Individual voluntary insurance can be treated in to distinct manners. One option is to treat them as an employer-sponsored plan; which would thereby be covered under ERISA and would be subject to all the reporting and disclosure requirements. The other option is to treat them as a non-employer sponsored benefit. To determine if a plan is employer-sponsored, a set of guidelines (which was provided by the DOL) can be used. Essentially all this means is that an employer can choose not to be the sponsor voluntary-type benefits. Currently, courts use a 3-part test to determine whether an employer is a plan sponsor.
The 3-part test is briefly outlined below:
- A safe harbor exemption from ERISA
- Requires there be no pre-tax (employer) contributions,
- The employer does not receive any compensation for its services other than reasonable compensation for administrative services, and the employer’s role is limited to collecting premiums through payroll deduction and remitting them to the insurer.
Typically employers do not want to sponsor these plans since they create a liability for administering them. The safe harbor exempts them of ERISA report and disclosure requirements, including plan document, SPD, etc. An employer has the option of sponsoring these plans and can even collect premiums on a pre-tax basis.