Opinion ID: 52297
Heading Depth: 1
Heading Rank: 2

Heading: ERISA Governance

Text: We are presented with the threshold question of whether House’s disability policy is a benefit plan regulated by ERISA. To determine the answer “we ask whether a plan: (1) exists; (2) falls within the safe-harbor provision established by the Department of Labor; and (3) satisfies the primary elements of an ERISA ‘employee benefit plan’ — establishment or maintenance by an employer intending to benefit employees.” Meredith v. Time Ins. Co., 980 F.2d 352, 355 (5th Cir. 1993). AUL asserts that House’s state law claims for penalties and attorneys fees are preempted because the policy covering House was part of an “employee benefit plan” as defined by ERISA and not exempt under safe harbor. Relying on our decision in 6 Robertson v. Alexander Grant & Co., 798 F.2d 868 (5th Cir. 1986), the district court held that the Class 1 disability coverage for partners in House’s firm was a separate plan and, since it benefitted only partners and not any employees, it was not governed by ERISA and therefore House was entitled to state law penalties and attorneys fees.
We have frequently stated that the existence of an ERISA plan within the statutory definition is a question of fact. See, e.g., Meredith, 980 F.2d at 353. However, where the factual circumstances are established as a matter of law or undisputed, we have treated the question as one of law to be reviewed de novo. See id at 355. (stating our purpose as review of the summary judgment record for genuine issues of material fact, but applying the statutory scheme as a question of law to the facts established by the district court and overturning the district court’s determination that an ERISA plan existed); see also Custer v. Pan American Life Ins. Co., 12 F.3d 410 (4th Cir 1993) (holding that when the factual circumstances are undisputed, whether the facts suffice to demonstrate the existence of a plan as defined by ERISA is a question of law to be reviewed de novo); JAMES F. JORDEN ET AL., HANDBOOK ON ERISA LITIGATION § 201(A) (3d ed. 2007) (“[W]hen the factual circumstances are undisputed, the existence of an ERISA plan is a question of law to be reviewed de novo.”). It is clear that, while not so stating, we have followed our sister circuits in treating the existence of an ERISA plan as 7 a mixed question of fact and law.3 In this case, where the parties concede the existence of the firm’s employee welfare benefit plan and the facts relative to whether House’s coverage was a part of that scheme or a separate plan were undisputed, the district court’s interpretation of the word ‘plan’ as used in ERISA poses a question of law subject to de novo review. B. Whether the policy under which House is claiming benefits in this action falls under the safe harbor exclusion. With respect to the first Meredith inquiry (existence of a plan), there is no dispute here that an intentional benefit plan existed at the firm. Thus we begin with the second Meredith factor: to qualify as an ERISA plan, the plan cannot fall within the Department of Labor’s safe harbor exclusion.4 The safe harbor provision states that a group or group- 3 See, e.g., New England Mutual Life Ins. Co., Inc. v. Baig, 166 F.3d 1, 3 (1st Cir. 1999) (“[T]he district court’s interpretation of the word ‘plan’ as used in ERISA poses a question of law subject to de novo review [but] the court’s inquiry into the nature and the scope of the benefits actually at issue . . . demands factfinding, and is to that extent reviewable only for clear error.”) (internal quotation and citation omitted); Kulinski v. Medtronic Bio-Medicus, Inc., 21 F.3d 254, 256 (8th Cir. 1994) abrogated on other grounds by Ky. Ass'n of Health Plans, Inc. v. Miller, 538 U.S. 329, 341, 123 S. Ct. 1471 (stating that the existence of an ERISA plan is a mixed question of fact and law that on appeal is reviewed de novo); Peckham v. Gem State Mut. of Utah, 964 F.2d 1043, 1047 n.5 (10th Cir. 1992) (same). 4 We begin with safe harbor analysis for the sake of clarity in tracking Meredith. We note that, if House’s disability coverage were, as he urges, a wholly separate plan comprising non-employees only, it would fall outside of ERISA under prong three of Meredith and could not be swept back in by failure to qualify under the safe harbor analysis. In other words, if one’s objective is, as House’s, to prove a non-ERISA plan, establishing that the plan under consideration fails prong three (no employee welfare benefit plan), would render safe harbor analysis moot. 8 type insurance program will not be considered an ERISA Plan if (1) the employer does not contribute to the plan; (2) participation is voluntary; (3) the employer’s role is limited to collecting premiums and remitting them to the insurer; and (4) the employer receives no profit from the plan. 29 C.F.R. § 2510.3-1(j). The plan must meet all four criteria to be exempt from ERISA. There is no question that, considering the firm’s life and disability plan as a whole, the safe harbor exclusion is not met. For Class 2 and 3 employees, participation was mandatory and the firm contributed 100% of the employees’ premiums. We believe the same holds true for the Class 1 partner coverage standing alone. First, while the partners paid their own premiums for the optional disability coverage, they benefitted from the unitary rate structure the firm was able to negotiate by bargaining for disability coverage as a package for all classes. The partners therefore effectively received a premium discount or constructive contribution from the firm. Second, the firm’s role was not, with respect to the Class 1 