ERISA Plan May Exist Where Only One Employee Is Involved

By Elaine A. Lisko, Health Law & Policy Institute

One of Congress’ primary objectives in enacting the Employee Retirement Income Security Act (ERISA) was to secure and protect the interests of workers and to apprise them of their rights and duties under employee benefit plans. A problem arises, however, in determining when an ERISA-based plan exists.

ERISA’s provisions define several terms, including "employee benefit plan" and "employee," but these definitions do not indicate the number of employees that are needed to have a plan. 29 U.S.C. § 1002. In the context of reviewing workers’ rights under an employer-sponsored health insurance plan, this does not present a problem usually, because only large employers can afford such plans. Nevertheless, on occasion, courts are asked to consider whether plans that cover only a handful of individuals are subject to ERISA.

A majority of the federal circuit courts of appeal, including the First, Second, Third, Fifth, Sixth and Ninth Circuits, have recognized that, where a plan’s only participants are the company’s owners, the plan is not subject to ERISA. The inapplicability of ERISA to this type of plan finds further support in United States Department of Labor (DOL) regulations, providing that an "employee benefit plan" does not include a plan without employees, like a Keough plan with only a sole proprietor or partners as participants. 29 C.F.R. § 2510.3-3(b).

Is a plan with a sole proprietor plus at least one other employee subject to ERISA? This question was recently addressed by the Fifth Circuit in Vega v. National Life Insurance Services, Inc., ___ F.3d ___, 1998 WL 347186 (5th Cir. June 30, 1998) (applying Texas law). The Vegas brought a state court action against their group health insurer to recover surgical costs. The insurer removed the action to federal court and subsequently moved for summary judgment, arguing that ERISA preempted the state court causes of action and that the Vegas could not recover under ERISA because the insurer had not abused its discretion in denying their medical claim. The district court granted the motion and the Vegas appealed.

On appeal, the Vegas contended that the district court erred in concluding that ERISA governed the action because they were the sole owners of the Subchapter S corporation that had obtained the group health policy under which they sought to recover. In rejecting this argument, the Fifth Circuit noted its earlier opinion recognizing the DOL regulation that specifies that an insurance plan covering only a sole proprietor and his or her spouse is not an ERISA employee benefit plan. See Meredith v. Time Ins. Co., 980 F.2d 352 (5th Cir. 1993) (applying Texas law). The Fifth Circuit noted further, however, that the case before it was distinguishable because "the instant plan involves at least one other employee." This distinction was sufficient to support a finding that the Vegas’ plan was an ERISA-based plan.

The Fifth Circuit’s holding is in accord with an earlier Fourth Circuit opinion as well as an earlier DOL Opinion Letter. See Biggers v. Wittek Indus., Inc., 4 F.3d 291 (4th Cir. 1993) (involving benefit other than health insurance); U.S. Dept. of Labor Op. Letter No. 91-20 A (July 2, 1991). In the Opinion Letter, the DOL concludes that a benefits arrangement between a company and only one employee "appears to fall within the definition of ‘employee benefit plan.’" The Fifth Circuit’s decision is also in accord with Congress’ objective in enacting ERISA, because the group health plan affected the rights and obligations of at least one worker other than the Vegas.

Although the Fifth Circuit ruled against the Vegas on the ERISA issue, it found in their favor on the issue of whether the insurer abused its discretion in denying benefits. The court held that an inherent conflict of interest existed because the defendant served as both the insurer and the plan administrator, with complete discretion over coverage questions under the plan. As a result, the insurer was required to conduct a full and fair investigation of the claim taking into consideration all information reasonably available to it. The court found that the insurer did not conduct such an investigation and, therefore, abused its discretion in making the coverage determination. Consequently, the matter was remanded to the district court for further proceedings.