United States District Court, Northern District of Illinois, Eastern Division
March 14, 2002
DOLORES J. RUSSO, PLAINTIFF,
B & B CATERING, INC., AND JEFFREY DZIEDZIC, DEFENDANTS.
The opinion of the court was delivered by: Moran, Senior District Judge.
MEMORANDUM OPINION AND ORDER
Plaintiff Dolores J. Russo filed this action alleging that her
employer, defendant B & B Catering, Inc. (B & B), violated
ERISA, 29 U.S.C. § 1022, 1024(b)(1), by failing to timely
notify her that her health insurance had been terminated.
Plaintiff also alleges that defendant Jeffrey Dziedzic, a B & B
employee, is individually liable as a plan fiduciary. The
parties have filed cross motions for summary judgment. Plaintiff
agrees to the dismissal of Dziedzic, leaving B & B as the only
remaining defendant. Subsequent to defendant's motion, plaintiff
filed an amended complaint adding a conversion claim. The
instant motions, however, only address the ERISA claims. For the
following reasons, we grant summary judgment for plaintiff with
respect to liability.
In 1996, B & B offered its employees medical insurance through
a group policy. It used a broker to select a carrier and
contracted with United Health Care. Eligible employees were
invited to enroll and to have their premiums deducted from their
regular paychecks. Initially the company contributed 50% of the
premiums and employees paid the remainder. B & B filed for
Chapter 11 bankruptcy protection in December 1996, leading
United Health Care to cancel the policy in February or
March 1997. Employees were informed of this cancellation
sometime in March. Later in 1997, B & B contracted with another
medical insurer, Protective Life. Once again, the company
contributed 50% of the premium, and withheld the remaining 50%
from participating employees' paychecks That policy ended in
June or July 1998
In September 1998, B & B contracted with Rush Presbyterian
(Rush) as its new group insurer. For a brief period it paid 100%
of the premiums. In January 1999, approximately four months
after the initiation of the policy, B & B informed its employees
that it would cease contributing to the insurance premiums
entirely — employees themselves would now be responsible for
100% of the premiums. However, the company would continue to
deduct the relevant premiums from weekly paychecks and pay the
insurer directly. Employees were given the option to decline
coverage. This they could do by notifying Rush directly, rather
than by going through B & B. Rush sent its materials, including
descriptions of the coverage, identification cards, and
termination forms, to covered employees at their homes, not
through B & B.
B & B's financial difficulties continued, and although it
continued to deduct insurance premiums from employees'
paychecks, several of its checks in payment for the premiums
were returned unpaid by the bank. As a result, Rush cancelled
the policy in June 1999. B & B claims it had no knowledge of the
cancellation until it was informed by its broker in September
1999, shortly after which time it informed its employees,
B & B reimbursed plaintiff for any medical expenses incurred
by her during gaps between insurance policies. However, because
of the time lapse following Rush's termination, plaintiffs
preexisting condition has prevented her from acquiring new
The court may only grant summary judgment when there are no
genuine issues of material fact and the moving party is entitled
to judgment as a matter of law. See Celotex Corp. v. Catrett,
477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). We
must also draw all inferences and view all admissible evidence
in the light most favorable to the non-moving party. See
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct.
2505, 91 L.Ed.2d 202 (1986). This does not mean there must be
absolutely no evidence supporting the non-moving party, but
rather there is not enough to support a reasonable jury verdict.
Id. at 248, 106 S.Ct. 2505.
I. Does ERISA apply?
An ERISA employee welfare benefit plan must be "(1) a plan,
fund or program; (2) established or maintained; (3) by an
employer or employee organization or by both; (4) for the
purpose of providing medical, surgical, hospital care, sickness,
accident, disability, death, unemployment or vacation benefits
. . .; (5) to participants or their beneficiaries." Postma v.
Paul Revere Life Ins. Co., 223 F.3d 533, 537 (7th Cir. 2000).
The second element, whether plaintiffs health insurance plan was
established or maintained by B & B, is at issue here.
