In Beneficiary Dispute, Life Insurance Policy Was Subject to ERISA | Practical Law

In Beneficiary Dispute, Life Insurance Policy Was Subject to ERISA | Practical Law

In a beneficiary dispute involving death benefits under a supplemental life insurance policy, the US Court of Appeals for the Seventh Circuit held that the policy was subject to the Employee Retirement Income Security Act (ERISA) and not exempt from ERISA under the DOL's regulatory safe harbor for voluntary plans. As a result, the policy's death benefits were payable to the designated beneficiary – the participant's sister – without regard to equitable arguments asserted by the participant's ex-wife.

In Beneficiary Dispute, Life Insurance Policy Was Subject to ERISA

Practical Law Legal Update w-015-7690 (Approx. 5 pages)

In Beneficiary Dispute, Life Insurance Policy Was Subject to ERISA

by Practical Law Employee Benefits & Executive Compensation
Published on 16 Jul 2018 • USA (National/Federal)
In a beneficiary dispute involving death benefits under a supplemental life insurance policy, the US Court of Appeals for the Seventh Circuit held that the policy was subject to the Employee Retirement Income Security Act (ERISA) and not exempt from ERISA under the DOL's regulatory safe harbor for voluntary plans. As a result, the policy's death benefits were payable to the designated beneficiary – the participant's sister – without regard to equitable arguments asserted by the participant's ex-wife.
In a beneficiary dispute involving death benefits under a supplemental life insurance policy, the US Court of Appeals for the Seventh Circuit held that the life insurance policy was governed by ERISA and not exempt from coverage under the DOL's regulatory safe harbor for certain voluntary benefits (Cehovic–Dixneuf v. Wong, (7th Cir. July 11, 2018); see Practice Note, Voluntary Benefits). As a result, the policy's death benefits were payable to the designated beneficiary – the participant's sister – without regard to equitable arguments asserted by the participant's ex-wife (29 U.S.C. § 1104(a)(1)(D); see Practice Note, ERISA Fiduciary Duties: Overview: Duty to Follow Plan Documents).

Background

The participant in this case obtained basic and supplemental life insurance coverage, which was offered by the participant's employer through a commercial insurer. The participant had listed his sister as the sole beneficiary for both policies. However, after the participant died his ex-wife claimed that she and the couple's child were entitled to $788,000 in death benefits under the supplemental policy.
The participant's sister sued the ex-wife, seeking a declaration that the sister was entitled to the death benefits. The district court granted summary judgment for the sister, finding that the supplemental life insurance policy was subject to ERISA and that the sister was entitled to death benefits under the policy.

Outcome

On appeal, the Seventh Circuit agreed that the policy was subject to ERISA because it:

Policy Was a Welfare Benefit Plan Covered By ERISA

Under Seventh Circuit precedent, ERISA covers a welfare arrangement that meets five elements based on ERISA's definition of "employee welfare benefit plan." Under this five-part test, the arrangement must be a plan, fund, or program that:
  • Is established or maintained by an employer, employee organization, or both.
  • Provides certain listed benefits to participants or their beneficiaries, including medical, sickness, accident, disability, and death benefits.
(29 U.S.C. § 1002(1).)
The court held that the policy met this standard.

Policy Did Not Satisfy DOL's Safe Harbor for Voluntary Plans

Moreover, the Seventh Circuit rejected the ex-wife's argument that the supplemental life insurance policy fell outside ERISA's purview because the participant had paid all the premiums for the policy himself without any direct funding from the employer. The Seventh Circuit noted that an arrangement is not excluded from ERISA under the DOL's voluntary plan safe harbor if it fails to satisfy any of the safe harbor's four requirements. Specifically, the safe harbor requires that:
  • No contributions are made by an employer.
  • Participation in the arrangement is completely voluntary for employees.
  • The employer's sole functions regarding the arrangement are, without endorsing the program, to:
    • permit the insurer to publicize the program to employees or members;
    • collect premiums through payroll deductions or dues checkoffs; and
    • remit premiums to the insurer.
  • The employer receives no consideration (that is, cash or otherwise) in connection with the program, other than reasonable compensation for payroll deduction services.
(29 C.F.R. § 2510.3-1(j); see Practice Note, Voluntary Benefits: Four Conditions for Satisfying DOL's Safe Harbor.)
The Seventh Circuit concluded that the policy failed the safe harbor's third requirement because the employer had performed all administrative functions associated with maintenance of the policy. Relying on the summary plan description (SPD), the Seventh Circuit concluded that the employer's functions exceeded the limited functions permitted under the safe harbor (see Practice Note, Voluntary Benefits: Limited Employer Functions). In particular, the SPD indicated that:
  • The employer was the policyholder for all components of its plan, of which the supplemental life insurance policy was one listed item of several components.
  • The supplemental policy would remain part of the employer's group insurance policy, though it could be converted to an individual life insurance policy in certain situations.
(See Article, ERISA Litigation: Life Insurance Conversions and ERISA Fiduciary Breach Claims.)
The Seventh Circuit also declined to sever the supplemental life insurance policy for separate consideration from the basic life insurance policy and other benefits in the employer's group plan. Citing Seventh Circuit precedent in rejecting this argument, the court noted that the various components of a benefit plan should not be unbundled in determining whether the plan is subject to ERISA.

Practical Impact

Whether ERISA applies to an arrangement at issue in employee benefits litigation is an important threshold question that bears on jurisdiction and whether a party will be able to make state-law claims regarding the arrangement. If ERISA applies, then ERISA's broad preemption rule may supersede many state laws that would otherwise apply to the arrangement. In this case, the Seventh Circuit's conclusion that the supplemental life insurance policy was covered by ERISA meant that the ex-wife could not make certain equitable arguments that might otherwise have been available. For more information, see ERISA Litigation Toolkit and Practice Notes, ERISA Litigation: Preemption of State Laws (Overview) and ERISA Litigation: Preemption of Select State Laws.