By: HUB's EB Compliance Team

Employer-sponsored life and disability benefit plans often require that employees provide Evidence of Insurability (“EOI”) before certain coverage or coverage amounts take effect. Typically, EOI is provided through health questionnaire, and sometimes a medical exam. When payroll deductions are taken before insurer EOI approval, the mismatch between the coverage an employee is paying for and the coverage they actually have can go unnoticed for years. Recent Department of Labor (“DOL”) settlements and federal appellate court decisions confirm that this is not merely an administrative inconvenience: it can expose employers and insurers to liability under the Employee Retirement Income Security Act of 1974 (“ERISA”). Plan sponsors should understand EOI requirements and evaluate their payroll practices to ensure the two are aligned.

EOI Basics

The requirement to provide EOI most commonly arises in group life and disability insurance. Carriers typically establish a Guaranteed Issue (“GI”) amount — the maximum benefit available without medical underwriting — for employees who enroll when first eligible. An employee who elects coverage above the GI amount, misses the initial enrollment window, or requests a benefit increase beyond a permitted open-enrollment step-up must submit EOI, and coverage above the GI amount does not take effect until the carrier approves the application.

Similar insurability requirements do not apply to group medical, dental, or vision coverage. The HIPAA nondiscrimination rules prohibit group health plans from using health-status factors — a category that expressly includes evidence of insurability — to restrict eligibility or vary premiums among similarly situated individuals. This effectively precludes medical underwriting at the group health plan level, which is why the payroll-alignment issue discussed below arises almost exclusively in group life and disability contexts.

EOI in Practice

Issues involving EOI most often surface with newly eligible employees. For example, suppose a plan has a GI amount of $200,000 and a plan maximum of $500,000. A new employee who elects $400,000 of life insurance automatically receives the $200,000 GI amount; the remaining $200,000 is subject to EOI and does not take effect until the carrier approves it.

Until EOI is approved, the employee's premium should reflect only the $200,000 of coverage actually in force. If the carrier approves the application, the premium is adjusted going forward to reflect $400,000 in coverage. If the EOI is denied — or never completed — the premium should remain unchanged with the employee paying only the GI amount.

Where Payroll and EOI Status Diverge

Problems arise when payroll deductions are set based on the coverage an employee elected rather than the coverage approved, or when the employer and carrier fail to communicate an EOI denial. Continuing the example above, an employee who begins paying premium for the full $400,000 immediately upon electing coverage is paying for coverage that they do not yet have. If the EOI is later denied, the excess premiums must be refunded.

A more serious problem arises when the employer is never notified of an EOI denial and continues collecting premium for the full elected amount indefinitely. In that scenario, the employee may pay for coverage they never had for the remainder of their employment — an issue that often is not discovered until a claim is filed.

This is not a hypothetical risk. The DOL's Employee Benefits Security Administration (“EBSA”) has pursued a series of enforcement actions against major life insurance carriers for exactly this pattern: accepting premiums for supplemental coverage for months or years without resolving EOI status, then denying death claims when a required EOI was never on file. In recent years, EBSA reached settlements with several insurance carriers. While the specific terms of each settlement vary, they all restrict how long a carrier may wait before resolving EOI status or deny a claim on EOI grounds.

Federal courts have reached mixed conclusions regarding fiduciary exposure in this context. Some have found that a carrier breached its fiduciary duties of prudence and loyalty by maintaining an enrollment system that allowed it to collect premiums from an employee without ever confirming whether EOI was approved. Other courts have declined to find a fiduciary breach where the plan documents assigned responsibility for tracking and notifying employees of incomplete EOI to the employer rather than the insurer. Read together, these decisions establish that fiduciary responsibility for EOI administration is not automatic for either party — it depends on which entity the plan documents and administrative practice assign that function to. Plan sponsors should not assume the carrier is solely responsible for catching payroll misalignment.

A Worst-Case Scenario

The stakes are highest when an employee dies while paying premium for coverage that was never approved. Building on the example above, if the employee dies while paying premium calculated on $400,000 but EOI was never approved, the carrier will typically pay benefits based only on the $200,000 GI amount, consistent with the plan's written terms. The carrier will generally treat the payroll error as an administrative failure outside its responsibility.

The employee's beneficiaries, however, are likely to expect the full $400,000 for which premium was paid. Whether the employer bears responsibility for that shortfall depends on how the plan documents allocate EOI-tracking duties. Where those documents assign the employer this administrative function, a failure to reconcile payroll deductions with actual coverage may constitute a failure to administer the plan in accordance with its written terms — potentially exposing the employer to liability for breach of fiduciary duty under ERISA, including responsibility for the gap between premiums collected and benefits actually payable.

Employer Best Practices

  1. Confirm, for each line of coverage requiring EOI, which party — employer or carrier — is responsible for tracking EOI status and notifying the other of approvals or denials under the terms of the plan documents.
  2. Set payroll deductions to reflect only the coverage amount currently approved (typically the GI amount), adjusting deductions only after receiving carrier confirmation of EOI approval.
  3. Establish a periodic audit — at least annually — comparing payroll deduction records against carrier-confirmed coverage amounts to identify discrepancies before a claim is filed.
  4. When an EOI is denied or never completed, promptly refund any excess premium collected, retroactive to the date the overpayment began.
  5. Review carrier contracts and plan documents to confirm EOI notification timelines and responsibilities are clearly defined and consistent with current DOL settlement expectations.

Conclusion

Administration of EOI sits at the intersection of payroll, HR, and carrier operations, which makes misalignment easy to miss and costly to unwind. Given active DOL enforcement history and the fiduciary exposure confirmed in recent appellate decisions, plan sponsors should treat EOI-payroll reconciliation as a recurring compliance function rather than a one-time setup task.

If you have any questions, please contact your HUB Advisor. View more compliance articles in our Compliance Directory.

NOTICE OF DISCLAIMER

Neither Hub International Limited nor any of its affiliated companies is a law or accounting firm, and therefore they cannot provide legal or tax advice. The information herein is provided for general information only and is not intended to constitute legal or tax advice as to an organization’s or individual's specific circumstances. It is based on Hub International's understanding of the law as it exists on the date of this publication. Subsequent developments may result in this information becoming outdated or incorrect and Hub International does not have an obligation to update this information. You should consult an attorney, accountant, or other legal or tax professional regarding the application of the general information provided here to your organization’s specific situation in light of your or your organization’s particular needs.