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ERISA Follows the Plan Money

Trying to follow employee benefit court cases and litigation trends can be very confusing these days, and especially when headline reports focus on some factor that was probably not the meat of the matter. So, we get distracted by state court versus federal court venue, or who can sue, or a decision which seems broad, but was actually triggered by some miniscule factor. (OK, this is the cue for all of the excellent in-house legal & government compliance staff in SPBA firms to lobby for a pay raise.)

For example, a Stop-Loss case went through all the gyrations of which court and who could sue and was ERISA involved. However, the basic factor was very simple:

Stop-Loss may or may not have a connection & duty to ERISA. It is not automatic either way. ERISA follows the fate of plan assets. If plan assets are used to purchase the Stop-Loss, then ERISA fiduciary duty kicks in to be sure that the Stop-Loss fulfills its duties to the plan, in the same way that most TPAs have some discretionary power, and so their performance towards the plan is judged by fiduciary standards. In both examples, it is not that ERISA rules every aspect of the TPA firm or Stop-Loss….just what impacts plan assets (usually prudent costs) & security.

If the Stop-Loss is purchased by corporate or other non-plan assets, it is just like when the employer purchases fire insurance or liability insurance. Because the end-use of Stop-Loss pay-outs are intended to reimburse for expenses incurred as part of an employer's responsibility in an ERISA plan, it doesn't mean that the Stop-Loss is covered by ERISA, It is no different than if fire insurance reimbursed an employer for some plan materials that burned in a fire. The insurance is reimbursing the purchaser for his loss. What the money was used for is a whole different issue.

Important Reminder: Who is the official owner & premium-payer (and beneficiary) for Stop-Loss is extremely important. There is a detailed explanation on the member website. In brief, if the premium for the Stop-Loss is paid by a check from the plan, then the named owner & beneficiary of the Stop-Loss reimbursements better be the plan. If not, they call it stealing from the plan, and DOL will let you break rocks in jail awhile. Also, those plan-owned Stop-Loss pay-outs need to be placed in the plan trust…not co-mingled with the corporate funds. If Stop-Loss premiums come from corporate assets, then have the company be the owner & beneficiary and do the dispensing. Keeping it simple and visible also avoids some IRS snafus.

Beware where problems have arisen: The good news is that most errors in this arena have been unintentional. The bad news is that only your cellmate will care. So especially double-check the following:

>>"For convenience", the TPA happens to write the Stop-Loss premium check from the plan account, but lists the employer as the owner/beneficiary. The TPA figures the employer is going to reimburse the plan or was the original source of the money, so it is "just for convenience". Nope.

>>The TPA is thinking of the Stop-Loss as plan-owned and pays & proceeds accordingly. However, someone in the Stop-Loss process accidentally or out of habit records it in the employer's name as owner/beneficiary. Or, sometimes the formal paperwork is correct, but the Stop-Loss check is accidentally written to the wrong recipient (such as payable to the employer for plan-paid Stop-Loss) or mistakenly deposited into the wrong account.