Understanding the New Wave of ERISA Litigation Targeting Voluntary Benefit Plans

A new trend in Employee Retirement Income Security Act of 1974 (ERISA) class actions is targeting employers and benefits consultants over voluntary benefit programs, such as accident, critical illness, cancer and hospital indemnity insurance. These lawsuits allege fiduciary breaches and unlawful prohibited transactions and could result in significant exposure for employers, plan fiduciaries and brokers. Schlichter Bogard LLC recently filed several class action lawsuits under ERISA targeting major employers and their brokers/consultants for similar alleged breaches in fiduciary duties related to voluntary benefit plans. Schlichter Bogard's involvement in this litigation is significant given that it has been recognized as a pioneer of 401(k) excessive fee litigation, secured numerous U.S. Supreme Court victories favoring plan participants and obtained billions of dollars in ERISA class action settlements.

What Are Voluntary Benefit Plans?

Voluntary benefits are supplemental insurance products – such as accident, critical illness and hospital indemnity coverage – offered by employers on a strictly voluntary basis and fully paid by employees. Such programs are appealing to employers and employees alike. To employees, such products can be an additional perk of employment, providing employees access to products they may not otherwise seek out on their own and with the advantage of discounted group pricing. To employers, these products can be listed as an additional benefit of employment, allowing employers to distinguish themselves among competitors at a relatively low cost, since employees pay the full cost of voluntary benefits. 

The cost of participating in these programs is typically paid by employees through payroll deductions. Though employers often view these programs as having little to no ligation risk because employers do not subsidize the premiums or administer the programs, ERISA may apply under certain circumstances, triggering possible fiduciary obligations.

When Are Voluntary Benefit Plans Covered By ERISA?

The provisions of ERISA govern any "employee welfare benefit plan," which is defined as "any plan, fund, or program … to the extent that such plan, fund, or program was established or is maintained by an employer … for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise, (A) medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, [or] disability …." 29 U.S.C. § 1002(1). A voluntary benefit plan is generally excluded from the definition of an "employee welfare benefit plan" because it is not established or maintained by the employer. The U.S. Department of Labor (DOL) has established a safe harbor that, if met, ensures the voluntary benefit plan is not considered an employee welfare benefit plan and is therefore exempt from ERISA. See 29 C.F.R. § 2510.3-1(j). The DOL's safe harbor exempts voluntary plans from ERISA if all four of the following conditions are met: 1) The employer does not pay or contribute to the payment of premiums, 2) the employer does not receive any compensation other than reasonable administrative cost reimbursement, 3) employee participation is completely voluntary and 4) the employer does not endorse the program beyond allowing payroll deductions and allowing the insurance carrier or broker to advertise the availability of the benefit to employees.

In the recently filed class actions, the plaintiffs assert their employers failed to comply with the DOL safe harbor and that the plans meet the definition of an employee welfare benefit plan subject to ERISA and its fiduciary duties. 

What Is Endorsement, and Why Does It Matter?

The non-endorsement factor is often viewed as the most difficult of the safe harbor requirements to satisfy because there is no clear definition of what is considered to be an "endorsement." The DOL and some courts have provided some limited guidance, however. 

In a 1994 advisory opinion, the DOL explained that "[a]n [employer] will be considered to have endorsed a group or group-type insurance program if the [employer] expresses … any positive, normative judgment regarding the program."¹ The DOL further explained "[a]n endorsement within the meaning of section 2510.3-1(j)(3) occurs if the [employer] urges or encourages member participation in the program or engages in activities that would lead a member reasonably to conclude that the program is part of a benefit arrangement established or maintained by the [employer]."²

Examples of activities that may constitute endorsement include using the employer's name and logo on program communication material, saying that the employer arranged the program, negotiating or designing coverage terms, seeking out a specific insurer, assisting employees with enrollment or claims, and distributing information that associates the voluntary benefit with other ERISA benefits.³ The DOL has also opined that a communication to employees that states the employer is "enthusiastic" about the program may be an endorsement within the meaning of the regulation.⁴

Courts have also weighed in on what constitutes endorsement. For example, promoting a group policy to employees as part of the employer's customary benefits package (e.g., at open enrollment) has been considered endorsement.⁵ An employer's involvement in assessing the quality of particular types of coverage to be offered and limiting the selection of coverage available has also been considered endorsement.⁶ In addition, making a program available to employees on a pretax basis as part of the employer's cafeteria plan has been considered endorsement.⁷

Ultimately, the key question in the endorsement inquiry is whether the employer's activities with respect to the voluntary benefit would lead an employee to reasonably conclude that the program is part of the ERISA benefits offered by the employer. The more endorsement indicators that are present, the more likely it is that the employer will be found to have endorsed the voluntary benefit. 

What Are the Plaintiffs' Primary Theories of Liability?

The complaints filed by Schlichter Bogard are nearly identical and contend that all the voluntary benefit programs at issue are ERISA plans. The complaints allege that the employers and benefits brokers involved are plan fiduciaries.

