NON-SUBSCRIBER WORKPLACE INJURY BENEFIT PLANS

I.                    Why Should I Have an ERISA Plan?

Your ERISA Plan can:

1. Require litigious employees to arbitrate workplace injury claims;
2. Require use of medical care providers, and medical treatments, approved by you in advance;
3. Require drug and alcohol testing so as to provide evidence supporting your absolute defense of intoxication;
4. Offset Plan benefits paid against a related negligence claim and provide you subrogation for those benefits;
5. Provide you a liberal standard for denial of fraudulent injury claims;
6. Prevent Plan benefits from exceeding your occupational accident insurance coverage or your negligence indemnity coverage;
7. Require reasonable cooperation by an injured employee as a condition to continued receipt of Plan benefits from you;
8.  Set and enforce your light-duty and return-to-work requirements;   
9.  Require injuries to be reported to you immediately, in detail, with witness statements; and
10.  Meet your Plan disclosure requirements under ERISA.

You will find other valuable information free at our Website, including separate memos on injury claim defenses and claim arbitration.

A.                 Is My Benefit Program Governed by ERISA, Regardless?

The comprehensive regulatory scheme established by ERISA extends to “employee welfare benefit plans” used by Non-subscribers.  A Non-subscriber “welfare benefit plan” is any plan, fund or program established or maintained by an employer or employee organization, or a combination of both, that provides employees or designated beneficiaries medical, surgical, hospital care, sick leave, vacation benefits, unemployment benefits, accidental disability (such as wage replacement) or death benefits, apprenticeships or other training programs, including scholarship funds, day care centers, prepaid legal services, severance pay plans, and any other benefits other than pension benefits.  29 U.S.C. § 1002(1).  Welfare plans do not include so- called “payroll practices,” whereby an employer pays an employee, out of the employer’s general assets, his or her normal rate of pay as though time were worked, such as payments for sick pay, vacation and holiday pay, jury duty pay, active military duty pay, sabbatical pay, etc.  29 C.F.R. § 2510.3-1(b)(3).  They also do not include on-premises facilities provided by the employer for recreation or dining (other than day care facilities), holiday gifts or bonuses, sales discounts, or remembrance or strike funds.

Non-subscriber welfare benefit plans are subject to portions of Title I of ERISA, under the jurisdiction of the Department of Labor (“DOL”) Employee Benefits Security Administration.  Title I applies to plans maintained by an employer or by an employee organization “engaged in commerce or in any industry or activity affecting commerce....”  The “affecting commerce” standard has such a broad reach that most Texas businesses, even those whose activities appear exclusively local in character, fall under ERISA.  Generally, if any products are shipped or any supplies are obtained from outside Texas, the “affecting commerce” test is met. 

There are three relevant statutory exemptions from coverage under Title I.  The first is for benefit plans maintained to comply solely with state workers’ compensation or disability insurance laws.  (Several Federal District Court opinions in Texas have ruled that a typical Non-subscriber employee injury benefit plan is not maintained solely to comply with the Texas Workers’ Compensation Act, and thus is subject to ERISA.)  The second exemption is for benefit plans of federal and state governments and their political subdivisions and agencies.   The third exemption is for church employee benefit plans.

A group accident insurance program is excluded from ERISA coverage only if:  (1) no contributions are made by the employer; (2) participation in the program is voluntary for employees; (3) the employer receives no consideration except reimbursement for expenses; and (4) the employer's sole function with respect to the program is to permit the insurer to publicize the program to employees, to collect premiums through payroll deductions and to remit them to the insurer.  Sutherland v. U.S. Life Ins., 263 F. Supp. 2d 1065, 1069 (E.D. La. 2003). See also 29 C.F.R. § 2510.3-(1)(j)(2002).  Every Non-subscriber occupational accident insurance policy we have ever seen is governed by ERISA!!!

