Employers & Employees: Stop Buying So Much Insurance!

The insurance industry is massive, powerful, and 100% designed to win every single time. Commissions on some items you buy are more than 50%. YOU DON'T NEED ALL OF THAT!

Volunteering for Trouble

The Compliance Traps, Administrative Nightmares, Subtle Discrediting & Employee Frustration Voluntary Benefits Often Bring

Special guest column by Dagny Taggart | March 2023

As a wee lass, my grandmother used to admonish, “don’t go borrowing trouble.”

I only fully internalized or “grokked,” as the kids say, that message once installing voluntary benefit plans.

In the eyes of the ginormous corporations that have devoured nearly all the insurance brokerage market, I’m reasonably sure this makes me a bad broker. Because, you see, once you are publicly traded, your stock prices and your national VP’s job are tied inextricably to the holy grail of growth.  Client retention is nice and may even earn you a pat on the head or some other form of little doggie treat, but growth, my lass, well, that shall set ye free! 

I’ll never forget a conversation with a notoriously unscrupulous brokerage owner in the San Francisco Bay Area. We were at some stuffy, pompous, self-congratulatory industry meeting where brokers take a temporary leave from the golf course to discuss how to best grow revenue (your premium).

The greasy, slick-haired, dark pinstripe-suited, mafioso-looking founder told our CEO, “I’ll never understand why you put so much stock in retention. Once a client has identified that you cannot service them as promised, it will still take them nine to eighteen months to leave for a new broker. You can sell a handful more groups in that time!”

Even though that was nearly 25 years ago, very early in my career, I always remembered the message.

And I hated it increasingly each year I practiced. 

As a brokerage office is purchased by a bank, merged with another bank, and repacked to a private equity firm like every other financialized product in our country, brokers are inevitably hounded with the mantra of growth. New sales conquest lists are circulated monthly, sometimes weekly, to prod already organically competitive salespeople to climb over each other to push more premium dollars through their P&Ls. One company I worked with even created a gameshow-like point system to maximize salesy behavior. Referrals to decision-makers, cold calls made, meetings attended, and spam sent all earned various forms of atta-boys from the official brass. Meanwhile, 20-plus-year veterans who consistently renewed multi-million-dollar books of stable clients were regarded as an annoying relic to a bygone era in American Business: a time when steady service, professionalism, and integrity hindered the mantra of G-R-O-W-T-H.

 Enter Voluntary Benefits

Voluntary benefits offer a quick fix for a stagnant book of steady, satisfied clients. It is the cocaine bump from the countertop in the club bathroom when a partier doesn’t have the energy or personality to peacock with the amplified type-As. With voluntary benefits, an employer can roll out additional life, disability, accident, cancer, critical illness, pet, home, auto, gap, dental, vision, or hospital insurance at no cost to the employer and only for those employees who want to purchase it. As the pitch goes, it rounds out your offering, maximizes choice, and gives people more opportunity to cover what is important to them. Who could be against that?

And I must admit, as a budding, libertarian-minded little brokerita, I bought into the concept. Voluntary benefits were, after all, voluntary and offered commission to the brokerage of an additional 15 percent to 55 percent, depending on the line of insurance offered. Employees win, the employer wins, and the broker wins!

Alas, there is no free lunch. Imagine a product that is half commission. How can an insurer afford to sell you something that is half commission?

Hint: it is not by undercharging for the product.

 What’s the Real Message?

As much as every broker and I want them to be, your employees are not benefit experts. Let’s be frank: your HR team probably isn’t either – at least most aren’t. In fact, your employees hate dealing with benefits, particularly the insurance side, so much that they spend an average of eighteen minutes making open enrollment decisions. By contrast, they will spend four hours on the decision to buy a cell phone. Priorities.

No array of glossy brochures, automated video open enrollment meetings, or highly entertaining broker personalities [ahem] will drastically change that. A fantastic broker and presentation package might get their attention for forty-five minutes. And I know because I regularly do [smiling].

When we add V.D. (what I call voluntary dental) to your plan, as an example, we will divert attention away from where eighty percent of your benefits budget goes – toward medical. Why would we do that? Of course, if all you offer is medical and V.D., that is not a problem. But most employers offer employer-paid medical, life, dental, vision, employee assistance programs, and disability. Communicating that to employees takes the entire forty-five minutes. If we attempt to add the laundry list of other items from earlier in the article, we confuse and frustrate your audience.

But what else are we effectively saying?

