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Key Takeaways from Hansen v. Laboratory Corporation of America
A short-term disability (STD) plan is not automatically covered under ERISA just because it’s included in an employer’s benefits package. Even if an employer treats the plan like an ERISA plan – such as including it in a wrap plan or on Form 5500 – it may not qualify as an ERISA plan if it meets the payroll practice exemption under ERISA. This means an employer’s STD plan would need to meet state law requirements. A recent federal case in Wisconsin highlights this reminder to employers to make sure to properly classify their STD plan as an ERISA plan or payroll practice subject to state laws.
Background
The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that provides minimum standards for covered benefits for employees and generally preempts state laws that relate to employee benefit plans. ERISA covers health and welfare benefits such as disability insurance and retirement benefits. However, not all employee benefit plans and programs are covered by ERISA.
A significant exemption from ERISA is the payroll practice exemption which often applies to employer payments of wages during periods of missed work due to health or disability issues. If an STD plan qualifies for this exemption, it is not covered by ERISA, which means that state wage and leave laws apply to the STD benefits.
A plan qualifies as an ERISA exempt payroll practice if it:
- Pays employees their normal wages during leave,
- Is funded directly from the employer’s general assets, and
- Covers absences due to medical reasons (e.g., illness, pregnancy).
Hansen v. Laboratory Corporation of America
In Hansen v. Laboratory Corporation of America (Labcorp), an employee sued her employer in state court, claiming that she was owed STD benefits under Labcorp’s STD plan. Labcorp argued that ERISA required the case to be filed in federal court and the STD policy was an ERISA plan because:
- It was represented as part of the employer’s benefits package (e.g. open enrollment materials).
- It was included in the summary plan description (SPD) for the wrap plan
- Employees were informed of their rights under ERISA
- The plan was reported on Form 5500
However, the court ruled that:
- An employer’s labeling of a plan as ERISA-covered does not guarantee that the plan is actually covered under ERISA
- Because the STD plan met the payroll practice exemption criteria, it remained exempt from ERISA and subject to state law regardless of the employer’s intent.
- Compliance with certain ERISA requirements (i.e., Form 5500 filings) does not override the payroll practice exemption
The court remanded the case to state court for further proceedings.
Employer Action Items
Employers should not assume that an STD plan is protected by ERISA just because they categorize it that way. If the plan meets the payroll practice exemption criteria, the plan is likely subject to state laws instead.
The Hansen decision highlights several actionable considerations for employers managing STD plans.
- Understand the payroll practice exemption. Review whether your STD plan meets the payroll practice criteria (e.g., funded from general assets, constitutes normal compensation, and applies due to medical leave). If it does, recognize that the plan is likely subject to state law, not Note that the use of a third-party administrator (TPA) does not cause an ERISA exempt disability plan to lose that exemption so long as the criteria for the payroll practice exemption is met.
- Avoid mischaracterizing non-ERISA plans. Be cautious about labeling an STD plan as ERISA-covered in SPDs, Form 5500 filings, or employee communications unless it truly qualifies.
- Review compliance Conduct periodic audits of benefit plans to ensure accurate classification under ERISA or state law and consult legal counsel to determine whether updates to plan documentation or reporting are necessary.
- Prepare for state law implications. If your STD plan falls under state law, ensure compliance with relevant state regulations, including claim handling and appeals processes.
- Seek legal counsel for disputes. If disputes arise regarding STD benefits, consult with legal counsel to assess whether the plan falls under the payroll practice exemption or qualifies as an ERISA This analysis can influence litigation strategy and jurisdictional considerations.
This information has been prepared for UBA by Fisher & Phillips LLP. It is general information and provided for educational purposes only. It is not intended to provide legal advice. You should not act on this information without consulting legal counsel or other knowledgeable advisors.
