CHAPTER 39 LEGAL SERVICES PLANS

Transcription

1 CHAPTER 39 LEGAL SERVICES PLANS Introduction Employed persons usually do not qualify for legal aid or the services of public defenders. Most people tend to postpone seeking legal information and assistance until their needs become acute and, typically, more costly, according to the American Bar Association (ABA). Thus, wills go unwritten and legal documents go unchecked. Legal services plans can provide affordable legal representation and consultation for many who would otherwise not obtain such services. 1 Legal services plans are arrangements between a group of people and one or more lawyers to obtain legal assistance. Although such plans have been in existence since the late 1800s, their development was hindered well into the 1900s by bar associations, which opposed the plans on grounds that they constituted a form of client solicitation. However, four U.S. Supreme Court decisions between 1963 and 1971 recognized the constitutional right to obtain legal advice, and the court ruled that bar associations could not interfere with the establishment of legal services plans. Hewitt Associates LLC reports that 24 percent of private employers provided group legal services to their employees in 2007 (Hewitt Associates LLC, 2007). Legal services plans primarily provide preventive assistance by making legal information and advice readily available. By preventing disputes or simple legal matters from becoming serious problems, they offer the potential for reducing legal expenses; in addition, plan members often receive discounted rates. Plan Design and Cost Legal services plans encompass a broad spectrum of designs and costs, ranging from plans that offer free consultations and discounts to those that cover a wide range of legal services. Most plans are group plans. Plan Types Access plans provide members access to legal advice and services. They typically include in-office or telephone consultation with a lawyer; follow-up services, such as correspondence; a review of legal documents; self-help counseling; referrals to participating attorneys for further legal assistance; and fee discounts for more complex matters. 1 Legal services plans are sometimes known as prepaid legal services plans or group legal services plans. Chapter 39: Legal Services Plans 393

2 In addition to the services provided in the access plans, comprehensive plans provide other services such as legal representation for domestic matters; will and estate planning; traffic matters; and consumer, debt, and real estate issues. Enrollment In group plans, enrollment may be automatic or voluntary. In an automatic enrollment plan, all members of the group are automatically members of the plan. In a voluntary enrollment plan, only those members who choose to enroll are covered, on a prepaid basis. Household members typically are also covered. Delivery of Benefits The structures for delivering legal services plan benefits are as varied as those related to health insurance plans, but they can be classified under three broad categories: open panel plans, closed panel plans, and modified panel (or combination) plans. Open Panel Plans Under open panel plans (the least common), a member may use any licensed attorney. Payment for services is usually made according to an established fee schedule, with fees varying depending on the type of service provided. The plan participant is responsible for attorney fees in excess of the scheduled amount. Open panel plans may also use legal services trust funds. Open panel plans offer advantages and disadvantages. While a participant is able to choose his or her own attorney, the attorney selected is never obligated to accept the case, particularly if the attorney s caseload is heavy or the case is outside his or her area of expertise. Administrative costs are generally higher in open panel plans. Since the sponsoring employer has no control over the attorneys fees, sponsors often restrict coverage to selected services and/or impose maximum coverage limits. Closed Panel Plans There are two types of closed panel plans: staff plans and participating attorney plans. Staff plans provide benefits through a full-time, salaried staff of lawyers who are hired specifically to handle the group s needs. In participating attorney plans, a plan sponsor contracts with one or more law firms to provide access to legal services to a group of participants who are geographically dispersed. A closed panel can pay lawyers a per capita amount or pay according to a fee schedule. The plan usually pays the entire cost, but some plans may allow the client to be billed for costs in excess of a certain amount or require a percentage payment by the client, as in many health plans. Administrative costs under closed panel plans are generally lower than those under open panel plans. Since a smaller number of attorneys are involved, there are fewer records to manage and payments for services may 394 Fundamentals of Employee Benefit Programs

