Compliance April 21, 2006

Entity with Any Authority over Plan Assets is ERISA Fiduciary

April 21, 2006 (PLANSPONSOR.com) - The 6th Circuit US Court of Appeals has determined that a third party health plan administrator is a fiduciary under the Employee Retirement Income Security Act (ERISA) because it both had the authority to write checks on the plan account and exercised that authority even after its contract with a company ended.
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In reversing a lower court decision granting summary judgment for Preferred Health Plan, Inc. (PHP), the court said that, “The plain language of the statute establishes that it imposes fiduciary duties not only on those entities that exercise discretionary control over the disposition of plan assets, but also imposes such duties on entities or companies that exercise “ any authority or control”.”   The court noted that PHP had a “substantial amount of money” under its control at any given time, and exercised that control by depositing direct payments from COBRA participants, writing checks to cover approved claims, and allotting to itself a monthly administrative fee.

The health plan had argued that it was not an ERISA fiduciary because it performed only ministerial functions for the plan, but the court said that it was not its agreement with the company nor its day-to-day operations that made PHP an ERISA fiduciary.

A business owned and operated by the Fine family entered an agreement with PHP that named the entity both as third party administrator and plan administrator.   PHP processed claims, determined coverage and eligibility and made payments to eligible employees.   PHP paid claims from an account that was funded by employee and employer contributions and one former employee’s COBRA contributions.

The Fine’s company fell into financial trouble.   As a result the c ompany stopped making the payments required to support the healthcare plan, and PHP was unable to write checks payable from the plan account. Retaining for itself an administrative fee of $5,793.40, PHP cancelled its contract with the company.   It then sent a final letter to the company including checks that for the balance on of COBRA payments and the remaining funds in the plan account.

The company went bankrupt.  Unpaid medical bills for these employees ranged from $89 to $30,000, with the total amount of bills left unpaid upon the company’s bankruptcy exceeding $300,000.   The employees sued the company and PHP, claiming breaches in their ERISA fiduciary duties.

A lower court granted summary judgment in favor of the defendants, saying they were not ERISA fiduciaries. The appellate court upheld the lower court’s decision, except for dismissing PHP as an ERISA fiduciary.   The court remanded the claims against PHP to the lower court for further consideration.

The opinion is here .

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