Our benefits are not good enough to cover you and your loved ones should tragedy befall you or your family. Sure, we offer you a few employer-sponsored items, but you probably need to buy all the other items this pushy salesperson is here to deliver. There is a watering-down effect, and you taint the vital quality plans like group disability and medical with the lottery-esque nature of cancer or accident policies. It’s what my 20-year-old daughter would call a “low-key dis.”

Pro Tip: Brokers don’t buy the laundry list of benefits. Brokers buy medical, disability, and life if we have dependents and are in a phase of life without enough assets to cover mortgages and college tuition. Everything else is superfluous. One of the best things we can do as insurance and human resources professionals is to help educate our employees on the real need for insurance. Insurance is for the huge risks we cannot plan for or save for: death, disability, and serious medical issues. We can and should be able to save and plan for dental, vision, accidents, pet issues, etc. If one can’t, then they just aren’t trying. If you set aside the money you’d pay in premium toward your dental, vision, etc., you will have that money when the need arises; and you will not have to hand over 15% to 50% in commission and another 10% for carrier profit.

Administrative Hell

Much like third-party administrators and human resources information systems, voluntary benefit providers systematically over-promise and under-deliver. Here is a partial list of what every employer should expect when installing new voluntary benefit plans:

• The carrier will not enroll all of your employees correctly. There will be some with misspelled names, incorrect dates of birth, wrong benefit plans, and incorrect family tiers. Some may be dropped from enrollment entirely for no good reason.
• This will increase the HR department's workload and hours will be spent on the transition. It will also cause disruptions to the organization due to meetings, forms that need to be completed, and the inevitable discontent from some employees.
• If a company is going to add voluntaries, the CEO or other high-ranking executive should announce the change - and the business reason why - before the meetings.
• Depending on the type of product you offer, you may have to meet minimum participation levels. This means, for example, if 20% of your employees don’t elect to buy additional life insurance, you will not be able to offer it to any of them. And you may have just had 15% of them sign up. Now you get to go back and tell those 15%, “nevermind.”
• The first bill will not be accurate. The client must audit the first bill immediately upon receiving it and notify the carrier of changes. A binder check for the first month's premium is required with the master group application and will be credited on the first or second billing cycle. Therefore, your first few bills are not likely to be accurate.

And that list assumes you already boast a savvy and robust HR team. If you have new or inexperienced folks on the team or if you experience regular turnover in HR, these matters can grow unruly in a hurry.

One Midwestern company I worked with churned through three different benefit managers in eighteen months. HR was responsible for sending an evidence of insurability form to employees who applied for more than the voluntary life’s $100,000 guaranteed issue amount. That crucial detail was lost in the shuffle. So, tensions rose when the employer experienced the death of an employee who thought he’d purchased $300,000 of life insurance, and the carrier asked the employer where the evidence of insurability was. I’ll shortcut to the answer: to make the deceased widow whole, the employer had to self-fund the additional $200,000 in life benefits, and the Director of Human Resources lost his job. A forgotten form from a benefit manager on a voluntary life plan ended a career and cost this employer $200,000.

If you are reading this and unsure what an evidence of insurability is, do not offer voluntary benefits. That risk is too significant for you and your organization at this time. If you are going to provide voluntary life or disability, make darn sure that your broker explains these potential nightmares to you.  

 Compliance Nightmares

Beyond the previous chilling story, a whole other compliance issue can arise with voluntaries. Suppose there happens to be a legal dispute between one of your employees and your voluntary vendor. In that case, that vendor will almost certainly argue that the plan is covered by Employee Retirement Income Security Act (ERISA) and that the employee’s lawsuit should be filed against the employer instead of the insurer. If the court agrees, the legal burden shifts to the employer. And in case you were wondering, yes, this one also gets HR folks fired. Courts regularly rule that a voluntary plan is an ERISA plan, even if the employer never intended to sponsor the plan formally.

And if that happens, and the plaintiff’s attorney is worth his salt, they’ll also file claims against the employer for all the ERISA reporting, disclosure, and fiduciary requirements that weren’t followed.  Two of those penalties would be:

• $149 per day penalty for failing to provide Plan Document and SPD; and
• $2,097 per plan per day for failing to prepare and file Form 5500.

Furthermore, the legal standard for what mandates that ERISA covers a plan is not a bright-line test.  It is akin to the federal employee vs. independent contractor standard, if you are familiar with that.  It is a “totality of circumstances” test that requires the plan to:

• be completely voluntary without any employer contributions;
• not allow the employer to endorse or “take credit for” the plan;
• not allow the employer to receive consideration for collecting and remitting premiums;
• not use the employer’s name, or associate the voluntary plan with the employer-sponsored benefit plans;
• not communicate the voluntary benefits at Open Enrollment with all of the employer-sponsored ERISA-covered plans;
• not recommend the plan to employees;
• never say ERISA applies;
• not allow the use of the employer’s cafeteria plan; and
• not assist employees with claims or disputes.

