Courts have long held that when an employee is on disability leave and the employee’s normal compensation is paid out of the employer’s general assets, a payroll practice exists, and it is not subject to ERISA. In a recent decision, the United States District Court, Northern District of Utah further clarified the payroll practice issue as it relates to “buy-up” options.
Plaintiff was on short term disability leave for an illness. The Plan covered 80% of his pre-disability income, and was paid from the employer’s general assets. The employee also purchased a “buy-up,” or self-insurance coverage, for the remaining 20% of his pre-disability income. Plaintiff was denied his short term disability benefits and he brought a claim in state court. The Defendants removed the case to federal court on the basis that the claims at issue were preempted by ERISA. Plaintiff filed a motion to remand asserting that the Plan was exempt from ERISA because it was a payroll practice.
The Court agreed with Plaintiff, and remanded the case to state court on the basis that the Plaintiff’s option to “buy-up” insurance to cover the remaining 20% of his additional income did not take it out of the payroll practice exemption. The Court reasoned that the Department of Labor regulations specifically state that when payments are made from the employer’s general assets that either equal or represent a significant portion of an employee’s compensation it constitutes a payroll practice. In this case, the employer was covering 80% of the plaintiff’s pre-disability income. The Court held this constituted a significant portion of the employee’s income, and therefore was a payroll practice. The Court also noted that it would not adopt Defendants’ argument that when an employee opted to exercise a “buy-up” option at his own expense that it was no longer a payroll practice. The Court held that such a situation would be untenable for the Plan to manage, and it would bypass the purpose of ERISA which is to safeguard employees from the abuse and mismanagement of funds.
The U.S. District of Utah’s decision is consistent with the already established case law that has declined to identify any exceptions to the Department of Labor’s payroll practice regulation. Following case precedents, it is clear that when an employer is paying out of its general assets equal to or a significant portion of an employee’s compensation, a payroll practice exists, and it will not be subject to ERISA.
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This decision may be cited now as persuasive non-precedential authority. The decision may be modified by further proceedings in the district court or on appeal.
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