One More Issue for Overworked HR Departments: Evidence of Insurability? “I Thought Our Group Term Life Was Guaranteed Issue!”
June 22, 2023Admin.
A recent Wall Street Journal article raises a question about supplemental life policies that require enrollees to complete evidence of insurability questionnaires that are overlooked by the employer’s HR department. The article discusses a settlement that the Department of Labor (“DOL”) reached with Prudential (although the DOL is in discussions with many other insurers about the same issue), regarding supplemental group term life insurance policies. The article notes that the issue is relatively rare, and based on the number of overall transactions, that is true. However, the issue does arise, and many employers have been contacted by deceased employees’ families who thought that the employee had purchased life insurance coverage but are told that their claims were denied. Regardless of the actual number, the circumstances are distressing for those involved. Since the employees’ paychecks were generally reduced by the amount of the premiums, it is easy to understand why the families (and the DOL) have complaints. The issue appears straightforward: the employee paid the premiums, so the insurance company should pay the benefits. However, situations can be complex.
Group Term Life (“GTL”) Insurance
Many employers offer GTL as a part of their overall benefits and compensation packages. The basic coverage is generally offered to all employees as guaranteed issue. There is no assessment regarding the health condition of the insured, i.e., evidence of insurability (“EOI”), to make the determination regarding the issuance of the basic coverage. However, any supplemental benefits that are often an option for employees if they wish to purchase additional amounts beyond what the employer provides are typically subject to EOI for those supplemental amounts. Often the employer is responsible for administering the supplemental benefit. The employer is responsible for communicating those additional requirements to the employees and acting as the intermediary between the insurer and the employees, with respect to the EOI and the issuance of the additional coverage.
Tax Benefits - The Internal Revenue Code permits up to $50,000 worth of coverage tax-free. The tax benefit makes that a popular benefit and it is relatively low cost. However, the limit is significantly lower than many employees would find adequate. Employers often offer additional insurance coverage to supplement the employer-provided GTL. The additional amounts could be paid by the employer as a taxable benefit to employees, or by the employees to pay for any additional coverage via after-tax payroll deductions.
ERISA Coverage – GTL is a benefit that is covered by ERISA. That means that employers have all the administrative obligations that are attendant to maintaining an ERISA plan such as maintaining plan documents and filing forms 5500 (for plans with 100 or more participants). In addition, employers are fiduciaries with respect to all ERISA plans.
ERISA Exception - The Department of Labor (DOL) regulations provide that certain voluntary plans, if they meet the requirements below, would be excepted from ERISA. The regulations state that an ERISA plan “shall not include a group or group-type insurance program offered by an insurer to employees…under which:
(1) no contributions are made by an employer or employee organization;
(2) participation in the program is completely voluntary for employees or members;
(3) the sole functions of the employer or employee organization with respect to the program are, without endorsing the program, to permit the insurer to publicize the program to employees or members, to collect premiums through payroll deductions or dues checkoffs and remit them to the insurer; and
(4) the employer or employee organization receives no consideration in the form of cash or otherwise in connection with the program, other than reasonable compensation, excluding any profit, for administrative services actually rendered in connection with payroll deductions or dues checkoffs.”
Often the supplemental amounts are employee-paid using after-tax income, so most employers also take advantage of the regulatory exception to ERISA to carve the supplemental coverage out of their ERISA plans. That avoids many mandates associated with ERISA. Avoiding ERISA mandates seems like a good idea to many employers. However, ERISA also comes with protections for employers. Those protections include a requirement that any plan participant with a complaint first exhaust their administrative remedies under the plan before suing, limiting lawsuits to federal (vs. state) courts, and limiting damages available to the benefits promised under the plan plus attorney fees (i.e., there are no punitive damages available).
The settlement between the US Department of Labor (after an investigation by the Employee Benefits Security Administration) and Prudential, the insurer, is the result of an investigation by the DOL regarding GTL processes. The DOL is investigating several other insurers about the same issue and the results of those investigations have not yet been released but the insurers are not all taking the same tack that Prudential has.
The settlement states that Prudential sold various GTL policies that included basic life, paid for by the employer, with no EOI required, and supplemental life, paid for by the employee, that did require EOI. The settlement did not refer to the amounts of GTL at issue. The settlement noted that there were employers that deducted the employees’ share of the supplemental premiums from the employees’ paychecks and forwarded those amounts to Prudential. However, typically the employer was responsible for obtaining the EOI information and forwarding that to Prudential as well. But, in the 200 cases at issue here, that did not occur.
Prudential accepted the full premiums even when no EOI was collected by the employer and provided to Prudential, Prudential never sought or approved the EOI for the supplemental coverage. When claims were made, Prudential denied the claims for the supplemental benefits, although it did pay the claims for the basic benefits. They returned the premiums for the supplemental coverage (as is standard industry practice) based on the failure of the insured to get the EOI submitted and approved. Nevertheless, the DOL determined that the beneficiaries were not treated fairly under that process.
The settlement notes that the DOL alleges that Prudential is a fiduciary with respect to the GTL plan and Prudential neither admitted nor denied that status. Nevertheless, Prudential agreed to no longer deny claims for benefits due to the absence of the EOI, if they collected three months or more of premiums. Prudential has up to a year to obtain and approve or deny any EOI if they were collecting premiums during that time.
The provisions of the settlement indicate that the life insurance was covered by ERISA which is what would give the DOL jurisdiction (otherwise, insurance carriers are regulated by their respective state departments of insurance). The settlement only covers supplemental GTL that is governed by ERISA. Not all such coverage is covered by ERISA as many employers use the DOL exception discussed above for the supplemental benefits.
Since the DOL pursued and settled with the insurance carrier, many employers might not think that this is an issue that would concern them. However, this should actually be a warning to them regarding GTL, ERISA, and the ERISA exception for voluntary plans.
ERISA plan vs. ERISA voluntary benefit exception - Many of the supplemental GTL policies are intended to fall under the voluntary plan exclusion from ERISA. That exclusion means that employers will not have to comply with ERISA, but also that employers will not have the protections offered by ERISA. In this situation, that means that any claimants must first exhaust a plan’s administrative process before bringing any lawsuit, any lawsuit can only be heard in a federal court (as opposed to state courts where the process can be less predictable), and the claimants can only recover the plan benefits (and perhaps attorney fees), but there are no punitive damages. Just the avoidance of the potential for punitive damages can make ERISA a preferred system – particularly where the amounts at issue are relatively small, as they typically are for GTL.
Employer E&O coverage – In this instance (and others affecting other insurers), the DOL pursued remedies from the carrier rather than the employers. Employers should not necessarily expect that to be the case if the circumstances apply to the specific employer. Either the DOL or the beneficiaries of the employee may seek remedies from the employer rather than the insurance carrier. Whether the benefits are covered by ERISA or not, employers will want to confirm that they have the appropriate E&O coverage in place, as that will assist them with mitigation of the risks.
Employer administrative practices - Regardless, the issue is one that is under scrutiny from the enforcement authorities. We can easily expect that employer practices will be under additional scrutiny as well. Therefore, employers who offer supplemental GTL that requires EOI to be effective, should make sure that the employer or the employer’s vendors take the extra steps necessary to have the EOI forms sent to the plan participants, and be returned to the insurer for review. That should also be done before any additional amounts are deducted from employee paychecks.
Employers with supplemental GTL need to be aware of the potential issues with the EOI requirements for any supplemental coverage. They should take the steps necessary to confirm the distribution and return of the EOI questionnaires and follow up to make sure they are sent to the carriers for examination and approval before deducting premiums for the coverage from affected employees’ paychecks.