EMPLOYEE BENEFITS

Employer Sponsored Disability Plans: Avoiding Fiduciary Classification

May 2002

By Donald R. Saxon* and Dana R. Scott

Three out of ten working people between the ages of 35-65 will be disabled for 90 or more days during their working career. Indeed, the risk of disability is greater than the risk of death at all ages between 20 and 65. Employers have recognized the statistical prevalence of disability among the employee population and now offer disability coverage as a key benefit in employee compensation packages. According to the 2001 Benefits Survey conducted by the Society for Human Resource Management, 84% of employers responding offer Long Term Disability Coverage.

The Fiduciary Issue

While employers are willing to offer disability benefits, they do not want the potential liability exposure which arises when they are characterized as "fiduciaries" under the Employee Retirement Income Security Act of 1974, as amended (ERISA). ERISA covers retirement plans and employee welfare benefit plans; disability benefit programs are welfare benefit plans (ERISA Sect. 3(1); DOL Reg. 2510.3-1). An employer/sponsor of a welfare benefit plan performs a fiduciary act under ERISA (Sect. 404(a)(1)(B)) when that employer makes a discretionary determination regarding claimant benefits. However, the mere providing of information concerning the disability plan does not result in fiduciary characterization. Two cases decided last year address this distinction and provide a roadmap for Human Resource professionals regarding disability benefits.

Watson

In Watson v. Deacon Waltham Hospital, 141 F. Supp. 211, 145 (Dist. Ct. Mass., 10 April 2001). The plaintiff (Watson) alleged that the employer was a fiduciary and violated its fiduciary duty under ERISA, Section 404(a) by failing to inform Watson that full time employees were eligible for long term disability benefits. Watson began employment as a part time employee in October 1992 and switched to full-time status in November 1993, but alleged that he was never informed of his eligibility for long term disability benefits. For health reasons and through the encouragement of his employer, Watson subsequently changed back to part time status in March 1996. He again changed to full-time status in March 1999 and was then informed of his eligibility for long term disability benefits. A month later Watson ceased working and filed a claim for long term disability benefits. The carrier denied Watson's claim due to a preexisting condition. Watson sued the employer, alleging fiduciary violations of ERISA, Section 404(a).

The court found breaches of ERISA's reporting and disclosure provisions (ERISA, Sections 101-105) but found that the employer was not a fiduciary. The employer was neither the plan sponsor, the plan administrator, nor named as a fiduciary in the plan and did not become a fiduciary by merely providing information and performing ministerial functions. The court held that even though the Human Resource Department indicated they "handled everything" for the plaintiff's sponsor, this was not enough to confer fiduciary status. Rather, the statement indicated the employer's role as a "facilitator."

Hamilton

The example of what not to do is found in Hamilton v. Allen Bradley Co., 244 F. 3019 (11th Circuit, 13 March 2001). The Allen Bradley Co. (Allen) required its employees to contact the Human Resource Department whenever they sought disability benefits. The plaintiff (Hamilton) asked the Human Resource Director several times whether she qualified for disability benefits; the Director advised that she did not. Moreover, the Director refused to give Hamilton a claim form and did not inform her of the identity of the disability plan insurer. The Director finally did give the plaintiff a disability application two years after she had left employment The plaintiff forwarded the application to the carrier; the carrier denied the claim on the basis that it was untimely. The plaintiff sued Allen as a co-plan administrator for improperly denying her benefits, and as a fiduciary for breaching its fiduciary duties to provide her requested information about the plan.

The issue, as most precisely defined, was whether Allen had sufficient decisional control over the claims process to render it a fiduciary; i.e., was Allen a gatekeeper. The court held, notwithstanding disability plan booklet language indicating that claims had to be made to the carrier, that requiring its employees to go through its Human Resource Department in order to obtain an application placed Allen in sufficient control over the process to render Allen a fiduciary. Allen handed out claim forms without obtaining information from the carrier and fielded questions about the plan from employees. The plan booklet referred to Allen as the designee of the plan administrator, authorized to process all claims and appeals. The court found Allen to be a fiduciary under ERISA.

It is important to note that an employer performs a fiduciary act when determining whether a claimant is entitled to benefits (ERISA Section 404(a)(i)(B)). If the employer fails to submit to the insurer a completed application for benefits (Krohn v. Hereon Memorial Hospital, 173 F.3d, 542 (6th Circuit, 1999)), or refuses to contact an insurance company on the basis that the employer (in this case, the HR Director), believes the plaintiff had no claim, then a fiduciary act occurs (Hamilton, 244 F.3d at 827). A fiduciary has a duty to give complete and accurate information response to employee questions. Drennon v. General Motors Corporation, 977 F.2d 246 (6th Circuit, 1992).

The Road Map

From review of Hamilton, Watson and similar cases, we can describe procedures that will allow an employer to sponsor a disability benefits plan for its employees while avoiding the liability potential of fiduciary characterization:

1. The plan booklet or Summary Plan Description should indicate that the insurer is the fiduciary and plan administrator; that a disability benefits application form can be acquired either from the carrier or from the Human Resource Department. The booklet should also indicate that the carrier is responsible for the determination of benefits eligibility, processing of all claims and appeals.
    
2. Human Resources should exercise no discretionary activity regarding the distribution of forms or their processing if an employee requests a disability form, give it to him. If he completes the form, forward it to the carrier for processing and adjudication.
    
3. If an employee asks for information, provide all information requested and refer the employee to the carrier or the Summary Plan Description for any questions concerning benefit eligibility, claims application/determination and the appeals process.
    
4. Under no circumstances should the Human Resource Department act as a gatekeeper. Human Resources should forward any claim applications to the carrier and refer all discretionary determinations regarding eligibility, benefits, claims and appeals to the carrier. Benefit eligibility determination should never be made at the Human Resource Department level.

 
5. The booklet should indicate when an application must be received in order to be timely and should include all address, telephone, fax and e-mail information necessary to reach the carrier.
    
6. As with all other benefits, an employee who moves from part-time to full-time status, or visa versa, should be informed of the benefits available at that level of employment.
    
7. If an employee is provided the booklet/SPD and it is clear to the Human Resource personnel that there is a misunderstanding on the part of the employee regarding any issue, Human Resources has the obligation to advise the employee that he may be in error, and direct the employee to carrier personnel who can provide the correct information. It isn't enough to rely on the distribution of the plan booklet or SPD when the Human Resource Department is aware of an employee's misunderstanding (Bin's v. Exxon, 220 F.3d, 1042 (9th Circuit, August 2000)).

In sum, Human Resources should provide information and applications, and forward all completed applications to the carrier or third party administrator for benefit eligibility determination and claims adjudication. However, any action beyond that, particularly if discretionary, may give rise to fiduciary characterization of the employer.

*Donald R. Saxon is admitted in New Hampshire, California, and Nevada.

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