The Next Wave of Fiduciary Challenges

In late December, the law firm of Schlichter, Bogard opened a new front in the ongoing battle over fiduciary responsibility—and liability—in the management and delivery of employee benefit plans. In this latest volley, lawsuits were brought against four major employers (United Airlines, CHS/Community Health Systems, Laboratory Corporation of America, and Allied Universal) alleging that these employers—and their insurance brokers—violated ERISA in the management of the employers’ voluntary employee benefit plans.

First, Some Background on Voluntary Plans

Employers typically offer voluntary benefits—such as accident, critical illness, and hospital indemnity insurance—as supplemental coverage alongside core health benefits. These policies are marketed as helping employees manage out-of-pocket medical costs and financial shocks from illness or injury. These benefits are usually fully employee-paid through payroll deductions and are marketed as optional, low-cost protections.

That said, benefits under these policies are often narrow, capped, and contingent–meaning these policies pay a fixed amount for a covered contingency (such as a hospitalization or a critical illness)—but the payments do not actually cover the cost of the hospitalization or treatment of the illness. As a result, policyholders may never receive meaningful payouts relative to premiums paid, and employees often purchase these products without a clear understanding that payouts are fixed and may not align with actual medical costs. Also, loss ratios are commonly low, indicating that a large share of premiums goes to commissions and administrative costs rather than claims.

Additionally, it should be noted that these voluntary programs are on the very edge of being covered by ERISA. The Department of Labor (DOL) has issued regulations describing criteria for determining whether a voluntary, fully employee-paid plan is or is not covered by ERISA. Under this DOL guidance a voluntary plan that is fully employee paid is not subject to ERISA if the “sole functions of the employer … with respect to the program are, without endorsing the program, to permit the insurer to publicize the program to employees or members, to collect premiums through payroll deductions or dues checkoffs and to remit them to the insurer” and the employer “receives no consideration in the form of cash or otherwise in connection with the program, other than reasonable compensation, excluding any profit, for administrative services actually rendered in connection with payroll deductions”. 29 CFR § 2510.3-1

Because these coverages are not central to employers’ benefits offerings (compared to benefits such as retirement, health care, life insurance, and LTD)–and because they are fully employee-paid–some employers simply may not manage these plans as carefully as they do their core programs. With this background in mind, enter the latest wave of lawsuits.

The Players and the Allegations

In each of these four cases, the defendants are the employer and an insurance broker. To summarize the allegations:

• Each employer is identified as a plan fiduciary due to the employer’s control over the selection of the insurer used.
  
• Each employer is also identified as a “party-in-interest” under ERISA by virtue of employing participants in these plans.
  
• Each broker is identified as a “party-in-interest” by virtue of being a service provider to these plans.
  
• Each broker is also identified as a fiduciary because these brokers identified the carriers—and commission levels– for consideration by the employers, thereby (arguably) setting its own compensation. The brokers also (allegedly) acquired fiduciary status by providing plan administration and management services.

The core allegations are that the brokers selected carriers with higher commission payments (and correspondingly low rates of benefit payments—“loss ratios”)—thereby increasing their own income. At the same time, the employers are accused of failing to monitor the brokers and accepting low or no-cost additional services from these brokers (such as bundled HR or benefits consulting)

while allowing the brokers to collect these excessive commissions. These allegations trigger an array of ERISA claims:   

• The employers breached their fiduciary duties because they did not prudently select or monitor brokers, did not monitor the reasonableness of the brokers’ direct or indirect compensation, allowed the brokers to engage in prohibited transactions (described below), and engaged in prohibited transactions (receiving subsidized services in exchange for giving brokers access to excessive fees).
  
• The employers also engaged in prohibited transactions by receiving improper benefits from the brokers in connection with the excessive commissions charged by the brokers and by causing the plans to engage in prohibited transactions.
  
• The brokers breached their fiduciary duties by collecting excessive fees—thereby dealing with assets of the plans in their own interests and receiving consideration for their own accounts in connection with transactions involving plan assets.
  
• The brokers engaged in prohibited transactions by causing excessive compensation to be paid to themselves from the plans. 

It must be emphasized that these represent both legal and factual allegations that, no doubt, will be vigorously contested. Nonetheless, these complaints set the stage for changes in the voluntary benefits marketplace.

What Now?

These are new complaints, and it will take years to see how courts will assess these claims. It must be noted that these cases seek to extend familiar ERISA excessive-fee theories—developed primarily in the defined contribution context—into an area where courts have provided far less guidance. Accordingly, it is premature for employers to take any dramatic steps to restructure their voluntary benefit plans. Nonetheless, these lawsuits should serve as a wake-up call to employers. Merely because these plans are employee pay-all and only involve “secondary” benefits, if employers are involved in establishing or managing the program (such as by selecting or promoting providers), these plans are covered by ERISA. ERISA coverage is an all-or-nothing proposition; once an employer is sponsoring an ERISA plan, that ERISA status triggers the full panoply of ERISA obligations. In other words, it may be time for employers to pay some more attention to their voluntary benefit plans.