In some cases, judges ruled that employers endorsed plans because they announced the programs in memos written on company stationery. I’m reminded of the old Jeff Foxworthy routine, ya might be a redneck ERISA if …

 

Failing any of the above bullets might make your plan an ERISA plan, depending on the court’s assessment of the action's severity and/or frequency.  Of course, failing to abide by more than one further tips the scale in the direction of ERISA.

Benefit attorneys who litigate these types of cases regularly report that 80% to 90% of voluntary benefit plans are, in fact, ERISA plans once litigation commences and the voluntary provider makes this reflexive initial motion.

And With All of That, There Are Some Places for Them

With all that said, is there ever a time when voluntary benefits are a good idea? Yes, they can be appropriate and even desirable in a handful of circumstances.

Voluntary home and/or auto insurance is often just a link to a carrier that employees can quote themselves. It is done at any time of the year and regularly gets employees an additional 5% to 10% off, in addition to any other discounts for which they may qualify. Employers regularly can and do stay out of these offerings.

Pet Insurance. As with home and auto, it is typically just a link to a vendor that can and will offer your employee a modest discount because they work for you. Like with home and auto, I’ve never seen a pet plan morph into an ERISA plan.

Voluntary Group Life and Disability. These are often no-brainers. Notice that I said group coverage here. I do not like the idea of individual, 1099’d, 100% commissioned enrollers sitting across from your employees and asking them what momma and the baby will do when they die.  No, this is the option to buy additional life and disability above and beyond the core employer offering. We communicate it in a group setting, and then treat it like an ERISA plan as it is linked to your underlying life and disability. But know, all my caveats in this piece's “Administrative Hell” section apply. If you don’t have a seasoned, stable, savvy HR staff, you may want to consider holding off on these lines for a bit.  

Union Demanded Plans. Other than what I’ve mentioned here, I’d pass on the voluntary stuff. But I do know that there are times when a workforce demands it. I have seen that from time to time in union environments. In that case, partner with an exceptional broker to find a voluntary provider with a long, stable track record. Believe it or not, I have encountered those in my career. They aren’t totally fictitious unicorns but are exceedingly rare, glorious beasts to behold in the wild. 

Dagny Taggart is a retired and recovering broker and attorney who spends most of her days in a walled compound in Galt’s Gulch, Colorado, walking her Labrador and watching the squirrels cavort. After a 30-year career in benefits, she retired in her early 50s and now consults with large employers and brokerages on healthcare, benefits, and ERISA.

How Voluntary Benefits Can Make Your Offering Look 'Second' Class and Backfire with Employees

This is an excerpt from a well-written, longer piece from Marsh Consulting Group: 

Whether it’s critical injury insurance, cancer insurance, or pet insurance...the hype surrounding voluntary benefits seems to increase every fall. Led by the calls of an animated duck, many employees hear the sales pitch for these products and become convinced that the extra premiums they pay will protect them financially from the risk of catastrophic accidents and illnesses. Employers, pinched between ever-rising health care costs and employee protests against higher deductibles, open the door for a voluntary sales pitch as an escape route. But employers who offer robust benefits packages aren’t doing their employees a favor by adding these kinds of voluntary benefits. These products, which typically pay out less than 50% of the premiums toward actual claims, may in the end hurt employers’ credibility once their employees realize that voluntary benefits aren’t much of a benefit after all. 

Employees pay 100% of the premiums for voluntary benefits in return for a cash payout for an approved claim. Employers like voluntary benefits because they do not pay any of the cost, unlike with their other health and welfare benefits. Employees like voluntary benefits because they feel threatened by the high deductibles and out-of-pocket limits set by their health plan to control costs. Some voluntary benefits, such as disability or term life insurance, may make financial sense for employees if the potential loss is more than they can cover with their savings. The problem with many other voluntary products is that employees trade a reduction in their monthly take-home pay to protect against a very small risk of incurring a large claim. In many cases, employees are already protected against a large financial loss by their health plan, group disability plan, and other employer-provided benefits. ... 

Why Brokers Push Voluntary Benefits 

...Voluntary benefits often provide the broker with a first-year commission exceeding 60%, compared to a 3-7% commission for health plans.  No wonder brokers are raving about voluntary products! ... 

The Difference Between Group and Individual Voluntary Benefits Products 

Not all voluntary benefits are a bad deal. For example, life and disability benefits can be valuable because the financial consequences of a death or disability can be catastrophic. Voluntary dental and vision coverage can also make sense. 

