AFLAC, Wrap Doc, COBRA & Other Implications?

[Guest ANON-MD]

I am in the process of putting together a wrap document for all of our Sect. 125 plans. Currently, our company offers AFLAC deductions on a pre-tax basis, thus making it a part of 125. If I include the AFLAC info in a the Wrap document, does it then become liable for COBRA and all other ERISA requirements? I have seen conflicting opinions on this.

Any help is appreciated?

Anyone else with AFLAC on a pretax basis and a wrap doucment? How were you advised to structure things?

TIA

[Chaz]

Whether a voluntary plan is subject to ERISA is a facts and circumstances determination but, in general, I advise clients NOT to permit employees to pay for AFLAC-type benefits on a pre-tax basis through a cafeteria plan. I believe that a number of court decisions have found that doing so takes the benefit outside of the DOL safe harbor making it much more likely that the employer will be deemed to have "endorsed" the plan.

[bcspace]

Nevertheless, AD&D plans are allowable in the framework of a cafeteria plan. I myself am looking for info on how to write one into a plan document for the first time so any help would still be appreciated.

[J Simmons]

Whether a voluntary plan is subject to ERISA is a facts and circumstances determination but, in general, I advise clients NOT to permit employees to pay for AFLAC-type benefits on a pre-tax basis through a cafeteria plan. I believe that a number of court decisions have found that doing so takes the benefit outside of the DOL safe harbor making it much more likely that the employer will be deemed to have "endorsed" the plan.

I agree if the AFLAC policy is a group one owned by the company in which EEs can obtain coverage that they cannot obtain under an individual policy at the same premium cost. If the coverage is the same, at the same cost, that the individual could obtain on his or her own, then the company may walk a very, very narrow path to satisfy 125 and avoid ERISA.

[bcspace]

Could an AFLAC benefit be added to the plan mid year in the case of a change in insurance premiums or would we have to wait till the next plan year?

[TPApril]

Situation: AFLAC plans for different case in question are determined to be fully voluntary. They were included in the wrap around plan document. Does this alone make the plans subject to ERISA with the need to satisfy disclosure requirements? Whatabout if DCAP is included in the document?

Or, to restate question more generally - If company chooses to treat non-ERISA benefits as ERISA plans, what is the action that proclaims them as subject to ERISA? Would including them in the wrap around plan document be such an action?

[QDROphile]

Including the individual policies in the plan documentation changes the optics, possibly to the point of making them part of the employer's ERISA plan. Including non-ERISA benefits in a document (defined as some pieces of paper held together with a staple) that serves as an ERISA plan document does not itself make the benefits subject to ERISA. It may make interpretation of the plan terms difficult and it may require certain things to be done with respect to the non-ERISA benefits as ERISA would have them done.

[Chaz]

If the wrap document explicitly states that the employer does not endorse the voluntary benefits AND that a description of the benefits is included for the convenience of the employees, AND that the employer does not intend that benefits be subject to ERISA, it would make it less likely (but not definitively) that a court or the DOL would determine that the safe harbor is satisfied. This is something that you should run by your counsel as the specific wording will make a big difference. I can't see the upside in including a description in the wrap.

The voluntary benefits are generally ERISA benefits but for the DOL safe harbor. Any actions that the employer takes to "endorse" the benefits takes the benefit out of the safe harbor requiring the application of ERISA, COBRA, etc.

[J Simmons]

TPApril,

What is the perceived benefit of including the individual policies in the employer's ERISA-wrap document?

There is an entire body of case law that discusses the employer involvement, and when individual policies end up being part of an ERISA plan. As QDROphile and Chaz mention, there are implications of doing so. One is that you give AFLAC a protection at the expense of your employees. If the individual policies are outside of an ERISA plan, then a claim denial might subject AFLAC to insurance "bad faith" liability to the insured whose valid claim has been denied. There's the opportunity for a jury too. By 'wrapping' the individual policies into an ERISA plan, you do a disservice to the employees, and give AFLAC a protection that Congress really wanted for employers, to encourage them to provide employee benefits.

[TPApril]

John: I am trying to determine the reason these voluntary benefits were included and designated ERISA benefits. I would like to amend them plan to take them out. Not only that, they were never included in the 5500 filings.

[J Simmons]

TPApril,

Good luck with decanting the wrapped individual policies out of the ERISA wrap.

You might want to check out a couple of court rulings that immediately come to mind. Roehrs v Minnesota Life, 2/16/2006 Findings of Fact and Conclusions of Law (U.S. Dist. Ct--Dist. Ariz., Case # CV-03-1372-PHX-LOA) and Peterson v American Life & Health, 48 F3d 404 (9th Cir 1995).

[Guest MTurner]

John: I am especially intrigued by your comment: Good luck with decanting the wrapped individual policies out of the ERISA wrap.

It’s recently come to light that by including Aflac type insurance products in our client’s employee benefits guide may constitute endorsement and no longer subject to the DOL Safe Harbor. My initial thought was to include these products in our clients Wrap docs to “protect” them and then after their next renewal, amend the wrap (removing these products) and remove any mention of these Aflac type products from their open enrollment materials.

What I don’t know if doing this will “un-endorse” the products or not and based on your comment, I’m thinking not. I looked at the case law references you provided and with all the legalese, and although I see the outcome was the court sided with it being part of an ERISA plan….I’m not sure it's possible to "un-endorse" by “unwrapping” them.

Do you have specific references to the subject matter? Or resources I can turn to for guidance?

[J Simmons]

MTurner, for unwrapping, or in my wording, decanting, the AFLAC type insurance products, I look to avoid the factors that in Roehrs v Minnesota Life, 2/16/2006 Findings of Fact and Conclusions of Law (U.S. Dist. Ct--Dist. Ariz., Case # CV-03-1372-PHX-LOA) and Peterson v American Life & Health, 48 F3d 404 (9th Cir 1995) led the courts to find the arrangements were subject to ERISA, as well as the factors in the safe harbor of DoL Reg §2510.3-1(j).

The more you fit under the -1(j) criteria and avoid the factors that led the courts to the ERISA application conclusions in Roehrs and Peterson, the better.

I am not sure you can hermetically seal against it being ERISA plan. You need to read the group policy to make sure that the insurer does not have language in there trying to assure that the group policy will be ERISA governed. Many do. If not, I like also to send a certified notice to EBSA/DoL explaining what we're doing (unwrapping) and that's why despite the insurance coverage yet being available to employees, we're excluding it from the company's ERISA welfare benefit plans and any reporting of them.