Compliance Corner: When “Voluntary” Alone Is Not Enough:  Understanding the Voluntary Plan Safe Harbor Rules

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As many employer plan sponsors are aware, the Employee Retirement Income Security Act (“ERISA”) generally applies to “employee welfare benefit plans”, which are any plans, funds or programs established or maintained by an employer for the purpose of providing certain benefits to participants and beneficiaries. ERISA comes with a range of compliance requirements (e.g., fiduciary obligations, plan document and summary plan description requirements, and reporting requirements (i.e., the annual Form 5500)), so it is very important for employer plan sponsors to consider and determine whether their welfare benefit plans are subject to those requirements (and if so, to ensure compliance therewith). Many different types of employee benefit plans and programs fall under ERISA’s definition of “welfare benefit plan”, which includes medical, surgical, and hospital benefits (e.g., medical, dental, and vision plans, health flexible spending accounts, health reimbursement accounts, employee assistance plans); benefits in the event of sickness, accident, disability, death, or unemployment (e.g., disability, life, AD&D, severance plans); vacation benefits; apprenticeship or other training programs; scholarship funds; and prepaid legal services. Despite failing under this definition, many welfare benefit plans are nevertheless exempt from ERISA’s compliance requirements if they satisfy a specific exemption, including most notably, the “voluntary plan safe harbor.” This month’s Compliance Corner focuses on voluntary plans and explains how employer plan sponsors can offer certain supplemental benefit plans or programs under the voluntary plan safe harbor exemption in order to avoid ERISA’s various compliance requirements.

What are Voluntary Benefits?

Generally, voluntary benefits are not part of the employer’s standard benefits package that includes health and dental insurance, for example. Instead, voluntary benefits are optional for the employer (as in, there is no law or possible tax penalty if the employer does not offer these benefits) and employee and are offered to employees in order to supplement the employer’s other benefit offerings. Generally, through voluntary benefit plans or programs, the employer will permit its employees to purchase voluntary insurance policies that provide coverage to employees individually. This includes, for example: (i) life insurance policies; (ii) disability coverage; (iii) accident and sickness programs (e.g., critical illness, hospital indemnity), and (v) other specialty policies (e.g., pet insurance).

Voluntary benefits are intended to attract and retain talent and address employees’ overall health and wellness, including financial and personal wellness, without adding significant costs to the employer. Generally, employers and employees share the cost of these benefits, but more often than not, employees pay for the full cost of the premiums and any employer costs are limited to possible administrative fees or ancillary costs related to informing employees about the benefits available.

While voluntary benefit programs come with many advantages, some employers are hesitant to offer these types of supplemental benefits in addition to those standard benefits that may be more necessary in the current job market. In addition to potential costs, some employers shy away from the additional legal compliance requirements that come with employee benefits generally. For some employers, the voluntary benefit exemption from ERISA may provide relief in this respect.

Voluntary Plan Safe Harbor Exemption  

As mentioned above, ERISA exempts certain benefit plans and programs from its coverage pursuant to various exemptions, one of which is the voluntary plan safe harbor exemption. Notably, however, not all voluntary benefits generally discussed above will satisfy the voluntary benefit safe harbor exemption. As set forth below, there are specific conditions that must be satisfied to utilize this safe harbor, and such conditions go beyond the common misconception that such benefits must only be “voluntary” in the sense that they are optional and fully paid by the employee.

A plan or program can utilize the voluntary plan safe harbor if it satisfies the following four (4) conditions: (i) no contributions are made by an employer; (ii) participation in the program is completely voluntary for employees; (iii) the employer receives no consideration (cash or otherwise) regarding the program (subject to limited exceptions); and (iv) the employer engages in limited and specific functions and does not endorse the program. See 29 C.F.R. § 2510.3-1(j). Each of these conditions, which are discussed in more detail below, must be satisfied to utilize the voluntary plan safe harbor. 

No Employer Contributions

The voluntary plan safe harbor is unavailable if the employer makes any contribution for the benefits or coverage at issue. Said another way, the benefit must be paid exclusively by the employee, and the employer cannot pay any portion of the premium.

Federal courts have found an employer will not be deemed to make contributions in this respect if the employer is merely acting as a conduit for the payment of premiums (i.e., the employer makes payroll deductions and remits the deductions to the insurer). Notably, however, IRS guidance indicates that in order to satisfy this safe harbor condition, any such payroll deductions must be made on an after-tax basis.  More specifically, IRS guidance treats pre-tax payroll deductions made through an Internal Revenue Code Section 125 cafeteria plan to be “employer contributions”. As such, if an employer permitted employees to pay for any voluntary benefit coverage through the employer’s cafeteria plan on a pre-tax basis, such payment would likely amount to an “employer contribution” and fail to satisfy the first element of the voluntary plan safe harbor.

