On May 18, 2018, the United States District Court for the Northern District of California granted an insurer’s motion to dismiss state law claims in Stolebarger v. The Prudential Insurance Company of America, 2018 WL 2287672 (N.D. Cal. 2018). As background, Stolebarger brought this case after Prudential denied his claims for long-term disability (LTD), which he was claiming due to suffering from mental illness. His LTD policy was provided through his employment with the Bryan Cave law firm. In bringing this case, Stolebarger claimed that Prudential had violated portions of California’s Unfair Competition Law (UCL), amongst other claims of breach of contract. In the alternative, Stolebarger asserted that they violated ERISA.

Interestingly, Stolebarger claimed that his LTD policy was a voluntary plan. In keeping with the requirements necessary for a plan to be a voluntary plan, he alleged the following:

That his premiums were paid entirely by him, with no contribution from Bryan Cave
That participation in the LTD was completely voluntary for all Bryan Cave personnel
That Bryan Cave’s sole functions in connection with the LTD were to permit Prudential to publicize the program to employees and to collect premiums through payroll deductions and remit them to Prudential
That Bryan Cave received no consideration (outside reasonable compensation for administrative services) in connection with the Policy
While those are generally the requirements to be met for asserting that a plan is a voluntary plan – and, thus, exempt from ERISA – the court reviewed the plan documents and came to the decision that the LTD was, in fact, ERISA-covered. Specifically, Bryan Cave provided an SPD for the LTD, and that SPD stated that the LTD was governed by ERISA. Additionally, Bryan Cave identified itself as the plan sponsor, plan administrator, and agent for legal service of process. As such, the Court found that Bryan Cave had endorsed the LTD, which meant that the plan didn’t meet the requirements necessary to be a voluntary plan.

Since the Court decided that ERISA applied to the LTD, Stolebarger’s claims based on state law were preempted. Generally, in order for a state law to fall outside of ERISA’s express preemption provision, two requirements must be met: the state law must be specifically directed toward entities engaged in insurance, and the state law must substantially affect the risk pooling arrangement between the insurer and the insured. The Court found that neither of those standards had been met. Additionally, a state law is completely preempted if the claim could have been brought under ERISA and if there’s another legal duty, independent of ERISA, which is implicated by a defendant’s actions. The court found the state law to be preempted since Stolebarger’s assertion that his claim had been wrongly denied would be based squarely upon the terms of his ERISA-covered LTD policy.

So, the court essentially deemed the LTD plan to be an ERISA-covered plan and then ruled that ERISA preempted state law in this situation. Although we don’t normally report on federal district court cases, we thought it important to highlight how the issue of voluntary plans can arise in a court case. With this case in mind, employers should consider whether or not their plan documents line up with their desire for a certain plan to be voluntary. Specifically, they should be careful not to distribute documents that promise rights under ERISA where they don’t intend any to exist. They should also ensure that they meet the four requirements for sponsoring a voluntary plan, if that’s their goal.

Source: NFP BenefitsPartners