Health Plan Held to Same ERISA Fiduciary Standards as Retirement Plans

April 2019

The U.S. Department of Labor (DOL) recently asserted against a not-for-profit health plan sponsor breaches of Employee Retirement Income Security Act (ERISA) fiduciary duties and prohibited transactions for allegedly allowing the plan to pay excessive fees to its service providers.[1]
 
Notwithstanding the fact that the DOL lost in a federal district court, this case reminds health plan sponsors that their ERISA fiduciary duties — including selecting and monitoring service providers and their fees — should be viewed essentially the same way as their retirement plan fiduciary duties. Even if employers outsource health and welfare plan administration (which is very common), this case confirms that employers still have a duty to monitor co-fiduciaries and plan service providers and to make sure that the plans do not pay excessive fees.  
 

BDO Insight

Health care plan sponsors of all sizes should periodically evaluate their procedures to ensure they can document prudence in exercising their fiduciary duties in plan operations.


Roadmap for employers

The court’s meticulous dissection of DOL’s claims gives health and welfare plan sponsors a “procedural prudence” roadmap to follow in assessing whether their plan operation may trigger potential ERISA liability exposure. Investing in a robust fiduciary process often yields victory (or at least better results) for employers, as shown in the recent wave of 401(k) and private university 403(b) retirement plan excessive fee lawsuits.
 
In this case, the employer proved that it did not simply delegate authority and turn a blind eye on the plan. Rather, the employer showed that its oversight process included:
 
  • Regular review of third-party administrator (TPA) and insurance broker’s services and fees, including their effectiveness and scope. 
  • Annual meetings with the TPA, broker and individual trustee, including reviewing each of their annual reports. 
  • An annual plan audit performed by an outside accounting firm. 
  • Outside legal counsel’s review of service provider contracts. 
  • Periodic monitoring of the plan’s administrative and claims procedures. 
  • Informal market information collection on service provider options and alternatives by talking to other service providers at conferences and gauging their fees, even though formal, written requests for proposals (RFPs) were not undertaken. 


No RFP, no problem

The court specifically rejected DOL’s position that ERISA requires RFPs to ensure that the plan pays the lowest cost. The court said that ERISA does not require fiduciaries to “scour the market” to find the cheapest option for participants. Rather, reasonableness is all that is required. The court found that the employer was prudent in relying on its advisors and informal external sources because the employer’s demographics and industry limited the universe of potential service providers for this particular plan to only two possible TPAs. Moreover, the plan had already used one of those two TPAs before switching to the other one.
 
The employer primarily hires individuals with intellectual developmental disabilities who provide janitorial services to federal, state and local government agencies. Many of those government contracts are subject to the federal Service Contract Act (SCA). The SCA mandates that employers must pay employees performing services on that government contract “prevailing wages” and allows employers to provide a certain amount of health or other fringe benefits in lieu of cash. The employer contributed the required SCA prevailing wage amount to a self-funded health and welfare trust, which was coordinated with stop-loss insurance. Many of the government contracts also involved dealing with unions. And many plan participants were also eligible for Medicaid.
 
Accordingly, the TPA needed to be familiar with the SCA, union and Medicaid rules, understand self-funded plans and stop-loss insurance, and be equipped to handle the special challenges of dealing with a plan where 75 percent of the participants are disabled (1,500 out of 1,900 total plan participants were disabled). Informal market research showed that very few TPAs could service the plan’s unique needs, so doing a traditional RFP did not make practical sense for this plan. Even DOL’s expert witness conceded that if the employer had conducted a formal RFP, the incumbent TPA may have been selected as the winner due to its unique ability to handle the plan’s needs.
 
Even without doing a formal RFP, the employer considered six other TPAs who lacked experience in one or more of the plan’s special needs and concluded that only one of the six was a feasible candidate. The employer decided to remain with their existing TPA, since the disruption to plan participants of a vendor switch did not seem to be in the best interests of plan participants. The court looked favorably at the employer’s “best value” and “best fit for participants” approach, even if it was not the lowest cost.
 

Employer negotiated fees

An important factor in assessing the prudence of the employer’s process was that the employer periodically negotiated the plan’s service fees. Such negotiations lead to decreased fees for 2006 and 2007, which held steady in 2008. In 2009, the TPA and broker agreed not to increase fees for five years (through 2014) and in 2011, the fee freeze was extended to 2019 — such that their fees were unchanged for 10 years (from 2009 to 2019).
 

Even small employers and non-profits can incur significant litigation expense

This case shows that DOL is willing to take employers (even smaller employers and not-for-profit employers) to court over allegations of health and welfare plan excessive fees. The case took four years to reach this decision. The bench trial (i.e., the judge heard the case without a jury) took eleven days, featured eleven witnesses (including four experts) and over 140 exhibits were filed. Even though the employer successfully defended this lawsuit, each party typically bears its own litigation costs, which can be substantial.
 


CONTACT:

 
Andy Gibson
Compensation and Benefits Leader
  Alex Lifson
Principal

 

Norma Sharara
National Tax Office Managing Director, Compensation and Benefits
  Joan Vines
National Tax Office Managing Director, Compensation and Benefits