With articles provided by the law firm of Reish & Luftman
July 1999, Vol. I, Issue I
I am pleased to welcome the contribution of the law firm Reish & Luftman to the Benefits Professional newsletter. Reish & Luftman will be providing article contributions to the Benefits Professional Update on a quarterly basis. Professional Practice Insurance Brokers, Inc. is proud to bring to our readers their extensive expertise and experience in this format. As always, your comments and suggestions are appreciated. -- Shell Simonson
Sources of Liability Against Benefit Plan Service Providers
By Joe Faucher
Sound business practice mandates that employee benefit plan professionals assess their risk - i.e., their potential liability. In the Benefits Professional Update, our goal is to educate benefits professionals - third party administrators ("TPAs"), actuaries, accountants and other service providers - about the sources of potential liability, and means of avoiding liability. In this, the debut edition of the Benefits Professional Update, we discuss the theories that are most frequently pursued against plan service providers.
The typical claims against benefit administrators come in two forms: (1) state negligence or "malpractice" claims, and (2) claims under the Employee Retirement Income Security Act of 1974 ("ERISA") for breach of fiduciary duty or for participation in a prohibited transaction.
ERISA Claims
True ERISA claims against third party benefit plan administrators ("TPAs") used to be somewhat rare. In recent years, the U.S. Department of Labor ("DOL") has announced its intention to expand its pursuit of plan service providers, and private parties have become more inventive in the theories they advance in claims against service providers. Additionally, in order to enhance profits and maintain a relevant presence in the expanding 401(k) field, many service providers have taken on greater roles in plan administration. A good example is the frequency with which TPAs act as intermediaries in communicating investment decisions of plan participants. Other TPAs actively promote investment advisory services. The result is a world in which the law is struggling to keep up with the TPA's changing role.
Fiduciary status, and therefore fiduciary liability, arises in two ways: first, any person designated by the plan as a trustee, administrator or investment manager is an ERISA fiduciary, and may be liable to the extent he or she breaches fiduciary duties.
ERISA also includes a "functional" definition of fiduciary. That is, regardless of whether the plan refers to a person as a fiduciary, a person may be found to be a fiduciary if he or she is found to have performed one of the functions ERISA defines as a fiduciary function. If you perform one or more of the fiduciary functions, you are a fiduciary (at least to the extent you perform the fiduciary function). If the services you provide are outside those functions, you are not a fiduciary. The traditional functions performed by ERISA plan service providers, such as TPAs and actuaries, do not fall within ERISA's "fiduciary" functions, which include (i) asserting discretionary authority or control respecting management of the plan, or asserting any authority or control over the plan's assets, (ii) rendering investment advice for a fee or other compensation with respect to plan assets, or (iii) discretionary authority or control over plan administration.
In regulations interpreting ERISA, the DOL has stated that persons who perform certain administrative functions within a framework of policies, practices and procedures made by other persons are not plan fiduciaries. According to the DOL regulation (29 C.F.R. § 2509.75-8), those non-fiduciary functions include applying rules determining eligibility for participation or benefits, calculating service compensation credits for benefits, preparing employee communications material, maintaining service and employment records, preparing reports required by government agencies, calculating benefits, and processing claims.
Although that DOL regulation appears to establish a bright-line test regarding whether certain conduct amounts to a "fiduciary function", the cases interpreting ERISA have tended to muddy the waters. In one recent case in the Ninth Circuit United States Court of Appeals, the court held (in a welfare plan context) that an insurance company that administered health claims and made determinations regarding eligibility and whether benefits should be paid, could not be determined as a matter of law not to be a plan fiduciary. The court held that it didn't matter that the plan documents specified that the insurance company was not a fiduciary. This case, and others like it, represent a departure from the previous conventional wisdom, and from the DOL regulation cited above which states that "[a]pplication of rules determining eligibility for participation or benefits" is not a fiduciary function.
Fiduciaries also may be subject to "co-fiduciary liability" under ERISA, which imposes liability on fiduciaries for the acts and omissions of other fiduciaries if the fiduciary (i) knowingly participates in or knowingly undertakes to conceal the act or omission, (ii) enables another fiduciary to commit a breach, or (iii) has knowledge of a breach by another fiduciary, unless he or she makes reasonable efforts to remedy the breach.
Finally, ERISA's prohibited transaction provisions apply not only to fiduciaries but to "parties-in-interest", which include persons who provide services to the plan. Depending on the jurisdiction within which the benefits professional practices, service providers may be liable for knowing participation in a fiduciary breach. This can result in the service provider having to disgorge whatever benefit was earned as a result of its participation in the breach. Additionally, a service provider may be required to disgorge any compensation it receives in exchange for its services in excess of "reasonable compensation".
The line between fiduciary functions and "ministerial" functions has been blurred over the past few years. In future reports, we will discuss some of the ways that the DOL and crafty plaintiffs' attorneys have expanded the potential ERISA liability of benefit plan service providers.
State Law Malpractice Claims
Benefit plan service providers may also be liable under state law negligence, or malpractice, claims. This is the most common source of litigation against benefit plan professionals, since in most cases, plaintiffs concede that the benefit plan professional is not engaged in any fiduciary function under ERISA. Generally speaking, the question in these cases is whether the service provider fell below the applicable standard of care in providing its services. Another common issue is whether the plaintiff - the plan sponsor or plan administrator - is liable in whole or in part for the damage the plan sponsor or the plan claims to have incurred.
These cases can arise in as many different ways as there are services provided by benefit plan service providers. Errors occur in calculating distributions (particularly distributions to highly compensated or key employees), advising clients regarding the ramifications of the plan's top heavy status, claims related to alleged errors in drafting the plan, and in a myriad of other ways. In future editions of the Benefits Professional Update, we will discuss real-life cases involving negligence claims against plan service providers, and ways in which liability could have been avoided.
Copyright 1999 by Professional Practice Insurance Brokers, Inc., a Hilb, Rogal & Hamilton Company. Reprinted with permission from The Benefits Professional Update, July 1999 (vol I, issue I).