While dental and vision claims are never catastrophic, this coverage is often a good value because insurers are able to negotiate network discounts with providers. But do critical illness, accident, and cancer voluntary benefits make sense? These voluntary benefits are intended to cover a portion of one’s deductible and coinsurance under certain circumstances. Ideally, employees are able to self-fund their out-of-pocket costs for such events through tax-advantaged HSAs or FSAs.... 

In sum, most mid-size employers offer “first class” benefits packages that already provide strong financial protection against serious illnesses and accidents. Be careful not to push “second class” voluntary benefits on your employees that may be in the best interests of your broker instead of your employees.

 

The Hidden Risks of Voluntary Benefits

Unfortunately, most employers are only ever told one side of the story regarding voluntary (worksite) benefits.  They are told the benefits are free to the employer and make the employer offering look more robust while satisfying an employees' irrational need to avoid all forms of perceived risk against anything from pet calamities to cancer. 

I will never forget sitting in a meeting where a shameless voluntary salesman urged the crowd to purchase his cancer and critical illness policies by explaining that once skin cancer was found on his nose, he bought a new van with his worksite payout.  

Delightful.  We've now taken employee benefits the a new level of sophistication.

Aside from the never-ending administrative challenges of voluntary benefits (incorrect billing, only partial approvals for life amounts, and constantly changing premiums that blow up your payroll deductions), there are rock-solid legal reasons to avoid (or minimize) the prevalence of worksite benefits in your organization.

The conundrum an HR department faces is their natural instinct to make sure that voluntary benefits are vetted thoroughly, and rolled out to employees in a smooth, organized and controlled fashion just like the rest of your benefits.  However, it is precisely these instincts that will turn your voluntary benefits program into an ERISA Plan and embroil you in a compliance nightmare.  

If a voluntary plan is deemed to be an ERISA Plan, the employer must create a written Plan Document and distribute SPDs to its Participants. If the Plan has 100 or more Participants on the first day of the plan year, the employer must also file a Form 5500 with the DOL and provide a summary of it, called a Summary Annual Report (SAR), to its Participants.  

Once deemed and ERISA Plan, you vouch for the validity of your voluntary program as a plan fiduciary.  Be prepared to then get sucked into legal disputes between your employees and their voluntary provider, who likely sold the policy via a 1099 agent who is nowhere to be found years down the road when things hit the fan.

This is from: HR Benefits Alert:

For most firms, voluntary benefits are a win-win arrangement. But be careful. 

On the positive side, voluntary benefits cost employers next to nothing, yet boost employees’ morale and benefits satisfaction. An Aon survey found 77% of organizations offer at least one voluntary benefit. 

What happens if there’s a legal dispute between one or more of your employees and the vendor?  In some cases, employers unwittingly get dragged into court. The vendor could potentially argue that the plan is covered by ERISA, and the employee’s lawsuit should instead be filed against his or her employer. 

If the court agrees, the legal burden would shift to the employer.  Some courts have, in fact, ruled that a voluntary benefits may be covered under ERISA, even if it wasn’t an employer’s intention to formally “sponsor” the plan. 

If push comes to shove, vendors will protect themselves. In fact, some attorneys warn that a voluntary plan insurer’s first move if sued by one of your employees will be to try to get the legal burden shifted from itself to you. 

Two seemingly innocent things that can be turned against you in court:

• the written announcement to tell employees about the new voluntary benefit, and

• getting involved if there’s a dispute between an employee and the plan vendor.

Be careful with announcements 

When you offer a new voluntary benefit, the natural tendency is to try to get employees pumped up to participate. But you can get in trouble if people get the impression the firm endorses the plan. Helpful practices:

• Don’t put the announcement on organizational letterhead

• Put a disclaimer on the description

•  either exclude your voluntary offerings from employees’ benefits manuals or list them separately, and

• hold open enrollment at a different time than for ERISA plans (401(k), main health plan, etc.).

Also, if the vendor offering the voluntary plan has competitors, you may want to remind employees the vendor of the voluntary plan isn’t the only game in town. Some firms pass along lists of competing vendors. 

Avoid involvement in disputes 

As with your ERISA plans, chances are employees will come to you when they have a problem with a voluntary plan. Your first inclination is to help. 

But many experts warn it’s better to stay out. Reason: Courts see this as the action of a plan sponsor. But you can steer someone in the right direction (e.g., giving a contact name to call) while remaining neutral in the dispute. 

Good intentions gone bad  

From an ERISA standpoint, the most dangerous voluntary plan design is one that is partially paid by the company, even if employees pay the bulk of the cost. 