Virtually all Non-subscriber injury benefit plans are governed by ERISA, whether or not they were intended to be.  The fact that “the plan is not in writing” does not mean there is no “plan” under ERISA.  Blau v. Del Monte, 748 F.2d 1348, 1355 (9th Cir. 1985).  An ERISA Plan exists if a reasonable person could ascertain its intended benefits, its benefit procedures, its beneficiaries, and the source of its financing.  See Scott v. Gulf Oil Corp., 754 F.2d 1499, 1504 (9th Cir. 1985).  Under decisions of the Federal Court of Appeals for the Fifth Circuit, the mere payment of premiums for a group insurance policy covering employees does not conclusively establish a program subject to ERISA, but is “substantial evidence” that an ERISA Plan has been established.  Kidder v. H & B Marine, Inc., 932 F.2d 347 (5th Cir. 1991).  Many Non-subscribers who “self-fund” employee injury benefits  (even if the self-funding of benefits is simply payment of a deductible under an occupational accident policy) do so in the mistaken belief they are not covered by ERISA.  This is incorrect and certain penalties may apply, as discussed below.

 B.                What is the Relationship Between My ERISA Plan and My Insurance Policy?

 Benefits set forth in your ERISA Plan become an obligation which you must satisfy when a covered injury occurs.  Be sure your ERISA Plan does not require benefit payments beyond the coverage limits and exclusions of your occupational accident insurance policy.  For example, do not commit to pay “unlimited lifetime medical” expenses, unless that is what you really intend to do!  Do not commit to pay “benefits just like (or better than) workers’ comp.,” unless that is what you really intend to do!  If you have legal indemnity (negligence lawsuit) insurance subject to an aggregate policy limit, consider setting your ERISA Plan benefits low enough to leave adequate liability coverage for injury claim litigation, defense, and settlement. 

 C.                What Can an ERISA Plan Actually Do For Me?

 1. Benefit Claim Denials are Safer. 

 A denial of benefits by a plan administrator under a properly written ERISA Plan will only be overturned by a court if the denial was “arbitrary or capricious” or an “abuse of discretion.”  Under this standard, which the United States Supreme Court articulated in Bruch v. Firestone Tire and Rubber Co., 109 S.Ct. 948 (1988), and followed by our Circuit in Brown v. PFL Life Ins. Co., 111 Fed. Appx. 258, 2004 LEXIS 20676 (5^th Cir. 2004), the district court may only consider the evidence that was before the plan administrator at the time the benefits were denied. 

If you as plan administrator deny a benefit claim, you must provide a timely written explanation to the claimant, giving reasons for the denial.  Explanation must be made in terms comprehensible to that type of worker and the claimant must have at least 60 days to request a full and fair review of your denial.  If your ERISA Plan provides for appeal of benefit denial to be made (first) to you as plan administrator, this process must be followed.  Only after the claimant has exhausted this “administrative procedure” can he bring suit against you on his benefit claim.  ERISA provides concurrent jurisdiction in both the Federal District Courts and state courts for claims arising from denial of plan benefits.  This claim can be difficult for the employee to win; if your ERISA Plan document is properly drafted, the standard for reversal of a denial of plan benefits is that you must have acted in an “arbitrary and capricious” manner.

 2.   Mandatory Binding Arbitration of Workplace Injury Claims Can be Required. 

Please review Binding Arbitration for Non-subscriber Injury Claims located at www.texasatty.com for more details about how arbitration may be beneficial to you.

 Your ERISA Plan can include a provision which mandates binding arbitration of workplace injury claims.  If you decide to include an arbitration provision in your ERISA Plan, in order for it to be effective, you must disseminate it to your employees in a manner in which they will understand.  This may require you to have the provision in several different languages if you have employees that speak different languages. 

A.        Arbitration can avoid an excessive jury award.  Arbitration takes the “runaway jury” out of the claim process. Workplace injury claim arbitration is not yet well established, so predictions about arbitration awards are not reliable.  Anecdotal evidence is positive, however.

