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Is Your Life Insurance Policy Subject to ERISA?

By: Krista Maschinot, Esq.

You may think this is a ridiculous question; however, Plan Sponsors and employers may want to reconsider this inquiry in light of a recent Seventh Circuit ruling.

The case, Cehovic-Dixneuf v. Wong (7th Cir. July 11, 2018), involved a dispute as to the true identity of the beneficiary of a life insurance policy.  The defendants argued that the policy was NOT governed by ERISA, thus the policy was not the controlling document.  However, the Court disagreed and explained that the life insurance policy was in fact subject to ERISA because it satisfied the five requirements outlined under 29 USC §1002(1) establishing that the policy was an employee welfare benefit plan that did not satisfy the requirements of the safe harbor exception contained in 29 C.F.R. §2510.31-(j).

The Court explained that the following elements must be present for an employee welfare benefit plan to be subject to ERISA:

  1. A plan,
  2. Established or maintained,
  3. By an employer or by an employee organization, or by both,
  4. For the purpose of providing medical, surgical, hospital care, sickness, accident, disability, death, unemployment or vacation benefit, apprenticeship or other training programs, day care centers, scholarship funds, prepaid legal services or severance benefits,
  5. To participants or their beneficiaries.

The life insurance policy at issue satisfied all five of the elements as it was an employer established plan that provided the beneficiaries of the participants with death benefits.  The Court went on to exam the four requirements of the Department of Labor safe harbor provision and found that the policy did not meet all four requirements:

  1. The employer made no contributions;
  2. Employee participation is completely voluntary;
  3. The employer does not endorse the plan, and its sole functions are to permit the insurer to offer the program to employees, collects premiums through payroll deductions, and remit them to the insurer; and
  4. The only consideration the employer receives in connection with the plan is for reasonable compensation for payroll deduction services.

The reason the safe harbor provision was not satisfied was that the employer violated the third provision by performing all administrative functions in association with the policy.  In making their determination, the Court looked to the Summary Plan Description (“SPD”) as it explained how the employer was involved with the maintenance of the policy.  With this finding, the court precluded the defendants from making any state law arguments as to why the named beneficiary should be disregarded.

So again, is your life insurance policy subject to ERISA?  Perhaps it is time to review your SPD and determine whether adjustments are necessary.