You already know that an individual disability policy may nevertheless be governed by ERISA, even when the employee pays her own premium. This can occur when the employees benefit from a rate structure or premium discount the employer was able to negotiate in obtaining group benefits.
But does ERISA apply when the employee “converts” a group disability policy to an individual policy?
What does “conversion” mean, anyway? Can the policy merely be a “continued” policy, rather than a “converted” policy? Does ERISA apply then? Maybe yes.
These issues are highlighted in the recent case of Henderson v. Paul Revere Life Insurance Company, 2013 WL 1875151 (N.D. Tex May 6, 2013) [PDF] (ERISA applied to individual disability policy because the policy was not “converted” but was merely “continued”.).
FACTS: Dr. Robert Henderson was the sole owner of Henderson PA. He provided all employees group health insurance benefits. Henderson also obtained an individual disability insurance policy from Great West. This policy was initially owned by Henderson PA. But when Henderson PA dissolved in 1991, the disability policy reverted to Dr. Henderson himself. Henderson then joined another medical practice, DS Group, where the group remitted premiums through list billing for a Paul Revere individual disability policy. Henderson received a 15% discount premium for the Paul Revere policy as a result of the group purchase.
Henderson submitted a claim for disability under the Great West and Paul Revere individual disability policies. The insurers contended the individual disability policies were governed by ERISA.
-Were the individual policies governed by ERISA?
-Was a converted Policy governed by ERISA?
TRIAL COURT HELD: YES and NO. The Great West Policy was not governed by ERISA; But the Paul Revere Policy was governed by ERISA because it was not “converted”—it was merely a “continued” policy.
1. “Under ERISA an ‘employee welfare benefit plan’…means an plan, fund or program…established or maintained by the employer…for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise…benefits in the event of sickness, accident, disability [or] death.” Op. at 5
2. “The plan must provide benefits to at least one employee, not including an employee who is also the owner of the business….” Op. at 5.
3. Dr. Henderson says he was the sole owner and could not be considered an employee. “When an owner purchase a policy benefiting only the owner and no other employees, the policy is not part of an ERISA plan[.]” Op. at 6.
4. “Because the Great West policy covered only Dr. Henderson (the owner of Henderson PA) and no other employees…the court concludes as a matter of law that the Great West Policy is not part of an ERISA plan.” Op. at 8.
5. But the Paul Revere policy is governed by ERISA. “[E]ven when employees pay their own premiums, an employer nevertheless “contributes” for purposes of the safe harbor provision if the employees benefit from a rate structure or premium discount the employer was able to negotiate in obtaining group benefits. Op. at 8.
6. The court concludes as a matter of law that the 15% discount applied to the Paul Revere policy by virtue of the policy’s being list-billed and included in DS Group’s ESP is ‘contribution’ [by the employer]….” Op. at 9.
7. “Dr. Henderson received a 15% multi-life discount because he purchased the Paul Revere Policy together with other employees…. Whether he could have received a similar discount ‘if any employer assumed the task of paying the premiums’ is irrelevant to the question whether DS Group provided a ‘contribution’….” Op. at 9.
8. “When an employee converts an ERISA plan to an individual plan that covers only the employee as an individual, not as an employee of his former employer, the converted policy is not an ERISA plan.” Op. at 11.
9. Conversion of a policy occurs only when “‘an ERISA plan participant leaves the plan and obtains a new, separate, individual policy based on conversion rights contained in the ERISA plan. The contract under the converted policy is directly between the insurer and the insured. It is independent of the ERISA plan and does not place any burdens on the plan administrator or the plan. There are also no relevant administrative actions by the employer.’” Op. at 11
10. A new, separate, individual policy was never created. There was no reason to convert the policy from a group policy to an individual policy because it was issued as an individual policy. Instead, the policy number and effective date remained the same and Dr. Henderson, post-employment, continued to receive the 15% premium discount. Op. at 11.
11. A “continued” policy is not a “converted” policy. Because the Paul Revere policy was not converted into a new policy after it lapsed, the policy was governed by ERISA. Op. at 12.