 B.        Arbitration is confidential.  If a negative arbitration “award” results, the arbitration process provides a certain degree of confidentiality for the result.  At times you may want to “set an example,” if an unwarranted lawsuit is brought. An arbitration proceeding typically does not lend itself to an “example setting” fight.

 C.        Arbitration is usually cheaper.  Arbitration can be a lot cheaper than litigation, if depositions, witnesses, experts, document production, etc. are limited by your arbitration agreement.  The cost savings lie in attorney fees and expenses, because of the streamlined process.  However, because the process typically begins with a lawsuit, a motion to compel arbitration in the court is usually necessary to move the claim out of the courthouse. 

D.        Arbitration is usually quicker. This is true, even after working through a court motion to compel arbitration. For one thing, there are no court docket and setting delays.

 E.        Arbitration is usually “final”. Trial court judgments can be appealed for a wide variety of reasons. This can drag the proceeding out for years, and greatly increases legal costs.  Arbitration awards, on the other hand, can be “vacated” only on limited grounds, particularly when the FAA is specified and applied.

 F.         Arbitrators may be more familiar with your business.  Many arbitrators come from the same industry in which the injury claim arises. They usually have industry experience and may understand workplace problems and conditions better than a judge or jury.

G.         Arbitration can limit punitive damages.  An arbitration agreement can bi-laterally limit or deny certain remedies, like punitive damages.  This is a growing trend.  Whether this will reduce the actual dollars awarded is uncertain. 

 3.  Benefit Coverage and Benefit Denial Claims May be Removed to Federal Court.

 There is a well-developed body of law surrounding ERISA benefit claims, and judicial positions and outcomes tend to be relatively predictable.  Claims for denial of benefits are covered by Federal law and may be adjudicated in Federal court.  In the Federal courts of the Fifth Circuit (where Texas is located), a claim for employee welfare benefits is viewed as analogous to a claim against a “trust,” which is a proceeding in equity; therefore, a jury trial is usually not available for Plan benefit claims.  

Workplace negligence claims are normally tried in state court with a jury trial available.  However, even today, the plaintiff’s attorney will occasionally plead for ERISA Plan benefits in his state court petition.  This may allow removal of the entire case to Federal court, based on ERISA jurisdiction. The state-law tort claim will go along.  This can have a chilling effect on the tort injury claim.  The tort claim will continue to exist, but must now be pursued in the Federal court system.  However, a common law negligence claim that alleges only that an employer failed to maintain a safe workplace does not necessarily relate to an ERISA Plan.  Consequently, such a negligence claim is not preempted by ERISA.  See Hook v. Morrison Milling Co., 38 F.3d 776 (5^th Cir. 1994).  (Preemption of state laws by ERISA is discussed in further detail below on p. 9). If an employee alleges other causes of action which are properly removed to federal court, the federal court can exercise supplemental jurisdiction over a related claim, i.e., a negligence claim, pursuant to 28 U.S.C. § 1367(a).  See Pyle v. Beverly Enters.-Tex., Inc., 826 F. Supp. 206, 211-212 (N.D. Tex. 1993).

 II.         ERISA Disclosure and Filing Requirements.

A.        Is My Plan Exempt From ERISA Filing and Reporting?

 Most plans having fewer than 100 participants at the beginning of a plan year need not file an annual report or distribute a summary annual report for the plan year. ERISA defines a plan year as any 12-month period selected for record keeping purposes. This exemption applies only to plans which have fewer than 100 participants at the beginning of the plan year, and are unfunded[1] or funded through insurance paid for by the employer.  All plans must furnish Summary Plan Descriptions (“SPDs”) to plan participants in the usual fashion and make the complete plan document available to participants.