In a major ruling a few years ago (Burgess v. Cigna Life Insurance), a U.S. district court ruled against an employer with a voluntary supplemental disability plan in which the firm paid a portion of premiums on behalf of its lower-paid employees. 

While most employees paid the entire premium — and firm made clear to  people the plan was a voluntary benefit –the court said it didn’t matter. The act of contributing to some employees’ premiums made it an ERISA plan.

Don't Let Your Voluntary Benefits Program Become an ERISA Plan as Most Employers Have

This is from Kevin M. Ohara at Life Health Pro:

To their surprise and dismay, some employers have learned that their voluntary benefit programs are ERISA programs, subject to all of the same requirements and liabilities as their traditional benefit plans of the Employee Retirement Income Security Act.

Despite assurances from carriers that such programs are not subject to ERISA, mistakes made by the employer in the design and administration of the plans may cause the programs to fall under the ERISA umbrella. Should that occur, the noncompliance penalties and obligations can be quite severe. It need hardly be said, too, that the customer relationship the agent or broker has built with the hapless employer would be in tatters.

By being aware of the rules under ERISA, and through proper planning, agents and brokers of voluntary worksite benefits can help guide their employers around potential exposures.

Truly voluntary plans--that is, those fully paid by the employee without contributions from the employer--are by definition ERISA-exempt under the Act's "safe harbor" provisions. But the U.S. Dept. of Labor has recently stepped up efforts to uncover programs that, due to an employer's mishandling, fail to qualify for that exemption.

Some employers only become aware that their voluntary benefit plans have become ERISA-eligible when they receive an inquiry from the DOL. More often, the situation comes to light when a voluntary benefit carrier, having been challenged over a claims-payment issue, seeks to invoke ERISA protection to avoid a state insurance department investigation, along with the possibility of penalties or a large jury award. Either way, the employer is generally caught unaware and must scramble to meet its newly discovered obligations.

Most benefit programs that make the shift into the ERISA category do so because the employer has stepped over a legally defined line and becomes too closely involved with the plan.

To avoid ERISA liability, the plan sponsor must have minimal interaction with the program. Other than offering the plan, collecting premiums and remitting those premiums to the carrier, the employer must avoid any direct intervention with the voluntary benefit program whatsoever.

In an effort to be helpful to its employees, the plan sponsor may cross the line and risk exposure. Even the level of enthusiasm the employer shows in promoting the plan will be considered in the DOL's assessment of whether ERISA applies.

Some behaviors that could jeopardize the safe harbor status of voluntary benefits include:

• Employer contributions to the plan costs, even relatively insignificant ones.
• Employer's staff intervention on behalf of an employee in day-to-day carrier dealings.
• Tying participation in the voluntary plan to eligibility for other benefits.
• Listing the voluntary plans alongside traditional ERISA programs in companywide communication materials.
• Placing the employer's logo on a voluntary product carrier's marketing materials.
• Publicly taking credit for introducing the benefit.
• Company managers and supervisors actively recommending voluntary benefits to rank-and-file employees.

A particularly difficult situation arises when deciding whether to include the plan in the employer's cafeteria program. By commingling the voluntary plans with the basic health programs within the Section 125 plan, the employer is at risk of tacitly promoting the plan. In addition, since including the program in communication materials about the cafeteria plan may imply the plan's similarity to other, ERISA-qualified benefits, a case could be made that the employer misled employees about the plan's status.

If, despite the sponsor's best efforts, a voluntary program has been determined to be an ERISA program, all of the standard requirements would apply. These include triggering obligations to file 5500 Forms, develop plan documents and summary plan descriptions, include HIPAA-COBRA and other required language where appropriate, and follow nondiscrimination rules. Even increased obligations under the Family and Medical Leave Act and the Uniformed Services Employment and Reemployment Rights Act of 1994 may be triggered.

Producers selling voluntary benefits can help employers steer clear of such possibilities by making sure the producer or an outside administrator, not the employer, handles one-on-one sales and enrollment for the benefits. Except for the truly financial aspects of these plans (e.g., premium collection via standard payroll processes), all communications about the plan must take place directly between the employee and the carrier or its representatives.

The availability of voluntary programs has proven to be a boon to employees, providing a range of benefits at a cost unavailable in the individual market. But in an employer's exuberance to provide these expanded opportunities to their staff, there is a danger that the "Law of Unintended Consequences" may drag it into a regulatory morass. To maintain the plan's ERISA exemption, help keep your employer clients aware of the need to remain at arm's length from these benefits.

