Seventh Circuit Agrees Supplemental Life Insurance Policy Is Subject to ERISA

On July 11, 2018, the U.S. Court of Appeals for the Seventh Circuit ruled in Cehovic-Dixneuf v. Wong, No. 17-1532 (7th Cir. July 11, 2018), that a supplemental life insurance policy was subject to ERISA because it satisfied the five requirements for being an ERISA employee welfare benefit plan. The court reasoned that the policy wasn’t exempt from ERISA under the DOL's regulatory safe harbor for voluntary plans because it didn’t satisfy all four of the exception requirements. As a result, the policy's death benefits were payable to the designated beneficiary, the participant's sister and plaintiff, without regard to equitable arguments asserted by the participant's ex-wife, the defendant.

As background, this fully insured supplemental life insurance policy was offered by the participant's employer with a death benefit of $788,000. The participant listed his sister as the sole beneficiary for both the supplemental policy and a basic life insurance policy with a death benefit of $263,000. However, after the participant died, his ex-wife claimed that she and the child she had with the participant were entitled to the death benefits from the supplemental policy. The participant's sister sued the ex-wife, seeking a declaration that the sister was entitled to the death benefits.

The district court ruled in favor of the sister, and the Seventh Circuit affirmed that decision, finding that the supplemental life insurance policy was subject to ERISA and that the sister was entitled to death benefits under the policy. Any equitable arguments asserted by the defendant couldn’t succeed if the supplemental life insurance policy is covered by ERISA because ERISA generally requires plan administrators to manage plans according to the governing documents, including beneficiary designations.

To avoid ERISA application, the defendant argued that the court should sever the supplemental life insurance policy from the basic life insurance policy. They also argued that the plan was voluntary since the premiums were paid in full by participants with no employer contributions. However, the court explained that under Seventh Circuit precedent, ERISA covers a welfare arrangement that meets five elements based on ERISA's definition of employee welfare benefit plan.

Quickly, here are the following five elements that must be present for ERISA to cover an employee welfare plan:

  1. A plan, fund, or program
  2. Established or maintained
  3. By an employer or by an employee organization, or by both
  4. For the purpose of providing medical, surgical, hospital care, sickness, accident, disability, death, unemployment or vacation benefits, apprenticeship or other training programs, day care centers, scholarship funds, prepaid legal services or severance benefits
  5. To participants or their beneficiaries

All of those criteria were deemed satisfied because the supplemental life insurance policy was part of a program established by the participant’s employer for the purpose of providing death benefits to participants or their beneficiaries.

Moreover, the Seventh Circuit noted that an arrangement isn’t excluded from ERISA under the DOL's voluntary plan safe harbor if it fails to satisfy any of the safe harbor's four requirements. Specifically, the safe harbor requires that:

  • The plan must be completely voluntary for employees
  • No employer contributions toward coverage are allowed
  • Employer involvement (without endorsing the program) must be limited to only specified activities allowed by the regulations
  • The employer must not profit from the plan

The court’s opinion was pretty straightforward, as the Seventh Circuit concluded based on key information from the SPD that the policy failed the safe harbor's third requirement because the employer had performed all administrative functions associated with maintenance of the policy. In other words, the employer's functions exceeded the very limited ones permitted under the safe harbor. Specifically, the employer was listed as the policyholder of the supplemental life insurance policy and the SPD described the policy as being part of or related to the ERISA covered basic life policy.

In summary, employers should be aware of ERISA application of certain benefits and the compliance obligations that follow, such as SPD distribution. Ultimately, this case demonstrates that when ERISA applies to an arrangement, ERISA's broad preemption rule may supersede many state laws that would otherwise apply to the arrangement. In this case, the Seventh Circuit's conclusion that the supplemental life insurance policy was covered by ERISA meant that the ex-wife couldn’t make certain equitable arguments that might otherwise have been available.

Cehovic-Dixneuf v. Wong »