 B.                What Are My ERISA Filing and Disclosure Requirements?

  In view of the sanctions for noncompliance with ERISA reporting and disclosure requirements (discussed below on p. 6), the employer seems the most appropriate administrator.  The “administrator” of a Non-subscriber ERISA Plan has the responsibility to submit reports (if required) to the Department of Labor (“DOL”) and to furnish specified information to plan participants.  If an administrator is not identified in the ERISA Plan document, the employer is ordinarily the administrator.  The style, content, and format of reports and Summary Plan Descriptions are highly regulated; therefore, plan administrators are advised to get competent legal advice in these areas.  Once an employee becomes a participant in your plan, he remains a participant for disclosure purposes so long as he remains eligible for benefits.[1]

1. Annual Report.

If an annual report to the DOL is required, it is made on a “Form 5500.” As a practical matter, almost all Non-subscribers with fewer than 100 covered employees at the beginning of the plan year are exempt from filing Form 5500. 

Plans with 100 or more participants at the beginning of the plan year must file Form 5500  within seven months after the end of each plan year.  If you are required to file a Form 5500, most unfunded (or funded with employer purchased insurance) ERISA Plans are required to attach few, if any, of the schedules to Form 5500 (please check the current Form 5500 instructions available at www.irs.gov).  These annual reports are filed with the DOL’s Employee Benefits Security Administration. 

Your own taxable year is ordinarily the most convenient reporting period for your ERISA  Plan.  If your ERISA Plan is funded by an occupational accident policy under which the insurer furnishes you reports for a different period, that period might be more convenient, but it is usually advantageous to adopt a uniform plan year for all your pension and welfare benefit plans which report under ERISA.

2. Summary Annual Report to Your Employees.

A Summary Annual Report consists of statements and schedules necessary to fairly summarize the latest annual report.  29. U.S.C. § 1024(b)(3)(2005).  As a practical matter, almost all Non-subscriber employers with an ERISA Plan are exempt from providing employees a summary annual report.  The DOL Regulations specifically exempt unfunded welfare benefit plans (regardless of the number of plan participants) from the requirement to distribute a summary annual report.  See 29 C.F.R. § 2520.104-24(a). 

3. Your Summary Plan Description (“SPD”).

A plain-language SPD must be distributed to each ERISA Plan participant within 90 days after he or she becomes a participant, or within 120 days after establishment of your ERISA Plan, if later.  Additionally, if your ERISA Plan covers 100 or more employees on the first day of your plan year, your SPD must also be filed with the DOL when first required to be distributed.

When your ERISA Plan is modified in a “material respect,” your SPD must also be revised so that the document furnished to new participants is not more than 120 days out of date.  A summary of the modification must be distributed to prior recipients of the SPD and filed with the DOL within 210 days after the end of the plan year in which the modification is adopted.  Section 104(b)(1) of ERISA requires general distribution of an updated SPD every fifth year, which incorporates any material intervening modifications, and every tenth year, whether or not your plan has been amended.  29 U.S.C. § 1024 (2005).  The plan administrator is also responsible for making plan documents available to plan participants and the DOL upon request, and for maintaining plan records for a period of six years.

Special rules apply to plans which cover employee groups with a significant proportion of participants who are literate in the same language, and that language is not English.  Our law firm prepares SPDs in English and Spanish; we have other languages available if you need them (i.e., Vietnamese, Cambodian, etc.).

 C.        ERISA Enforcement.

ERISA reporting and disclosure requirements carry serious penalties for noncompliance.  There is a civil penalty of up to $100 per day for unreasonable failure to furnish plan disclosure documents requested by a plan participant, within thirty (30) days after the request.  29 U.S.C. §1132(c)(1)(B) (2005).  Willful violations may result in criminal penalties under ERISA Section 501.  The maximum penalty is a $100,000 fine and imprisonment for ten (10) years in the case of an individual, and a $500,000 fine in the case of a non-individual.  29. U.S.C. §1131 (2005).  Further, the DOL may assess a civil penalty of up to $1,000 a day for failure or refusal to file the annual report.  29 U.S.C. § 1132(c)(2)(2005).  These are severe penalties, so be aware of your filing requirements.