coverage, limited to merely serving as a conduit for partner premiums. We have found sufficient employer involvement to defeat safe harbor in cases where the employer had a lesser degree of administrative involvement than here. See, e.g. Hansen v. Continental Ins. Co., 940 F.2d 971, 977-78 (5th Cir. 1991). We conclude that neither the multi-class life and disability coverage as a whole nor the specific Class 1 partner coverage meet the safe harbor exclusion. Even if safe harbor is barred, however, that does not necessarily mean that the insurance policy is part of an ERISA plan. A plan that falls outside of the safe harbor exception does not fall 9 within the jurisdiction of ERISA unless it satisfies the third Meredith prong. Hansen, 940 F.2d at 975. C. Whether the insurance policy under which House is claiming benefits in this action is part of an employee benefit plan under ERISA. To meet the third Meredith prong, a plan must satisfy the primary elements of an ERISA ‘employee benefit plan’ — establishment or maintenance by an employer intending to benefit employees. Under ERISA, an employee welfare benefit plan is, in pertinent part: . . . any plan, fund, or program, which was . . . or is . . . established or maintained by an employer . . . for the purpose of providing its participants or their beneficiaries, through the purchase of insurance or otherwise, . . . benefits in the event of sickness, accident, disability, death or unemployment .... 29 U.S.C. § 1002(1). “The term ‘participant’ means any employee or former employee of an employer . . . who is or may become eligible to receive a benefit of any type from an employee benefit plan . . . .” Id. at subsection (2)(B)(7). Department of Labor regulations specify that any plan under which no employees are covered in not an ERISA plan, 29 C.F.R. § 2510.3-3(b), and that partners who wholly own a business are not normally employees of that business under ERISA, id. at subsection (c)(2). See Raymond B. Yates, M.D., P.C. Profit Sharing Plan v. Hendon, 541 U.S. 1, 21, 124 S. Ct. 1330, 1344 (2004) (“Plans that cover only sole owners or partners and their spouses . . . fall outside [ERISA's] 10 domain.”); Meredith, 980 F.2d at 358 (finding no ERISA plan where group insurance policy covered sole proprietor and spouse and no employees); However, a plan covering both working-owner employers or shareholders as well as employees is governed by ERISA. Yates, 124 S. Ct. at 1341-42. We clarify that § 2510.3-3(b) is specifically limited in its application to the determination of the existence of an employee welfare benefit plan. An owner of a business is not considered an “employee” for purposes of determining the existence of an ERISA plan; in other words, ERISA does not govern a plan whose only fully vested beneficiaries are a company’s owners. See Yates, 124 S. Ct. at 1343-44 (“Plans that cover only sole owners or partners . . . fall outside [ERISA’s] domain.”). However, once an employee benefit plan is established (because other employees are covered by the plan in addition to the owner), a working owner, in common with other employees, is a plan “participant” governed by ERISA.5 See Yates, 124 S. Ct. at 1341-42 (“Plans covering working owners and their nonowner employees, on the other hand, fall entirely within ERISA’s compass.”) (emphasis in original). In Robertson v. Alexander Grant & Co., 798 F.2d 868 (5th Cir. 1986), relied upon heavily by the district court in the instant case, we held that a retirement plan benefitting only partners was, despite similarities to a parallel employee plan, distinctly separate and 5 The dissent cites to cases that pre-date Yates, which clarified this two-part inquiry, citing and tracking our own reasoning in Vega v. Nat’l Life Ins. Servs., Inc., 188 F.3d 287, 294 (5th Cir. 1999) in determining that a working owner may qualify as a participant in an employee benefit plan covered by ERISA. 11 therefore not covered by ERISA. Id. at 871-72. In addition to Robertson, the district court also relied on Slamen v. Paul Revere Life Ins. Co., 166 F.3d 1102 (11th Cir. 1999). In that case, a dentist in a solely owned dental practice purchased separate disability insurance policies for himself and his employees, but at different times and from different insurers. The Eleventh Circuit applied our decision in Robertson to hold that Dr. Slamen’s insurance policy was separate from the insurance benefits provided to his employees and was not governed by ERISA. Id. at 1105. House also directs us to a Ninth Circuit opinion, citing both Slamen and Robertson, and holding that a disability policy covering only the owners of a business is not converted into an ERISA plan simply because the employer subsequently sponsors a separate ERISA health insurance benefits plan for its employees. LaVenture v. Prudential Ins. Co., 237 F.3d 1042, 1046-47 (9th Cir. 2001). The court found no evidence that the disability policy and the unrelated health plan were so intertwined as to constitute one overall benefit plan. Id. at 1047. We find no previous instance in which we have considered the application of Robertson to a multi-class group insurance policy where one class comprises only owners or partners. While the scheme established by House’s firm (employer-paid disability coverage for non-partners with optional disability coverage available to partners at their own expense) appears to be a common one, there is a dearth of precedent on whether the partner class constitutes a separate non-ERISA plan. We note that in Wolk v. UNUM Life Ins. of America, 186 F.3d 352, 355 (3d Cir. 1999), under nearly identical facts — a multi-class disability policy under