Watch Out for Liabilities with Voluntary Benefits

This is from Ilan Mochari writing for CFO Magazine (link):

... What's fueling the growth [in voluntary benefits]? "Health-care costs are eating away at profits, and not only are employees being asked to pay more, but often their pay is frozen or increases are minimal," observes Leonard Sanicola, senior practice leader at WorldatWork, a nonprofit association based in Scottsdale, Arizona, that focuses on compensation and benefits. "Voluntary benefits allow companies to offer something in return at a time when economic and business conditions are challenging." Undoubtedly, insurers have picked up on the trend; AFLAC, for example, has built its whole business on selling insurance through employers.

Thrown A Bone 

... Indeed, offering a choice of vendors is crucial for avoiding the major potential pitfall of voluntary plans: the risk that a vendor problem will trigger an employee lawsuit against the employer. [And note that virtually no employer actually offers a choice.] A choice underscores the point that the employees, not the employer, are responsible for vetting and selecting vendors. According to attorney Richard Menson, a partner at McGuire Woods LLP in Chicago, a company should explain that its affiliation with a vendor does not constitute an endorsement. "I would be clear to employees that they are on their own as participants, and that the plans are not subject to the Employee Retirement Income Security Act," he says. Menson adds that he hasn't seen any ERISA suits over voluntary benefits go to court—because corporations are prudent about how they communicate voluntary benefits, and because most cases with merit are settled before trial. As an added safeguard, most insurance vendors provide employers with indemnification clauses that hold corporations harmless in case of any trouble.

But the fact that legal liabilities are relatively easy to avoid doesn't mean an employer can choose vendor alliances carelessly. A mediocre vendor reflects poorly on the corporation and damages any goodwill earned from offering the voluntary benefit in the first place. "There's still a great responsibility for the company to screen its vendors," observes Pete Fornal, president of HR Consultants, based in East Greenwich, Rhode Island. "If your employees' customer-service experience is not good, you need to change providers."

Talk Is Not Cheap 

One key mistake employers make is not in how they choose the voluntary benefits to offer, but in how they communicate those benefits to their workers. "Employers think that the only time they need to communicate is during annual enrollment," says Herbster. "They communicate it once and then forget about it." She advises employers to have a link that describes benefits—and allows for registration—on a Web page that workers access frequently.

Another way to communicate, points out Aon's Sullivan, is to hire an enrollment company. Enrollment companies—such as Worksite Communications in Tallahassee, Florida, and Ward Services in Columbia, South Carolina—specialize in getting employees to sign up for programs through one-on-one meetings and telephone- and Web-based services. "You can't just jump in and do 10 voluntary benefits overnight," warns Sullivan. "Talk about 2 or 3 at first."

Above all else, experts encourage employers to be honest in their communications—even if that means admitting that the voluntary benefits are as much about saving corporate dollars as they are about pleasing pet lovers.

But the process of vetting vendors and communicating with employees takes time, which is why not every company offers voluntary benefits. "It takes effort to communicate about the benefits, sign everyone up, and process the paperwork through the payroll system," says Fornal. That effort, however, may pay off in better employee morale—no small thing these days, when workers are forced to dig ever deeper into their wallets.

Ilan Mochari is a freelance writer based in Cambridge, Massachusetts.

---

The Doubt of the Benefit: Why Voluntary Benefits Are Not Win-Win

Voluntary benefits may seem like a win-win. Here's why they could be a lose-lose. 

This is John Goff, writing at CFO Magazine: 

Corporate benefits packages may be shrinking, but voluntary benefits are skyrocketing. According to a recent survey, 6 of every 10 companies now offer at least one voluntary, or supplemental, benefit. Employees buy such products—most often some form of life, health, disability, or dental insurance—directly from vendors, usually through a payroll deduction. It's easy to see the appeal of voluntary benefits: they cost employers next to nothing, yet boost employee morale.

But voluntary benefits are not necessarily a win-win—in fact, they could be just the opposite. Consider the case of UnumProvident Corp., the nation's largest disability insurer. In 2003, voluntary offerings represented about 40 percent of Unum's U.S. brokerage sales. Over the past year, however, policyholders have accused the self-described "leader in income protection" of systematically denying disability claims.

Management at Unum, which recorded a net loss of $386.4 million in 2003, has denied the charges. But regulators in 45 states are conducting a joint market-conduct exam of Unum's handling of claims—the largest such review in U.S. history. That probe is likely to be completed sometime this summer.

Such problems with a vendor can turn into a morale-buster for employees, and a headache for their employers.

