Chapter 2 — Recipe for Fraud

As a result of the McCarran-Ferguson Act, insurance regulation in the United States is, in reality, a patchwork quilt of state-by-state laws — coordinated to some extent by the NAIC, with some aspects subject to federal mandates. It has been relatively easy for unscrupulous operators to exploit the seams within this confusing patchwork of rules and laws — bilking thousands of unsuspecting consumers out of millions of dollars by selling “phony” insurance plans.

Phony insurance scams typically occur when legitimate insurance is difficult to obtain — when premiums are rising or coverage is restricted, employers become vulnerable to promoters offering what appears to be a more affordable alternative. The following chapters explain the common vehicles these promoters use and the warning signs agents should recognize.

The Florida Department of Financial Services urges agents and consumers to verify before buying. The following are key warning signs of a phony insurance plan:

• If it sounds too good to be true, it usually is. Beware of prices significantly lower than others you’ve been quoted.
• Be suspicious if getting a quote is too easy and if brochure materials seem vague or evasive.
• Beware of claims that you are buying a “membership” or that what you are buying “is not insurance.”
• Beware of a company with many association names — sometimes with a “catch-all” category if you don’t fit into any of the others. Also be cautious if you are solicited for a “union plan.”
• If you are offered an ERISA plan, call the Florida Department of Financial Services to find out if it is valid.
• Allow yourself enough time to investigate. Don’t be rushed into a decision.
• Medical providers seeking coverage should identify the entity that would be financially responsible for paying their claims, then check with the Department to be certain the company is licensed in Florida. It is not enough that the agent who is offering the insurance is licensed.

One key area of exploitation is based on the wording of ERISA (Employee Retirement Income Security Act), passed in 1974 to safeguard private-sector pension plans and employee benefit programs. This federal law seemingly supersedes state regulation of employer-provided benefit plans. In reality, ERISA imposes certain requirements on many persons offering employee benefits, but does not override state insurance laws that may apply to these plans.

Congress amended ERISA in 1983 to more clearly spell out continued application of state insurance laws over ERISA plans. Unfortunately, the language of that amendment was written as an “exemption” to a “preemption” — effectively a double negative — creating confusion that operators have exploited for decades. By misinterpreting the complex and technical language of ERISA, these promoters have bamboozled unsuspecting employers who find affordable, legitimate health insurance coverage hard to come by.

One way these promoters exploit the unsuspecting is by packaging the benefit plan as a “multiple employer welfare arrangement” or MEWA. ERISA applies to health plans established by an individual employer or a “group or association” of employers. Single employer plans are exempt from state regulation, while multiple employer (association) plans are subject to state insurance laws.

Sometimes promoters will market their bogus plans as a “union plan,” “union ERISA plan,” or “union MEWA” — exploiting a legitimate exemption for collective bargaining agreements in federal law as a way to avoid state regulation.

Another variation on this scam is the so-called VEBA or “voluntary employee’s benefit arrangement.” VEBAs are legitimate arrangements under the federal tax code that provide tax deductions for employers who fund employee benefits. Promoters of bogus insurance have twisted that concept into an alleged exemption from state insurance laws.

A VEBA is a creature of the Internal Revenue Code (Sections 419 and 419a). It is not an insurance concept — it is merely a vehicle by which certain employee benefits, including health-care benefits, can be funded. It is a tax-exempt (not regulatory-exempt) vehicle. The fact that a VEBA is a creature of federal law does not change the reality that the risk-bearing entity must have a Certificate of Authority from the Florida Department of Financial Services as an insurer or as a MEWA.

Professional Employment Organizations (PEOs) or “employee leasing firms” transfer employees from a client firm to the leasing firm, which processes payroll, obtains workers’ compensation, and provides employee benefits. Because of economies of scale, PEOs can provide services at substantially lower cost. This is all perfectly legal.

However, ERISA views the employer-employee relationship as more than a technical transfer. Since the client firm continues to control work rules for the employee, under ERISA the client firm is considered the employer — not the PEO. The PEO’s benefit package, available to the employees of many different employers, is therefore classified as a MEWA and is subject to state insurance regulations.

Furthermore, Florida law (Section 468.529(1), F.S.) specifically prohibits PEOs from sponsoring a self-insured health plan. Claims by dishonest PEOs that they are exempt from state insurance laws due to ERISA pre-emption are just as bogus as claims by any other MEWA.

The bottom line: regardless of the guise, any benefit plan which assumes risk for two or more unrelated employers is subject to state insurance regulation. Likewise, if there is a commingling of funds of unrelated employers at any level — primary insurance, reinsurance, stop-loss coverage — the plan is subject to state insurance laws.