Many businesses over the past several years have been struggling, especially small businesses. For various reasons, including impending bankruptcy, garnishment of a bank account by a creditor, or needing to catch up on some other bills, sometimes an employer do not make the monthly health insurance premium payment, even though it withheld money from employees' wages for those premiums. The employers often think that if the business survives, it will "catch up" on its delinquent insurance bill. But if the business fails, the employees merely lost premium payments, and they will become priority creditors in a bankruptcy to recoup the withholding not used to pay for insurance. But the real problem arises when one of the employees visited a doctor and had tests performed, and received a bill for that $3500 MRI, or worse $25,000 in doctor and hospital bills for a surgery, all because the insurer revoked coverage for the employer's failure to make the insurance premium payments.
In the above situation, unless the employer is a state or local government or a church, the employer most likely created a welfare benefit plan covered by Employee Retirement Income Security Act ("ERISA") § 3(1), and the funds withheld from your wages to go towards the insurance premiums become plan assets "as of the earliest date on which such contributions . . . can reasonably be segregated from the employer's general assets." 29 C.F.R. § 2510.3-102(a)(1). The regulation provides a safe harbor for plans with fewer than 100 participants as of the start of the year, which would include the typical small employer. In that case, if the employer pays the insurance company within 7 days of withholding the money from employees' the funds will not be "plan assets" while in the employer's possession and until paid to the insurer. Id. § 2510.3-102(b).
If such withholding for insurance premiums become "plan assets", then mishandling of those assets by a fiduciary by not using the assets for the exclusive benefit of employees could subject such fiduciary to liability for breach of fiduciary duty under ERISA § 409. An unsophisticated employer may believe this would only be a debt of the corporation, but this liability extends to any person who exercised any authority or control over the plan assets. ERISA § 3(21)(A). This means whomever had the authority or control to not pay the insurance premiums with the employees' withholding will most likely be a fiduciary subject to liability. And that liability could include all bills issued to employees that would have been paid by the insurer had the employer not mismanaged the plan assets and instead paid the insurance premiums. See In re Louis Jones Enters., Inc., 442 B.R. 126 (Bankr. N.D. Ill. 2010); In re Charter Graphic Servs., 230 B.R. 759 (Bankr. N.D. Tex. 1998). Similar facts could arise with disability insurance or life insurance. If you have not received benefits that should have been paid for with your withholding for insurance, consult an experienced ERISA lawyer.