Health Plan Fiduciaries Breached ERISA's Fiduciary Duties in Failing to Remit Participant Contributions

Practical Law Legal Update w-028-6298 (Approx. 5 pages)

Health Plan Fiduciaries Breached ERISA's Fiduciary Duties in Failing to Remit Participant Contributions

by Practical Law Employee Benefits & Executive Compensation

Employer Fails to Remit Withheld Participant Contributions to Insurer

The employer in this case failed to timely remit health plan premiums that had been withheld from the plaintiff-participant's paycheck to the plan's insurer, and the insurer notified the employer shortly thereafter that the participant's health coverage was terminated. The employer, its owner, and the individuals involved in administering the plan did not, however, inform the participant of this fact. As a result, the insurer later denied coverage for nearly $300,000 in medical expenses incurred by the participant relating to kidney failure. The participant sued the employer, its owners, and an employee involved with administering the plan for breach of ERISA's fiduciary duties, including the duties of loyalty and care, for failing to remit plan assets to the insurer. The participant also claimed that the defendants violated ERISA by using plan assets for personal benefit and not holding plan assets in trust.

(Regarding ERISA fiduciary breach claims, see Practice Note, ERISA Litigation: Causes of Action and Remedies Under ERISA Section 502 for Benefit and Fiduciary Breach: Common Types of Fiduciary Breach Claims.)

Court Finds Violations of ERISA's Fiduciary Duties

The court held that the employer and owner were ERISA fiduciaries and that they breached certain of their ERISA fiduciary duties.

First addressing the defendants' ERISA fiduciary status, the court held that:

The employer was an ERISA fiduciary at all times relevant to the litigation.
The employee-administrator was a fiduciary up until she was terminated by the owner, who at that point became an ERISA fiduciary for purposes of managing the disposition of plan assets and administering the plan.

(For more information, see Practice Note, ERISA Fiduciary Duties: Overview: Fiduciary Status.)

Failure to Remit Participant Contributions to Plan; Improper Use of Plan Assets

Turning to the participant's fiduciary breach claims, the court first concluded that the participant's premium contributions withheld from her paychecks were plan assets even though they were not actually delivered to the plan (see Practice Note, ERISA Plan Asset Rules: Defining Plan Assets Under ERISA). Next, the court held that the employer and its owner, by failing to remit the participant's contributions to the plan and instead using those assets to pay the owner's other operating expenses, violated ERISA's fiduciary duties of loyalty and care.

As to ERISA's fiduciary duty of loyalty, the court reasoned that the employer's failure to remit the premiums was not an action taken solely in the participant's interest or for the exclusive purpose of providing the participant benefits—as ERISA requires. As to ERISA's fiduciary duty of care, the court reasoned that the employer's and owner's failures to pay plan premiums and to timely inform the participant of her resulting lapse in coverage did not satisfy the statute's prudent person standard. The employer and owner also did not try to reinstate the plan, despite opportunities to do so.

Regarding the participant's improper use of plan assets claim, the court held that the employer and owner:

Were parties in interest for purposes of ERISA's prohibited transaction rules.
Improperly benefited from using the participant's premium contributions for the employer's operating expenses.

(See Practice Note, Prohibited Transactions and Exemptions Under ERISA and the Code.)

Failure to Segregate Plan Assets; DOL Nonenforcement Policy

The participant also claimed that the employer, owner, and employee-administrator breached ERISA's fiduciary duties by:

Failing to set up a separate bank account to hold employee premium contributions.
Instead holding the plan assets in the employer's general operating account.

The court observed that under ERISA's trust requirement, all plan assets must be held in trust. Moreover, under DOL regulations, employee contributions must be segregated (thereby becoming plan assets) as of the earliest date on which they may reasonably be separated from the employer's general assets.

However, the court declined to rule for the participant on this claim, owing to a question of whether the employer's plan was a cafeteria plan that could invoke a DOL nonenforcement policy regarding ERISA's trust requirement (see Practice Note, Cafeteria Plans). Specifically, in DOL Technical Release 92-01, the DOL recognized an exception to ERISA's trust requirement for cafeteria plans. Under the 92-01 nonenforcement policy, the DOL does not take enforcement action solely due to a cafeteria plan's failure to hold participant contributions in trust. In the court's view, if the employer's plan was a cafeteria plan (a fact that could not be determined from the record), the fiduciaries could be exempt from having to segregate withheld employee contributions with a reasonable time. The court indicated that the employer may have established a simple cafeteria plan—though no evidence on this point was presented (see Practice Note, Simple Cafeteria Plans Under the ACA).

Other Claims

The court also declined to rule for the participant on her other claims, including that:

The employer was liable as a co-fiduciary for its agents' fiduciary breaches.
The defendants failed to provide proper notice under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) (see Standard Document, COBRA Election Notice).

Per the court, regarding the COBRA claim: "COBRA simply does not cover a situation in which an employer's group health insurance plan lapses because of failure to pay plan premiums."

Practical Impact

As this case underscores, plan fiduciaries can run afoul of numerous provisions under ERISA and its regulations when they do not correctly handle participant contributions—including ERISA's fiduciary standards of care, prohibited transactions rules, trust requirement, and regulations governing plan assets. The court was hindered in its analysis (as was the participant in asserting claims) by the absence from the record of key governing plan documents. Unlike many other litigated ERISA disputes, however, the opinion does not address whether ERISA penalties were owed for the administrator's failure to timely provide ERISA-required documents in response to a formal participant request (see Practice Note, ERISA Litigation: Penalties for Failing to Provide Documents and ERISA Litigation Toolkit).

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