In this edition of The Benefits Professional Update, Joe Faucher of Reish & Luftman contributes "The Top Three Reasons That TPAs Get Sued". As a litigation partner in the firm defending TPAs in trouble on a regular basis, Mr. Faucher offers distinctive insight into the ominous world of litigation that most TPAs either choose to ignore or avoid.I would like to extend a special invitation to benefits professionals nationwide attending the 2000 ASPA Annual Conference at the Grand Hyatt Hotel in Washington, D.C. this October. There will be a Monday evening hospitality presentation on liability issues in the Theatre Conference Room at 7 p.m. This unique presentation will provide attendees with the opportunity to openly interact with Mr. Faucher on topics ranging from DOL litigation against service providers to fees paid by insurance companies and mutual fund companies to questions relating to your own risk management practices. There is no cost to attend and continued education credit is available. I respectfully request RSVPs.
One of the dangers of writing a newsletter that is read by a large number of actuaries is that somebody will probably ask for statistics that support your conclusions. When I was asked to write about the "top 3" reasons that TPAs and other benefit plan service providers get sued, I was pretty confident that I knew those reasons, even without statistics readily at hand.
So at the risk of leaving out other hotbeds of litigation involving benefit plan service providers, here is the "Big 3," as I see them:
One of the most common elements in malpractice litigation against benefit plan service providers is the claim that clients were not adequately advised regarding the plan's top heavy status.
The quickest and easiest way to slip is to not listen carefully to your client when he tells you what he wants out of his plan. For instance, in a meeting with a client, the client says "I'm concerned about the cost of sponsoring a plan." You say "that's fine, we'll design a plan that offers you the lowest possible cost." That is fine - as far as it goes. But it doesn't go very far, because TPAs and their clients sometimes don't speak the same language. If they did, the conversation might have gone something like this: Client - "I've been sponsoring a money purchase pension plan. I want to continue to provide a benefit for my employees, but I want it to be done on the cheap in every respect. My goal is to provide a benefit for my office workers." TPA - "Generally, a 401(k) plan provides the lowest possible administrative expenses. You said you want to provide a benefit for the office workers. Does that include you?" Client - "I'd love to participate in the plan, but only if it doesn't cost the company more if I participate." TPA - "It may cost more for you to participate, depending on several factors. Specifically, if your plan is top heavy, and you defer income to the plan, then the company will incur a matching contribution equal to . . ."
The problem is, people tend not to speak in these specifics. Often, when a client states that he wants to avoid unnecessary plan expenses, service providers assume that he means that he wants to avoid administrative expenses, such as actuary fees. But what the client may really mean is that he doesn't want the company to have any unnecessary expense at all - and that may mean he doesn't want to pay any matching contributions for the non-key employees, even if that means that the key employees cannot defer income into the plan.
Unfortunately, some benefit plan service providers make the mistake of thinking that the client couldn't possibly mean that he - the owner of the company - would forego deferring income into his company plan. After all, the numbers probably work out so that if the key employees defer income, the long term benefits to the key employees exceeds the short term cost of the matching contributions on behalf of the non-key employees. But the TPA should never make this assumption without a detailed conversation with the client.
Another mistake which may cause TPAs to get caught in a top heavy quagmire is to assume that the client has carefully reviewed the plan document, and is well versed in its terms. From the TPA's standpoint, it is tempting to assume that the plan sponsor has a clear understanding of (1) the concept of a top heavy plan, and (2) the ramifications to the company when key employees defer income into a top heavy plan. After all, isn't that laid out in their own plan document?
The problem arises down the road, when plan sponsors fail to make required matching contributions, and look to their TPA to pick up the cost of those contributions. Invariably, plan sponsors will argue "this is why I hired a TPA - if I knew how to comply with all of these complex requirements, I could have done the work in-house." As a practical matter, it's sometimes difficult to defend a case by pointing to an isolated passage on page 33 of a 53 page document. Therefore, there is no substitute for clear, specific communications regarding the concept of top heavy plans, and the consequences of allowing key employees to defer to those plans.
Plan service providers sometimes forget that they are operating in a technical environment. In that environment, "God is in the details." The plan document itself is significant. The amendments are significant. The responses to census information requests are significant. The information that is missing from census information requests is significant. Almost any error, no matter how seemingly trivial, can result in the plan sponsor having to spend significant time and money to correct the problem.
For instance, in one case that we handled, our client provided administrative services for several years to the sponsor of an ongoing retirement plan. Each year our client requested information regarding plan participants, and each year he was advised that the sponsor had only one employee ? the company president. Ten years later, our client was asked to prepare an amended and restated plan document. He prepared the new plan document, using a "prototype" plan document preparation service. He checked all the boxes that he believed were applicable to the plan based on the information he had received in the preceding ten years. Unfortunately, our client didn't carefully study the old plan document in preparing the new one. If he had, two things might have happened: first, he might have noticed that the old plan had a provision in it that specifically excluded from participation in the plan those employees who were subject to a collective bargaining agreement; second, assuming he noticed that provision, he might have said to his client "I see your old plan has a provision excluding these union employees -- why is that provision in there if you don't have any union employees?" Presumably, the response to that question might have been "oh, I have union employees - I just didn't mention them in my responses to your information request forms since they were excluded from participation in this plan."
The example demonstrates the importance of understanding that every plan, and every plan sponsor, is different, even if they look a lot alike. Unfortunately, from time to time, benefit plan consultants pay little attention to the "routine" provisions of the old document in creating a new one. In our case, since our client believed that the sponsor didn't have any employees besides the company president, he didn't check the box to exclude union employees. The IRS audited the plan, noticed that the new plan did not exclude union employees, and required the plan sponsor to contribute an amount equal to what the plan required for the benefit of the mistakenly included union employees.
Paying careful attention to seemingly irrelevant details can be the difference between getting sued and winning (or losing), and not getting sued at all.
Reason number 3 is difficult to define. The fact patterns are all over the map. However, the common thread that runs between many of these cases is a failure by the TPA to recognize a problem client. TPAs-like all businesspeople-should establish guidelines for themselves to determine when a client is simply not worth keeping. Does the client respond timely to requests for census information? Does the client insist that the TPA deal with someone outside the company, such as an accountant, rather than someone inside the client's own four walls? Does the client attempt to condition payment of the TPA's fees on whether another professional resolves problems with the plan? Does the client refuse to sign the TPA's engagement letter? Do the trust accountings fail to match up to deferral and payroll information?
If the answer to any of these questions is "yes," it is likely that you have a problem client. Keeping problem clients is a business decision. If you do keep them, the relationship needs to be managed on your terms. And, if you recognize a client as a problem client, you need to treat them as such- document your advice in writing; make it clear that your continued services depend upon the client eliminating the problem; terminate the client if the problem isn't resolved to your satisfaction.
Copyright 2000 by Professional Practice Insurance Brokers, Inc., a Hilb, Rogal & Hamilton Company. Reprinted with permission from The Benefits Professional Update, Third Quarter Update.