A Cautionary Tale on Informal Benefit Arrangements – Standalone Life Insurance Policies


A district court in the Seventh Circuit holds that employer-owned life insurance policies covering four key employees constitute a part of a plan subject to Employee Retirement Income Security Act of 1974 (“ERISA”), even without a written plan document.


In Alberth v. Southern Lakes Plumbing & Heating, Inc., an employer purchased and paid the premiums on life insurance policies covering four of its key employees. When one of the key employees left the employer, he requested the cash value of his policy. There was, however, no formal plan document or agreement addressing access to the policy cash value. Further, a key employee had been paid the policy cash value when he previously left the employer. The employer claimed the former employee was not entitled to the cash value of the policy. The former employee then made multiple requests for copies of the policy documents. After the employer refused his requests, the former employee sued. The former employee claimed the surrounding circumstances demonstrated that the life insurance policies covering the four key employees constituted an ERISA plan, and sued the employer for failure to provide information about the plan and for benefits under the plan. The employer argued that no ERISA plan was created because it had entered into separate ad hoc agreements with the former employee and the other key employees.


The Court found that the death benefits provided through the policies to the key employees constituted an ERISA plan, based on the existence of an administrative scheme and reasonably ascertainable terms, even in the absence of a written plan document. As a result, the Court ruled that the employer’s refusal to provide policy documents triggered certain ERISA penalties and that the case should proceed to trial on whether the former employee indeed had a right to the policy cash value.


Takeaways


The facts and holding in Alberth highlight at least three important lessons for employers that maintain informal or unwritten employee benefit arrangements:


  1. One-off life insurance arrangements with employees should be carefully reviewed to determine if ERISA applies. If an arrangement is subject to ERISA and has not been maintained in compliance with ERISA, an employer could face ERISA litigation and DOL and IRS penalties.

  2. Put unwritten arrangements into writing. Having a formal written understanding of the arrangement can help employers and participants better understand their rights with respect to the arrangement.

  3. Administrative precedent is important. Employers should document all of their administrative decisions, so in the event of litigation they have a record to support their decision.


This material is intended for informational purposes only and should not be construed as legal or tax advice. It is not intended to replace the advice of a qualified attorney, tax advisor, or plan provider.

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