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ERISA Clarification re Stop-Loss Ownership

 ERISA Fiduciary Reminder...especially important for Stop-Loss. It is important that the entity paying the stop-loss premium is consistent with the name of the beneficiary. In other words, if the stop-loss premium is paid from the plan assets account, it would be a taboo prohibited transaction for the proceeds from the stop-loss policy to go to the employer. (This is a very important warning, because it is a common unthinking situation.)

If the premium comes from the plan assets, then the plan assets should be the recipients of the stop-loss payments for which it paid premium. Or, if the employer's corporate assets (completely separate from the plan contributions) pay for the premium, then have the employer be the beneficiary. Don't mix & match.

States have been complaining to DOL about "self-funded" plans with what they consider low stop-loss triggers. Thus, some states feel that the minute there is any "insurance" flowing into a plan, then the whole plan becomes "insured". Since DOL sees ERISA questions each as specific facts & circumstances, DOL is not very good about broad statements.  Meanwhile, in some ERISA plans, such as Taft-Hartley plans, there is no one "employer" entity to pay or receive stop-loss money. It has to go/come from the plan itself.

Since each situaiton is viewed as a stand-alone set of circumstances, there has been an ongoing opinion debate when/if a self-funded plan suddenly morphs into fully-insured status because of some feature of its Stop-Loss.  Meanwhile, there is the important reality that Stop-Loss does not insure any person or evetn.  Stop-Loss reimburses the plan sponsor or the plan...much as liability or fire insurance might do.  A DOL division chief summarized, "There's a line there somewhere, but we don't know where that line is." (It's the standard official DOL answer that "It depends on facts & circumstances".)

What should you do? Well, obviously, there is no one right answer, so let's explore wise & cautious options, which minimize legal liability & hassle. This is especially true since DOL has tended to "give away the store" to states in recent years. So, things (like this issue, which used to be ironclad ERISA) tend to be eroding away. Don't count on DOL to defend you.

The cleanest method (for both ERISA preemption + fiduciary reasons) is for the stop-loss premium to be written from the employer's corporate asset account...and receive payment back to the corporation (just like their fire insurance). If it is necessary to pay from plan assets and have the plan as beneficiary, make it as distant as possible and uninvolved with any individual plan participants' situations. (The McCarran-Ferguson Act, which empowers states to regulate "the business of insurance", is triggered whenever there is a relationship between an insurer and an individual plan participant.)

However, again, never never allow plan assets to pay for stop-loss coverage that then pays to the employer. Why? While most of the plan assets probably come from the employer, some portion of the plan assets are employee contributions (co-pays, COBRA, etc.). Therefore, DOL would see it as employee money paying for coverage that pays the employer. That could trigger criminal (jail time) charges against the employer. Meanwhile, IRS would smell fraud, because the plan asset money was contributed and a tax deduction taken by the employer...but the employer gets the money back via the stop-loss reimbursement.