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Who Owns Stop-Loss Policy


A reminder from SPBA Past President Fred Hunt:  We get a couple of hundred calls a year from TPAs and Stop-Loss Service Partners about what "should" happen and what laws apply in various circumstances with a Stop-Loss policy. My first question back is to ask, "Who owns the policy?" (By "own" I mean whose funds paid the premium and who is named to receive the reimbursement?) The wrong answers to this question can get your client a striped suit with numbers, and maybe a next door cell for you.

Despite the huge importance of knowing the answer to this question, the most frequent answer I get from plan sponsors, TPAs and Stop-Loss Partners is, "Uhh......I don't know." If TPA, client, broker, and Stop-Loss don't have the ownership issue foremost in their awareness, then you're just spinning your wheels headed for a crash.

Here is a description of the two options:

Plan-owned: The Stop-Loss policy premium is paid by plan asset dollars (money the employer has contributed to the plan trust or account such as a claims account). Plan assets are considered sacred money by ERISA, so ERISA fiduciary responsibility applies. In a plan-owned Stop-Loss policy, the beneficiary (named recipient) of the reimbursement payments must be the plan itself, directly. (Payable to an employer who then immediately pays the plan is not good enough.) If the Stop-Loss pay-out check is made out to the employer or anyone but the plan, then the employer has just committed fraud, and is apt to get free housing behind bars.

Why is it "fraud???", you ask. The reason is that the money that paid for the Stop-Loss was sacred plan assets that had been contributed for the good of the plan, and a tax deduction taken by the company for that contribution. That money is only to protect the plan and pay legitimate claims. If the employer receives the pay-out from that plan-paid benefit, then the employer has, essentially, embezzled the money. You may say that the employer will quickly deliver the money he receives into the plan. Yes, but the employer had "constructive receipt", and had the power to use it for something else if the employer had wanted. The IRS has also been known to want to tax such payments as "income". So, it is legal facts & protection that count, not good intentions.

There are advantages to plan-owned Stop-Loss policies. People get unnecessarily spooked by the concept of ERISA fiduciary duty. It is actually just common sense and prudent behavior. If a Stop-Loss policy is plan-owned and thus protected by ERISA fiduciary, then there is legal incentive for all parties involved to always be fair to the plan. If a provider or some entity tries something questionable, it is not a spat between just you and them. It is them versus the Department of Labor and federal law.

Employer owned: The Stop-Loss premium is paid from corporate assets unrelated to plan assets. The pay-out is also paid to corporate assets. The role of employer-owned Stop-Loss is much like a fire insurance policy the employer might have. There are occasional ways for ERISA fiduciary duty to be triggered in employer-owned Stop-Loss arrangements, but they are exceptions to the rule. Obviously, in employer-owned Stop-Loss, the employer should not take a tax deduction of the amount paid as premium as a contribution to the health plan. (It can be taken as a regular business deduction just like the fire insurance premium.) Also, if a provider or anyone else tries to play games about the pay-out or costs, the employer is on his own. DOL & ERISA have no role. There is also an ERISA filing issue. If the PLAN (plan-owned) has an insurance policy, then a Form 5500 Schedule A needs to be filed. If an EMPLOYER (employer owned) has an insurance arrangement that might be intended to help the plan but there is no legal ownership or duty with/to the plan....then the Stop-Loss is invisible in the mind of the DOL, and you should not file a Schedule A. However, if a Stop-Loss policy is listed as employer owned and employer receives the check, but the premium is paid by plan assets, it needs to be noted on Schedule A of Form 5500…which becomes the employer's documented confession of having committed fraud.

Next to ignorance, carelessness is the biggest problem.

Typical TPA goofs: The TPA is hurried or careless and forgets to see who is listed as the legal owner of the Stop-Loss, and pays with the wrong check......and/or.......the TPA carelessly uses a plan check to rush off the premium in time, or because the employer wasn't handy that day to write a corporate check. Typical Stop-Loss goofs: The MGU or carrier is so used to plans being employer-owned, that that's what they write down (and what ends up on the final document), even if the TPA said or understood it to be plan-owned. Or...the Stop-Loss didn't notice that the premium check sounded like a plan name instead of a corporate name. Or...the Stop-Loss pay-out check is carelessly accidentally made out to the employer instead of the plan.

Brokers sometime make the same kind of careless goofs. Or we have seen instances in which brokers have some separate reason for how they label things. (One broker had the Stop-Loss premium run through him as well as the payment.) No reason outweighs the reasons given above!

By definition, things involving Stop-Loss tend to be big bucks. That means that prosecutors would see it as big fraud and diversion of funds. Please please please go this very minute and make a list so you know who owns each Stop-Loss policy....and establish a fail-safe system to be sure that the premium & pay-out checks flow directly and properly.