The hidden risks of voluntary benefits
January 27, 2009 by Bill MeltzerPosted in: In this week's e-newsletter, Latest News & Views, Voluntary benefits
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.
September 18th, 2008 at 2:32 pm
Another reason why our agency won’t talk to AFLAC or those like it–too much ER involvement on something the EE could choose individually outside of work.
A relative of one of our employees was a representative for supplemental plans (much like AFLAC). When I made the space available to him, I was sure to keep my distance in any of the transactions and made sure that the employees knew we were not “sponsoring” the coverage. It was all handled by individual employees for their own benefit–no deductions from payroll were made; no direct or indirect ER responsibility for the plan or payments.
While some of our EEs would like to have some of the policies that are offered, we don’t pursue the option because of the technicalities and lack of committment from most employees. We can’t justify the expense of administering several volunatry plans and maintaining the payroll records. We have significant turnover in our agency which makes keeping records; enrolling & dis-enrolling rather time consuming. We don’t need the ongoing headache for the temporary “joy” that starting down that path would entail.
January 29th, 2009 at 2:03 pm
We did what the article suggested. The AFLAC offering annoucement was not on company letterhead, the information meeting was held after regular business hours, and it was made clear to the staff that aside from setting up the payroll deductions, our company was not going to be involved in the adminstration of the plan. We were also reassured from the AFLAC reps about this.
We have a completely different open enrollment period as well. AFLAC information is given seperately to employees as well.
January 29th, 2009 at 4:15 pm
We just started AFLAC and I wish I had read this article and the comments earlier. Great suggestions. I will be keeping a copy of the article and the comments for future reference. Next year I will take a more hands off approach to open enrollment.
January 29th, 2009 at 4:38 pm
Finally. I am the Managing Partner of a HR Outsourcing firm and also hold insurance licenses in all 50 states. I’ve been in the insurance, benefits and risk managment field for over 28 years. Fortunately, for ourselves and our clients, we discovered the potential for employer liability several years ago. Particularly, from the sponsorship position.
Having said that, unfortunately, with courts taking a much more liberal view AND the new administration which is introducing laws daily to harm employers, my best advice to my clients now is OFFER nothing. Regardless of where the law stands today, liberal courts are interpreting law in a whole new fashion. It’s an outright assault on the employer and the employeees are winning.
Oh, you are right about the Voluntary Benefit providers pointing the finger at the employer. I recently met with a large voluntary carrier and they suggested (rather strongly) that an employer who announces the program to employees is in no way sponsoring the program and is therefore NOT an ERISA plan. B.S.
Also, being in the insurance business, I can tell you that less then 10% of AFLAC agents have VERY LITTLE understanding of insurance, benefits, insurance law etc. Afterall, they were landscapers yesterday and insurance agents today!
January 29th, 2009 at 5:11 pm
I understand the inherent risk involved with voluntary benefits, but after 23 years working in HR and partnering with voluntary benefit providers each of those years, I have a different perspective. Relationships between an employer and voluntary benefits provider can be successful – not to mention a great benefit enhancement for employees. There is risk in just about everything HR deals with and a good example is the millions of employers who outsource payroll processing, but are still 100% liable for the any errors the outside vendor may make. There is huge potential liability, yet obviously many choose not to bring payroll processing in-house. Take the time to do the research, weigh the potential risks verses the potential benefits and then make an informed decision based on your company’s situation
January 30th, 2009 at 11:35 am
When I started working here, we had a benefits specialist, now with downsizing, I am also in charge of benefits and administering voluntary plans are a hassle…
February 2nd, 2009 at 7:14 pm
I finally gave in to employee requests and allowed AFLAC to come in and sell to our employees. Although I think our employees’ could get more bang for the buck in an Flexible Spending Account or in the 401(k) plan, the employees really seem to appreciate the fact that we responded to their requests.
So far – so good.
February 5th, 2009 at 3:28 pm
We have offered AFLAC products for years and have never had a problem. Our representative is extremely professional and as far as I am aware, has never done lawn work. In fact, she has represented AFAC for at 15 years. We have always made it clear it is completely voluntary and there is no pressure to buy their products.
February 5th, 2009 at 10:03 pm
I am an insurance broke that has been selling core and voluntary benefits since 1974. I market my services to large groups and municipalities. Not once have I had a client sued by an employee over benefits provided through a voluntary insurance carrier. This “chicken little” approach to voluntary benefits, and the supposed solutions won’t do anything to minimize the liability of a dispute.
Why stop at voluntary benefits? Offering any benefits at all creates liability. Implementing Section 125 plans, HSA programs, HRA plans, etc.., all create liability for the employer, if an employee does not feel that he/she has received the benefits that they are entitled to. Heck, offerins sick pay, vacation days, personal days, all of these benefits are at least as adminstratively burdensome as voluntary benefits, and all come with liability attached. The best way to protect yourself and your company is to make sure that your liability insurance coverage includes benefit disputes. Otherwise the only way to eliminate a company’s liability is to shut the doors.
February 6th, 2009 at 9:46 am
I have to agree with Kevin…..As a former manager (14 years) for the leading voluntary benefit company, I NEVER told an Employer that the benefits were not an ERISA plan nor did I tell an ER what I thought they wanted to hear. As with anything you offer as an employer, there will always be someone that complains or has a problem or concern.
Guess how many BC/BS problems I am forced to try and help our team with. Because I was in the insurance world for eighteen years and in mgmt for 14 of them, I am able to see both sides of the coin.
For those of you wishing to point fingers at the AFLAC agents, note that the article mentions CIGNA, not AFLAC.
There are idiots representing every insurance company. Be careful who you work with and call references (any qualified agent should provide you with company names and contacts).
Supplemental benefits can be a life saver for those working paycheck to paycheck, especially with families. When offered properly and professionally, these programs enhance even the best major medical plans, not to mention the HDP’s that are becoming ever so popular.
February 6th, 2009 at 11:32 am
I am an HR consultant (SPHR), and an Aflac representative. When a company signs its agreement with Aflac, the company is contractually assured that there is no liability to the employer regarding claims. All disputes are handled directly between the employer and Aflac. As for Aflac agents being “landscapers yesterday and insurance agents today” (Ray), all Aflac agents have to go through the same licensing process as other agents, and Aflac has a stringent training program that new associates must go through. New associates work closely with an experienced agent until they are able to work on their own.
There are people in any industry who are incompetent. Business owners should be sure they are comfortable with the person they are working with, and make them accountable.
As a side note, in my former job we offered Aflac to our employees (200+). They loved the benefit, and the administration was not a problem at all. When I started my own business, I wanted to sell Aflac as one of my services because we had such a great experience.
February 6th, 2009 at 12:10 pm
Cindi:
This issue isn’t about liability with claims BUT about ERISA liabilities. (which are far more onerous) Having a voluntary benefit plan designated as an ERISA plan (particularly since it is a voluntary plan which is not and should not be administered by the employer) places an extra burden upon the employer. This is particularly true since these plans are touted as “NO direct cost” and “NO liability” to the employer. These statements by any company offering voluntary benefits could put the employer in a position to ignore procedures which they would follow if they knew in advance that the benefit plan (voluntary) was in fact an ERISA plan. Also, you should know that I have always been a big proponent of such plans.
February 10th, 2009 at 9:34 am
We have an Aflac group. However, it is not mentioned in the manual. We do not contribute anything towards the premiums. If someone has a question, I direct them to the Aflac rep and he handles it. If the rep comes to our office, I will make an announcement over the intercom system, but nothing “official” will be posted.
Are we safe?
-Ross
February 10th, 2009 at 5:14 pm
Thanks Ray
Lynn