1. What's the formula for pricing a TPA firm to buy or sell? Answer: There is no rhyme or reason to valuing TPA firms....further confused by lots of misleading stories & data. A brain-storming discussion at an SPBA meeting once identified 22 different types of pricing formats. Every deal is very personal & unique...depending on the innermost reasons & intentions of both the buyer & seller. Since the seller usually stays on for a few years, we strongly suggest that before the deal is finally consummated, buyer & seller should sit down and have a very candid discussion....as if they were getting married, because that's the kind of relationship it is. So, while still saying there is no rule of thumb, it seems that "normal" pricing seems to plot a graph of 3 to 7 times of net income of the firm compared to with the graph of 1 to 1 1/2 times gross income (if it is a healthy profitable firm). Where those two intersect gives at least a theoretical starting point.
2. What are the salary ranges & operating ratios within TPA firms? This makes pricing a TPA look simple, by comparison. SPBA has tried both formally and informally to collect such data, and it is always gobbledygook. Why? TPA job titles, duties, and sources of payment are myriad. Some get salary. Some get small salary and mostly commission & bonus. Some get parts of their compensation from several different parts of related businesses. Even the total amounts vary by thousands of percent. For example, Fred Hunt's small referral service for members has "marketing" jobs ranging from $20,000 to $250,000. Similarly, the structure of the finances of SPBA firms is all across the range. The last time SPBA had a formal operating ratio survey, the compiler reported: 30% of you have no phones. 20% of you have no office rent/purchase/overhead costs. 10% of you have no personnel costs. etc. etc. The TPAs, of course, had these expenses, but they were allocated differently.
3. Must I have 501(c)(9) trusts? You're talking apples & oranges. 501(c)(9) VEBA is an IRS term and refers only to the tax status of the interest earned by the plan's assets & reserves. VEBA has no reference or relevance to ERISA or being a trust. For several reasons, very few health plans bother getting 501(c)(9) VEBA status anymore. The issue of a trust is a DOL/ERISA matter. Yes, 99% of plans should have a formal separate trust.
4. Does DOL automatically consider TPAs as fiduciaries? Pretty much yes. Why? ERISA considers any one who has any discretionary power to have some fiduciary responsibility. So...if the TPA uses any judgement in administering the plan (such as each time a decision is made whether a claim is OK to pay), he is exercising discretionary power.
5. Is the TPA the "fiduciary" & "administrator"? Yes & no; both words have multiple uses. Here's the Fred Hunt handy (unofficial) system to keep track: The "Fiduciary" (capital F) is the official trustee/sponsor of the plan, whereas TPAs and anyone else with any discretionary power may have varying degrees of "fiduciary" responsibility. The lower-case type of fiduciary is also sometimes known as "knowing participant" or "co-fiduciary". Meanwhile, the "Administrator" (capital A) is the official trustee/sponsor of the plan, whereas the TPA or in-house clerical staff are the "administrator". When ERISA and DOL use the term "administrator", they almost always mean the official trustee/sponsor.
6. How does DOL/ERISA view payments to the TPA besides the basic contract admin. fee? We live in an era of tie-in deals, discounts, rebates, etc. However, DOL/ERISA takes a very old-fashioned traditional view. They assume that all money generated related to the existence of the plan belongs to the plan. For example, a TPA may feel that he worked hard to earn the commission for placing the stop-loss. However, DOL would say, "But if there wasn't a plan, then there wouldn't have been a commission...therefore the commission belongs to the plan." They apply that thinking to discounts, rebates, etc. It's not that DOL won't allow the plan to knowingly designate that kind of side money to you. It is just that they see it as a distribution of plan assets, so they think the client plan should be as aware of the amounts & arrangements as they would be if they wrote a check. So, what would happen if DOL asked your client if they know the TPA made $X of plan asset money from the PPO, UR or whatever? DOL views the side money as part of the TPA's total compensation for admin. services to the plan (and they evaluate the total compensation when deciding whether to challenge the plan sponsor for being too generous in paying the TPA).
