You, Your Employees, ERISA, and Your House

(Earlier this year I wrote this article for a human resources publication. I never heard if they actually published the piece. I looked on their website and couldn’t find it. Waste not, want not.)

I assume, like most HR professionals, you have something to do with your company’s employee benefit plan. Further, I assume you are human and therefore, sometimes make mistakes. Now, I’m sure your mistakes are mostly small. However, I bet, every once in a while you (like most of us) pull a doozy!

Let’s assume that on a busy Friday, an employee comes in and asks that his or her insurance coverage be changed to add a new spouse. You make a note and then the phone rings. Then, another call comes in and two more people walk into your office. You look up, and it’s time for you to go to a late meeting across town.

The next week comes and the employee’s change never gets done. Who knows why? Maybe the cleaning crew knocked your note into the trash. The fact remains, you have an employee-spouse without coverage.

Two weeks later the spouse falls asleep at the wheel and hits a tree. There are $250,000 in uninsured medical bills out there.

Call your realtor, your house is about to go up for sale.

The Employee Retirement and Income Security Act, or ERISA, is the federal law passed in 1974 that governs employee benefit plans. Most people know it for its impact on pension plans. A lesser known provision makes administrators of employee benefit plans PERSONALLY liable for errors and mistakes. The act covers pension plans, group health insurance, disability coverage, dental, and any other employee benefit program an employer offers.

It is the “personally liable” part that gets most HR people’s attention.

The issue is pretty straightforward. If you administer a health insurance or pension plan, you are liable for any mistakes you make – you, not your company, is liable. If you forget to add an employee to the health insurance, it’s your house and bank account that is tapped to pay a claim. If the premium doesn’t get sent and the policy is canceled, it’s your assets on the line. Fail to make decisions in a prudent manner about the 401k plan, and guess what happens to your savings account?

The HR manager will have even more to be upset about when I mention the next kicker: In addition to personal liability, ERISA specifically forbids indemnification by the plan. If you make a mistake, your company might not bail you out. Insurance is the only third party solution to the personal liability provision.

The Fiduciary Responsibility Liability Insurance Policy is the solution to the ERISA problem. Also called a FRIP, the policy provides protection for “wrongful acts” that result in a claim against the administrator of benefit plans. Premiums range from a few hundred dollars to thousands, depending on the size of the employer.

By the way, many people confuse ERISA fiduciary liability with the ERISA bond requirement. The law mandates that employee pension and retirement plans have a bond of 10% of the assets (up to $500,000) to cover loss of the funds through embezzlement. Some fiduciary policies include the fidelity coverage. Most do not.

Some businesses and insurance agents confuse employee benefit liability insurance with the FRIP. Bad call! The FRIP covers errors and omissions in the administration of benefit plans. The employee benefit liability policy covers mistakes but excludes ERISA liabilities. The wrong claim against an employer with employee benefit liability could result in a “For Sale” sign going up in front of the HR manager’s house.

Talk to your insurance adviser about your options. You may have to do a bit of homework to come up with the data on your employee benefit programs. Most small and medium sized employers purchase at least $1 million, but look at your own exposures and the premiums your insurer will charge for more coverage. Just don’t let your ERISA exposures go uncovered.