Voluntary benefits: The next frontier in fiduciary litigation

Voluntary benefits used to be a low-cost add-on for employers, but that is changing fast. Recent lawsuits now claim that some voluntary programs fall under the Employee Retirement Income Security Act (ERISA), and that employers (and their brokers) are not meeting their fiduciary duties. This shift has made voluntary benefits a growing source of risk, and potential cost. The lawsuits also underscore important ways to minimize risk for employers who sponsor voluntary benefits, or any other health and welfare arrangement.

What counts as a voluntary benefit

These programs include accident, critical illness, hospital indemnity and supplemental life or disability coverage. Employees usually pay the full cost of whatever coverage they elect through payroll deduction, and employers offer access at discounted group rates.

Many employers assume these plans fall outside ERISA because they are “voluntary” benefits. This can be true, but only if they meet the Department of Labor safe harbor, which requires:

• No employer premium contribution
• Participation that is fully voluntary
• No employer endorsement of a product or carrier
• A limited employer role, such as payroll deduction
• No compensation to the employer beyond basic administrative costs

If an employer selects vendors, negotiates pricing, sets eligibility, includes the benefit in ERISA plan documents, files it on Form 5500, or takes part in claims or communication decisions, the plan likely becomes subject to ERISA.

And that means that fiduciary duties follow.

Why brokers and consultants are included

Fiduciary status under ERISA hinges on discretion. Even if a consultant does not claim to be a fiduciary, they can still be treated as one if they influence vendor selection, steer placements, control compensation structures, or appear to have decision authority over a plan or its assets. If they are found to be fiduciaries, they can face prohibited transaction claims related to commissions or incentive payments that were not disclosed or reviewed.

What the new lawsuits say

Several large employers have already been sued. The complaints claim that:

• Voluntary benefit programs are ERISA plans
• Plan fiduciaries did not follow a prudent, documented process
• Consultant and carrier compensation was unreasonable or not disclosed
• Competitive reviews and benchmarking were not performed
• Brokers and consultants used incentive structures that created conflicts

The plaintiffs seek millions in relief and personal liability for fiduciaries. These cases are still in progress, but the trend is clear: voluntary benefits are now under the same microscope as retirement and major medical plans.

Steps you can take to reduce risk

Voluntary benefits should no longer be on autopilot. There are a few immediate actions that can lower your exposure (for voluntary benefit plans and other health and welfare plans as well):

1. Create a committee structure: If you do not have one, set up a health and welfare committee separate from any retirement committee. Delegate clear oversight responsibilities.
2. Keep records: Meet regularly, review all benefit arrangements and keep detailed minutes. Strong documentation helps defend decisions and reduce legal risk.
3. Confirm ERISA or safe harbor status: Review every benefit offering. If a program does not meet the safe harbor, treat it as an ERISA plan and follow the needed compliance steps, including accurate Form 5500 filings.
4. Ensure fee transparency: Review all service agreements, and ask for full disclosure of direct and indirect compensation. Add audit rights and annual certifications. Make sure day-to-day practices match what the contract says.
5. Benchmark vendors: Run periodic benchmarking or RFPs for carriers, TPAs, PBMs and brokers. Compare services and fees against peers to support the reasonableness of your decisions.

Voluntary benefits are getting more attention than ever. A clear process, clean documentation and transparent compensation reviews go a long way in managing that risk. We can help you evaluate your current approach and connect you with the right legal support as needed.

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_{This publication has been prepared by TrueNorth Companies, L.C and is intended for informational purposes only. Transmission of this publication is not intended to create and receipt does not constitute, a client relationship with TrueNorth Companies L.C. This publication does not constitute any type of representation or warranty, and does not constitute, and should not be relied upon as, legal advice. This publication is not a contract and does not amend, modify or change any insurance policy you may have with an insurance carrier.}