ERISA Section 502 provides for civil enforcement of participants’ rights, both as to information and benefits. 29 U.S.C. § 1132 (2005).  Actions may be maintained by ERISA Plan participants, their beneficiaries, plan fiduciaries, or by the Secretary of Labor, and by or against a plan as an entity.  State and Federal courts have concurrent jurisdiction over actions by participants or beneficiaries for enforcement of rights to benefits, and Federal District Courts have exclusive jurisdiction in all other cases.  29 U.S.C. § 1132 (e)(1) (2005)[2].  In almost all ERISA-governed cases, the plan administrator should be able to remove the litigation to Federal court. 

III.                ERISA Fiduciary Duties.

A.        What Are My Fiduciary Duties Under ERISA?

 If you administer your own ERISA Plan (which virtually all Non-subscribers do, because they want to control benefit claims), you are a “plan fiduciary” under ERISA.

Any person having discretionary control over the operation of an ERISA Plan or the investment or disposition of plan assets (in case of a funded plan), or who renders investment advice for compensation, occupies a fiduciary position with respect to the ERISA Plan.  Adoption, amendment, and termination of a plan by the employer are not generally considered fiduciary functions.  Most Non-subscriber ERISA Plans are unfunded and do not require investment advice or carry the fiduciary or reporting risks of a plan with a benefit trust or pool of assets.

The general responsibility of a plan fiduciary under Section 404(a) of ERISA is to  discharge the duties with respect to the plan for the exclusive purpose of providing benefits to plan participants and their beneficiaries in accordance with the plan documents and consistent with Title I of ERISA.  29 U.S.C. § 1104(a)(2005).  The Plan fiduciary must do so with care, skill, prudence and diligence. Abrogation of this duty can give rise to statutory liability for resulting losses to your plan participants, despite any exculpatory language in your plan document.  29 U.SC. § 1110(a)(2005).  In addition, the fiduciary who is responsible for the breach of duty may be assessed a penalty by the DOL of up to 20% of the resulting losses.  29 U.S.C. § 1132(l)(1)(2005).  This penalty may also be assessed against any non-fiduciary who knowingly participates in the breach of duty. 

If an employer is not the plan administrator, the employer is typically a “fiduciary” only with respect to appointment of the actual fiduciaries and the oversight of their performance.  This can be important for Non-subscribers who do not have expertise in-house to properly administer their own injury benefit plan.

B.        Prohibited Transactions.

 Section 406(a) of ERISA prohibits a plan fiduciary from, among other things, causing a plan to engage in a sale, loan, or service transaction with a “party in interest.”  29 U.S.C. § 1106 (2005).  Persons connected with a plan, including employers and other fiduciaries, service providers, participants, and certain of their officers, affiliates, and relatives, are “parties in interest.”  Section 406(b) of ERISA prohibits self-dealing by fiduciaries with respect to plan assets, including acting on behalf of any party whose interests are adverse to those of the plan.  A penalty equal to five percent of the “amount involved” may be imposed under Section 502(I) of ERISA upon a party in interest who participates in a prohibited transaction.  29 U.S.C. § 1132 (Part I) (2005). The penalty becomes 100 percent of the amount involved if the transaction is not “corrected” within 90 days after notice from the DOL.  Section 407 of ERISA also limits the securities issued by, and real property leased to, an employer or affiliate, which a plan may hold.  29 U.S.C. § 1107 (2005).

Section 408(b) of ERISA provides some narrow exemptions from the “party in interest” rules contained in Section 406.  29 U.S.C. § 1108 (2005).  Section 408(a) empowers the DOL to grant additional exemptions.  The drafters of ERISA adopted this approach to prohibit all types of transactions which have the potential for conflicts of interest, and to leave creation of justifiable exceptions to the regulatory process.  Of the numerous administrative exemptions that have been granted, the most relevant to Non-subscriber ERISA Plans is Prohibited Transaction Exemption 77-9, concerning insurance agents and brokers as “parties in interest.”  For example, an insurance agent or broker that receives a sales commission in connection with the purchase, with Plan assets, of an insurance or annuity contract, is an example of a transaction which is exempted from the "parties in interest" rules under 77-9.

