What’s Payable by ERISA Plan Assets? + Self-test
A reminder from SPBA Active Past President Fred Hunt
There is such a flurry of new types of benefits, expenses, requirements etc. that a member asked, “Please send me the updated list of what may and may not be paid by plan assets.” There has never been such a list, but the need for reminder & review is valid. Caveat: DOL’s answer to any specific question, and thus any comments here is “It depends on facts & circumstances.”
Let me set forward some background & basics. ERISA was created to be (and remains) the ultimate consumer-protection law. So, business & financial things that are normal practices in insurance law & general business transactions can be seen as civil and/or criminal (jail) breaches of fiduciary duty with ERISA plans & their assets. Even attorneys expert in other areas of law often do not realize this unique ERISA situation.
The key is to view ERISA plan assets as your sacred duty to protect…from misuse, loss, waste (paying too much), and/or for self-serving purposes of the plan fiduciary(s). DOL uses the word “prudent”. Was each transaction prudent? Did the people with any discretionary authority (thus fiduciary duty to the degree of that power) act prudently in the best interests of the plan’s purpose as described in the plan document? (Note: It is hard to imagine a TPA who claims to never use their brain or judgment, so just assume DOL will see TPAs as having considerable ERISA fiduciary responsibility. DOL decides if & how much fiduciary duty they expect of you…not you, so don’t try to play naive “Who??? Me???” The person/entity named in the plan as the plan trustee or sponsor has ultimate ERISA fiduciary responsibility. (DOL might ask them accusingly why they hired such an incompetent TPA, and then go after both of you.)
What may be paid by plan assets? Legitimate prudent payments for services needed to run the plan effectively. ERISA was written in an era when Taft-Hartley collectively-bargained plans were dominant. The employer role in such plans is essentially a labor agreement to send in the negotiated amount for workers & hours worked, period. The power & decision-making is the Trustees. Knowing this model is useful for understanding ERISA policy, because if you ask your question in the context of that kind of plan, answers become more obvious.
If there is essentially no “employer” control role and the plan asset trust fund is the only source of funds, then that answers the answer of “who” (the plan itself) could pay. That then highlights the key question of paid to whom, how much, and for what plan assets may be spent?? So, TPA fees, legal expenses, audits, etc. costs of required reporting & forms would seem to be fine to be paid by plan assets (ASSUMING that they are required or legitimate for operating the plan properly & efficiently). However, this is when the “facts & circumstances” can kick in. A TPA who sets his own fee with the power to make the approval of that decision on behalf of the plan can raise red flags. A TPA or vendor who sets a %-of-savings or other arrangement which might (even slim chance) be seen as able to be skewed to increase the income to the TPA or vendor (such as not paying or under-paying a legitimate claim as a way to increase “savings”) can be a caution flag. Similarly, employers & plan sponsors need to be above any suspicion about helping themselves. Paying for the boss’s wife’s tummy tuck (a service not covered by the plan) is not good. Any possible thing that may seem like shortchanging some or all plan participants or playing favorites is misuse of plan assets and other possible problems.
Identifying & protecting plan assets: With the mindset that plan assets are “sacred”, they should be treated that way. About 99% of ERISA plans should have separate trusts. Money is considered plan assets as soon as it is “known”. For example, when the employee contribution amount shows as withheld on the pay stub….that amount is “known” and should be in the trust fund (not kept in corporate accounts). Same thing with COBRA premiums, and when any employer money is due. A separate accounting category or even separate checking account of the employer is NOT sufficient. Intentions are honorable, but SPBA members & I have seen too many surprises (and the same applies to TPA claims-paying accounts where client money is sitting around longer than the quick transitional time to pay the claim). For example, if a lawsuit freezes the assets of the employer or TPA, having a special accounting code or separate checking account still makes it the corporate assets, not protected by ERISA and not paying the claims of the plan participants. Similarly, if the employer or TPA with this money in their accounts gets bought, the plan money was included goes with the other assets of the employer or TPA.
For TPAs and some employers, co-mingling is also a serious concern. Assets of one ERISA plan absolutely positively may not be used to pay the expenses of another plan (or anything other than its own plan expenses). So, if, for example, a TPA has funds of Client A in the claims paying account waiting for claim checks to be cashed……and a “check in the mail” gets delayed or is insufficient to Client B, there better not be one penny of Client A’s money that gets used (even accidentally & briefly) for Client B.
Protecting the assets is a very tender topic in ERISA. The trigger for the law was when Studebaker went bankrupt, and it was realized that all the pension and other benefits money was gone too. People moan that creating a trust is “too expensive” or “too much trouble”. Not true. Trusts are used every day for estate or other planning/protection, and can be established with reasonable fees. The employer or trustees can be the plan trustee. The purpose of the trust is simply to insulate the plan money from unforeseen disappearance or mix-up, because no one would like the outcome from that!
Handy self-test: I have tried to simplify & condense the equivalent of a library full of legal cases, government advice, etc. So, this is certainly not legal advice. Over my 40 years living with ERISA, I have found a self-test which is about 95% accurate if the person is truly honest with himself.
Self Test 1: After reading this, assume that one of the aggressive TV investigation reporters & DOL agent barge in your door and examine every conceivable document and transaction…..and assumes or applies the worst-possible interpretation to everything. When such a TV show is about to be broadcast nationwide, if there is anything that would make you squirm in embarrassment or twinge of guilt……you have identified the area(s) of ERISA fiduciary. So, do the self-test often before there’s a knock at your door and with any new kind of situation.
Self-test 2: I guess the other self-test is to ask yourself what you would do if you had charge of some sacred jewels. You’d put them in a locked box (trust), and you’d make very sure that they were placed into the box when they are supposed to be, and you certainly would not risk having your jewels mixed up with someone else’s. In other words some paranoia is a good thing in ERISA fiduciary duty.
The SPBA Website has many with more descriptions with detail & perspective relating to ERISA & fiduciary duty as well as other related employee benefits issues.