Worse, insult may be added to injury if employees who bought a product believe their employers endorsed the vendor in question. In practice, few companies stand by supplemental plans, because doing so makes it more likely that a program will fall under the purview of the Employee Retirement Income Security Act (ERISA)—which substantially raises a plan sponsor's reporting, disclosure, and fiduciary responsibilities. Warren Steele, senior vice president of marketing at insurer AFLAC, believes that less than 10 percent of the company's corporate clients treat voluntary programs as ERISA plans. (An official at AFLAC notes, however, that Mr. Steele does not know the exact percentage.)

Critics claim that it's in the vendor's interest for the sponsoring company to back its products—and not just to boost sales. Attorneys point out that, generally, ERISA favors insurers over employees in policy disputes. ERISA preempts some state law, which can mean cases are heard by judges, not juries—a huge plus for defendants. More important, ERISA prohibits workers from suing insurers for punitive damages.

In fact, when sued by a policyholder, an insurer's first move is usually to try to convince a judge to rule that a supplemental plan is an employee welfare benefit plan (and hence subject to ERISA). Such a ruling could be bad news for an employer, which can suddenly find itself running afoul of Department of Labor (DoL) regulations. As for policyholders, the inability to sue for punitive damages may make it difficult to find an attorney to take a case. "This is a disaster for employees," declares Joseph Belth, professor emeritus of insurance at Indiana University. "They're being taken to the cleaners."

Message: We Care 

None of this is cheery stuff for companies with voluntary benefit programs. And that's getting to be a long list. According to Avon, Connecticut-based advisory firm Eastbridge Consulting Group, which conducted the survey cited above, sales of supplemental worksite insurance topped $4 billion in 2002, double the amount sold just five years earlier.

Scores of insurers offer such plans, including AFLAC, Unum, Liberty Mutual, AIG, Wachovia, and MetLife. Joe Foley, senior vice president of market development and communications at Unum, says that sales of the company's voluntary benefits have been increasing at nearly a 35 percent clip in the past several years. Notes Foley: "Voluntary has been our fastest-growing segment."

While critics charge that businesses launch voluntary benefit plans to camouflage cutbacks in their own company-funded programs, by and large the programs appear to be well intentioned. Even Mark DeBofsky, a partner and plaintiffs' attorney at Chicago law firm Daley, DeBofsky & Bryant, grants, "The employers' motives are usually good."

Telecommunications company Verizon Inc., for instance, maintains a program called Verizon Advantage. Through the plan, employees have access to group rates on automobile and homeowners' insurance. "Some employees can save oodles of money," says Sheila Small, an assistant treasurer for risk management and insurance who runs the program.

Voluntary programs also help promote the message that a company cares about its workers. Standard Register, a document-management company in Dayton, lets insurance vendors sell a wide array of financial products to employees. According to Richard Mayer, the total-rewards manager of the company, the program reinforces the idea that "Standard Register is a great place to work." Among the company's current voluntary offerings: auto insurance; homeowners' coverage; and extra long-term disability, life, and accidental-death insurance.

A Fine Line 

Companies can run into trouble when they try to claim too much credit for these packages. Managers looking to steer clear of ERISA cannot endorse a voluntary plan. The difference between simply announcing a plan and endorsing it "can be a fine line," acknowledges AFLAC's Steele.

Some critics claim that vendors are only too happy when corporate customers unwittingly cross that line. Notes Jim Gehring, an attorney in the Chicago office of Seyfarth Shaw: "It works to a vendor's advantage for it to look like a plan is endorsed." Offering policies from several vendors can help set employees straight, experts advise. But some insurers say they're not wild about dealing with businesses that plan to present products from many providers. "We don't like to offer our plans with other vendors," admits Steele. "Employees could get confused about which one they bought."

Some say employees are already confused about what they've bought, convinced that their employers endorse the insurance. Says Carl Metzger, a partner at law firm Testa Hurwitz & Thibeault: "To some extent, these plans could be viewed as a bait-and-switch."

Observers point out that seemingly innocuous acts by an employer can be construed by workers—or the courts—as a company endorsement (see "You Might Be ERISA If..." at the end of this article). In several cases, judges ruled that employers endorsed plans because they announced the programs in memos written on company stationery. Interceding in a dispute between a vendor and an employee could also transform a voluntary program into an employee welfare benefit plan. In general, according to the DoL, the more involved a company gets with an insurer's plan, the more likely it is that the employer will be seen as having endorsed the program.

