Top 3 Life Insurance Compliance Obligations for Employers

Group life insurance plans are a valuable benefit many employers offer to their employees. Employers may also provide employees the opportunity to purchase additional voluntary coverage for themselves or their dependents.

Administering a group life insurance plan may appear innocuous, however, failure to comply with 3 general requirements can have significant financial consequences for the employer.

1 – Evidence of Insurability

Most insurance policies are designed to have a coverage level amount (e.g., $50,000) that employees may elect that is a “guaranteed” level of coverage. This amount is known as a “guaranteed issue” and is available to all employees when they are first eligible to enroll in coverage. If an employee wants to enroll in an amount higher than the guaranteed issue or is enrolling at a time other than when they were first eligible for the coverage, the insurance provider requires the employee to complete an evidence of insurability (EOI) form.

Until the employee has returned their EOI form and the insurance provider has notified the employer of their approval of the employee’s level of coverage above the guaranteed issue, the employer should only deduct premiums from an employee’s paycheck for the guaranteed issue amount.   

Why does this matter? 

If the employee fails to return their EOI form, or the insurer does not approve the increased life insurance amount, the insurer has no contractual obligation to pay a life insurance benefit above the guaranteed issue amount.

What does this mean? 

By taking premium payments for the full amount of coverage the employee elected, the employer may be misrepresenting to the employee the amount of their life insurance coverage. If the employee were to pass away, the employer may be responsible for paying the difference between the guaranteed issue benefit amount and the amount elected by the employee. (Example:  Van Loo v. Cajun Operating Co., 703 Fed. Appx. 388 (6th Cir. 2017))

2 – Portability or Conversion Rights

Most group life insurance plans have portability or conversion provisions that allow an employee to continue their coverage after the employee terminates employment or is no longer actively working (e.g., disability leave). The provisions explaining the employee’s rights are found in the life insurance policy documents (e.g., summary plan description).

In addition to making sure employees receive a copy of the insurance plan documents, it is a best practice for an employer to notify an employee who is losing coverage of their rights by providing a portability or conversion form, or instructions on obtaining a form in an employee’s termination packet.

Why does this matter? 

If the employee does not elect to continue their policy, the insurance carrier is no longer obligated to pay life insurance benefits if the former employee passes away.  

What does this mean? 

If an employee is terminated from employment or is out on a leave of absence and an employer failed to provide a former employee of their rights to keep the coverage in place, they may be liable to pay the life insurance amount.

3 – Terminating coverage according to policy terms

Keeping an employee on benefits when they are not actively at work is risky. Group life insurance policies contain rules that define when an employee is eligible for coverage and how long coverage remains in effect when an employee is no longer actively at work.  

Employers need to be familiar with the terms of their group life insurance plan and properly terminate coverage when an employee is no longer eligible.

Why does this matter? 

An insurer is not responsible for paying a life insurance benefit for an employee who passes away if they were ineligible to be enrolled on the plan.

What does this mean? 

The employer may be liable to pay the life insurance benefit if they misrepresented to the employee that coverage was in effect. (Example: McBean v. United of Omaha Life Insurance Co. and By Referral Only, Inc., Case No. 18cv16MMA (JLB) (S.D. Cal. Apr. 5, 2019).

Best Practices for Administration

An employer needs to read their policy and be knowledgeable about the rules. If an employer requires clarity on how to apply the rules or their responsibility, they should contact the insurance provider for assistance or seek guidance from legal counsel.

If you have questions about the above or need help with an employee benefits administration question, please contact us. We would love to hear from you!

The Compliance Rundown is not a law firm and cannot dispense legal advice. Anything in this post or on this website is not and should not be construed as legal advice. If you need legal advice, please contact your legal counsel.

WARNING: Keeping an Employee on Benefits When They Are Not Actively at Work Is Risky

Employers who are trying to be generous by keeping employees on their benefits plan, may be making a costly mistake.

There are eligibility rules known as “actively at work clauses” for employer group benefits including medical, dental, vision, life, and disability. These provisions allow the insurer to exclude coverage for employees who are not working a minimum number of hours each week, such as when they are on a leave of absence because of an illness or furloughed.

