties would be:

  • $149 per day penalty for failing to provide Plan Document and SPD; and
  • $2,097 per plan per day for failing to prepare and file Form 5500.

Furthermore, the legal standard for what mandates that ERISA covers a plan is not a bright-line test.  It is akin to the federal employee vs. independent contractor standard, if you are familiar with that.  It is a “totality of circumstances” test that requires the plan to:

  • be completely voluntary without any employer contributions;
  • not allow the employer to endorse or “take credit for” the plan;
  • not allow the employer to receive consideration for collecting and remitting premiums;
  • not use the employer’s name, or associate the voluntary plan with the employer-sponsored benefit plans;
  • not communicate the voluntary benefits at Open Enrollment with all of the employer-sponsored ERISA-covered plans;
  • not recommend the plan to employees;
  • never say ERISA applies;
  • not allow the use of the employer’s cafeteria plan; and
  • not assist employees with claims or disputes.

In some cases, judges ruled that employers endorsed plans because they announced the programs in memos written on company stationery. I’m reminded of the old Jeff Foxworthy routine, ya might be a redneck ERISA if …


Failing any of the above bullets might make your plan an ERISA plan, depending on the court’s assessment of the action's severity and/or frequency.  Of course, failing to abide by more than one further tips the scale in the direction of ERISA.

Benefit attorneys who litigate these types of cases regularly report that 80% to 90% of voluntary benefit plans are, in fact, ERISA plans once litigation commences and the voluntary provider makes this reflexive initial motion.

And With All of That, There Are Some Places for Them

With all that said, is there ever a time when voluntary benefits are a good idea? Yes, they can be appropriate and even desirable in a handful of circumstances.

Voluntary home and/or auto insurance is often just a link to a carrier that employees can quote themselves. It is done at any time of the year and regularly gets employees an additional 5% to 10% off, in addition to any other discounts for which they may qualify. Employers regularly can and do stay out of these offerings.

Pet Insurance. As with home and auto, it is typically just a link to a vendor that can and will offer your employee a modest discount because they work for you. Like with home and auto, I’ve never seen a pet plan morph into an ERISA plan.

Voluntary Group Life and Disability. These are often no-brainers. Notice that I said group coverage here. I do not like the idea of individual, 1099’d, 100% commissioned enrollers sitting across from your employees and asking them what momma and the baby will do when they die.  No, this is the option to buy additional life and disability above and beyond the core employer offering. We communicate it in a group setting, and then treat it like an ERISA plan as it is linked to your underlying life and disability. But know, all my caveats in this piece's “Administrative Hell” section apply. If you don’t have a seasoned, stable, savvy HR staff, you may want to consider holding off on these lines for a bit.  

Union Demanded Plans. Other than what I’ve mentioned here, I’d pass on the voluntary stuff. But I do know that there are times when a workforce demands it. I have seen that from time to time in union environments. In that case, partner with an exceptional broker to find a voluntary provider with a long, stable track record. Believe it or not, I have encountered those in my career. They aren’t totally fictitious unicorns but are exceedingly rare, glorious beasts to behold in the wild. 

Dagny Taggart is a retired and recovering broker and attorney who spends most of her days in a walled compound in Galt’s Gulch, Colorado, walking her Labrador and watching the squirrels cavort. After a 30-year career in benefits, she retired in her early 50s and now consults with large employers and brokerages on healthcare, benefits, and ERISA.