Voluntary benefits: The new ERISA target

Employers may face a new wave of lawsuits over the cost and value of their voluntary benefits menus.

Attorneys with Schlichter Bogard—a firm known for filing suits over the fees and fund options at employers’ 401(k) retirement plans—are now helping workers sue employers and their benefits advisors in federal courts over concerns about voluntary benefits options.

The plaintiffs in the suits, who are seeking class-action status, have accused employers and advisors of violating the Employee Retirement Income Security Act by:

• paying brokers excessively high fees and commissions,
• choosing insurers with low ratios of benefits payments to premiums and
• choosing products with unreasonably high premiums.

Last month, plaintiffs filed suits in the U.S. District Court for the Northern District of Illinois against Community Health Systems, Laboratory Corporation of America and United Airlines. Plaintiffs also filed a suit in the U.S. District Court for the Southern District of New York against Universal Services of America.

See also: 5 key voluntary benefits to watch in the near future 

The suit against CHS, a hospital company, also named Gallagher Benefit Services as a defendant. Arms of Mercer was named as a defendant in the suits against United Airlines and Universal Services of America, a security and facility services provider. Lockton is also on the list of defendants in the Universal Services of America lawsuit.

Willis Towers Watson is a defendant in the suit against Laboratory Corporation of America.
A representative for Allied Universal, a company formed from the merger of Universal Services America and another company, said Allied Universal declines to comment on pending litigation.

United Airlines declined to comment.

The other defendants could not immediately be reached for comment.

Nevin Adams, a benefits attorney who blogs for the National Association of Plan Advisors, appears to be the first observer to notice the wave of voluntary benefits ERISA suits. He described the suits as “coal in their Christmas stockings” for the affected employers and benefits advisors.

What are voluntary benefits, and what are the issues with them?

Voluntary benefits: Voluntary benefits include products such as accident insurance, critical illness insurance, hospital indemnity insurance and cancer insurance.

Employers deduct the premiums from the workers’ paychecks, but the people who pay for the coverage pay most or all of the premiums.

Consumer groups have repeatedly raised questions about levels of broker commissions and loss ratios for the kinds of products sold through voluntary benefits programs.

Advocates for the products have argued that the ratios of broker commissions to premiums tend to be high and the loss ratios tend to be low. This is because the premiums are very low and many of the fixed, per-person costs associated with offering any insurance product—such as protecting customers’ data security and sending them information about their coverage—are about as high for low-premium products as for high-premium products.

Why is ERISA an issue for these particular benefits?

ERISA: ERISA includes a provision that requires employer plan sponsors and some other benefits players to act as “fiduciaries,” meaning that they are supposed to put the interests of the plan participants first.

In the past, lawyers have helped workers sue employers over allegations related to a wide range of activities that might involve ERISA fiduciary obligations.

In one case, for example, a court found that a human resources executive had breached his ERISA fiduciary duty requirements by failing to tell a widow how to keep her husband’s employer-sponsored life insurance in place.

Employers can use a “safe harbor” provision to avoid being subject to ERISA fiduciary requirements. The plaintiffs in the new voluntary benefits suits assert that the employers named as defendants took actions that subjected the benefits to ERISA requirements, such as letting their logos appear on communication materials and helping with marketing.

Complaint details: Employers and benefits advisors may want to pay attention to how the plaintiffs’ attorneys assess voluntary benefit plan cost-efficiency.

When the attorneys were developing the suit over the Universal Services of America voluntary benefits, for example, they found that one former company employee paid $89.96 per year for accident insurance, $304.72 per year for critical illness insurance and $124.28 per year for hospital indemnity insurance. However, a current company employee pays $191.36 per year for accident insurance, $795.60 per year for critical illness insurance and $283.92 per year for hospital indemnity insurance.

The plaintiffs in the case also allege that:

• Mercer and Lockton received about $23 million in connection with the voluntary benefits coverage sold to the Universal Services of America employees from 2019 to 2014.
• Broker commissions amounted to 39% of the money the employees paid for the voluntary benefits.
• Broker commissions for voluntary insurance at other, comparable plans at companies like Kohl’s and Dollar Tree tend to range from 2% to 8% of the premium dollars spent.
• Voluntary benefits participants and beneficiaries probably received less than 50 cents of benefits per $1 of premiums paid.

Similarly, at Laboratory Corporation of America, an employee listed as a plaintiff pays $99.84 per year for accident insurance, $547.82 per year for critical illness insurance and $205.14 per year for hospital indemnity insurance. Willis Towers Watson received $2 million in commissions from 2019 through 2024 in connection with the LCA voluntary benefits policies, and the commission payments amounted to 28% of the employees’ premium payments, according to the LCA complaint.

This article was originally published on BenefitsPRO, a sister site of HR Executive. For more content like this delivered to your inbox, sign up for BenefitsPRO newsletters here.