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Percents, Rebates & Any Unusual Payment Arrangements: ERISA Concerns

By SPBA Past President Fred Hunt (present at the writing of ERISA) – August 2016

 

 Over the decades, many very creative arrangements have been envisioned and recommended to self-funded employee benefit plans, TPAs, plan participants etc.  They are often copied or adapted from perfectly-legal practices in insurance companies & allowed under normal business law.   The key to the explanation below is that ERISA and its fiduciary duty is very different and much more strict than insurance & normal business law, so put them out of your mind as a comparison.  To set the stage, let me give a favorite example.  When you buy a GM vehicle, you are virtually forced to buy other GM products, such as a (GM-owned Delco) battery.  That’s perfectly legal.  However an ERISA plan being defacto forced to make a purchase from a vendor without separate fiduciary judgment whether it is the most “prudent” use of funds could be viewed as a civil and/or criminal breach of fiduciary duty. 

(By the way, many laws & regulations change, but ERISA fiduciary duty described here, has remained firm for over 40 years, so the 2016 date of this writing will remain steady.)

Since the number of examples is infinite, let me give this answer, below, to a question raised by one of our members:

 The question & example is actually an ERISA fiduciary issue, and is an example of one of those things that is perfectly legal in normal business & insurance law, but potentially a serious crime under ERISA.  The detailed explanation below is because it is hard to comprehend for non-ERISA folks, so you have to hold their hands to walk them through their disbelief. 

The key is that it is always the duty of anyone with ANY ERISA fiduciary responsibility (any discretionary powers...which includes you) has the duty to always be sure that the plan & participants get the most "prudent" (best) deal.  For many years, DOL key enforcement speakers at our SPBA meetings would give their great example.  So, here is the DOL hypothetical (but ideal) scenario example:

A plan contracts with a claims review specialty company to review any questionable...or maybe any large claim,...and they would receive 30% (you can insert any number) of the savings.  In the simplistic example, a claim came in for $100,000, and went to the review company.  In about 10 minutes of work, they discovered that it was a typo, and should have been only $100.  The review company rightly took their 30% of $99,900.

Here's the zinger:  The TPA & plan sponsor pat themselves on the back that they "saved" the plan nearly $70,000 by using the review firm.  However, DOL's view is to ask "Do you (fiduciary) think it was a prudent expenditure to pay $30,000 for 10 minutes of work????"   DOL's answer is no.  I used to ask them "What if it had taken the review company weeks or months to find the error?"  The DOL's response (like all questions about ERISA fiduciary responsibility) is whether a "prudent man" (1974 wording) would see the cost & result as a wise deal for the plan & participants.  The $30,000 for 10 minutes would fail that test.   So...for example, I guess if the contract had a provision that says that the % will never exceed what would be a bargain open-market price for the services (in other words the plan/participant is always the guaranteed winner), then it might be OK.  However, that destroys the whole profitability the vendor or service provider was counting on, so they're not interested.  Important point:  Notice that DOL lays blame at the feet of the plan & fiduciary for the ill-considered decision to commit the plan to the arrangement, not the entity providing the service or product.  That is why TPAs & plan sponsors are so cautious.

The other common situation where this issue comes up is payment arrangements with TPAs.  A vendor comes to a TPA and says that if you use their (whatever) service or product, the vendor or plan sponsor will pay you a % of the reduced cost (or whatever).  The problem is not only like the above example of whether whatever cost the TPA gets is, each time, a prudent expenditure for plan assets.........but also it raises DOL suspicions whether the TPA (or whoever) is influenced by potential payments to act in a way that makes the "savings" or whatever measurement pay out better.  (Sad example:  Some non-SPBA TPAs over the years have, indeed, generated phenomenal savings in claims costs, and gotten a handsome % payment.   However...it turned out that they simply didn't process or pay a whole bunch of claims as the year approached an end.  Of course, this action caused (visible) costs to the plan and the participants to be very low, and the TPAs were paid their % performance bonus.  The govt. gave those folks "free housing" and orange jumpsuits with a number for something like 10 years.  In another (non-SPBA) TPA-gone-wrong instance, the bonus was paid for prompt payment.  So, the renegade TPAs simply paid whatever was billed instantly, even some twice-billed items.  Great speed, so they got a bonus...then came a lesson in the travails of a DOL criminal enforcement action.

So, the answer when you are asked or pressured to do a percentage or performance deal is to say that TPAs & ERISA plans are held to a much higher standard of honesty & service, so what may seem logical & legal in the insurance industry or regular business can get you bars on the windows  & orange jump suit under ERISA fiduciary enforcement.  A kosher hotdog maker used to have an ad that is a great one-liner answer: "We answer to a higher authority!"https://ssl.gstatic.com/ui/v1/icons/mail/images/cleardot.gif

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