September 24, 2012 (PLANSPONSOR.com) – A court has ruled that a third-party administrator (TPA) authorized to pay medical claims on behalf of employers is a fiduciary under the Employee Retirement Income Security Act (ERISA).
The 6th U.S. Circuit Court of Appeals noted that ERISA provides that “a person is a fiduciary with respect to a plan to the extent he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets.” The term person is defined broadly to include a corporation such as a TPA, Circuit Judge Jane B. Stranch wrote for the majority.
Although an entity must exercise discretionary control over managing a plan in order for that entity to become a fiduciary, an entity that exercises any authority or control over disposition of a plan’s assets becomes a fiduciary. So the threshold for becoming a fiduciary is lower for entities handling plan assets than for entities managing the plan, Stranch explained. An entity such as a TPA becomes an ERISA fiduciary when it exercises “practical control over an ERISA plan’s money.” The appellate court found that Professional Benefits Administrator (PBA) is a fiduciary under ERISA because it had the authority to write checks from plan accounts and exercised that authority. Moreover, PBA had control over where plan funds were deposited and how and when they were disbursed. The court said the fact that PBA used plan funds in ways contrary to how it had agreed to use them demonstrates that PBA had practical control over plan funds once it received them from employers.