Voluntary benefits under scrutiny: What employers need to know

Benefits with standards

Voluntary benefits have been around for decades. Employers use them to bolster their benefits portfolio by offering a range of insurance coverages, memberships, and other supplemental programs, which employees may select—and pay for—themselves. As such, voluntary benefits are regarded as advantageous for employers and employees alike.  

While these extra offerings allow employees to pick and choose, they come with strict regulations under the Employee Retirement Income Security Act (ERISA), which governs private health and pension plans. Its purpose is to protect plan participants (employees and beneficiaries) from mismanagement. Failure to structure a voluntary benefits plan in compliance with ERISA, or its safe harbor provisions, can mean liability for employers, their broker partners, and any associated service providers. 

New legal scrutiny

Historically, voluntary benefits programs flew under the radar of ERISA transgression. Whether employers designated their plans under ERISA or claim the protections of ERISA’s safe harbor exemption, little attention was given to the compliance of programs or their associated fees and broker commissions. Since late 2025, however, that has drastically changed, with an influx of lawsuits against employers and their brokers alleging ERISA violations, excessive fees, and prohibited transactions.  

This wave of litigation raises several questions. One, whether ERISA law applies to all voluntary benefits plans, including those that have sought its safe harbor exemption. Two, whether brokers and service providers are considered fiduciaries under ERISA’s rules. And three, whether employers are liable if the courts find their voluntary benefits arrangements in violation of ERISA. Cases such as these are currently pending. 

Safe harbor isn’t always a safe bet

What's clear is that plans may be at risk even when they claim exemption under ERISA’s safe harbor provisions. If a plan doesn’t satisfy exemption requirements, it triggers the full application of ERISA and its fiduciary responsibilities. Regardless of how employers classify their plan, it’s essential that they comply with ERISA’s safe harbor rules which can be difficult to satisfy.  

Safe harbor is granted on four conditions, and failure to meet any one of these will void a plan’s exemption.

• No employer contributions. Employees must pay 100% of a plan’s premiums. This can’t be done through pre-tax salary reductions under an IRC Section 125 cafeteria plan; only post-tax contributions are allowed.  
• No employer influence. Employee participation must be completely voluntary. Employers must not insist on employee participation in a plan, nor offer incentives that may influence participation.
• No employer endorsement. Employers may facilitate enrollment onto a plan and collect premiums through payroll deduction to pass to the insurer, but they may not endorse a plan.  Examples of “endorsement” include:
  • Using the employer’s name or logo on employee communications about voluntary benefits
  • Including a voluntary benefits plan with other ERISA plan documents
  • Recommending or showing enthusiasm for a plan (e.g. through employee webinars)
  • The concept of “endorsement” is quite vague, and employee perception may be considered. 
• No employer profit. Employers may not receive any profit from providing a plan. They may only receive “reasonable” compensation for administering plan provisions or payroll deductions. Also, employers’ broker partners and service providers may receive commissions or fees, but not beyond what could be viewed as “reasonable.” There’s no set dollar amount as to what’s considered “reasonable,” but steep commissions that fluctuate with new enrollment could be deemed excessive when compared to the benefit utilization or work performed.  

In short, regardless of an employer claiming safe harbor exemption, a litigant could make objective and subjective arguments, especially surrounding endorsement and profit, that they’re in violation of ERISA law.  

More exposure all around

If this is the case, it’s important to identify a plan’s fiduciaries—the people who manage it—as they may be held personally liable. These parties or individuals might be “named fiduciaries” as per the plan documents, “functional fiduciaries” as based on their actions, or “common fiduciaries” as based on their decisions.  

They generally include employers, broker partners, and plan service providers, but liability isn’t always clear. For example, brokers may claim to be “not fiduciaries” in their contract but could still be perceived as fiduciaries based on their actions, decisions, or oversight of a plan (as evidenced by allegations in recent litigation). 

Duties and liabilities

In terms of responsibility, fiduciaries carry a considerable load. And, when subject to ERISA analysis, they’re judged on everything from how they manage and monitor a plan to how they’re compensated for it. Any breach of fiduciary duty can result in liability for damages.

Under ERISA, there are four main fiduciary duties in relation to voluntary benefits.

• Loyalty. Act solely in the interest of plan participants and beneficiaries, receiving payment only for reasonable expenses.
• Prudence. Behave with care, skill, and diligence of a person familiar with such matters. This is often referred to as procedural prudence.
• Adherence. Operate the plan according to the written documents and instruments governing it, provided they’re consistent with ERISA.
• Employee interest. Avoid prohibited transactions, self-dealings, or actions that benefit the fiduciary at the expense of the plan. Specifically, fiduciaries must not:
  • Deal with any plan assets in their own interest or for their own personal account
  • Act in any capacity in a way that’s averse to the interest of the plan’s participants or beneficiaries  
  • Receive any consideration for their own account from any party in connection with a plan-related transaction

How to mitigate risk

Recent litigation has heightened the scrutiny of voluntary benefits plans operating under ERISA and thus increased the risk for employers who provide them. This extends to any brokers, strategic business partners, and service providers involved.  

There are several ways businesses can mitigate their risk, and these should be documented and retained for both internal and external audit purposes. 

1. Fiduciary committee. Create a group with the specific task of reviewing, selecting, and providing voluntary benefits plans. Adopt a charter for this committee and delegate fiduciary responsibilities. Hold regular meetings, e.g. quarterly, and make sure to document all minutes and activities.      
2. Administrative service agreements. Review these annually to ensure service levels are met and compliance standards are up to date. Don’t just sign a vendor’s standard agreement.      
3. Broker/consultant agreements. Review contracts annually to ensure expectations are satisfied in terms of support for your voluntary benefits plans.      
4. Broker/consultant fees. Ensure broker and consultant compensation (both direct and indirect) is transparent and reasonable. Consider any potential conflicts of interest. If running an ERISA plan, make sure broker compensation is accurately reported on annual Form 5500 filing.    
5. RFP calendar. Develop a strategy to conduct a regular RFP process, e.g. every three years, for all insured products and broker/consultant relationships.    
6. Market benchmarking. Conduct regular benchmarking, e.g. every two to three years, to compare plans in terms of product offering, design, and pricing. Also carry out and document regular reviews of the benchmarking process.    

While legal cases are still pending, the spotlight is on employer-provided voluntary benefits and we expect to see copycat lawsuits.

Now is the time for employers to review their plans’ contractual terms, management, oversight, and compliance. Howden has specialists who can review your current benefits programs, identify your exposures, and help mitigate your risk.  

To learn more, visit us at Howden Health & Benefits or view our on-demand webinar.