By: D. Ward Kallstrom and Michelle M. Scannell

In a recent case presenting the issue whether a supplemental long-term disability (“LTD”) policy was subject to ERISA under the DOL (“Safe Harbor”) regulations, the District of New Jersey found that an employer’s mere offering of a group policy with a group discount was a “contribution” sufficient to create an ERISA plan.  McCann v. UNUM Provident, et al., 3:11-cv-03241-MLC-TJB (Jan. 31, 2013). 

 While Kevin McCann was employed as a resident by Henry Ford Hospital (“Hospital”), he applied for an individual supplemental LTD insurance policy (the “Policy”) through the Residents’ Supplemental Disability Insurance Plan (“RSDP”), which was underwritten by UNUM Provident (“Provident”).  Residents who purchased RSPD policies paid all premiums individually but received premium discounts as present or former Hospital employees.   McCann’s Policy became effective the day after his employment ended. 

Several years later, McCann became disabled and LTD benefits commenced under the Policy.  When Provident terminated the benefits, McCann sued it for breach of contract.  Provident moved for summary judgment on the grounds that the RSDP was an ERISA plan and hence ERISA governed McCann’s claim.  McCann filed a cross-motion for summary judgment, contending that the Policy was a group insurance policy exempt from ERISA under the Safe Harbor regulation, 29 C.F.R. § 2510.3-1(j). 

The court noted that under Third Circuit precedent, an ERISA plan generally exists if from the surrounding circumstances a reasonable person can ascertain the intended benefits, beneficiaries, financing, and procedures for benefits under the plan.  Shaver v. Siemens Corp., 670 F.3d 462, 475 (3d Cir. 2012).  The court found that the RSDP satisfied this definition.

The court then turned to the Safe Harbor regulation, which removes a group insurance policy from ERISA coverage where (1) no contributions are made by the employer; (2) participation in the program is voluntary; (3) the sole functions of the employer with respect to the program are to permit publication of the plan and to collect and remit premiums; and (4) the employer receives no consideration in connection with the program.  Provident conceded that the second and fourth Safe Harbor criteria were met, but asserted that the first and third criteria were not. 

McCann argued that the first criterion was met because an insurance company’s group discount should not be construed as an employer contribution.  Acknowledging that the Third Circuit had not yet addressed the issue, the court noted that several other courts had reasoned that “employees who receive group discounts receive a benefit that they could not otherwise receive as individuals, and would not have received but for the employer’s role in creating the . . . plan.”  The court adopted this reasoning, and held that the first criterion was not met because the Hospital contributed to the RSDP by obtaining a group discount for employees. 

The court agreed with Provident that the RSDP did not satisfy the third Safe Harbor criterion because the Hospital “endorsed” the RSDP.  The court noted that the logic of the third criterion is that where an employer is neutral about a plan, its lack of involvement vitiates the need for ERISA’s safeguards.  But where the employer exercises control over a program, or makes it appear to be part of the employer’s benefits package, the Safe Harbor does not apply.    The Hospital had repeatedly agreed to provide the RSDP as part of its benefits package, so even though the Hospital did not collect or remit premiums, the third criterion did not apply.

Therefore, the court determined that the RSDP was an employee benefit plan within the meaning of ERISA, and McCann was a plan participant or beneficiary. 

As McCann demonstrates, individuals who purchase supplemental insurance coverage and receive group discounts by virtue of their employment may be surprised to learn that such policies can be governed under ERISA’s regulatory scheme, regardless of when the policy becomes effective.  Employers setting up such arrangements may also be surprised to learn that they have created plans that trigger the reporting, disclosure, fiduciary, and enforcement provisions of ERISA.  According to McCann, these results apply even though the policy was not effective until after the individual buying it was no longer employed.