The critical factor is the employer's level of administrative
involvement in the plan. Defining which employees are eligible
to participate, contributing to premiums and performing some
administrative functions can all implicate ERISA. On the other
hand, allowing insurance carriers access to employees on a
neutral basis, or withholding the employees' premiums from
paychecks is generally not enough to bring a plan within ERISA's
coverage. See Brundage-Peterson v. Compcare Health
Services Ins. Corp., 877 F.2d 509, 510 (7th Cir. 1989). We
also consider a Department of Labor regulation that excludes
certain group insurance plans from ERISA, if
(1) No contributions are made by an employer or
(2) Participation the program is completely voluntary
for employees or members;
(3) The sole functions of the employer or employee
organization with respect to the program are, without
endorsing the program, to permit the insurer to
publicize the program to employees or members, to
collect premiums through payroll deductions or dues
checkoffs and to remit them to the insurer; and
(4) The employer or employee organization receives no
consideration in the form of cash or other wise in
connection with the program, other than reasonable
compensation, excluding any profit, for
administrative services actually rendered in
connection with payroll deductions or dues checkoffs.
29 C.F.R. § 2510.3-1(j).
For a plan to remain outside of ERISA, employer neutrality is
imperative. If the arrangement favors a finite set of plans over
employees shopping for insurance in the open market, the favored
plans are considered to have been established by the employer.
See Stange v. Plaza Excavating, Inc., 2001 WL 114407 at *4
(N.D.Ill. Feb. 7, 2001), citing Thompson v. American Home
Assurance Co., 95 F.3d 429, 436 (6th Cir. 1996) and Johnson v.
Watts Regulator Co., 63 F.3d 1129, 1134 (1st Cir. 1995).
Although not dispositive, an employer's payment of employees'
premiums will almost invariably implicate ERISA. First, the
regulatory safe harbor explicitly excludes such plans. And
second, employer contributions will favor the employer-sponsored
plan over others, negating neutrality. It is noteworthy that
neither party has identified a case where the court found ERISA
inapplicable to the plan in question. See, e.g.,
Brundage-Peterson, 877 F.2d at 511 (employer contracted with
two insurers, designated eligibility and paid premiums);
Postma, 223 F.3d at 538 (employer paid premiums and performed
administrative functions); Sofo v. Pan-American Life Ins. Co.
v. Contingency Resources, Inc., 13 F.3d 239, 241 (7th Cir.
1994) (employer contracted with insurer, designated eligibility,
paid 50% of premiums, performed some administrative functions
and declared intent to invoke ERISA); Lopez v. Guardian Life
Ins. Co. of Amer., 834 F. Supp. 251 (N.D.Ill. 1993) (employer
responsible for notifying employees of continuation rights,
revising monthly payment schedules and assuming liability for
continued health benefits).
For better or worse, Congress legislated broadly and the
Supreme Court has construed that language to reach virtually all
employee benefit plans. See Brundage-Peterson, 877 F.2d at
512, citing Metropolitan Life Ins. Co. v. Taylor, 481 U.S. 58,
107 S.Ct. 1542, 95 L.Ed.2d 55 (1987). We are also mindful of the
Seventh Circuit's warning that a "complicated, variable,
case-by-case standard . . . would create more uncertainty and
litigation than the gain in substantive justice would warrant.
Employers, employees, and insurance companies would have no
clear idea whether their rights and obligations were defined by
federal law or by state law." Brundage-Peterson, 877 F.2d at
511. To avoid this problem we must construe the safe harbor
narrowly. Only a minimal level of employer involvement is
necessary to trigger ERISA.
The plan in question was established in September 1998, when
defendant contracted with Rush to provide group coverage for its
employees. The employer's responsibilities included providing
claim forms to employees, accepting proof of loss forms
from employees and notifying employees of continuation
rights.*fn1 This is far more active than simply permitting an
independent insurer access to its employees. At the plan's
inception B & B also paid the entire premium for its employees.
This arrangement is comparable to others that have been held to
be within ERISA's coverage in that defendant contracted with a
single insurance provider and provided some administrative
support for that plan. See, e.g., Brundage-Peterson, Postma,
Sofo, Lopez, supra. We find that ERISA applied to B & B's group
health plan as initially established.
Defendant counters that once it ceased contributing to
premiums in January 1999, its plan should no longer have been
governed by ERISA. The addition of employer contributions can
certainly bring a non-ERISA plan within the statute. See
Postma, 223 F.3d at 538. But neither party has cited any
authority on the issue of whether terminating the employer's
contribution can remove an ERISA plan from the statute's
purview. The test's disjunctive language — established or
maintained — suggests that ERISA still applies. Even if the plan
is no longer maintained by the employer, it was still
established by the employer. Once an employer has established an
ERISA plan, it may well have to terminate the plan and establish
a new one if it wants to be outside the federal statute. B & B
did not do so. When defendant discontinued its contributions, it
explicitly stated that it was modifying the plan, not
terminating it. This alone is sufficient to keep the plan within
ERISA. Regardless, the plan as modified was still an ERISA plan.
