Voluntary Benefits Suits Raise Risks for Employers, Consultants

A series of novel fiduciary lawsuits over supplemental benefits is testing a new legal tactic against insurance brokers, which have so far dodged major legal liability for rising health-care costs.

The cases also raise a new legal threat for employers in an area where they devote less time and resources than they do to traditional health and retirement plans.

Studies show increasing enrollment in “voluntary” or supplemental health plans as costs continue to rise. The plans involve accident, critical illness, cancer, and hospital indemnity insurance—voluntary benefits that are not subsidized by employers. The lawsuits highlight the significant influence employers cede to consultants in designing their benefit plans, and the conflicts that come with commission-based sales.

Plaintiffs firm Schlichter Bogard last month filed four class actions in federal courts in Illinois and New York, alleging CHS/Community Health Systems Inc., Universal Services of America LP, Laboratory Corp. of America Holdings, and United Airlines Inc. violated the Employee Retirement Income Security Act by failing to monitor premiums and broker commissions in their supplemental plans.

The cases also allege that brokerage firms Gallagher Benefit Services Inc., Lockton Companies LLC, Mercer Health & Benefits Administration LLC, and Willis Towers Watson US LLC engaged in prohibited transactions under ERISA by pushing business toward more expensive plans and accepting commissions ranging from 22% to 40% of premiums.

All of the companies either declined to comment or did not return requests for comment when the cases were filed.

The National Association of Benefits and Insurance Professionals said it doesn’t comment on active litigation, but “has long supported transparency, full disclosure, and acting in the best interests of employers and employees across all segments of the benefits market.”

Critics of the plaintiffs bar argue these types of legal threats dissuade employers from offering benefits at all. But Schlichter Bogard Co-Managing Partner Andrew Schlichter dismissed the notion, saying there is “nothing onerous” about fulfilling ERISA’s obligation to workers.

“Any claim that requiring employers to comply with ERISA’s fiduciary duties will deter employers from offering employee benefits ignores decades of experience following the passage of ERISA, in which employee benefits programs not only have not vanished, but have expanded dramatically,” he said in a statement.

High Interest

Interest in the lawsuits is high, given Schlichter Bogard’s history.

The firm pioneered similar fiduciary breach lawsuits in the retirement space, reshaping how employers monitor administrative fees in 401(k) plans. Schlichter Bogard also previously ran a series of LinkedIn advertisements looking for employees enrolled in health plans of companies like Target Corp. and PetSmart Inc., but has not yet filed any cases.

Other plaintiffs lawyers have been trying to import the 401(k) strategy into lawsuits over prescription drug costs in traditional health plans. But they have struggled to convince the courts that plaintiffs have the right to sue, in part because the employer bears the majority of plan costs.

Employees pay the full cost of voluntary plans by contrast, said Jennifer Berman, chief legal officer of benefits consultancy Lumelight. That could solve the standing issue that recently doomed a drug pricing case against Johnson & Johnson.

“That being said, the courts right now have been relatively pro-employer on these types of issues,” she cautioned, adding that tracing the financial harm in retirement plans is still much easier than it is in health plans.

It’s also hard to know whether the commissions reported in the complaints are as high as they seem because it’s not clear how many services the consultants are providing, said Donovan Pyle, CEO of Health Compass Consulting.

A bigger issue is that brokers are often paid in “front-loaded” commissions, meaning they receive higher checks in the first couple years of a new contract. That encourages them to shuffle contracts among insurance companies every few years, Pyle said.

“It’s very common practice among legacy brokerage firms,” he said.

Commissions are a common part of any industry, Pyle added, noting he often booked luxury vacations for top-performing brokers when he worked for an insurance carrier. But employers have little visibility into the commissions, and rely on consultants for objective advice.

“That’s fine if the employer understands that, hey, these are supply-side salespeople,” he said. “Their job is to sell you products.”

ERISA Exemptions

All four employers concede their voluntary plans are subject to ERISA on their annual Form 5500s, according to the complaints.

But not all voluntary benefits are subject to ERISA fiduciary requirements, Berman said. Some fall under a safe harbor, although it’s difficult to meet the requirements of the four-part test determining whether they’re exempted.

That test mandates that employers contribute nothing to the plan, receive nothing beyond compensation for administration costs, that participation for employees is voluntary, and that employers do nothing to administer or endorse the plan aside from allowing payroll deductions.

The last requirement is tricky because it’s a fuzzy standard, Berman said. And employers are unlikely to allow just any insurer to use payroll deductions, which means employers likely had some role in selecting the plan. It’s also difficult to engage in basic promotional activities without crossing the “endorsement” line.

“If it’s listed in your benefits guide, that’s almost certainly an endorsement,” she said.

Pyle doubts the cases will have a major impact on the larger problem for employers and workers despite the headlines, given the relatively small number of employees who enroll in voluntary benefit plans.

“It’s focusing on the wrong thing,” he said.

But Berman thinks the courts will start to look for fiduciary practices common in the retirement space, such as whether employers have fiduciary committees evaluating their vendors, and whether they established reasonable compensation benchmarks.

“The fiduciary principles are the same between the health and welfare world and the 401(k) world,” she said, “and we have not seen employers—on a widespread basis—adopt basic fiduciary practices.”