Voluntary Benefits Lawsuits Add Fiduciary Concerns for Employers

Plaintiff’s lawyers are breaking new ground by suing employers for allegedly failing in their fiduciary duties to manage their voluntary benefit plans, including dental, vision, accident insurance, critical illness, cancer and hospital indemnity benefits.

These class action lawsuits typically allege that employers exercise sufficient control over these plans to trigger fiduciary duties under the Employee Retirement Income Security Act (ERISA) and that those duties were breached. Once ERISA applies, employers can face claims tied not just to plan design, but to the prudence of benefit selection and monitoring.

If these lawsuits gain traction, they may open a new category of potential liability tied to benefit offerings that many employers have historically overlooked.

At the center of the litigation is the claim that certain voluntary benefit arrangements are not exempt from ERISA, either because they fail to meet the voluntary plan safe harbor or because employers exercise sufficient control to trigger fiduciary duties.

Five areas drawing scrutiny

Four recent class action lawsuits filed against large employers include similar allegations that the employers and their benefits brokers breached ERISA fiduciary duties by allowing excessive commissions, failing to monitor insurers and brokers and engaging in conflicted arrangements within employer-sponsored voluntary benefits programs.

Each of these companies was sued by an employees’ union benefit or welfare plan:

• United Airlines
• Laboratory Corporation of America
• Community Health Systems
• Allied Universal

Key areas of alleged exposure include:

1. Benefits selection processes — Employers are being accused of failing to run competitive requests for proposals, benchmark offerings or document why certain carriers or products were chosen. A casual selection process that keeps the same plan each year can be portrayed as imprudent once fiduciary standards apply.

2.  Contracts — Agreements with insurers, brokers and enrollment vendors are under the microscope. Vague terms, unclear delegation of responsibilities or contracts that fail to spell out fiduciary status can make it harder for employers to defend their role as plan sponsors.

3. Broker and vendor compensation provisions — Embedded commissions, overrides and incentive payments are a central theme in the lawsuits. Plaintiffs argue that employers failed to monitor compensation levels or allowed conflicted arrangements that inflated employee premiums.

4. Premium levels — Even when employees pay the full cost, plaintiffs contend that employers must ensure premiums are reasonable relative to the benefits provided. A lack of benchmarking can be framed as a breach of the duty of prudence.

5. Insurance product loss ratios — Loss ratios are being used as a proxy for value. Low ratios may be cited as evidence that plans were overpriced or structured to favor intermediaries rather than participants.

Steps employers can take

While none of these cases has been decided on the merits, they send the message that voluntary benefits are no longer viewed as litigation-proof. Employers and HR leaders may want to consider:

• Confirming whether each voluntary benefit arrangement is intended to be ERISA-covered or exempt — and documenting that determination.
• Reviewing contracts to clarify fiduciary roles, responsibilities and delegation.
• Increasing transparency around broker and vendor compensation, including commissions and incentives.
• Benchmarking premiums and insurer loss ratios against the broader market.
• Documenting benefit selection decisions and the rationale behind them.
• Strengthening employee decision support and education to demonstrate a focus on participant outcomes.

Voluntary benefits may remain optional for employees, but the lawsuits suggest fiduciary oversight is becoming less optional for employers. Employers that pay closer attention now to ensure compliance with any applicable fiduciary duties can reduce their risk of becoming the next test case.