When Does Benefits Plan Qualify as Payroll Practice?

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“My short-term disability benefits should have been extended,” said Susan, who received disability benefits under her employer's plan. “You told me that my short-term disability benefits would eventually turn in long-term benefits and would be covered.”

“Your coverage under the short-term disability plan was properly terminated,” said Sharon, the company's benefits director. “You received full compensation under the plan so you can not pursue your claims for benefits.”

FACTS: An employee applied for short-term disability benefits under her employer's life insurance plan, which was handled by a claims administrator. The administrator sent notification to the employee that the claim was approved for short term disability benefits, over a one-month period. The administrator extended the employee's plan an additional month.

After having twice extended her short-term disability benefits, the administrator then notified the employee that the claim was withdrawn and that she was allowed to appeal the company's determination for withdrawal. The employee appealed.

The company confirmed receipt of the appeal and sent the employee a letter stating that the benefits determination was upheld on review and that no further appeals were authorized.

Is an employee's claim for short-term disability benefits considered an ERISA plan or a payroll practice plan?

The employee filed a motion to reverse the administrator's decision in order to recover long-term disability benefits under the Employee Retirement Income Security Act. She claimed that: she was granted short-term disability benefits for a two-month period; the administrator told her that if benefits were extended to cover a three-month period, long-term disability benefits would be activated; her condition remained the same; and that the administrator's denial was “arbitrary and capricious.”

The administrator filed a motion to maintain its decision, asserting that the employee can not make a claim for long-term disability benefits because she never filed a claim for such benefits and she “failed to exhaust administrative remedies available had such claim for LTD benefits been denied.”

In a reply brief, the administrator agreed that it did advise the employee that if benefits were extended to cover a three-month period, long-term disability benefits would be activated, however it later told the employee that it determined that no short-term disability benefits were payable past the three-month period.

In a motion hearing, the employee asked to revise her original benefits request under ERISA and instead seek short-term benefits instead of long-term benefits under ERISA. The administrator replied that the short-term disability plan was a payroll practice plan not governed under ERISA, and thus the court could not rule on the matter.

ISSUE: What are the determining factors involved to classify a disability benefits claim as a payroll practice?

DECISION: The short-term disability plan was a payroll practice plan and not an ERISA plan, a federal district court ruled.

The court relied on regulations issued by the Secretary of Labor, which exclude certain payroll practices from the definition of an employee welfare benefit plan or welfare plan, including “payment of an employee's normal compensation out of the employer's general assets.”

Additionally, the court also cited a district court decision (Langley v. DaimlerChrysler Corp.), which determined that a company that paid totally disabled employees full pay for a portion of the time and 70 percent pay for another portion of the time were made from the company's general fund and were thus considered a payroll practice excluded from ERISA coverage.

Under the employer's short-term disability plan, salaried employees received normal pay for the first 26 weeks of disability and such payments were made from the employer's general assets. The court further determined that even if the employee had sought recovery of long-term disability benefits, allowing such a claim would be futile because such payments would also be considered a payroll practice.

POINTERS: By setting up and running an STD plan as a payroll practice, employers avoid ERISA requirements. In a case decided by the U.S. District Court for the Middle District of Pennsylvania, Comcast Corp.'s short-term disability benefit plan is a “payroll practice” that is exempt from ERISA (Bernard v. Comcast Comprehensive Health and Welfare Benefits Plan, M.D. Pa., No. 1:09-cv-02097, 12/6/10).

Under a collective bargaining agreement between Comcast and the plan participant's union, employees were paid for personal absences because of illness or injury under the company's disability policies, and eligible employees were paid a portion of their salaries for up to 26 weeks. The participant sought short-term disability benefits for severe headaches, but was denied such benefits.

Under Labor Department regulations, normal compensation paid to an employee as a result of disability and from an employer's general assets is a “payroll practice,” not an employee welfare benefit plan governed by ERISA.

According to the court, Comcast presented evidence that short-term disability benefits are paid out of its general assets and that it paid a portion of approved employees' normal compensation as short-term benefits. The participant failed to demonstrate that the source of the benefits was something other than Comcast's general assets, the court said (Schra v. Metro. Life Ins. Co., 2015 BL 50203, E.D. Mich., No. 4:13-cv-13650, 2/26/15).

For more information, see Compensation and Benefits Library's “Short-Term Disability Benefit Programs” chapter.

To contact the reporter on this story: K.W. Mitchell in Washington at kwmitchell@bna.com

To contact the editor on this story: Michael Trimarchi at mtrimarchi@bna.com.