If I Convert my Former Employee Disability Policy to a Private Policy Does ERISA Govern?

Many employer welfare benefit plans offer employees who quit their employment the option of converting their disability insurance plan to a private plan. When a claim for disability benefits is filed, there may be a dispute over whether the conversion plan is governed by ERISA. If so, then ERISA preempts any state law claims a plaintiff may have. If not, the conversion policy is a private policy not subject to ERISA preemption.

The case of Paula Bates v. Hartford Life & Accident Ins. Co. (Hartford), provides guidance in how this issue has been resolved by courts. In that case, Plaintiff worked for about three years as an independent insurance agent for American Family Insurance (American). While working, she was covered by American Family’s long-term disability plan. When she quit her job, she exercised her option to convert the American Plan to a policy through the Group Long Term Disability Plan of Insurance (Group). The policy holder of the Group Plan was the Northern Trust Company (Northern). Hartford was the administrator for both the American Plan and the Northern Plan.

Hartford denied Plaintiff’s claim for disability. It also denied her claim again on appeal. When Plaintiff had exhausted her administrative remedies, she filed a lawsuit alleging, among other things, multiple state law claims, including breach of contract and bad faith. She alleged in her complaint that her Northern conversion plan was a private plan, not an employee benefit plan, and therefore not governed by ERISA. Hartford disagreed and asked the Court to dismiss her state claims as preempted by ERISA.

The U.S. District Court for the District of Idaho analyzed relevant clauses in the policies, ERISA law, and Ninth Circuit precedent and determined that the conversion plan did not meet the elements of an ERISA plan. Accordingly, the Plaintiff could pursue her state law claims since they were not preempted by ERISA.

Elements of an ERISA Disability Policy

The Court noted that “Whether an ERISA plan exists is a question of fact, requiring consideration of all the surrounding circumstances from the point of view of a reasonable person. The burden to establish the existence of an ERISA plan is on the party advocating its existence.”[citations omitted.]

An employee benefit plan is defined as “an employee welfare benefit plan” which has the following elements:

It is a plan, fund or program;

·        Established or maintained;

·        By an employer or by an employee organization, or by both;

·        Its purpose is to provide, among other things, disability benefits;

·        To the participants or their beneficiaries;

Further, an employee benefit plan must “cover at least one employee to constitute an ERISA benefit plan.”

When an Employee Benefit Disability Plan is Converted to a Private Policy and the Elements of An ERISA Plan are Not Met, ERISA no Longer Governs

In one court case, the “conversion” of an employee benefit plan occurred when an employee left his employment but remained insured under his employer’s plan. There was no conversion since the only thing that changed was the former employee now paid his own premiums instead of the premium’s being paid by his employer. In that case ERISA governed since nothing about the policy had changed, only who paid the premium. .

In the instructive case of Bates, the Ninth Court distinguished the situation where a former employee converts the policy to a brand-new policy when the employee no longer qualifies for coverage under the employee benefit plan. Plaintiff could not have continued coverage under the American Plan because she no longer qualified. She went through the conversion process, so she was covered under the Northern Plan. The Court found the Northern Plan was not a continuation of the American Plan, and the Northern Plan was a conversion plan.

The Court stated that, “What matters is not whether a plan is a group or individual plan, but whether it meets the elements of an ERISA plan.”

The Northern Plan Did not Meet the Elements of an ERISA Plan

Again, the Bates case provides guidance to courts when considering if a conversion plan is an ERISA plan. The Idaho Court considered the following elements:

The Plan was organized for the purpose of providing disability benefits. The parties agreed the Northern Plan was a “‘plan, fund, or program’ organized for the purpose of providing disability benefits.” This is likely to be true whenever a plan is at issue.

Northern Trust is not an employer for purposes of ERISA. The Court noted that the plan was between “the insurer and the insured and that the former employer had no administrative responsibilities.” The Northern Plan was established by the Northern Trust and Hartford decades ago of the purpose of providing conversion policies to those who qualified under their employer sponsored policies.

There was nothing in the record to indicate that Northern was acting for the benefit of anyone but itself and Hartford by establishing the Northern Plan. The Court concluded, “Considering all the circumstances surrounding the Northern Plan’s formation, administration, and the absence of meaningful involvement by American Family or any other employer, this Court finds that Northern Trust is not an ’employer’ for purposes of ERISA.”

Plaintiff is not a participant and the Northern Plan does not cover any employee

Hartford argued that the Northern Plan is governed by ERISA because it provides benefits to “participants or their beneficiaries.” A participant is defined as an employee or former employee who may become eligible to receive a benefit from an employee benefit plan which covers that employee.

The Court pointed out that only former employees are “participants” in the Northern Plan “because ‘current employees’ are beneficiaries of their current employers’ group benefits plan.” The Court said the answer is “straightforward. An employee benefit plan must cover at least one employee to constitute an ERISA benefit plan.” An employee is defined as “any individual employed by an employer.” The Court concluded that “the Northern Plan does not cover a single ’employee’ and thus cannot provide coverage to ‘participants’ for purposes of ERISA.”

The Court ultimately held “That Hartford has not met its burden to establish that the Northern Plan is governed by ERISA. The Northern Plan is a conversion plan. The Northern Trust is not an employer as defined by the statute. And, finally, the Northern Plan does not cover any employees as required by ERISA. Accordingly, the Court finds that the above captioned action is not governed by ERISA.”

This case was not handled by our office, but we believe it can be instructive to those who have converted their employer benefit plan for long term disability benefits (LTD) to an individual plan. If you have any questions about this case, or any other question about your own disability claim, contact one of our attorneys at Dell & Schaefer for a free consultation.

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