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Voluntary benefits may seem like a win-win. Here's why they could be a lose-lose.
John Goff, CFO Magazine
April 1, 2004
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.
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.