Pre-paid legal services plan

[Chaz]

Can a pre-paid legal services plan that an employer makes available to employees fit into the DOL safe harbor for voluntary plans and thus not be subject to ERISA assuming all the requirements of the safe harbor are satisfied? 

[Brian Gilmore]

Yes, that safe harbor is available for any ERISA welfare benefit plan.  However, be careful with that "no endorsement" prong because it's rarely satisfied.

Here's some details:

https://www.newfront.com/blog/the-erisa-voluntary-plan-safe-harbor

ERISA §3(1) defines an “employee welfare benefit plan” to include any plan, fund, or program established or maintained by an employer that provides:

• Medical, surgical, hospital benefits (e.g., medical, dental, vision, health FSA, HRA, EAP);
• Benefits in the event of sickness, accident, disability, death, or unemployment (e.g., disability, life, AD&D, severance);
• Vacation benefits;
• Apprenticeship or other training programs;
• Day care centers;
• Scholarship funds; or
• Prepaid legal services.

...

No Employer Endorsement of the Program

The third condition of the voluntary plan safe harbor is clearly the most difficult condition to satisfy—both because of its ambiguity in scope and its inconsistency with typical employer practices.

Employers commonly refer to offerings that meet the first two conditions above as a “voluntary benefit.”  However, for purposes of the voluntary plan safe harbor, employers must have additional degrees of separation from the program to qualify for the ERISA exemption.

The regulations specify that the sole functions of the employer with respect to the program can be to a) permit the insurer to publicize the program to employees, and b) collect premiums through payroll deductions to remit them to the insurer.  The employer cannot “endorse” the program in those limited permitted functions.

In making sure employees are aware of the program, DOL guidance states the employer “may facilitate the publicizing and marketing of the program, but only to an extent short of endorsing the program.”

What constitutes “endorsing the program”?  The overarching theme from the DOL guidance is that endorsement occurs if the employer “expresses to [employees] any positive, normative judgement regarding the program,” or if it “urges or encourages member participation in the program or engages in activities that would lead a member to reasonably conclude that the program is part of a benefit arrangement established or maintained by the [employer].”

The various court cases and DOL guidance interpreting this somewhat ambiguous language generally have found the following employer practices to at least potentially constitute endorsement:

• Employer selection of a specific insurance carrier to offer the program
• Employer selection of specific types of coverage to be offered under the program
• Employer involvement in the plan design of the program
• Program design structures that are only available to employees
• Program materials that include the employer’s name, logo, or any other identifying markers
• Positive statements about the program made by the employer (e.g., a recommendation to enroll)
• Including the program in ERISA documents (e.g., wrap SPD) or filings (e.g., Form 5500)
• Stating that the benefit is subject to ERISA in program materials
• Providing claims and appeals assistance to employees

Accordingly, employers relying on the voluntary plan safe harbor exemption from ERISA will want to carefully monitor their benefit administration practices to avoid any of these forms of potential endorsement.  Given how common these practices are with all other health and welfare benefits, it will likely take significant education and restraint among the HR, people operations, and benefits professionals responsible for plan administration to avoid inadvertently slipping into one of these traps for the unwary.

 

Slide summary:

2023 Newfront ERISA for Employers Guide