In litigation involving an ERISA plan administrator's misappropriation of participant plan contributions and use of those funds for corporate purposes, a federal district court awarded a plan participant and beneficiary more than $41,000 in statutory penalties under ERISA. The plan administrator failed to timely furnish the participant and beneficiary plan documents they had requested in writing under ERISA (Kinsinger v. SmartCore, LLC, (W.D.N.C. Aug. 27, 2019)).

The employer-defendant in this case was the plan sponsor and plan administrator of an ERISA group health plan funded using the employer's general assets and participant contributions. The employer also obtained stop-loss insurance coverage for the plan, and claims were handled by a third-party administrator (TPA) under an administrative services agreement (ASA). Both the ASA and the stop-loss coverage were cancelled, however, after the employer stopped paying required premiums and began using participant contributions for other purposes. Around the time of these cancellations, the spouse of a covered plan participant sought the TPA's preauthorization for a hysterectomy – a procedure she received upon securing the plan's approval. The employer later informed the participant of the coverage cancellation in correspondence that did not specifically address the spouse's claim (including whether that claim was denied). The employer later asserted that the spouse's procedure had not received proper preauthorization, though the claim was never formally denied under procedures that satisfied the Department of Labor's claims procedures under ERISA (see Practice Note, Internal Claims and Appeals Under the ACA).

Through counsel, the participant submitted a written request for plan-related documents, as permitted under ERISA Section 502(c)(1). The requested documents included:

(See Practice Note, ERISA Litigation: Penalties for Failing to Provide Documents.)

The employer, as ERISA plan administrator, did not respond to this request. More than two years later, by which time the claim was the subject of litigation, the employer provided certain of the previously requested documents to the participant and beneficiary, as plaintiffs, in response to a discovery request. The lawsuit included ERISA claims for benefits, fiduciary breach, statutory penalties for failure to provide documents, and attorney's fees (see ERISA Litigation Toolkit).

Before addressing the plaintiffs' statutory penalties claim, the district court concluded that the employer was an ERISA fiduciary and that it had breached ERISA's fiduciary duties by:

The court concluded that misappropriating participant contributions and using them for other purposes (including corporate purposes) is "a clear fiduciary breach." The court ordered any withheld funds to be restored to the plan, along with restitution to plan participants and beneficiaries.

Regarding the ERISA statutory penalties claim, the court ruled that the employer (acting through its president and a principal) was the ERISA plan administrator when the participant first requested the governing ERISA plan documents. The court rejected the employer's argument that there was no need to respond to the participant's written request for documents because it had previously provided the participant an SPD. The court observed that ERISA Section 502(c)(1) does not absolve plan administrators from responding to documents that have already been provided. Also, the participant's request included documents other than the SPD.

Citing the defendant's "extreme bad faith" in misappropriating participant funds, the court also permitted the plaintiffs to recover attorney's fees and costs regarding their ERISA claims (see Practice Note, ERISA Litigation: Attorney's Fees).

An ERISA 502(c)(1) penalties award of more than $40,000 is relatively large, and in fact slightly more than the billed cost of the surgery at issue in this case (see Practice Note, ERISA Litigation: Penalties for Failing to Provide Documents: Examples of Penalty Award Calculations). But it likely could have been worse for this employer. ERISA gives the district courts discretion to award penalties of up to $110 per day, and this court clearly was not pleased with the employer's plan administration and litigation tactics. (In one section of its opinion, the court references the employer's attempts to stonewall the litigation using extremely weak and frivolous legal defenses.) As the court notes, a significant penalties award serves not only to punish a plan administrator's misconduct, but also to deter similar misconduct by other plan administrators. Because Section 502(c)(1) claims are fairly common in the benefits litigation context, plan administrators should treat these requests seriously when they arise during the claims administration process – particularly for contentious claims that may end up in the courts.