IV.               Federal Income Tax Treatment of ERISA Plan Benefits.

 A.                 Non-subscriber ERISA Plan Benefits Generally.

 In general, benefits received by your employees under your ERISA Plan (and your group health plan) are excluded from the employee’s taxable income, if such amounts are paid to reimburse your employee for medical care expenses.  Payments made directly to the healthcare provider are considered indirect payments to your employee and are also excluded from your employee’s taxable income.  To the extent payments to your employee exceed actual cost of the medical services, the payments are taxable as ordinary income to your employee.

Other than reimbursement of medical expenses, benefits paid from contributions by you as an employer not already included in your employee’s gross income, or paid directly by you, are taxable to your employee as ordinary income.  Employees must pay taxes on these amounts because they are considered taxable wages (which were lost due to accident or sickness).

 B.                Wage Continuation Plans.

 If an employee is entitled to wages while absent from work due to sickness or injury, those wages are included in the employee’s gross income (unless related to a permanent disability, described below).

 C.                Disability Benefits.

 Employer disability income payments unrelated to absence from work are excluded from the gross income of the employee (whether paid in a lump sum or in installments).  Examples of disability payments unrelated to absence from work are lump sum or periodic payments for permanent loss, or permanent loss of use, of a member or function of the body, or for permanent disfigurement.  If the payments themselves are unrelated to absence from work (i.e., based on permanent disability), they may be made during an absence from work and still be excluded from income by your employee.  For example, if your occupational accident policy provides that an employee absent from work due to a broken arm will receive $500 a week for a period not in excess of 104 weeks, that money is not taxable income to the employee.

Disability income payments in the nature of wages are taxable.  Also, “line of duty” disability payments may be taxable if the employee does not suffer the type of permanent loss required for exclusion.  See “Wage Continuation Plans,” above.

Employer contributions or premiums for coverage under a short-term or long-term disability income plan are tax-deductible to the employer.

 D.                Life Insurance Premiums and Benefits.

With respect to premiums, the cost of (premium for) up to $50,000 of employer-paid group term life insurance is tax exempt to the employee.  The cost of life insurance coverage over $50,000 is taxable to the employee in accordance with rates prescribed by the IRS.  An employer may also provide up to $2,000 of group term life insurance on employees’ dependents, with premiums tax-free to the employee.  Life insurance benefits may not discriminate in favor of key employees, or the favored employees will be taxed for the full amount of the cost (premiums) for all their coverage.

Life insurance benefits paid as a result of death of the insured employee are excluded from the employee’s and the beneficiaries’ gross income.  No distinction is drawn between life benefits under life policies, accident policies, health insurance policies, or endowment contracts.  If the benefits are paid in installments, however, a portion of the payment usually consists of interest, which will be taxable to the beneficiary.

E.                 Death Benefits Not Paid By Insurance.

 Under the Internal Revenue Code, “death benefits” are different from life insurance proceeds.  Death benefits are amounts paid by an employer as a result of an employee’s death, not paid by an accident or health policy or other insurance.  “Death benefits” are excluded from gross income up to the amount of $5,000.  Death benefits in excess of $5,000 are taxable to the recipient.

F.                 Workers’ Compensation Benefits.

 Generally, benefits paid under workers’ compensation laws are not taxable to the employee.  Payments made after an employee returns to work may be taxable as wages.  Non-subscriber workplace injury income benefits are taxable as ordinary income to the employee.

V.        Preemption of State Laws by ERISA.

             A.        Workplace Injury Negligence Cases are Not Pre-empted by ERISA.

ERISA will not preempt tort claims for workplace injuries.  However, the tort claim can sometimes be removed to Federal court when you remove an inadvertently pleaded claim for ERISA Plan benefits.  If you desire to avoid the state court jury system, the better course is to require mandatory binding arbitration of workplace injury claims.

