Justice Department Moves to Stop 'Fraudulent' Health-Care Plan

April 20, 2004 (PLANSPONSOR.com) - Two businessmen who sold health-care plans to employers that involved an illegal disguise of wages as health-care benefits have been sued by the U.S. Department of Justice.

The Justice Department filed a civil injunction complaint against William Paul Crouse Jr. and Carmelo Zanfei last week inthe U.S. District Court for the Northern District of Illinois in Chicago, asking the court to order the men to stop selling allegedly fraudulent employee benefit schemes to employers. The suit alleges that 200 employers across the United States used the schemes to lower their federal employment taxes by illegally disguising wages as health-care benefits for as many as 20,000 employees, according to a news release issued by the Justice Department.

In addition, the complaintalleges that employers who use the defendants’ schemes underreport wages on W-2 annual wage statements given to employees.   This in turn could lead to reduced social security benefits for those employees if not correct, the complaint said.

“Employers shouldn’t be enticed by schemes to evade employment taxes,” said IRS Commissioner Mark Everson. “In the end, failure to pay employment taxes amounts to stealing, both from the employees of the business and from honest taxpayers. The owners and directors of businesses should note they are held to a higher standard for payment of employment taxes because they can be personally liable if they don’t follow the law.”

The estimated loss to the U.S. Treasury from the schemes so far may be as much as $63 million, the Justice Deparment said.

The Plan

Crouse and Zanfei operated the alleged scheme through their business TRG Marketing.   Under the TRG Marketing plan, employees were offered low-cost health-insurance plansthrough a multiple employer welfare arrangement (MEWA) designed to protect participants and their dependents by providing reimbursement for catastrophic health expenses.  The plan was funded by premium payments made by employers on behalf of their employees, by employees through payroll deduction, and by individual participants who were not associated with any employers. 

As the plan was set up, employees who had not sustained medical costs would receive advance medical reimbursements, which the lawsuit claims were wages disguised as medical reimbursements so the employer could avoid paying taxes on that amount.   But plan participants began complaining that TRG would not pay on their health claims, leaving some individuals stuck with medical bills for tens of thousands of dollars each.   In total, participants were allegedly left with between $5 million and $17.5 million in unpaid medical claims, the news release said.

This is not the duo’s first run in with the feds.   In October 2003, the U.S. Department of Labor (DoL) filed suit in the U.S. District Court in Indianapolis alleging the two violated Employee Retirement Income Security Act (ERISA) provisions by mixing assets of the health plan with the marketing firm’s money, by failing to charge adequate premiums and by not establishing appropriate underwriting procedures to make sure that enough assets were available to pay benefits (See  DoL Sues Indianapolis Marketing Firm for Health Plan Misdeeds ).   The DoL’s suit seeks payment for all health claims filed by participants and beneficiaries under the TRG health plan and restore any plan losses with interest, as well as any undue profits received by Crouse and Zanfei.