Skip to main content

ERISA Fiduciary Reminder

With so many TPAs today offering services a-la-carte (letting the client pick and choose among many options), and as more & more TPAs enter into arrangements with specialty service entities (PPOs, prescription cards, etc.), an ERISA refresher is worthwhile. We get lots of calls on this, and TPA arrangements with...and especially payments from...other entities that serve the plan are now the # 1 item DOL investigators examine in TPA routine investigations (what used to be called audits). So, now is the time for you to see how your firm's arrangements would look to DOL. DOL looks individually at each transaction that involves plan assets: whether paying premiums for stop-loss coverage for the plan or payments for a prescription or other service or your TPA administrative fee...and/or any money earned (such as commissions/fees/bonus/interest) generated because of the plan's business. DOL & ERISA have the purist view that everything should be done for the plan at the lowest possible price that will get quality. AND, they look askance at anything that might even potentially be seen as a conflict of interest or influence on your best judgement. They call this latter prohibition "self-dealing" (even though such tie-in deals are considered routine and wise in the rest of the business & insurance community). Furthermore, DOL looks at all income generated because of the plan when determining whether the total cost is "prudent" (the word they use for fiduciary duty). So, while it is good and desirable that everyone serving an employee benefit plan be paid well to support their top-quality service, it is important to look at each transaction and arrangement to be sure that it would look fair under the scrutiny of a DOL agent. Often, this is as simple as disclosure to the plan sponsor or trustees how your fees or income related to the plan are derived. Once that's done, you've pretty much done your duty, and it is up to the plan sponsor to decide whether it's a good deal in total. Since most arrangements for side services and fees end up letting the TPA keep his basic admin fee reasonable, there is usually no problem. However, even if you disclosed everything and the DOL feels that your total costs were exorbitant they may go to your client and say, "Why would you allow such a rip-off?" So, it's just important to be sure that an outsider looking at the whole deal would see that you (and any other service provider) were fair and open with the plan. What's NOT under ERISA fiduciary duty? ERISA applies to the benefit plan and especially to plan assets and whether plan participants receive what they were promised in the plan document. If a business transaction takes place totally outside the plan and plan assets, then ERISA fiduciary usually isn't a factor...unless it happens to impact the plan assets or services to participants indirectly somehow. Vitally Important for Stop-Loss: This comes up most often relating to Stop-Loss. If the stop-loss contract (both payment for the coverage as well as beneficiary) are strictly with the client (in the same way that the client buys fire insurance or car insurance to protect himself from risks)...then ERISA fiduciary presumably does not apply. Many Stop-Loss have tried to issue policies only in the name employers in hopes of side-stepping ERIS fiduciary risk. Meanwhile, obviously, if stop-loss is paid by plan assets and the plan itself is the beneficiary of the policy, then ERISA fiduciary applies. Falling back under ERISA: However, two things often happen which put even employer stop-loss arrangements back under ERISA fiduciary. First, sometimes there is an inadvertent goof, and plan assets are used to pay the premium for the employer-named stop-loss. If the policy is paid by the plan and shows the employer as the beneficiary, DOL & IRS could consider it fraud. Both TPA and Stop-Loss need to double-check each other to avoid this goof. Second (and more commonly), stop-loss carriers & MGUs want powers of review and decision making about plan operations. That power & influence over plan decisions brings the stop-loss back under ERISA fiduciary. Why? Ask yourself, does the employer's car or fire insurance get to influence plan decisions? To be assured of being outside of fiduciary responsibility, stop-loss would need to be as detached from the plan operations as the employer's fire & car insurance. On the bright side: ERISA fiduciary duty may seem like a puritanical pain in the neck sometimes, and it may seem at odds with practices that are common in normal business and insurance. However, they also have a benefit. The strict protections are why the framers of ERISA did not allow punitive damage lawsuits under ERISA. If you goofed, it is viewed as having been an honest goof (though Rep. Norwood's legislation and some of the "quality & protection" crusaders would allow punitive and malpractice cases within ERISA). ERISA was designed to be the ultimate consumer protection law. So, if you meet the ERISA fiduciary standards, you can sleep at night comfortable that you aren't going to end up as some public horror story. You can show that you were fair & open. Giant Caveat + How to Prepare: People always want specific generic answers about ERISA and especially about fiduciary duty. Ain't no such thing! The standard answer from DOL to any such question is "It depends on facts & circumstances." It is not a satisfying answer, but it is true. The outcome & answer (and how DOL might approach it) swings back & forth numerous times based on each seemingly-miniscule little detail. So, don't try to rationalize the answer you want and don't give in to wishful thinking. You can perform the best test yourself: Imagine that one of the TV scandal investigation reporters is at your door. He's going to look at everything. Assume he will make the most damning possible interpretation of each transaction, and it will all be dragged out on TV. With that scenario in mind, do your your own review of your operations (assuming the worst, not what you know were your good intentions at the time). If there's something you'd find embarrassing on that TV show...now is the time to correct it.