A General Introduction to the Subject
By: Michael A. McKuin
What Exactly Is ERISA?
ERISA is an acronym for the Employee Retirement Income Security Act of 1974. The body of ERISA law includes the federal statute 29 USC. 1001, et seq.; the regulations (See: e.g. 29 CFR 2560 et seq.), and the "common law" (decisional law of the federal courts). The law was enacted by Congress to address irregularities in pension plan administration. Legal historians credit the 1963 closing of the Studebaker plant in South Bend, Indiana as the genesis of ERISA. Because that pension fund was so poorly administered, the plant closing resulted in a loss of pension benefits for many of Studebaker’ employees. The mismanagement of the Teamsters Central States Pension Fund also played a part, because of its rather colorful history of making questionable loans to certain mob run casinos in Las Vegas.
The Broad Scope of ERISA
ERISA states that: "[T]he provisions of . . . this chapter shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan . . ." 29 USC 1144(a). This is ERISA’s broad preemption clause. Under that clause, any inconsistent State laws are rendered meaningless, including important State consumer laws relating to group health, life and disability insurance, while at the same time there are no federal consumer insurance laws. Therefore, the insurance industry has in a very ingenious way carved out the single greatest immunity from civil liability ever devised.
The "Employee Welfare Benefit Plan"
When it was enacted more than forty years ago, ERISA was not intended to affect group medical or disability insurance; however, almost inexplicably, a very small part of the statute made reference to a thing called an "employee welfare benefit plan". Although this term is defined in in the statute, 29 USC 1002(1), it is not clear whether anybody back in 1974 had any idea as to exactly what it was or what it would become., But because of ERISA’s broad preemption clause, (and as the result of federal judicial decisions over the succeeding four decades), this seemingly insignificant part of the law has resulted in practically all employer-sponsored health, life, and long term disability plans being characterized as "employee welfare benefit plans" under ERISA. Accordingly, today ERISA impacts practically all employee benefits in the private sector.
Is my Plan Governed by ERISA?
In determining whether a plan is governed by ERISA, courts have generally followed the approach of the Eleventh Circuit in Donovan v. Dillingham, 688 F.2d 1367 (11th Cir. 1982) (en banc). Under the Dillingham test, an ERISA plan exists if a reasonable person can ascertain: (1) the intended benefits, (2) intended beneficiaries, (3) the source of financing, and (4) the procedures for receiving benefits. Id. at 1373. The purported plan need not be formal or written to qualify as an ERISA benefit plan, but rather, the court must look to the "surrounding circumstances" to see if the four factors have been met. Id. at 1372-73.
As a practical matter, it does not take much to satisfy the test and Courts will generally find the existence of an ERISA plan even where no such plan is wanted by anyone (except the insurance company), unless some stringent requirements are met and the plan falls under the "safe harbor" regulation 29 CFR. § 2510.3- 1 (j). Under that regulation, an employee welfare benefit plan does not include a group insurance program in which: (1) the employer does not make contributions, (2) participation by employees is voluntary, (3) the sole functions of the employer are, without endorsing the program, to permit the insurer to publicize the program and to collect premiums by payroll deduction and forward them to the insurer, and (4) the employer receives no remuneration other than reasonable compensation for administrative services actually rendered in connection with the payroll deduction. If you were employed in the private sector and if your benefit plan was provided by your employer, the odds are your plan is governed by ERISA.
The Standard of Judicial Review
In any ERISA-governed dispute over benefits, the Court may adopt one of two possible standards of review: either a de novo standard or a deferential standard . The outcome of a case often depends upon which standard is applied. Under de novo review, the Court looks at the claim as it would any other contract dispute. There is no presumption of correctness of a Plan's decision denying a claim. Deferential review is more restricted. The Court's focus is upon whether the Plan's final decision was an "abuse of discretion". As a general rule, if the Plan gives the reviewing fiduciary "discretion" to interpret the plan or decide benefit eligibility issues, the deferential standard applies. If no such discretion exists, then the de novo standard applies. (See article: The Looking Glass Logic of ERISA - Firestone v. Bruch). However, recently States have enacted certain insurance laws, which are not preempted by ERISA and which ban such discretionary clauses in insured plans. Employer self-funded plans may still include such clauses. (See article: Discretionary Bans and ERISA's Savings Clause).
