Voluntary Benefits Under the Microscope: What Employers Need to Know Now

Voluntary health and welfare benefits have long been perceived by many as a flexible, low-risk way for employers to enhance total rewards offerings without significantly increasing costs. That perspective is now being tested.

Whether so-called “voluntary” benefits truly qualify for exemption from the Employee Retirement Income Security Act of 1974 (“ERISA”) is being scrutinized as a result of a new wave of ERISA class action lawsuits filed against employers and their service providers. As a result, programs that were historically implemented with minimal oversight are increasingly becoming a potential source of unexpected risk.

Safe Harbor Exemption From ERISA

A Department of Labor (the “DOL”) safe harbor creates a narrow exemption from ERISA’s definition of an “employee welfare benefit plan” for certain voluntary insurance arrangements offered in the workplace. To qualify and remain exempt from ERISA, four conditions must be satisfied:

1. No Employer Contributions. The benefit must be funded entirely by employees - no employer contributions are permitted. Even reimbursements of employee premiums or employer facilitation of pre‑tax payroll deductions (e.g., via a cafeteria plan) can constitute an employer contribution.
2. Completely Voluntary Participation. Employees must freely choose to participate. Any requirement, incentive, or default enrollment by the employer can negate voluntariness and eliminate application of the safe harbor.
3. Limited Employer Role (No Endorsement). The employer’s role with respect to the arrangement must be strictly Typical permitted activities include:
   • Permitting the insurer or issuer to publicize the program to employees; and
   • Collecting premiums through after-tax payroll deductions (and remitting to the insurer).

   As there is no clear definition of what is considered to be an "endorsement,” this factor is often viewed as the most difficult of the safe harbor requirements to satisfy.

4. No Consideration Other Than Reasonable Administrative Reimbursement.
   An employer cannot receive any cash or benefits from the insurer or plan in connection with offering the program, other than reasonable compensation for actual administrative services (e.g., processing payroll deductions). Profit‑sharing or other indirect compensation can invalidate reliance on the safe harbor.

Why This Matters for Employers

Accident coverage, critical illness benefits, hospital indemnity plans, supplemental life and disability insurance, and similar offerings are ubiquitous in today’s workplace. Yet many employers underestimate how easily these programs can become subject to ERISA and other corresponding benefits laws.

Seemingly routine actions - endorsing a benefit, negotiating terms with a vendor, helping employees resolve claims issues, or incorporating employer branding into benefit materials - can convert a voluntary program into an ERISA-covered plan, with significant compliance consequences.

The result? Employers may unknowingly face exposure to fiduciary liability, reporting failures, legal compliance failures, and litigation risk.

What Regulators and Plaintiffs Are Focusing On

Recent scrutiny has centered on whether employers are doing more than simply allowing vendors to market voluntary benefits to employees. Key areas of focus include the level of employer involvement in plan design and administration, communications that imply employer sponsorship or recommendation, negotiation of pricing or coverage terms, compensation or incentives received from benefit vendors (even if indirect), and failure to prudently select and monitor voluntary benefit insurers.[1]

These issues often surface during DOL audits, participant complaints, corporate transactions, or class-action lawsuits.

The Hidden Cost of Getting It Wrong

If a voluntary benefit does not qualify for the ERISA safe harbor exemption, employers may face obligations they never planned for with respect to their voluntary benefit plans, including but not limited to:

• Maintaining ERISA-compliant plan documentation for each benefit;
• Meeting summary plan description document and distribution requirements;
• Filing Form 5500s for each benefit;
• Applying COBRA, HIPAA, and other benefits laws to such benefits;
• Active plan management to meet fiduciary duties; and
• Providing for, and administering, ERISA claims and appeals procedures for each benefit.

Failure to meet these obligations could result in penalties under ERISA (as well as other laws), such as penalties for failing to file a Form 5500 (up to $2,739 per day, adjusted annually) and failing to produce required plan documents upon request (up to $110 per day, beginning 30 days after a participant request).

Honigman Recommendations

Employers should consider re-evaluating their voluntary benefits programs now, before the DOL or plaintiffs attempt to do it for them.

Practical risk-management considerations include:

1. Conducting a targeted compliance review of all voluntary benefits. A compliance review of voluntary benefits can help assess the likelihood of the benefit meeting the safe harbor exemption.
2. Proactively aligning employer practices with intended safe harbor exemption treatment. For example, review employee communications and enrollment materials to determine if they should be updated and reassess vendor relationships and compensation structures to ensure best practices are being followed.
3. Determining when it makes sense to intentionally treat a health and welfare benefit as ERISA-covered and comply accordingly. For benefits that may not meet ERISA’s safe harbor exemption (e.g., where it is not certain that the employer has not “endorsed” the voluntary benefit), employers should consider treating the benefit as subject to ERISA (and other corresponding benefit laws).

How Honigman Can Help

Honigman’s Employee Benefits and Executive Compensation practice group helps employers navigate the evolving regulatory landscape surrounding voluntary health and welfare benefits. With increased scrutiny becoming the norm - not the exception - now is the time to take a closer look at your voluntary benefits portfolio. For more information, please contact any member of Honigman’s Employee Benefits and Executive Compensation practice group.

[1]E.g., see: Braham v. Laboratory Corporation of America Holdings (N.D. Ill., filed December 23, 2025); Primm v. United Airlines, Inc. (N.D. Ill., Filed December 23, 2025); Fellows v. Universal Services of American, LP (d/b/a/ Allied Universal) (S.D. N.Y., filed December 23, 2025); and Brewer v. CHA/Community Health System (N.D. Ill., filed December 23, 2025).