If a voluntary benefit plan is deemed to be an employee welfare benefit plan, a company can end up with a long list of DoL violations, resulting in fines and penalties. Attorneys warn that employers could also wind up on the hook if a vendor goes out of business (four life and health carriers failed in 2003). In that event, directors and officers could find themselves making good on their insurer's policies. According to Testa's Metz-ger, D&O insurance policies at public companies typically do not cover these sorts of suits.

Worse, some observers believe it's only a matter of time before a plaintiff's attorney challenges the DoL ruling that an employer endorsement triggers ERISA protection. If an employer does not meet all the safe-harbor conditions, that does not automatically mean a court would find that the employer established an ERISA plan. Rather, although the safe harbor may not apply, a court could still find that the employer's conduct did not constitute sufficient involvement with the insurer's voluntary benefit plan to make it an employer-sponsored employee benefit plan under ERISA.

If that happens, it would be open season on companies that provide voluntary benefits to workers. Lacking ERISA protection, employers could be taken to court in some circumstances for punitive damages—in jury trials, no less.

Easy Access 

If it's difficult for corporates to determine if a supplemental benefit is bound by ERISA, it's easy to see why vendors are bound and determined to sell the plans.

Take industry leader AFLAC, which began selling cancer insurance in 1964, mostly to small businesses. In 2001, the company convinced management at not-so-small business Wal-Mart to offer voluntary insurance to its workers. To date, says Wal-Mart spokesperson Christi Gallagher, the takeup rate by the retailer's associates has ranged between 5 and 10 percent.

Hardly a stampede. But do the ciphering and you realize that Columbus, Georgia-based AFLAC has sold close to 100,000 policies down at the Wal-Mart. And experts note that with time, employee participation in voluntary benefit plans can rise as high as 25 percent. "[These programs] are great for vendors," says Susan Nash, a partner and employee-benefits expert at law firm McDermott Will & Emery. "They have easy access to employees."

On the whole, employees seem to like being accessed, too. A 2003 survey of workers conducted by NFO World Group for MetLife found that 49 percent of respondents would like their employers to offer a wider array of voluntary benefits. Still, it's doubtful many employees examine the financial health of a vendor when they purchase a supplemental-insurance policy.

Moreover, some critics claim insurers are more inclined to dispute claims made on group policies purchased at work than those bought by customers on their own. Says Indiana University's Belth: "It's quite clear that an insurer is more likely to deny a claim if it's ERISA than if it's not under ERISA."

Few workers know this. Neither are they aware that if they sue, and their policy is deemed to fall under ERISA, the odds are stacked in favor of the insurers. That fact has apparently not been lost on some insurance-company executives, however. In a memo sent out in 1995, a manager at Provident Cos. (which later merged with Unum Corp.) identified 12 claim situations in which the insurer had settled for $7.8 million in the aggregate. If these 12 cases had been covered by ERISA, the memo noted, Provident's total liability would have been no more than $500,000. Concluded the manager: "The advantages of ERISA coverage in litigious situations are enormous."

This is not what the bill's creators had in mind back in 1974. "ERISA was supposed to be for the protection of participants," says Belth, glumly. "Now, it's being turned absolutely on its head."

Employers that don't give sufficient thought to their voluntary benefit plans could find themselves in an equally awkward position. Eager to help workers, they could wind up on the receiving end of an employee lawsuit. Says Metzger: "Voluntary benefit plans often come under the heading of 'No Good Deed Goes Unpunished.'"

John Goff is technology editor of CFO. Additional reporting was provided by CFO.com deputy editor David Katz.

You Might Be ERISA If...

Attorneys say seemingly harmless acts by a company can elevate a voluntary benefit plan into an employee welfare benefit plan. Here's what to avoid.

1. Only one vendor. Insurers may want only their products on offer, but the more vendors there are, the less likely workers will think their employer vetted the seller.
2. Plan announcement on letterhead. Says one attorney: "Some courts have deemed that the mere description of a plan on company letterhead makes it ERISA."
3. Enthusiastic annoucement. An employer's over-the-top message to workers about a plan may be seen as an endorsement.
4. No disclaimer. Attorneys disagree on this one, but it can't hurt to put out a disclaimer on all messages to employees about a supplemental plan.
5. Plan mentioned in other literature. Including information about a voluntary plan in a brochure that also describes a company's ERISA plans could lead to trouble.
6. Negotiating for a better deal. Trying to get vendors to include more workers in the program, for example, gets an employer more involved in the plan—and closer to ERISA.
7. Advertising in a dispute. Employers should avoid interceding in a dispute between a vendor and an employee: Explains one lawyer: "That's something a plan administrator would do."
8. Scheduling the same election period. The open-enrollment period for a voluntary plan should never coincide with the enrollment period for a company's ERISA programs. —J.G.