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.
PBA agreed to pay medical providers for claims incurred under several employers’ health plans. Each agreement required PBA to establish a segregated bank account for each plan into which it would deposit the funds that it received from the corresponding employer for paying the medical claims, and authorized PBA to pay medical claims by writing checks from these accounts. Because these funds were to be used solely to pay claims under the plans, PBA agreed that it would not commingle the funds for each plan with PBA’s own assets and would not use these funds for its own purposes.
Despite these promises, PBA not only failed to use funds supplied by the employers to pay the claims incurred under the corresponding plan, but it commingled and misappropriated those plan funds for its own purposes. When PBA received too many complaints from medical providers or plan participants, PBA would withdraw funds from its main, commingled account and put that money into the respective employer’s separate account to pay the claim(s) in question.
The appellate court affirmed a lower court’s judgments awarding amounts of unpaid claims to each employer.The 6th Circuit’s opinion is at http://www.ca6.uscourts.gov/opinions.pdf/12a0271p-06.pdf.
« 403(b)s Relieved From SEC Rule in Certain Situations