If you have a fully insured plan, the carriers define the rules on how long an employee who is on an unprotected leave of absence (e.g., not out due to a reason covered by the Family Medical Leave Act (FMLA)) may remain on the plan before coverage must be terminated and continuation coverage (e.g., COBRA) offered. If you are self-insured, it is a conversation that should have been discussed when creating plan documents with the stop-loss carrier.

If an employer does not follow this provision and fails to terminate an employee and offer them continuation coverage, then the carrier may not cover any claims, leaving the employer financially responsible. It has been my experience, although the carrier leaves eligibility verification up to the employer, before paying a large claim, many carriers are thorough and review an employee’s status by asking for payroll records.

There is no standard rule for when an employee who is not actively at work must be terminated from active coverage. Often, for ease of administration, carriers will permit an employee to remain on the plan for up to 12 weeks to be the same as a protected leave of absence under the FMLA. However, an employer must check their plan documents and never assume. Once the employee no longer meets the definition of actively working, the employer should terminate the employee and offer continuation coverage. This includes providing port/covert paperwork for life and disability coverage.

If you have questions about the above, or need help with another employee benefits administration question, please contact The Compliance Rundown. We would love to hear from you!

The Compliance Rundown is not a law firm and cannot dispense legal advice. Anything in this post or on this website is not and should not be construed as legal advice. If you need legal advice, please contact your legal counsel.

Leave of Absence & Employee Benefits

Q: I have an employee whom is out on FMLA due to an injury outside of work. If he chooses to decline insurance at open enrollment and then comes back to work later this year, would he be able to re-instate his insurance at that time?

A: Yes. When an employee is on FMLA they do not have to continue their benefits and upon return to work, all benefits must be restored without requalification. (Even if the employee chooses not to retain coverage during leave, the employer is obligated to restore coverage upon reinstatement). Or stated another way, an employee is free to stop their benefits while on FLMA at any time and then have them reinstated upon return.

The “rule” behind this is found here: §825.209   Maintenance of employee benefits.

(e) An employee may choose not to retain group health plan coverage during FMLA leave. However, when an employee returns from leave, the employee is entitled to be reinstated on the same terms as prior to taking the leave, including family or dependent coverages, without any qualifying period, physical examination, exclusion of pre-existing conditions, etc. See §825.212(c).

Q: We are a small employer (35 employees) and are not required to give FMLA leave; however we have elected to do so for our one employee who is due to give birth in the beginning of October. The company does plan to cover our portion of the medical benefits and during the period that she does not draw a paycheck, she will pay her portion of benefits directly to us. When does leave officially start and what the best practice is notify the employee of this start?

A: Let’s start with the basics. An employer who is not subject to FMLA, can provide a leave of absence (LOA). This LOA however, would not be a “protected” leave (e.g. requiring benefits to continue) under the federal FMLA law. Therefore, the first consideration is to check with the insurance carriers. In general, when on an unpaid, unprotected LOA, this is considered zero hours worked. If the plan’s eligibility requirement is 30 hours/week, they would no longer be eligible for benefits and COBRA should be offered due to a reduction in hours. TIP: An employer will want to verify whether their carriers will allow benefits to be maintained for someone on an unprotected LOA.  (If self-funded, check with the stop-loss carrier.)

NOTE: All employers, regardless of size, should have a formal, written LOA policy in their employee handbook. This policy would outline the LOA “rules” (e.g., what qualifies, when it starts, if PTO has to be used first, how long permitted, payment schedule & late payment rules, etc.), which would ensure not only that their employees are aware of their “rights” but also to ensure it is applied on a uniform and consistent basis, to avoid employee relations issues & discrimination claims (an employment law issue).

An employer not subject to FMLA, could follow the guidelines for FMLA (Family and Medical Leave Act Employer Guide), assuming approval is obtained from carriers. Otherwise, again, coverage would terminate and COBRA offered when the employee is no longer working full-time.

Additional Resources:

“The Five Ws, and One H of Health Reimbursement Arrangement (HRAs)” Alera Group, 25 Aug. 2020,