In support of their allegation as to the fiduciary status of the employers, the plaintiffs allege that the employers are plan fiduciaries because they have discretionary authority in the administration of the voluntary benefit plans. As a result of this alleged fiduciary status, the plaintiffs argue that the employers have a duty to select insurers for their employees with care and diligently and prudently select voluntary insurance benefit administrators. Moreover, the plaintiffs allege that employers have the duty to monitor compensation of all plan service providers to ensure those service providers are receiving only "reasonable compensation" for services to the plan. To that end, according to the plaintiffs, the employers have a duty to ensure that fees paid to third-party service providers are not excessive by reviewing benefits, premiums, carriers, claims and commissions and comparing the fees the program charges to reasonable fees in the marketplace.

With respect to the brokers, the plaintiffs allege that they are functional fiduciaries subject to ERISA because, as a matter of industry practice, they exercise discretion in administering voluntary benefit plans by withholding information about lower-cost options to maximize commissions. According to the plaintiffs' allegations, voluntary benefit plan brokers may "screen the bids they receive from carriers, selectively presenting to the employer only a curated set of alternatives, removing from consideration options which the broker deems to provide an insufficient commission." In addition, the plaintiffs allege that brokers can be functional fiduciaries by engaging in self-dealing through commission structures tied to high-premium products. The broker's alleged interest in maximizing its commission is in direct conflict with the interests of participants in lower costs.

The complaints allege the fiduciaries violated their duties with respect to the management and administration of the voluntary benefit plans by "failing to monitor, negotiate, and ensure prudent and reasonable carrier selection, broker commissions, and loss ratios." 

The complaints also claim that fiduciaries engaged in self-dealing and, as alleged co-fiduciaries, were liable for other fiduciaries' conduct. The plaintiffs argue that the employers had no process in place to select or monitor the insurance carriers and brokers or ensure that the brokers' commissions were reasonable. The plaintiffs also allege that the employers and brokers engaged in ERISA-prohibited transactions by causing the brokers to collect excessive commissions from plan assets.

The plaintiffs in these cases claim that they suffered financial harm by overpaying for the voluntary benefits. Among other things, the plaintiffs seek disgorgement of profits, removal of breaching plan fiduciaries and, critically, remuneration for all plan losses.

Why Now?

These novel lawsuits challenging voluntary benefits are not only notable for what they allege, but also because they implicate consultants and brokers. To that end, plaintiffs may be leveraging data gathered regarding service provider compensation disclosed pursuant to the Consolidated Appropriations Act of 2021 (CAA) to push these lawsuits.

The CAA bolstered certain disclosure requirements to increase transparency into the costs paid to benefit plan service providers. It requires "covered service providers" to disclose "direct" or "indirect" compensation of $1,000 or more that they receive for services they provide to the plan. Effective December 27, 2021, this includes commissions, bonuses, overrides and non-cash compensation. This requirement provides fiduciaries better information to monitor the reasonableness of fees and gives participants more data to claim that such fees were not reasonable.  

These lawsuits may also be propelled by the Supreme Court's landmark decision in Cornell v. Cunningham – discussed in a previous Holland & Knight alert – which significantly eased a plaintiff's burden to plead the existence of an ERISA-prohibited transaction and drive a case into costly discovery.

What Can Employers and Brokers Do Now to Reduce Litigation Risk?

To help minimize litigation risk, employers should consider reviewing what voluntary benefit plans are available to employees and assess whether they satisfy the requirements of the DOL safe harbor. If the plans do not satisfy all four requirements of the safe harbor, employers should consider modifications to bring those benefit offerings within the safe harbor, thereby reducing the risk that ERISA fiduciary obligations attach to those plans. Regardless, employers should consider creating a process to monitor voluntary benefit programs offered to their employees, including the commissions charged by the various brokers, akin to what many employers maintain to monitor retirement plans and health plans.

Employers should also be aware that group health plans have additional compliance burdens under the Consolidated Omnibus Budget Reconciliation Act and Affordable Care Act, in addition to ERISA. As such, employers should be mindful when dealing with voluntary plan arrangements involving health benefits.

Brokers and advisors can also take steps to minimize risk. Those steps could include reviewing the likelihood that those plans they broker could be subject to ERISA, setting forth fiduciary obligations clearly in service agreements and documenting the basis for their commission rates. 

If you would like assistance with reviewing and evaluating litigation risk associated with any voluntary benefit plans offered to employees, or if you have any questions about the impact of the voluntary benefit plan litigation on your business or benefit offerings, please contact the authors or another member of Holland & Knight's ERISA Litigation Team or Executive Compensation and Benefits Team.

Notes

¹ DOL Advisory Opinion 94-23A (1994).

² Id.

³ See id.

⁴ DOL Letter to Mr. Jerry L. Oppenheimer, Dec. 16, 1976.

⁵ Kanne v. Connecticut Gen. Life Ins. Co., 867 F.2d 489, 493 (9th Cir. 1988).

⁶ Steigleman v. Symetra Life Ins. Co., 701 F. Supp. 3d 924, 933 (D. Ariz. 2023), aff’d, No. 23-4082, 2025 WL 602175 (9th Cir. Feb. 25, 2025).

⁷ Stoudemire v. Provident Life & Acc. Ins. Co., 24 F. Supp. 2d 1252, 1258 (M.D. Ala. 1998).

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.