The Office of General Counsel issued the following opinion on January 31, 2005 representing the position of the New York State Insurance Department.
Re: Death Benefits, Self Funding
Question Presented:
May an employer self-fund a program whereby it pays a benefit to the individuals beneficiary upon the death of an executive?
Conclusion:
Since such a program would be governed by the Employee Retirement Income Security Act (ERISA), 29 U.S.C.A. § 1001 et seq. (West 1999 and 2003 Supplement), the jurisdiction of the New York Insurance Department has been preempted.
Facts:
An insurance agent licensed in accordance with New York Insurance Law § 2103(a) (McKinney 2000 and 2005 Supplement), and as an insurance broker in accordance with New York Insurance Law § 2104 (McKinney 2000 and 2005 Supplement), has a client that self-funds its health benefits plan and purchases a group life insurance policy to fund a program whereby a sum of money is paid to the beneficiary upon the death of one of its executives. The client now desires to self-fund the death benefit program through the amounts heretofore paid in premiums to the life insurance company.
It was inquired if such self-funding would be prohibited by the New York Insurance Law (McKinney 2000 and 2005 Supplement) and the regulations issued thereunder. If such self-funding would not be prohibited, it was inquired whether the client would have to be "bonded" or purchase reinsurance.
Analysis:
New York Insurance Law § 1101(a) (McKinney 2000 and 2005 Supplement) defines doing an insurance business:
In this article: (1) Insurance contract means any agreement or other transaction whereby one party, the insurer, is obligated to confer benefit of pecuniary value upon another party, the insured or beneficiary, dependent upon the happening of a fortuitous event in which the insured or beneficiary has, or is expected to have at the time of such happening, a material interest which will be adversely affected by the happening of such event.
(2) Fortuitous event means any occurrence or failure to occur which is, or is assumed by the parties to be, to a substantial extent beyond the control of either party.
Unless otherwise exempt, New York Insurance Law § 1102 (McKinney 2000 and 2005 Supplement) prohibits the doing of an insurance business by an entity without a license from the Insurance Department. The provision of health benefits by an employer or the payment of a benefit upon the death of an employee would constitute the doing of an insurance business.
ERISA, 29 U.S.C.A. § 1102(1) (West 1999) defines an employee welfare benefit plan:
(1) The terms employee welfare benefit plan . . . mean any plan, fund, or program which was heretofore or is hereafter established or maintained by an employer . . . to the extent that such plan, fund, or program was established or is maintained for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise, (A) medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, death . . . .
The provision of a benefit upon the death of an employee also constitutes an employee welfare benefit plan, if the plan is funded. Dependahl v. Falstaff Brewing Corp., 653 F 2d 1208 (8th Circ. 1981).
ERISA, 29 U.S.C.A. § 1144(a) (West 1999) preempts state jurisdiction over self-funded employee welfare benefit plans. Accordingly, the Insurance Department cannot impose any requirements on such self-funded plans. Questions concerning any bonding and reinsurance requirements should be addressed to:
Employee Benefit Security Administration
United States Department of Labor
Room 575
JFK Federal Office Building
Boston, MA 02203
For further information you may contact Principal Attorney Alan Rachlin at the New York City Office.