Short Term Disability Plan as a Payroll Practice

I blogged recently about an Eighth Circuit decision where the court concluded that a deferred compensation agreement with a single employee did not constitute an ERISA plan. I warned employers that courts do not always accept an employer’s characterization of a plan or program as being covered by ERISA. Another example of this phenomenon is Behjou v. Bank of America Group Benefits Program.

In Behjou, the employee sued the Bank of America claiming that he was improperly denied long term disability benefits and underpaid short term disability benefits. His claims included state law claims for failure to pay salary and intentional infliction of emotional distress. The Bank of America claimed that both the long term disability plan and the short term disability plan were ERISA plans so any state law claims were preempted.

The court looked at the Department of Labor’s regulation under ERISA that distinguishes payroll practices from ERISA plans for short term disability arrangements. Even though the Bank of America’s program was an integrated program of short and long term disability benefits, the court concluded that the short term disability program met the requirements of a payroll practice and therefore it was not an ERISA plan and state law claims were not preempted.

Unfortunately, for a typical short term disability arrangement, the only way that an employer can be certain that the program is not a payroll practice is to insure the benefit, rather than having it paid from the employer’s general assets. That is typically more expensive than self-funding the benefit. The employer can also ask the Department of Labor for an advisory opinion on the status of the employer’s short term disability arrangement. However, those requests are typically for rulings that the arrangement is not an ERISA plan. Thus, even if the employer treats the program as an ERISA plan, including filing Form 5500s and following ERISA claims procedures, there is no guarantee that the courts will agree that the arrangement is subject to ERISA.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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