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If You Leave Your Employer but Maintain Your Disability Policy, You Probably Still Can’t Escape the Tough Rules of ERISA

In a dispute over long-term disability benefits, it’s important to determine if the disability policy falls within the scope of the Employee Retirement Income Security Act of 1974 (ERISA).

ERISA is a federal statute that applies to claims for employee benefits, including disability benefits.  All else being equal, a claimant will have an easier time overturning a denial of disability benefits if the employee’s disability plan is not governed by ERISA. That is because claimants making claims under policies governed by ERISA face significant hurdles not faced by claimants who have non-ERISA policies.

The most consequential difference between ERISA and non-ERISA disability cases is that federal courts decide ERISA cases under the “arbitrary and capricious” standard of review.  What that means is that courts will not overturn a denial of disability benefits unless they find that the denial was without a factual basis.  This is a highly deferential standard of review and requires a court to uphold a plan administrator’s denial of benefits if it is supported by only modest evidence in the record.

As well, ERISA claimants cannot recover extra-contractual damages that otherwise may be available under state law.  In addition, ERISA claimants typically cannot avail themselves of discovery to learn more about their denial of benefits.  Rather, they can only rely on what is in the administrative record, or the claim file, in arguing that they are entitled to long-term disability benefits.

Because it is so important to know if a disability case will be subject to ERISA, one would think that it would be relatively easy to figure out if the policy at issue is subject to ERISA.  Unfortunately, that’s not always the case.  For example, in Alexander v. Provident Life & Acc. Ins. Co (E.D. Tenn. 2009), the plaintiff’s policy bore the hallmarks of both an ERISA and a non-ERISA policy. In that case, the plaintiff, a doctor, had an individual disability policy through his employer, a medical practice. After he left the medical practice that employed him, he continued the policy and paid all the premiums.

The doctor would subsequently qualify for long-term disability benefits.  In 2007, ten years after the doctor left the medical practice, the disability insurer (“Defendant”) discontinued his benefits. By then, the medical practice that had offered the original policy in the first place was no longer in business.

Despite this set of facts, the Defendant argued that the doctor’s disability policy was part of an employee benefit plan governed by ERISA and that did not change after he left the medical practice.   The court agreed.  In coming to its decision, the court held that the policy at issue was subject to ERISA after finding that it satisfied all components of a three-step analysis set out by the United States Court of Appeals for the Sixth Circuit.

The first part of the court’s analysis was to determine if the policy at issue fell under the Department of Labor’s “safe harbor” provision. The safe harbor provision excludes an employee insurance policy from ERISA coverage if, among other factors, the employer makes no contributions to the policy.  Here, the employer paid 35 percent of the doctor’s premiums each pay cycle while the doctor was employed, and, as a result, the court found that policy did not fall into the safe harbor provision.

The second part of the court’s analysis was to determine if, based on the surrounding circumstances, a “reasonable person” could conclude that a plan existed, that there was a class of beneficiaries, and that there was a procedure in place for obtaining benefits. Here, the court found that the plan at issue passed the reasonable person test, in part, because the lower price of the doctor’s policy was obtained solely through his employment with the medical group.  As the court observed, if the doctor applied for the policy himself, his premiums would have been higher.  Therefore, a reasonable person would know that the employer set up a benefit plan for its employees.  (In contrast, a court would likely find that, if an employer merely allowed an insurance broker to market a disability insurance plan to its employees, that plan would not be subject to ERISA, as long as the employer otherwise took no other action with respect to the plan.)

The third and final part of the court’s analysis was to determine if the employer “established or maintained” the policy. In this instance, the court noted that the employer established the policy, and maintained it by paying part of the premiums every pay period while the doctor was employed.  The doctor had argued that the employer did not maintain the policy since he left the medical practice, and, that thereafter,  he paid for the premiums on his own. The court rejected that argument because the doctor continued the same policy, with the same price and terms, that he had with his employer, the medical practice. This was not a new policy.

The court also found that the employer maintained the plan, even though the doctor’s former employer was no longer in existence at the time the Defendant discontinued the doctor’s disability benefits. More specifically, the court stated that the doctor’s plan was an ERISA plan at the time it was established, and that the doctor continued the same policy, even after the medical practice disbanded.

In determining that the doctor’s policy fell under the scope of ERISA, the court essentially concluded that “once an ERISA plan, always an ERISA plan.” Other courts (although not the Alexander court), have relied on that phrase in justifying similar rulings.  In other words, if an employee welfare benefit plan is an ERISA plan at inception, it will remain an ERISA plan unless the employee converts it into a new plan.

As the above analysis shows, determining if a disability policy is governed by ERISA is not always easy, especially in cases when the claimant continued making payments on a disability policy after leaving the employment through which the policy originated.  If you are in a dispute over long-term disability benefits with your insurer, contact an experienced disability law firm to determine if the rules of ERISA would apply to your case.