District Court Finds Business Owner “Inadvertently” Created an ERISA Plan When the Company Offered and Paid for Its Employees’ Long-Term Disability Insurance

A recent district court decision, Steigleman v. Symetra Life Ins. Co., No. CV-19-08060-PCT-ROS, 2021 WL 778605 (D. Ariz. Mar. 1, 2021), shows us how a business owner who purchases long-term disability (“LTD”) protection may inadvertently create a plan governed by the Employee Retirement Income Security Act of 1974 (“ERISA”).

Plaintiff Jill Steigleman owned and operated a business and through her company purchased LTD coverage from Defendant Symetra Life Insurance Company. She filed a disability claim which Symetra eventually approved but Steigleman filed suit alleging breach of contract and the tort of bad faith based on the way Symetra handled the claim. Symetra initially admitted the state law claims were proper, but it changed its position and alleged that the claims were governed by ERISA. The court deferred judgment on that issue until Symetra sought summary judgment on two bases: ERISA preempts the state-law claims, and there is no evidence to support the state-law claims.

With respect to the ERISA issue, the court laid out the version of events in the light most favorable to Steigleman.

In 2008, Steigleman established Steigleman Insurance Agency, LLC, which she owned and operated, and worked as an agent selling Farm Bureau Financial Services insurance. As an agent, she was eligible to join “The Agents Association” (“TAA”), which “is an organization that individual agents voluntarily join and TAA then advocates on behalf of its members with Farm Bureau management.” TAA had a contract with an insurance broker known as “mgc group,” which created a benefits package designed specifically for TAA. The package allowed TAA members to purchase LTD insurance, among other insurance. The LTD insurance was provided by Symetra, but enrollment and premium collection were handled by mgc group.

Steigleman first purchased LTD coverage with Symetra in June 2009 and the premiums were paid by Steigleman Insurance Agency. As of 2016, her company employed two other individuals who were offered LTD coverage through the same arrangement involving TAA and mgc. They both elected the coverage and Steigleman Insurance Agency paid their entire premiums.

On summary judgment, Symetra argued that ERISA preempts Steigelman’s claims because (1) Steigleman Insurance Agency, LLC, “established and sponsored an ERISA-governed welfare benefit plan” when “[i]t purchased disability insurance” for Steigleman and her employees; and (2) TAA was an “employee organization” that “established and sponsored an ERISA welfare benefit plan” when it offered insurance packages to its members.

The court found the first argument to be dispositive and did not reach the second argument. There is no dispute that if Steigleman’s disability coverage was part of an “employee benefit plan,” as defined by ERISA, her state law claims cannot proceed.

ERISA defines an “employee benefit plan” as “any plan, fund, or program…established or maintained by an employer…for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance…benefits in the event of…disability.” 29 U.S.C. § 1002(1). If a particular arrangement covers only the owner of a business, that arrangement necessarily is not an “employee benefit plan” covered by ERISA. But an arrangement becomes an ERISA plan if it covers working owners and their nonowner employees.

When Steigleman first purchased disability coverage from Symetra, she was the only individual covered and ERISA did not apply to her coverage at that time. But when she hired employees and provided them coverage, an ERISA plan was created. The court explained:

“Once Steigleman Insurance Agency offered its employees coverage under the Symetra disability policy, and began paying the associated premiums, it would be strange to conclude there was not an ERISA plan, of some type, in the picture. From the employees’ perspective, their employer had created a program, that was maintained and paid for by their employer, for the purpose of providing benefits in the event the employees became disabled. That tracks, exactly, the statutory definition of “employee benefit plan.” 29 U.S.C. § 1002(1). And the fact that Steigleman Insurance Agency paid the premiums for its employees means it cannot take shelter in the “safe harbor” that exempts “certain group or group-type insurance programs” from being subject to ERISA. 29 C.F.R. § 2510.3-1(j).”

The court rejected Steigleman’s argument that ERISA will never apply to a particular arrangement based on events subsequent to the arrangement’s origins. The court also rejected the argument that two distinct plans were created. The court analyzed various cases involving the bundling of plans and determined that there is no evidence that Steigleman had any particular intent in establishing the various benefits arrangements. “That is, Steigleman did not have an intent to create an ERISA-plan covering her employees nor did Steigleman have an intent that her non-ERISA covered benefits remain distinct from those offered to her employees. Rather, it appears Steigleman simply did not consider ERISA at all.” The court concluded that Steigleman Insurance Agency offered a single ERISA-governed plan regarding disability benefits and the state-law claims are preempted.