In 1991, several different employer-negligence cases were filed against Wyatt Cafeterias, Inc., each brought by a separate employee, and filed in State district court.  Because Wyatt’s had an ERISA Plan, Wyatt’s removed each case to Federal District Court,  and each was assigned to a different federal judge.

In the 1991 case of Eurine v. Wyatt Cafeterias, Inc., Judge Barefoot Sanders originally opined that state law negligence claims which “related to” the ERISA Plan were preempted by ERISA.  Because the plaintiff brought only a negligence claim, and not an ERISA claim, the case was to be dismissed from the Federal district court, for failure to state a claim under ERISA.

On a motion by the plaintiff (supported by the Texas State Board of Insurance and the DOL), Judge Sanders withdrew his original ruling.  Judge Sanders substituted a revised opinion, holding that a workplace negligence suit is not automatically preempted by ERISA and should be returned to State court as a state law negligence claim.  Judge Sanders held that the state law claims at issue arose out of the employer-employee relationship, and not out of the ERISA relationship, and were thus not preempted.  All four cases then pending in the federal courts in the Northern District of Texas were remanded to state courts as negligence suits.  These injury claim remand cases have since been followed consistently by other federal courts across Texas.

 B.        Some Texas Statutes are Preempted.

The Texas Supreme Court, on January 30, 1991, decided a series of cases concerning whether claims under: (i) Article 21.21, Section 16 of the Texas Insurance Code (now Tex. Ins. Code § 541.151, et seq.); (ii) Section 17.50(a)(4) of the Business and Commerce code (See, e.g. the Deceptive Trade Practices Act “DTPA”); and (iii) Article 3.62 of the Texas Insurance Code, are preempted by ERISA.  Leading among these cases is Cathey v. Metro. Life Ins. Co., 805 S.W.2d 387 (Tex.), cert denied, 501 U.S. 1232 (1991).  The Texas Supreme Court held in Cathey that ERISA preempts these state law causes of action against an employer as plan sponsor.  The Court quoted the United States Supreme Court:

 to summarize ... if a state law relates to employee benefit plans, it is preempted.  The ‘saving clause’ excepts from the ‘preemption clause,’ laws that regulate insurance.  The ‘deemer clause’ makes clear that a state law that purports to regulate insurance cannot deem an employee benefit plan to be an insurance company. 

 When an ERISA Plan is in place, the Cathey decision makes clear that not only are your employee’s claims against you for bad faith denial of benefits, deceptive trade practices, etc., preempted, but such claims against the insurance company providing the insurance policy funding benefits under your ERISA Plan are also preempted. 

VI.       Claim Waivers, Offsets, Subrogation, etc.

 A.        Pre-Injury Claim “Waivers” Are No Longer Allowed.

 Employee pre-injury waivers were previously used by some Non-subscribers and signed by the employee before any injury had occurred.  The effect of the waivers was to preclude negligence lawsuits by employees against employers, in exchange for benefits defined in the ERISA Plan. 

Until early 2001, conflicting court opinions were entered regarding the legality of pre-injury waivers.  With a split in the Texas appeals courts, the Texas Supreme Court finally ruled on enforceability of waivers in Non-subscriber benefit programs.  On March 29, 2001, the Texas Supreme Court held Non-subscriber workplace injury claim waivers were enforceable.  Lawrence v. CDB Services Inc., 44 S.W.3d 544 (Tex. 2001). 

In an immediate reaction, the Texas Legislature passed and the Governor signed, a bill outlawing pre-injury waivers.  The statutory language states: 

 “a cause of action [to recover damages for personal injuries or death sustained by an employee in the course and scope of employment] may not be waived by an employee before the employee’s injury or death.  An agreement by an employee to waive a cause of action ... before the employee’s injury or death is void and unenforceable.”  (Tex. Lab. Code § 406.033) (emphasis provided).

