Group Health Policy for Tribal Members Was Not Subject to ERISA: Sixth Circuit

Practical Law Legal Update w-016-5045 (Approx. 4 pages)

Group Health Policy for Tribal Members Was Not Subject to ERISA: Sixth Circuit

by Practical Law Employee Benefits & Executive Compensation

Background

The Indian tribe in this case sued the TPA for its health benefits program alleging that the TPA breached its fiduciary duties under ERISA by:

Inflating the tribe's medical bills with undisclosed administrative fees.
Failing to take advantage of federal Medicare regulations that would have resulted in lower costs for health claims.

(See Practice Note, ERISA Fiduciary Duties: Overview.)

The tribe's health benefits program consisted of two policies:

A self-funded policy available only to tribal members (spouses and dependents who were not tribal members could not participate in the policy).
Another self-funded policy that covered tribal employees and employees' spouses and dependents, regardless of their tribal membership status.

The tribe funded the two policies from different sources.

(In related litigation, the Sixth Circuit had affirmed a district court's ruling that the TPA violated its fiduciary obligations under ERISA by charging hidden administrative surcharges (see Legal Update, Sixth Circuit Affirms $5 Million Award for TPA's Breach of ERISA Fiduciary Duties).)

Among other claims, the tribe argued that the member policy and employee policy together constituted a single ERISA plan (and, therefore, the TPA's fiduciary liability should extend to both policies). Rejecting this argument, a district court concluded that ERISA did not apply to the policy covering members. The tribe appealed.

Outcome

The Sixth Circuit agreed with the district court that the member policy was not covered by ERISA. The court reasoned that a presumption under controlling caselaw that all employee health benefits offered by an employer constitute a single ERISA plan did not apply (Loren v. Blue Cross & Blue Shield of Mich., 505 F.3d 598 (6th Cir. 2007)). For the presumption to apply, the benefits at issue must have been offered by an employer in its employer capacity. In this case, however, coverage under the tribal member policy depended on an individual's tribal membership, rather than on employee status.

Because the tribe could not rely on a presumption that the two policies were a single ERISA plan, the question was governed by the tribe's intent in creating the policies. The Sixth Circuit concluded that the tribe had failed to show that it intended for the policies to be a single ERISA plan. The court evaluated the following three factors in this regard:

Whether the plans had separate ERISA identification numbers.
Whether language in the plan documents reflected the tribe's intent to create multiple plans.
Whether the plans shared the same administrator or trust.

Although the policies shared the same plan TPA, the court noted that the tribe had not filed Form 5500s and so neither policy had an ERISA identification number. In addition, the plan documents did not contain language reflecting the tribe's intent to create more than one plan. As a result, the tribe could not rely on the other two factors to demonstrate its intent to create a single ERISA plan.

The court also reasoned that the tribe had not intended its member policy to be one of two benefit options for employees, because the only employees who received coverage under that policy did so due to their status as members of the tribe (not because they worked for the tribe). The different sources of funding for the two policies also supported the conclusion that the policies were not intended as two types of benefits offered to employees under a single ERISA plan.

Tribal Member Policy Was Not an ERISA Plan

Having determined that the policies were not a single ERISA plan, the Sixth Circuit also addressed whether the tribal member policy was an ERISA plan in its own right. The court evaluated the two policies' ERISA plan status by considering whether:

The policies satisfied the DOL's safe harbor regulations for determining if a program is exempt from ERISA (see Practice Note, Voluntary Benefits).
The policies were a plan by considering whether from the circumstances a reasonable person could ascertain:
- the intended benefits;
- the class of beneficiaries;
- the source of financing; and
- procedures for receiving benefits.
The employer established or maintained the plan with the intent to provide benefits to its employees.

The court concluded that although the tribe's employee policy passed this test for being an ERISA plan, the member policy did not. Specifically, the tribe could not demonstrate its intent to establish or maintain the member policy to provide benefits to its employees (despite the fact that some tribal employees were covered under the member policy). Instead, the tribe had established the policy with the intent of providing benefits to tribal members.

Practical Impact

An employer/plan sponsor typically has a good deal of discretion in determining how many ERISA health plans it sponsors. And, as this case illustrates, there are important compliance and litigation reasons for an employer to affirmatively decide how many plans it maintains and to demonstrate that decision through appropriate plan documentation and corresponding ERISA compliance (for example, filing Form 5500s for its ERISA plans). The alternative is to have a court (in a litigated dispute) or the DOL (in an enforcement action) make that determination for the employer, using the kinds of default rules, presumptions, and multi-factor tests that the Sixth Circuit invoked in this decision.

Group Health Policy for Tribal Members Was Not Subject to ERISA: Sixth Circuit | Practical Law