Several federal courts have addressed other specific scenarios that are illustrative in determining whether the voluntary benefits were paid exclusively by employees, and such courts have taken different approaches in this respect. For example, a federal district court rejected the argument that an employee’s receipt of a discounted rate for an individual disability policy was an “employer contribution” as the employer was not responsible for, or involved in, obtaining the discount for the employee, which was offered because the employee agreed to a specifically billing arrangement. See Shrago v. Unum Life Ins. Co. of Am., No. 8:20-CV-01097-PX, 2021 WL 3188320, at *6 (D. Md. July 28, 2021). Alternatively, another federal court found that where the employer facilitates and negotiates a discounted rate on behalf of its employees with respect to a voluntary benefit, the employer’s involvement amounted to an “employer contribution” preventing the application of the voluntary plan safe harbor. See Bommarito v. Nw. Mut. Life Ins. Co., 2018 WL 3537118 (E.D. Cal. July 23, 2018.

Voluntary Participation

In order to utilize the voluntary plan safe harbor to be exempt from ERISA, the voluntary plan must be completely involuntary for employees. If there is any indirect or direct requirement that employees participate in the plan or program, it will be deemed to be involuntary. For example, if an employer automatically enrolls employees in the coverage or plan offered, it will be considered involuntary.

Employer Receives No Consideration

The voluntary plan safe harbor is unavailable if the employer receives any consideration (cash or otherwise) from the insurance carrier for offering a voluntary benefit or plan to its employees.

No Employer Endorsement

In order to utilize the voluntary plan safe harbor, the employer cannot endorse, and must have a limited role related to, the voluntary benefits. Essentially, there must be a certain level of separation between the employer and the benefits; however, the specific level of separation required is not entirely clear. As a result, this is the most difficult condition to satisfy and often is the reason employers cannot rely on the voluntary plan safe harbor to avoid ERISA coverage.

The regulations provide a brief list of the permitted functions the employer can do with respect to the voluntary benefits, which include: (i) permitting the insurer to publicize the program to the employer’s employees; (ii) collecting premiums through payroll deductions; and (iii) remitting premiums to the insurer. Applicable guidance further provides that employer may facilitate the publicizing and marketing of the program. Federal courts have considered the question of what is an appropriate level of employer involvement on several occasions. Engaging in administrative activities that are incidental to such plans or program, in a neutral way, like designating a policy’s effective date, issuing certificates to enrolled employees, and maintaining a list of enrolled employees, is generally permitted under the applicable guidance.

While performing these limited functions, however, employers cannot “endorse” the plan or program in a way that encourages or pushes employees to participate in the plan. This determination is factual and will depend on the facts and circumstances of each particular situation. Courts have concluded that “endorsement” includes urging or encouraging employees to participate in the program; expressing positive judgment regarding the program; or otherwise doing or saying anything that would cause an employee to reasonably conclude that the program is established, maintained, or backed by the employer.

For example, courts have found there to be potentially sufficient levels of employer “endorsement” in the following activities (usually, in some combination thereof): (i) assisting individuals with claims, maintaining claims forms, or facilitating appeals; (ii) promoting the plan or program to employees as part of the employer’s customary benefits package and endorsing it in its benefits guide or similar communication; (iii) making the plan available to employees on a pre-tax basis through the employer’s cafeteria plan; (iv) determining eligibility for the plan or program; (v) making suggestions to the insurer regarding plan design and structure; (vi) setting key terms, including amount of coverage, for the plan; (vii) acting as a plan administrator by engaging in activities like establishing minimum benefit levels and maximum monthly payments; (viii) linking coverage to continued employment; and (ix) being the named policy holder or entering into a contract with the insurer. Moreover, if the employer provides employees with plan documents that refer to the plan or program being “subject to ERISA,” the employee’s “rights under ERISA,” or the benefit being an “employer plan”, courts may be more likely to conclude that there is endorsement and the safe harbor is unavailable. Notably, courts often rely on a combination of factors to conclude that an employer has endorsed a voluntary plan. As a result, it is not clear what, if any, one factor may be most determinative here; however, the more of these types of activities an employer engages in, the more likely it is that a court or the DOL will find that the employer is endorsing the plan (and cannot utilize the voluntary plan safe harbor).

For simplicity, some courts apply a five-part test to determine whether an employer has endorsed a voluntary plan, which provides a good roadmap for employers trying to make this determination. This test considers the following factors: (i) whether the employer has played an active role in determining which employees are eligible for coverage or negotiating the terms of the policy or benefits thereunder; (ii) whether the employer is named as the plan administrator; (iii) whether the employer has provided an summary plan description or other communication that specifically refers to ERISA or indicates that the plan is subject to ERISA; (iv) whether the employer has furnished any materials to its employees indicating that it has endorsed the plan; and (v) whether the employer participates in claims processing for the plan.

Conclusion & Next Steps

As detailed above, employers relying on the voluntary plan safe harbor exemption must ensure they are refraining from engaging in any activities that could amount to potential “endorsement” of the plan and jeopardize their exemption status.  This will require coordination and communication among an employer’s personnel responsible for benefit plan administration. For employers who have ample experience with ERISA compliance, avoiding ERISA through the voluntary plan safe harbor may not be worth the time and effort required to ensure the exemption applies appropriately; however, there are significant advantages to being exempt from ERISA, including the ability to avoid certain compliance requirements. If you are interested in implementing a voluntary benefit plan and/or need assistance in ensuring any such plan satisfies the voluntary plan safe harbor exemption, you should reach out to your benefits consultants or counsel.