 This law became effective June 17, 2001; all pre-injury waivers made after June 17, 2001 are void in Texas.  A pre-injury claim waiver remains enforceable in Texas only when the waiver is signed and the injury is suffered before June 17, 2001.  See Storage & Processors, Inc. v. Reyes, 134 S.W.3d 190 (Tex. 2004); Villareal v. Steve's & Sons Doors, Inc., 139 S.W.3d 352 (Tex. App.--San Antonio 2004, no pet.). 
 

             B.        Injury Waivers Have Waiting Periods

 Until recently, an employer could immediately approach an injured employee and seek to settle any potential liability for the workplace injury.  However, employer’s ability to obtain a post-injury waiver from an injured employee has been limited by the passage of HB 7, which became law on September 1, 2005.  HB 7 places statutory limitations on the validity of post-injury waivers signed by employees of Non-subscribers.  These limitations include:  (1) prohibiting the signing of a waiver before the 10^th business day after the date of the initial report of injury; (2) ensuring that a worker has received a medical evaluation from a non-emergency doctor; and (3) ensuring that the waiver is voluntary and is clearly identifiable in any written agreement (i.e., is not a condition of continued employment).  Employers seeking to obtain post-injury waivers after September 1, 2005, must be cognizant of, and comply with these new rules if they want their post injury waivers to be enforceable.

             C.        Offset for Benefits Paid. 

 An integral part of a Non-subscriber ERISA Plan is a provision to offset or set-off  ERISA benefits against a related judgment or arbitration award.  Texas courts have upheld this offset right.  See Tarrant County Waste Disposal, Inc. v. Doss, 737 S.W.2d 607 (Tex. App. -- Ft. Worth 1987, writ denied); Castillo v. Am. Garment Finishers Corp., 965 S.W.2d 646 (Tex. App. -- El Paso 1998, no writ).  For example, if your ERISA Plan has already paid $25,000 of covered injury benefits, and a jury awards $35,000, your employee would receive $10,000 after the offset. 

The cases upholding an offset rely on the fact that the ERISA benefit plan is provided not as a “collateral source” of injury recovery, but is intended for the employer’s benefit as an alternative to statutory workers’ compensation.  The reasoning is simple:  If the plan was purchased for the benefit of the employer, then the employer should be entitled to an offset for payments from the plan to the injured employee.  Taylor v. Am. Fabritech, Inc., 132. S.W. 3d 613 (Tex. App.—Houston [14^th Dist.] 2004, pet. denied).

 D.        Subrogation and Reimbursement.

 While subrogation and reimbursement are similar in effect, they are different doctrines.  With subrogation, the insurer “stands in the shoes” of the injured employee.  With reimbursement, the insurer has a direct right of repayment against the injured employee.  As a matter of logic and case law, a party can have either right, but not both at the same time.  Traditional subrogation allows the plan administrator to “take over” the covered person’s right to recover medical expenses from third parties.  Reimbursement, on the other hand, is a contract right under ERISA, and will apply after the employee receives injury compensation from a third party.  Plan recoupment provisions should allow for a first-lien priority of payment, without regard to whether the covered person has received compensation for all damages, or has been “made whole.”  Recoupment should extend to all covered persons, not just plan participants, and should be had from any source, without regard to how the covered person allocates the recovery.  Plan documents can also provide that recoupment will not be reduced by the covered person’s attorneys’ fees and costs in the personal injury litigation. 

 Disclaimer.

 Do not use this memo as legal advice or to make legal decisions.  This brief discussion of ERISA Plans for Texas Non-subscriber employers is not meant to be exhaustive.  It is also not intended as legal advice, but is offered solely to alert the reader to conditions in this marketplace.  Anyone attempting to implement any idea or provision of this memo should first seek advice of competent counsel.  Do not attempt to solve individual problems on the basis of the information contained herein alone.  Every situation is different!  Ask your lawyer!