ERISA’s Conflict of Interest Paradox
Although it's been more than 35 years ago, I remember being taught in law school the basic theory of insurance. Insurance was said to be a "pooling of risk". Under this theory, policyholders pay money into a common fund to protect themselves from certain identified risks of loss. The money in this theoretical fund constructively belongs to the policyholders and the insurance company earns a reasonable fee for administering the fund. That's great in theory, but it is not the way it works in the real world. When an insurance company receives premium dollars, it regards that money as its own (although it has done nothing up to that point to earn it, except to "sell" the plan). Yes, there are reserves set aside to pay claims, but there’s a minimum reserve amount required by state law and the actual reserve determined by a company’s underwriters. Nevertheless, from the moment it receives that premium dollar, the insurance company's goal is to keep as much of it as possible for itself. The less money paid out in claims, the more it keeps. The more it keeps, the greater its bottom-line profit. So, it's pretty basic that the financial interests of an insurance company are in many ways adverse to the interests of the plan participants.
But ERISA imposes fiduciary duties on those who administer a benefit Plan. If the Plan likewise gives that fiduciary “discretion” to decide benefit eligibility issues, it sets up a classic conflict of interest situation. Unfortunately, the way the courts have construed ERISA, nothing prohibits ERISA fiduciaries, from operating under such a conflict of interest. In fact, such conflicts are expected and to some extent even condoned. This is the ultimate paradox of ERISA. In recent years, the 9th Circuit and the U.S. Supreme Court have grappled with this problem in cases such as Abatie v. Alta Health & Life Ins. Co. 458 F.3d 955 (9th Cir. 2006), Montour v. Hartford Life & Accident Ins. Co., 588 F.3d 623 (9th Cir. 2009); and Metropolitan Life Ins. Co. v. Glenn, 128 S. Ct. 2343, 554 US 105, 171 L. Ed. 2d 299 (2008). And recently, states, such as California, have enacted statutes banning clauses in life and disability policies (as well as contracts, certificates, or other agreements), which grant insurance companies discretion to determine eligibility for benefits or to interpret plans. (See: Insurance Code §10110.6). In California, this would apply to all such policies issued or renewed on or after January 1, 2012 and it applies to all such policies, which insure California residents, regardless of where the policies were "issued". Insurance companies, however, have tested creative ways to try to get around the ban. (See article: Discretionary Bans and ERISA’s Savings Clause.). But in May 2017 the Ninth Circuit issued its decision in Orzechowski, v. The Boeing Company Non-Union Long-Term Disability Plan, 856 F.3d 686, 695 (CA, 2017), holding that “By its terms, §10110.6 covers not only ‘policies that provide or fund disability insurance coverage but also ‘contracts, certificates, or agreements that fund disability insurance coverage.” Therefore, unless the Supreme Court takes up the issue, it appears that for insured plans discretionary review for ERISA benefit plans is dead in California. It remains very much alive for employer self-funded plans.
Exhaustion of Administrative Remedies
If a claim is initially denied, ERISA requires that there be "a full and fair review by the appropriate named fiduciary of the decision denying the claim." 29 USC Section 1133(2). Therefore, all ERISA plans will have some kind of internal appeal process, by which claim denials are reviewed further upon the request of the claimant. Concomitantly, federal courts have required (subject to certain exceptions) that claimants exhaust the Plan's internal administrative review process, before filing a lawsuit. It is during this administrative review process that the "administrative record" is assembled. And as is explained throughout the articles at this website, this is a trap for the unwary. For that reason, you need a highly experienced lawyer on your side before you attempt to exhaust your administrative remedies.
Revised: August 2019
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