Court: Employer in Health Claims Dispute was ERISA Fiduciary

January 21, 2005 ( - A federal appeals court reinstated a lawsuit against a South Carolina company over allegations it didn't forward worker health plan contributions and caused $125,000 in claims to go unpaid.

In reversing a lower court decision, the US 4 th Circuit Court of Appeals ruled that an employer entrusted with employee contributions to be sent to a claims administrator is acting in a fiduciary capacity under the Employee Income Retirement Security Act (ERISA) – particularly since the US Department of Labor (DoL) has ruled that employee contributions are plan assets.

The appeals court ruling said that b etween July 24, 2000 and December 5, 2000, C.T. Enterprises didn’t pay for a total of $286,004 in medical plan claims invoiced by its third-party administrator Kanawha Benefits Solutions. Of this amount, the employees in this case had unpaid medical and dental claims in the amount of $125,343, according to the ruling. The plan was funded by employer contributions and employee contributions collected through payroll deductions.

A group of 22 employees sued the company and its officers for, among other things, breach of ERISA fiduciary duties. However, US District Judge Henry Herlong, Jr., of the US District Court for the District of South Carolina, ruled that the funding of the plan was a business function, rather than a fiduciary one, and that the employer’s failure to fund the plan was, therefore, not a breach of fiduciary duty.

The appeals court also rejected the employer’s argument that the transmittal of the employee contributions could be inferred based on evidence that the employer’s contributions exceeded the employee contributions, pointing to testimony that the employee deductions were a “fictional transfer,” had never been distinguished from company assets, and had not been forwarded to the administrator on a regular basis or in consistent amounts.

The court also found that the employer’s officers were fiduciaries when they directed that the employee contributions be diverted to pay other corporate expenses.

The case, Phelps v. C.T. Enterprises, Inc. is at .