For most firms, voluntary benefits are a win-win arrangement. But there can be hidden risks.

 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.

But what happens if there’s a legal dispute between one or more of your employees and the vendor? 

In many cases, employers unwittingly get dragged into court. The vendor may 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 shifts.  Some courts have 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, the 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.