When New York adopted a wage parity law setting minimum wage and benefit levels for home care workers, innovative home health care agency companies created a captive plan structure to meet the benefits requirements. Although aides may feel that they are being cheated under such a captive plan, a recent court decision in Gonzalez de Fuente, et al. v. Preferred Home Care of New York LLC, et al., 1:18-cv-06749 severely limits aides’ ability to contest the utilization of a captive structure.
In 2018, current and former certified home health care aides filed the first lawsuit to target use of captive insurance companies to provide health benefits; this month, plaintiffs’ lawsuit was dismissed for lack of subject matter jurisdiction, marking an important decision for those who are participating in, or are contemplating participating in, a captive plan in order to provide state-mandated benefits for employees.
Plaintiffs home health care aides’ lawsuit, filed in the U.S. District Court for the Eastern District of New York, alleged that the their employers, home health care agencies, used a captive insurance company to cheat their employees out of millions of wage parity monies which would be paid in wages or employee benefits. Specifically, the lawsuit alleged that in order to satisfy the benefit portion of their obligations under the Wage Parity Law, the employer defendants provided health benefits through a welfare benefit plan, a self-funded employee health benefit plan under ERISA. The lawsuit further alleged that the employer defendants' trust entered into an agreement with a captive insurance company in which the captive agreed to assume a 75% share of the plan's welfare benefit obligations and that this arrangement—a so-called "captive insurance scheme"—was designed to refund benefit dollars to the employer defendants. According to the plaintiffs, in a captive insurance scheme, the employer pays premiums to the captive insurer, which then uses the premiums to establish a reserve to pay covered medical claims. Meanwhile, the captive insurer invests the reserve amount and returns investment profits and excess premiums to the employer. The plaintiffs alleged that this arrangement violated the Employee Retirement Income Security Act of 1974, 29 U.S.C. § 1001 et seq. (“ERISA”) and the New York Home Care Worker Wage Parity Act, N.Y. Public Health Law § 3614-c (“Wage Parity Law”).
On October 9, 2020, United States District Judge Ann M. Donnelly granted defendants’ motion to dismiss plaintiffs’ ERISA claims (and declined to exercise jurisdiction over the remaining state law claims), resting her determination on the finding that the plaintiffs did not have standing. This ruling was based on the recent Supreme Court decision in Thole v. U.S. Bank, Nat’l Ass’n, 140 S. Ct. 1615 (2020), which held that the Thole plaintiffs did not have Article III standing to challenge the management of their defined-benefit retirement plan, because the Thole plaintiffs received defined fixed monthly contributions regardless of the plan's value.
Like in Thole, the recent decision in the Preferred/Edison case found that plaintiffs were plan participants who were guaranteed certain health benefits, regardless of the plan's funding. Notably, only employer dollars were paid to the captive for the reinsurance, and thus the captive was not an ERISA plan asset (as it would have been if employee dollars were comingled with employer dollars). The Court noted that while the plaintiffs cited the plan's high out of pocket costs and accessibility issues, they did not claim that they were denied any of the healthcare benefits promised under the plan; nor did they allege that plan management was so egregious that it substantially increased the risk that the plan and the employer would not be able to pay the participants' future pension benefits. The Court therefore dismissed plaintiffs' ERISA claims for lack of subject matter jurisdiction, in accordance with the ruling in Thole.
Those involved with any type of health plan using a captive insurance company should carefully analyze the legality of the plan under the compliance issues raised in the Preferred/Edison lawsuit.