Although participation in the plan was voluntary, B & B was not
neutral. It distributed, collected and remitted claim forms for
only one insurer This administrative support put Rush in a
The bigger picture only corroborates this result. Over a
three-year period, defendant initiated contracts with three
different insurance companies. In the interim, B & B
self-insured, reimbursing employees for medical expenses
incurred between contracts. Defendant was much too involved in
the whole insurance process to avoid ERISA or qualify for the
II. Did Defendant Violate ERISA?
Plaintiff alleges that B & B, as plan administrator, was
obligated to notify her of circumstances that could result in
loss of benefits under the plan and, as a plan fiduciary, was
obligated to inform her that her insurance coverage had been
terminated. Defendant denies having knowledge of the termination
before September 1999, and maintains it was not a plan
Employers must inform plan participants of any circumstances
that could affect benefits available under the plan.
29 U.S.C. § 1022. Defendant asserts that it complied with this by informing
plaintiff that Rush had terminated the plan in September, when
defendant claims it first learned of the termination. We
disagree. Defendant's office manager admits having knowledge
that the bank had refused to honor the premium checks. The
policy explicitly states (if it were not already obvious) that
failure to pay premiums is grounds for termination. Nor was this
a single incidence. Multiple premium checks had been returned
unpaid, and one of B & B's previous insurers had terminated a
policy for the same reason — unpaid
premiums. Defendant can hardly claim ignorance of the fact that
plaintiffs benefits were in jeopardy.
We now turn to the question of whether B & B was a plan
fiduciary and therefore responsible for notifying participants
within 60 days of any modification or termination.
29 U.S.C. § 1024(b)(1). The statute defines a fiduciary as one who, among
others, "exercises any authority or control respecting
management or disposition of its assets."
29 U.S.C. § 1002(21)(A). "ERISA makes discretion the sin qua non of
fiduciary duty." Pohl v. National Benefits Consultants, Inc.,
956 F.2d 126, 129 (7th Cir. 1992). It is equally clear that
fiduciary duties are divisible. One can be a fiduciary with
respect to only specific functions. See Plumb v. Fluid Pump
Service, Inc., 124 F.3d 849, 854 (7th Cir. 1997). Although
collecting premiums from employees and transferring those funds
to the insurer would normally be considered ministerial, see
29 C.F.R. § 1509.75-8(8), the facts here aptly demonstrate that there
is an element of discretion in that process — defendant
controlled the withheld funds. Defendant did not segregate the
premiums in a separate account for transfer to Rush. Instead,
defendant commingled the withheld premiums with other working
capital in its regular checking account. Those funds were
ultimately spent on other things and the checks to Rush bounced.
Once those funds were withheld from employees' paychecks, they
were plan assets. Defendant's decision not to earmark those
funds for health insurance premiums was discretionary. For the
limited purpose of ensuring that those assets were used to pay
health insurance premiums, defendant was a fiduciary.
B & B's group plan contract does not explicitly state who is
responsible for notifying participants of premium deficiencies.
Absent an express provision to the contrary, Illinois law puts
this burden on the employer. See Martz v. Union Labor Life Ins.
Co., 757 F.2d 135, 141 (7th Cir. 1985); P.I.A. Michigan City,
Inc. v. National Porges Radiator Corp., 789 F. Supp. 1421, 1425
(N.D.Ill. 1992). In P.I.A., the court held that the same
default rule applied under ERISA. The employer, not the insurer,
was responsible for informing participants that the premiums had
not been paid. 789 F. Supp. at 1425. Although not directly
applicable, the court found it relevant that the employer was
specifically responsible for informing participants of
continuation rights because it was "an indication that the
policy does not contemplate notice by [the insurer]." Id. at
1426 n. 4. Defendant's contract with Rush contains an identical
provision making B & B responsible for notifying participants of
continuation benefits, and we agree with the inference drawn in
P.I.A. When defendant's failure to segregate the withheld
funds led to returned checks, ultimately leading to termination
of coverage, it was obligated to notify its employees so they
could pay the premiums directly or secure other insurance.
Defendant's failure to do so violated ERISA.
For the foregoing reasons, plaintiffs motion for summary
judgment against defendant B & B Catering is granted with
respect to liability. The claim against defendant Dziedzic is