The Sixth Circuit has affirmed an award of over $5 million to a self-insured health plan against the plan’s TPA, due to the TPA’s retention of undisclosed fees disguised as amounts payable for benefits. The plan sponsor sued after learning that it had been paying claims that included “network access” and other fees imposed by the TPA but not delineated in the administrative services agreement or Form 5500 information prepared by the TPA. After the trial court found the TPA liable for self-dealing under ERISA’s prohibited transaction rules (see our article) and for breach of fiduciary duty (see our article), the TPA appealed.
[Hi-Lex Controls, Inc. v. Blue Cross Blue Shield of Michigan, 2014 WL 1910554 (6th Cir. 2014)]
The appellate court agreed with the trial court on all points. First, the TPA was a fiduciary because it exercised discretion in assessing the disputed fees (which the court held were not fixed by contract) and also exercised control over ERISA plan assets. The court rejected the TPA’s argument that the funds were the employer’s corporate assets (and not plan assets) because they were not held in a trust or separate account. (Under the services agreement, the plan sponsor transferred amounts—derived from general funds of the employer and from employee contributions—to a general account of the TPA from which it paid plan benefits.) The court found that, under DOL regulations, the employee contributions were clearly plan assets. And it found that the company funds were also plan assets, based on several factors, including SPD provisions indicating that the employer did not pay benefits directly and that the TPA reviewed claims and paid benefits from funds provided by the employer. The court also cited general trust law principles to support the conclusion that the TPA—by holding funds transferred to it for the purpose of paying plan benefits—effectively held the funds “in trust” and thus functioned as a fiduciary. Next, citing as binding precedent a 2013 Sixth Circuit decision, the court ruled that retaining undisclosed, discretionary fees from plan assets was both a fiduciary breach and “exactly the sort of self-dealing that ERISA prohibits.” The appellate court also agreed that the TPA’s misrepresentations and concealment extended the limitations period so that the lawsuit was timely, and upheld the award of the full disputed fee amount plus nearly $1 million in interest.
EBIA Comment: The plan asset holding was key here—if the funds had not been plan assets, the TPA would not have been an ERISA fiduciary and there would have been no fiduciary breach or self-dealing. We have noted some skepticism about the plan asset analysis in this case (see the articles noted above), but the appellate court’s endorsement reinforces the need for employers and TPAs to be more careful than ever in structuring their arrangements regarding the intended treatment of funds used to pay plan benefits. As we have long suggested, the best approach to avoiding plan asset status is to maintain funds in an employer account and grant checkwriting authority to the TPA for paying benefits. An alternative, given the extra administrative burdens of that approach, is to address the issue with contractual language (e.g., delineating that amounts transferred to the TPA are and remain funds of the employer until paid as benefits). As this decision illustrates, however, in the event of perceived abuses by a TPA, the courts will likely reach to find plan assets and fiduciary status. For more information, see EBIA’s ERISA Compliancemanual at Sections XIV (“How Plans Pay Benefits: Funded Versus Unfunded Plans and Plan Assets”), XXVIII.C (“Fiduciary Responsibilities Imposed by ERISA”), and XXVIII.D (“Prohibited Transactions Under ERISA § 406”); see also EBIA’s Self-Insured Health Plans manual at Sections XX (“Identifying ERISA Plan Assets”) and XXIII.C (“Service Provider Compensation”).
Contributing Editors: EBIA Staff.