7. What is "insurance" versus "self-funding"? The courts & states constantly bounce all around this issue, with differing answers based on slightly differing facts & circumstances. Here's the rule of thumb based on the major U.S. Supreme Court cases: If there is a direct relationship between an individual plan participant and an insurance company (such as the insurer paying claims in the name of John Doe), then it is "insured". If the sponsoring employer is ultimately responsible (though the employer or plan may have stop-loss to generally protect the employer's or plan's assets), then it is self-funded. There is also the "where the buck stops" test: If an employer can walk away from the bills, and the insurer will cover the costs, then it is insured. If the employer is still technically on the hook (even if he's only a conduit for stop-loss reimbursements), then it is self-funding. (There are so many hybrids and innovations these days by folks unfamiliar with these distinctions, that this should help you to recognize what's what.)
8. What's the "safe harbor" for how much plans can keep in reserves? There is a legal vs. practical answer to this, since circumstances have changed since this law was passed. In 1984, DEFRA included "reserve limits" for "funded welfare benefit plans". There was lots of talk about "safe harbors", but they later turned out to be neither safe nor a harbor. Essentially, IRS doesn't want any more put in the health plan account (judged at year end) than was reasonably expected to be needed. If you have a lucky year, and there's 60% left, fine...but you're not supposed to save money for some vague rainy day. You use the left-over money and only add enough in the second year as you honestly expect to need for the year. However...since 1984, government has hit plans with dozens of hidden & unpredictable costs such as several types of MSP, COBRA, HIPAA, etc. etc. Many of them hit in the middle of a year. So, guessing how much might be needed in any year is sort of a crap shoot. So, if your client wants to keep reserves, simply jot down a list of reasons (the unpredictables) for which you might legitimately expect to use it in that year.
9. What can & can't be done under ERISA fiduciary? There is no list of do's and don'ts. It is like when you tell your children to be "good". You mean for them to be perfectly behaved & responsible in all ways. Well, ERISA demands that you be "prudent" and they mean the same thing. ERISA looks at each transaction of the plan (each claim & each outside business arrangement such as with TPA, PPO, etc.). Would a "prudent man" (govt. sexism in 1974?) have done the same thing you did? Was there any self-gain motive, and if so was it adequately explained in advance to the client. All decisions are technically made by the client, who must be fully informed of relevant factors. To test yourself, pretend investigative reporters were coming in and will assume the worst possible scenario of each transaction & business relationship.
10. What triggers criminal (jail time) charges from DOL/ERISA? Essentially, if you lie, cheat, or steal...especially for your own gain...you're talking criminal. Example: You make an over-priced deal with a UR firm which your wife owns. You did not shop around at all, and mis-led the client into thinking it was an arm's length deal. A regular goof would probably be prosecuted as only a civil (fines) offense. ERISA is one of the rare laws that lets prosecution for the same offense proceed as civil and/or criminal and revert back & forth as the issue evolves.
11. What triggers a plan being considered a MEWA? This one of those questions that depends on individual facts & circumstances. However, as a rule of thumb, anytime you have more than one employer entity in the same plan there is the chance it could be a MEWA. If the employers are "under common control" (a term with its own maze of interpretations) , then it is a single employer. However any other arrangements would be MEWAs. Example: Cadillac & Buick are different employer entities clearly under common control of GM. On the other hand, Dad's Service Station (owed by Dad) and Mom's Dry Cleaners (owed by wife/Mom) are not under common control. Even if Dad & Mom owned both business together...but operated them quite separately, it might well be considered not under common control. When in doubt, assume most plans with different employers that don't clearly operate together from the same source of power would technically be a MEWA. That's why most of the provider-sponsored plans selling to different employers are technically MEWAs, and a Library of Congress study of Fortune 500 firms once found that 62% of those mega companies actually had MEWAs and didn't realize it.
12. Where should I be licensed as a TPA? SPBA's Elizabeth Leight organizes a very thorough survey of state TPA licensing requirements each year. In 2003 it showed at least 39 states with varying requirements. In most cases, you're caught in a Catch-22. Most states expect you to be licensed in their state before doing business there (administering one person in the state is often considered "doing business"). However, when you're selling a new client, you don't know in what states they might have workers or dependents. Adding insult to injury, laws like COBRA, QDRO, QMCSO, etc. can suddenly have you retroactively covering someone in a distant state with no way for the TPA to have known in advance. So, in the real world, TPAs have to make judgements how to proceed.