The Inherent Liability of Offering a Benefits Plan

Nov 25, 2014

Plan sponsors  do not always understand their fiduciary duty with respect to benefits plan administration.  In our work with new  clients, we come  upon plans quite often that do not have waivers signed by employees opting out of optional benefits or they may even allow employees to opt out of mandatory coverage which can have even worse implications. Opting out of mandatory benefits is particularly troublesome in that the potential liability can be significant in two ways.

First, if an employee is allowed to opt out of a mandatory participation plan and they have a high value claim (Life, LTD, Out of Country Medical, In country specialty drug), the employer could be held liable and responsible to pay that claim because they did not adhere to the administration rules of the contract which forms an element of the sponsors fiduciary duty.

Secondly, if any employee has incurred extremely high claims and the employer has not ensured that the participation minimums have been met, the insurer has the right not to pay the claim. Keep in mind that this administrative rule is not a mere suggestion.  The purpose of participation minimums is a fundamental principle of group insurance – to ensure an adequate spread of risk across the employee group.

We suggest operating a plan on a 100% participation requirement at all times – requiring employees to join as a condition of employment.  After all, the last thing an employer wants when they think they are doing the employees a favour is to receive a subpoena for an unpaid claim.

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