which partners paid for their own premiums for 12 optional coverage — the parties conceded that the policy was an ERISA plan. Although not precedential, we find a Texas district court case instructive because of its equal similarity to the facts of the instant case. See Lain v. UNUM Life Ins. Co., 27 F. Supp 2d 926 (S.D. Tex. 1998), rev’d on other grounds 279 F.3d 337 (5th Cir. 2002). Lain was a partner in a law firm6 that elected to provide disability insurance for all of its employees. Id. at 927. Insurance for partners under the same policy was optional and the partners paid the cost of their insurance. Id. at 927-28. The district court concluded that although Lain was not a “participant” as defined by ERISA for the initial purposes of establishing existence of an ERISA plan under 2510.3-3(b), she was a “beneficiary” of a plan including both employees and partners and therefore had standing to sue under ERISA. Id. at 934. (“The LTD plan expressly covers partners who pay their own premiums. Because Lain paid her premiums, she was a beneficiary under the plan.”). Ultimately, guided by Yates, Wolk, and Lain, we find this case distinguishable from Robertson, Slamen, and LaVenture. In each of those cases, separate and distinct plans were maintained exclusively for owners. Here, the record reflects that the partnerclass disability coverage was part of a comprehensive employee welfare benefit plan covering both partners and employees. The AUL life and disability insurance was bargained and paid for as a package by the firm, through a single subscription agreement resulting in a group policy. The policy contemplates and establishes a single plan, with 6 More precisely, Lain was the sole shareholder of Ellen Lain, P.C., which in turn was a partner in the law firm. 13 the only distinctions between classes being the method of determining pre-disability earnings — since partners’ variable, non-salary income would have to be calculated differently — and a more generic disability description to accommodate the variable occupations of the non-attorney participants. The rights of House as well as all nonpartner attorneys and firm employees, while spelled out in their individual certificates of insurance, arose from the group policy. The firm contributed 100% of the premiums for all non-partner participants and administered the entire insurance coverage for all classes of insureds. And as discussed above, while the partners paid their own premiums, they benefitted from the unitary rate structure the firm was able to negotiate bargaining for the disability coverage as a package, effectively receiving a constructive contribution from the firm. We therefore do not find the partners’ premium contributions enough to establish the partner-class disability coverage as a separate plan under Robertson and conclude that the non-partner and partner-class life and disability coverage are sufficiently related and intertwined as to constitute one overall benefit plan. Because that plan benefits both partners and employees, it is governed by ERISA. The district court’s separate-plan holding would mean that partners and nonpartner attorneys could assert identical claims relating to identical terms in the identical certificates of insurance issued by AUL and governed by a single subscription agreement, but the partners’ disability claims would be governed by state law and the non-partner participants’ disability claims would be governed by ERISA. State and federal courts 14 could be asked to read, interpret and apply the same policy provisions for persons in the various disability classes. While we acknowledge that the primary purpose of ERISA is protection of employees,7 we have recognized the anomaly of requiring some insureds to pursue benefits under state law while requiring others covered by the identical policy to proceed under ERISA as out of keeping with Congress's intent of achieving uniformity in the law governing employment benefits. Hollis v. Provident Life and Accident Ins. Co., 259 F.3d 410, 416 (5th Cir. 2001); see also Yates, 541 U.S. at 17-18; 124 S. Ct. at 134142 (“Recognizing the working owner as an ERISA-sheltered plan participant also avoids the anomaly that the same plan will be controlled by discrete regimes: federal-law governance for the nonowner employees; state-law governance for the working owner . . . Excepting working owner’s from the federal Act’s coverage would generate administrative difficulties and is hardly consistent with a national uniformity.”) (citations omitted). Because we conclude that the disability policy covering House was part of an ERISA plan, House’s state law claims for penalties and attorneys fees are preempted. 29 7 Congress enacted ERISA to correct abuses occurring in the administration of private retirement plans and ex plans. Robertson v. Alexander Grant & Co., 798 F.2d 868, 870 (5th Cir. 1986) (citing S. Rep. No. 127 93d Cong., 2d Sess., reprinted in 1974 U.S.C.C.A.N. 4838, 4838-44). Employees in the traditional employer-employee relationship are more vulnerable to abuses because they lack control and input over pension plan management. Id. This concern does not arise where the benefit plan covers only the employer; such plans are excluded from ERISA’s broad scope because when the employee and employer are one and the same, there is little need to regulate plan administration. Id. 15 U.S.C. § 1144(a) ([ERISA’s provisions] “supersede any and all State laws insofar as they may . . . relate to any employee benefit plan . . . .”). We therefore do not reach the issue of whether AUL’s partial payment of disputed benefits relieved it from obligation to pay penalties.