DOL Issues Cease and Desist Order for MEWA with Unpaid Claims

Practical Law Legal Update w-011-4380 (Approx. 5 pages)

DOL Issues Cease and Desist Order for MEWA with Unpaid Claims

by Practical Law Employee Benefits & Executive Compensation

MEWA's Failure to Pay Participant Health Benefit Claims

The MEWA involved in this litigation came to the DOL's attention after complaints by numerous participants notified the agency of the MEWA's "systemic failure" to pay health claims. According to the DOL, the MEWA operated in 36 states and covered around 14,000 participants and beneficiaries who worked for more than 560 employers. A DOL investigation revealed that:

Plan assets reflecting employee and employer contributions had been transferred to offshore Bermuda accounts.
The MEWA had failed to pay more than $26 million in participant health benefit claims.

DOL's Cease and Desist Order Regarding Marketing and Enrollment

As a result of the abuses revealed in its investigation, the DOL exercised – for the first time – its cease and desist authority under a MEWA-related provision added by the Affordable Care Act (ACA). Specifically, the DOL's cease and desist order prevents brokers and other entities from marketing the MEWA to prospective employers or enrolling new employers.

As background, under the ACA provision, the DOL may issue an ex parte cease and desist order without prior notice or hearing, if it appears that a MEWA's alleged conduct:

Is fraudulent, for example, involving misrepresentations of:
- the benefit terms offered in connection with the MEWA; or
- the MEWA's financial condition or regulatory status.
Creates an immediate danger to public safety or welfare.
Causes or can be reasonably expected to cause significant, imminent, and irreparable injury.

(ERISA § 521 (29 U.S.C. § 1151); 29 C.F.R. § 2560.521–1; see Practice Note, Affordable Care Act (ACA) Overview: MEWAs and Legal Update, DOL Final Rules Target MEWA Abuses.)

Scope of Temporary Restraining Order

The DOL's complaint alleges that the MEWA fiduciaries violated numerous provisions of the Employee Retirement Income Security Act (ERISA) in their role as fiduciaries for the underlying ERISA plans. Specifically, the complaint alleges that the MEWA fiduciaries:

Received unreasonable compensation and failed to disclose it to participating employers.
Paid themselves and others unreasonable administrative fees and expenses from participating plans' assets.
Failed to keep those plan assets in trust within the US (see Legal Update, Health Plan TPA Violated ERISA by Paying Its Own Fees from Plan Account: Ninth Circuit).

The DOL also obtained a TRO against the MEWA fiduciaries. The TRO, among other things:

Removes the MEWA fiduciaries from their roles as fiduciaries, service providers, trustees, and administrators for the MEWA and participating plans.
Prohibits the MEWA fiduciaries from acting as fiduciaries or service providers for the MEWA and participating plans.
Appoints an independent fiduciary for the MEWA and participating plans.
Requires the MEWA fiduciaries and related parties to immediately:
- notify the independent fiduciary of funds from trust or bank accounts containing participating employer or professional employer organization (PEO) contributions (see Standard Document, PEO Client Service Agreement); and
- transfer those assets to a bank account identified by the independent fiduciary.
Requires the MEWA fiduciaries to preserve and provide to the independent fiduciary all relevant books, records, and documents.
Prohibits the MEWA fiduciaries from transferring or disposing of plan assets.
Transfers control of certain bank accounts containing plan assets from the MEWA fiduciaries to the independent fiduciary.
Requires the MEWA fiduciaries to instruct anyone working on their behalf to cooperate with the independent fiduciary.

Under the TRO, the independent fiduciary is granted sole authority to manage the MEWA, participating plans, and plan assets. This includes the authority to:

Exercise all fiduciary duties concerning the MEWA and participating plans.
Terminate the MEWA and participating plans, if deemed appropriate.
Pay or deny claims submitted to the MEWA or participating plans.
Seek recovery of plan assets.
Pursue claims on behalf of the MEWA and participating plans.

Under the TRO, the MEWA fiduciaries also must reimburse the MEWA and participating plans for all fees paid to the independent fiduciary and service providers that the independent fiduciary hires.

Practical Impact

For many years, the DOL has identified MEWAs as one of its enforcement priorities – particularly when, as here, the allegations involve significant unpaid medical claims as reported to the government by plan participants. Aside from the sheer number of participants, employers, and states of operation under this MEWA, the enforcement action and litigation are also of note for the DOL's first-ever use of its cease and desist order authority, intended to prevent additional employers from becoming enrolled in the MEWA. However, under regulations implementing the DOL's cease and desist authority, a party negatively impacted by the order may request a hearing upon showing cause why the order should be changed or set aside altogether.

DOL Issues Cease and Desist Order for MEWA with Unpaid Claims | Practical Law