A recent decision by the Sixth Circuit Court of Appeals highlights the U.S. Department of Labor regulation that generally excludes employer self-funded short term disability (“STD”) arrangements from ERISA – i.e., STD plans paid solely from the employer’s general assets.  In Langley v. DaimlerChrysler, et al, an employee asserted an ERISA claim for benefits under DaimlerChrysler’s Disability Absence Plan (“DAP”) when she took a leave of absence due to stress at work.  When the claim was denied, the employee brought suit.  Pursuant to the DOL regulation, the lower court found the DAP to be a “payroll practice” providing “normal compensation” to an employee from “the employer’s general  assets” during a period of disability.  The court therefore granted DaimlerChrysler’s summary judgment motion to dismiss the claim since the DAP met the requirements for the ERISA exclusion.  The lower court also essentially disregarded the plaintiff’s arguments that ERISA nonetheless applied since DaimlerChrysler had held out the DAP as an ERISA plan through statements in the DAP’s summary plan description (“SPD”). The Sixth Circuit confirmed that the DAP was not an ERISA plan and that the claim was properly denied.  It also addressed the argument that the lower court gave too little weight to statements in the SPD that the plan was governed by ERISA.

This case is also noteworthy because it was the claimant trying to assert the DAP was an ERISA plan.  Often, the employer takes this position, usually to qualify for a deferential standard of review by the courts for claim denials (e.g., “arbitrary and capricious” in the Sixth Circuit, or “abuse of discretion” in the Fourth Circuit), among other reasons. 

In this case, the Sixth Circuit did evaluate the SPD statements and reviewed cases where employer-funded STD arrangements were and were not found to be subject to ERISA.  The court concluded that “mere labeling . . . is not determinative of whether a plan is governed by ERISA.”  The court suggested that otherwise employers could essentially opt into ERISA by merely attaching a label and then avoid state law claims due to ERISA preemption (e.g., tort liability).  The court also noted that ERISA’s protections are generally not necessary when benefits are paid out of the employer’s general assets. 

The court also pointed out that the employer did not seem to treat the DAP as an ERISA plan in other respects.  For example, it did not treat the DAP as an ERISA plan in Form 5500 filings and there was no evidence that benefits were funded from anything other than general assets. 

While there are advantages to ERISA coverage, when an STD arrangement is exempt from ERISA, employers can avoid disclosure and reporting requirements (i.e., SPD and annual Form 5500) and ERISA fiduciary responsibility requirements.

Employers sponsoring a short-term disability arrangement should decide whether or not they want the arrangement to be subject to ERISA and act in a manner consistent with such decision, with the understanding that a court could very well reject an attempt to make a self-funded arrangement paid out of general assets subject to ERISA.