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Funding: Practical Hints to Protect Yourself If You Think a Client Isn't Going to Fund Claims


There is a companion piece ("Funding: Employers having trouble....") for clients to read.

Nothing in writing or spoken from SPBA should ever be considered legal advice.

            One of the key questions asked during the Watergate trial was "What did he know and when did he know it?"  That question, along with the companion, "What should he have known and when should he have known it?" are the ERISA fiduciary questions that will be asked about you if your client plan goes down the tubes or is unwilling to fund claims.

            The good news is that the plan trustee(s), sponsor, or "official" Administrator (as differentiated from TPA) is always the fiduciary primarily held accountable to protect the plan and participants.  As TPA, you are simply a paper-pusher following specific orders for duties delegated to you by the plan authorities.  Thus, the Department of Labor civil and/or criminal liabilities should start with the employer, trustee(s), or official "Administrator".

            The bad news is that those plan authorities often have their own worries, and funding other peoples' medical or pension claims is not a big priority.  Also, the Department of Labor thinks so highly of TPAs that they feel that you are probably the tail wagging the dog anyway (that you are really telling the plan authorities what to do in plan matters).  Thus, they often start or include charges against the TPA as a "knowing participant" with fiduciary responsibility.  ("Knowing participant" includes everyone who knows or should have known about the plan operations.)  The DOL & prosecutors' attitude towards you will depend on their opinion (or documentation you can provide) of what you knew and when you knew it to protect the plan and/or what you should have known, and when you should have known it.

            Fiduciary responsibility is not defined by a specific list of do's and don'ts.  It is like when you tell your children to "be good".  You mean be perfect.  ERISA fiduciary says "be prudent".  Fiduciary duty requires that everyone have as their primary goal maximizing the size and safety of the plan assets (maximum prudent income and minimum prudent expenditure & risk)...and maximize the size and security of legitimate claims payments to legitimate plan participants.  Fiduciary duty is like the old school honor codes: "I will neither cheat nor condone it."  Thus, if someone with fiduciary responsibility sees a breach of fiduciary duty he's supposed to warn the plan participants and blow the whistle.

            TPA horror story (which has happened a few times):  Longtime client calls TPA and asks to stall claims 10 days because of low cash flow for some vague reason.  TPA says OK.  On 9th day, the client declares bankruptcy.  DOL says the TPA knew that claims being accumulated by participants in that 10 days weren't being covered in the normal timely manner.  With the bankruptcy (and also probably the personal bankruptcy of the trustee/Administrator person at the client employer), DOL demands the TPA pay for those claims (from the TPA's pocket) accumulated during the time when the TPA failed to warn the plan participants.  In most situations like that, the TPA has paid.  In those instances, the TPA clearly knew the funding was shaky.  What if the TPA only suspects the client is shaky?  That's when DOL will ask what should the TPA have known and/or when should he have known it?  And...What did the TPA do when he did know or deeply suspect?

Here are some handy hints to protect your legality & reputation.

1.  Document everything as soon as you even dream a client might be shaky.  The intent is to show DOL or a court that you did not really know there was trouble until the instant you are ready to undertake the fiduciary solution.  Thus, always document reasons why you think things are OK until you're ready to act (or else you'll be judged with 20/20 hindsight.  On the other hand, you must also avoid bad-mouthing from your client to other employers accusing you of "stabbing him in the back".

2.  If you vaguely suspect something might soon go wrong, generically remind your client of his fiduciary responsibility, and that it is always better to end something cleanly than in a legal mess (terminate the plan early rather than a long lingering unfunded death).  There is a companion piece on tdhe member website for this purpose, "Funding: Employers having trouble...".  If you think trouble is more obvious and imminent, write a letter to the client reminding him of his fiduciary duty, noting the good record of funding in the past, and (if there is any evidence of slippage) ask for "clarification" and assurance that funding will remain stable until the plan and participants are formally notified.  Mention in the letter that once a problem is ascertained, the trustee/sponsor/ official Administrator should notify all the plan participants about the plan's situation.  Otherwise, the TPA or any other entity with fiduciary responsibility aware of the problem must notify the plan participants & DOL.  Ask for a prompt written reply.  In that case, DOL comes down extra-hard on the employer for not doing the notifying.

3.  If financial disaster is clear, deliver a written letter to the trustee/sponsor/Administrator indicating that you now recognize that funding is and will be inadequate.  You are willing to do your fiduciary duty to notify the plan participants...however, since he is the primary fiduciary, it is really his duty, and if he fails to do it and the TPA does it, the trustee/sponsor/administrator will look especially imprudent, and it will significantly increase the chance of legal and criminal penalties for the employer.  Also remind him that his fiduciary duty is personal, and thus his personal assets are on the line, even if the employing company and plan are penniless.  This last letter shifts a sticky issue (notifying his employees).  You look like a loyal friend looking out after his legal vulnerability and finances when he is down.  That's much better than having him spread stories to his buddies (your current & potential clients) that you stabbed him in the back by bad-mouthing him to his own employees + DOL. The goal is to make sure that all legitimate claims made are paid.  The earlier a troubled plan is officially terminated, the fewer outstanding unpaid bills there will be.  As the ancient TPAs would tell you..."Be ye careful and cover thy posterior."  Keep a careful file of all letters & respones.  None of this is legal advice!

            Simple Summary:  ERISA is to assure that beneficiaries get the benefits they reasonably expected to get.  Thus, much of ERISA looks to be sure that there is enough money and that the money that has been set aside is managed very prudently.  If there is ever a problem, ERISA expects beneficiaries to be warned & protected in time.  It is like a building owner must warn people about an impending collapse and prevent people from entering the building (running up new claims) once the problem is known.  Failing to notify & warn people about a building (or plan) that is not stable carries serious liability for the individuals who fail to give the warnings.   

Meeting Handout