First of all, compliance is not optional; it’s the law! Second, employers who comply can avoid costly DOL penalties. Third, complying with ERISA helps employers reduce the impact of employee lawsuits.
Many states allow participants and beneficiaries to bring “bad faith” claims against insurers and administrators who deny benefits. In a state court, plaintiffs can collect the denied benefits plus compensatory damages, such as punitive or treble (triple) damages. Trials in state courts are decided by juries, which often favor the individual participant over a corporation or insurance company.
However, ERISA is a federal law which preempts state law. ERISA limits damages to the unpaid benefits and does not provide for jury trials. Having a plan that is in compliance with ERISA will help an employer avoid a lawsuit in a state court, and perhaps several different state courts. Being out of compliance creates exposure in either state or federal court.
In state court, every aspect of a case is subject to a “de novo” review, which disregards any previous decisions made in the matter, including issues that were not even in dispute. However, ERISA has a higher standard of review for overturning decisions of a plan administrator. In federal court, an administrator’s decision to deny a claim must be “arbitrary and capricious” before it can be overturned.
Many employers think “It’s not going to happen to me.” However, it happens a lot. In fact, there are a substantial number of cases where employers have been penalized by hundreds of thousands of dollars or more.