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Should a TPA Pay Client's Claims (from TPAs assets)?

Occasionally, SPBA members or client employers or plans float the question of whether a TPA should or could pay the client's claims or other expenses from its own (TPA) assets. Sometimes it is because the TPA is worried that a usually-prompt client is late and the TPA does not want to see the problems arise of late funding of plan participants' claims. Sometimes a mis-estimation or clerical snafu within the TPA arises, and the TPA feels badly. This article is in no way legal advice. Only a properly-trained attorney with access to all the facts & circumstances of a situation can render a legal opinion. Instead, this paper is to brainstorm and spot potential pitfalls. I see four areas which could stir up problems:

(1). The Department of Labor (DOL), the main enforcer of ERISA, assumes that bills are paid/funded virtually immediately. So, any lateness, especially an ongoing pattern of delays in transferring money from the client to the plan could raise some eyebrows among the DOL enforcement folks. Thus, even if there were other factors, DOL might well target their investigation on the employer/sponsor's pattern of funding delaysƒespecially since some of that money is probably from COBRA premiums and co-payments from plan participants. DOL considers those kinds of COBRA & employee monies to be plan assets to be deposited into the plan account as soon as known. "Known" means as soon as the employer generates a record of such paymentsƒsuch as a ledger entry or deduction on a worker's pay stub, the employer knows the amount and should immediately transfer it to the separate plan account. So, in general, it should always be the goal of the employer to have proper monies into the plan as promptly as possible. If not, there are too many ways for things to fall through the cracks. So, anything involving less-than-prompt payment/funding would probably end up with the employer/sponsor as DOL's investigation target.

(2). More DOL: Following up on that point, if the TPA advanced the money to pay claims and the employer then (re)paid the TPA, it would appear to DOL that the employer had paid sacred plan assets (COBRA premiums & employee co-pay) not to the plan, but to some other entity (TPA). Yes, a paper accounting trail could be shown...but it definitely would raise a flag and smell fishy to DOL enforcers.

(3). IRS closely monitors employer deductions for medical coverage. Money the employer pays into the plan is clearly deductible. However, money the employer might (re)pay to the TPA for advancing the funding could raise a red flag to the IRS. They might try to deny the deduction for that amount of money because it was not paid to the plan or an insurance company. IRS might well want the employer to treat it as if it were a payment for services by the TPA, and the TPA to treat it as taxable income. (That then raises the "cost" of the TPA services, which then raises yet another red flag at DOL in another area.)

(4). State Insurance Departments look for "fake" self-funding and fake insurance companies. If the TPA were to pay the claims with its own money, the State could say that the employer does not have a self-funded plan (since the payment/risk was by another entity), and the State might say the TPA became an "insurance company" by paying the money from its own assets. If the State decides the client isn't a self-funded plan, then that opens Pandora's box of things like mandated benefits, premium taxes, etc.

So, even though a TPA firm might want to be helpful and avoid having claims left unpaid, the truth is that DOL would probably consider the employer's "slow funding" as the root problem. So, to avoid creating more problems, I would encourage employer/sponsors to pay any current unfunded claims as soon as possible, and also minimize their exposure to DOL scrutiny by keeping the funding process prompt in the future. So, this is one of those instances where a TPA's good intentions and generosity would boomerang. It's more kind to the client to stay within the prescribed ERISA procedures for funding.