3 be easier. The lawyers in a closed panel plan often acquire special expertise in areas associated with the covered group s most common problems. Unions usually favor closed panel plans, under which they are able to control the quality of the legal work by controlling the selection of attorneys. Closed panel plans frequently can offer more efficient legal services at lower rates than open panel plans. Scope of Services Types of Services Covered Four broad service categories that may be covered under a comprehensive service plan are consultation, general nonadversarial, domestic relations, and trial and criminal. Consultation Legal services plans are used most frequently for legal information and advice (most legal matters require no more). They may deal with virtually any type of legal issue, including consumer matters, landlord-tenant disputes, and domestic disputes (e.g., overdue child support payments and visitation rights). Here, the attorney counsels the participant, either by telephone or in the office, on appropriate legal action or may provide self-help information so the plan participant can resolve the problem on his or her own. General Nonadversarial These services are generally performed in an attorney s office. They deal with such matters as review of documents, wills, and adoption papers; guardianship; name changes; personal bankruptcy; real estate transfers; estate closings; and Social Security, unemployment, and other benefit claims. Domestic Relations Legal separations and divorces are the most frequently used services covered by legal services plans. Most plans that cover these services also cover the costs of modifying divorce and separation agreements (such as changes in the terms of child custody agreements, visitation agreements, child support, or separate maintenance arrangements). Due to the high cost that is often associated with domestic relations legal problems, many plans limit these types of services. Trial and Criminal This type of service includes adversarial legal matters, such as contested adoptions and guardianship, civil suits, and contested domestic relations matters, and minor criminal matters such as suspension or revocation of driver s licenses, juvenile court proceedings, and misdemeanors. Although infrequently utilized, these services usually incur the highest plan cost per claim; thus, many plans do not cover them. Chapter 39: Legal Services Plans 395

4 Exclusions and Limitations In order to avoid excessive attorney fees and unnecessary services, plan sponsors may build in cost controls by excluding coverage for certain types of services such as actions against employers and unions; services for legal problems existing before the plan s effective date; lawyers contingency fees; and court expenses such as fines, court costs, filing fees, subpoenas, assessments, penalties, and expert witness fees. Plans may also use closed lists of eligible procedures, which automatically exclude some legal services from the schedule of benefits; limit the number of hours or dollar amount of services rendered; limit the frequency of coverage for a particular service over a specified time; or place maximum limits on the attorneys hourly fees, which are usually less than the prevailing rate. Taxation Initially, legal services plan contributions were counted as gross income to the employee. However, employers were allowed to take a tax deduction for their contributions. Subsequent legislative changes removed many of the initial deterrents to the establishment of these plans, particularly their explicit exclusion from taxation under the Tax Revenue Act of 1976, which added Sec. 120 to the Internal Revenue Code (IRC). The original law expired at the end of 1981, but subsequent tax laws in 1981, 1984, 1986, 1988, 1989, and 1990 extended the tax exclusion, sometimes retroactively. The extension included in the 1990 law expired on June 30, Currently, the tax exclusion for legal services plans under IRC Sec. 120 is still expired ; however, there is active lobbying to make it a permanent part of the tax code. Some observers believe that the impermanence of the tax exclusion for legal services plans may discourage their widespread development and use. In the past, in a qualified plan under IRC Sec. 120, employer contributions for legal services benefits of up to $70 per year were excludable from income tax. To qualify for favorable tax treatment, the plan had to meet the following requirements: An application for qualification must be filed with the Internal Revenue Service. The employer must establish a separate written plan for the exclusive benefit of employees (and their spouses or dependents); the plan must provide only legal services. The plan must provide personal legal services; it cannot provide legal services related to an employee s trade or investment property. The plan cannot discriminate in favor of shareholders, officers, or highly paid employees. In determining whether the plan is discriminatory, 396 Fundamentals of Employee Benefit Programs

5 certain employees may be excluded from consideration specifically, those covered under an agreement determined by the Secretary of Labor to be a collective bargaining agreement, providing there is evidence that group legal services benefits were the subject of good faith bargaining. Certain limits also apply to contributions made on behalf of shareholders and owners who have more than a 5 percent interest in a firm. The employer must transmit its plan contributions to designated recipients (e.g., insurance companies, tax-exempt trusts, or authorized service providers). All legal services plans maintained by a private employer or employee association are classified under the Employee Retirement Income Security Act of 1974 (ERISA) as employee welfare plans and are subject to certain requirements. Legal services plans sponsored by public employers are not subject to ERISA. Bibliography DeMent, Sandra H. Advice for Employers: How to Select a Prepaid Legal Benefit. Employee Benefit Journal (June 1998). Hewitt Associates LLC. Results Measurement: SpecSummary United States Salaried Lincolnshire, IL: Hewitt Associates LLC, Rosenbloom, Jerry S., ed. The Handbook of Employee Benefits: Design, Funding, and Administration. Sixth edition. New York: McGraw-Hill, U.S. Department of Labor. Bureau of Labor Statistics. Employee Benefits in Medium and Large Private Establishments, Washington, DC: U.S. Government Printing Office, Additional Information American Bar Foundation 750 N. Lake Shore Drive Chicago, IL (312) Chapter 39: Legal Services Plans 397

6 American Prepaid Legal Services Institute 1155 E. 60th Street Chicago IL (312) National Resource Center for Consumers of Legal Services 6596 Main Street P.O. Box 340 Gloucester, VA (804) Fundamentals of Employee Benefit Programs