The Cost/Benefit Analysis of Self-Funding Employee Health Benefits
I enjoyed this article from CFO on whether smaller employers should switch over to self-funded health plans, to take advantage of potential cost savings in comparison to insured plans, and to obtain comparatively favorable treatment under the ACA. I would throw in another point that favors self-funding a plan, which is that ERISA preemption provides more freedom from state health insurance mandates in that circumstance than would otherwise be the case.
Of more import, though, is the author’s warning that there are multiple hidden risks in self-funding that can threaten the financial well-being of a smaller employer, but which larger self-insurers have the financial depth to weather. There is no doubt that this is true, and that a smaller employer that wants to self-fund its health benefits must plan well for those risks, for instance through its stop-loss insurance structure, with enough sophistication and foresight that it has controlled for those risks.
There are other hidden risks as well, however, which are predominately operational, but which the article doesn’t address. I have spent years litigating disputes between administrators and plan sponsors over problems in the administration and management of self-funded plans. These problems have ranged from whether the administrator has properly determined eligibility or coordinated benefits, to whether the administrator approved care that the plan did not cover, to allegations of outright operational incompetence. Large self-funded employers often avoid these types of problems with the administrators of their self-funded plans, because they have the deep pockets to hire major, brand name administrators. Smaller employers sometimes end up with smaller, less sophisticated administrators, either because of cost or because they simply don’t know what to look for in picking an administrator. These operational risks place a smaller employer with a self-funded plan at risk of losses, and need to be accounted for by smaller companies in, first, deciding whether to self-fund health benefits and, second, in planning how to do so.
In the end, as most if not all employers know, there is no easy answer to providing health benefits in as cost effective a manner as possible. Self-funding is one good avenue, but its no panacea: it has to be done carefully to work well.
Another Case Showing That You Should Not Assume That Your Plan Provider Is a Fiduciary
Okay, so law blogging evangelist and reformed trial lawyer Kevin O’Keefe is advocating for shorter, more frequent blog posts, and I read his short post on that while I was in the middle of writing a long post for this blog, hopefully to go up tomorrow, on the Third Circuit’s recent opinion on the church plan exemption under ERISA. Amusingly, right when I read Kevin’s post, I had just tweeted a quick one liner on this article – “Court Rejects Excessive Fee Claims Against Principal” - from planadviser about an Eighth Circuit decision that illustrates an important point I often make: service providers to plans employ armies of lawyers whose job is to make sure that their contractual relationships with plan sponsors do not turn them into fiduciaries. Time after time, I find that plan sponsors assume their providers are fiduciaries, but we all know that time after time, they are not, and moreover, that plan sponsors often don’t learn this until a court, during a lawsuit, lets the service provider off the hook on the ground that the service provider is not a fiduciary. This article, and the Eighth Circuit decision it discusses, illustrates this phenomenon perfectly. So I am passing it along, as part of a short post written solely for that purpose, just as Kevin suggested.
Co-Fiduciary Liability and, In Other News, Thoughts on the Evidentiary Status of Medical Reviewers in LTD Claims
Two small notes today that I wanted to pass on. Each stuck in my mind as the possible foundation for a substantial blog post, but I have found that once items like this start to pile up in number, it can be quicker and more useful to get them out in a shorter post. Sports columnists, like the Boston Globe’s Dan Shaughnessy, used to describe columns full of small notes that were picked up along the way with none sufficient to warrant a full column on their own, as “clearing out the attic of my mind.” If I really set out to do that, we would be here awhile, but I am limiting myself to two items today: we can call it more like “cleaning out the corner of a desk drawer of my mind,” rather than the whole attic.
One of them was this article in Planadvisor titled “Do Retirement Plan Advisers Have a Duty to ‘Rat?’” Really, how can you not read an article with that heading? Although the headline sounds like clickbait for anyone in my line of work, it is actually a substantive discussion of a real problem, namely, when, given the risks on one hand of co-fiduciary liability and, on the other hand, of losing a client, a service provider should speak out about questionable or even illegal acts by a plan sponsor. One of my favorite southerners turned New Hampshire Yankee (which is not quite the same thing as a Yankee in King Arthur’s Court, but close enough), Adam Pozek, sums up the issue in this quote from the article:
Adam Pozek, a partner at DWC ERISA Consultants in Salem, New Hampshire, says, “It varies widely depending on what type of infraction there is. No one wants the reputation of turning a client in when something small happens, but in a situation where there is outright theft, most would agree the adviser has a duty to report it.”
Pozek also says it hinges to some degree on whether the adviser is acting in a fiduciary capacity. If not, in general, the adviser has less of a responsibility legally. However, depending on what titles they hold, they may have ethical or professional standards to consider. “It’s a judgment call for advisers who are not fiduciaries,” he states.
The other item I wanted to pass along is ERISA lawyer Rob Hoskins’ post on the ERISA Board the other day on this decision from the Southern District of New York noting that medical reviewers in LTD claims are not to be treated as experts for purposes of the federal rules of evidence and that their reports, on which LTD insurers and administrators rely in deciding LTD claims, are not subject to the Daubert standards that govern expert testimony. Its worth bearing that point in mind, simply because medical reviewers in litigated LTD claims sit in something of a unique position for purposes of the rules of evidence, in that they fall somewhere in between a treating physician, whose records are often broadly admissible, and an expert retained for litigation, whose testimony is governed by Daubert and the federal rules that govern expert testimony. Neither fish nor fowl, to a certain extent, are such reviewers and their reports for these purposes, but long standing practice has established the admissibility of such reports and the weight to be given them in the context of litigation over LTD claims.
The Zeitgeist of Chris Carosa
I used to be a fan, back in the old days when The New Republic was actually meaningful and influential, of its zeitgeist table, as it really did, in a glance, sum up what people were thinking and talking about, albeit in a humorous way. I couldn’t help but think of that this morning when I read Chris Carosa’s “FiduciaryNews Trending Topics for ERISA Plan Sponsors: Week Ending 7/27/12.” Its like a college survey course on one page of what everyone in the retirement industry either is or should be thinking about right now, from the costs of plans to fee disclosure to the coming tax wallop you are going to suffer to fix the public pension system to the misinformation, non-disclosure and outright confusion rampant in the knowledge base of plan sponsors and participants.
Heads I Win, Tails You Lose: The Privileged Position of Traditional Banks in ERISA Litigation
All right now, its time to get back up on the horse – the blogging horse, that is. I didn’t actually go on vacation for the last month, believe it or not – I had a major brief concerning a piercing the corporate veil case against a corporate officer due not long after the July 4th holiday, followed almost immediately by briefing concerning the First Amendment rights of internet posters. Fun stuff, but it hasn’t left much, if any, time for blogging.
So I am now going to try to catch up on a number of items that I spotted – but was never able to find the time to post on – over the past month. I am going to start today with this story right here, about the Sixth Circuit ruling that ERISA claims against a bank failed on the ground that the bank did not qualify as a fiduciary, while the state law claims against the bank could not go forward because they were preempted.
Speaking last month at an MCLE seminar on the subject of litigating top-hat and other compensation disputes, I discussed one of my favorite conceptual points, which is the theoretical possibility in certain cases of prevailing, as a defendant, by showing that the ERISA claims fail on technical grounds while state law claims are preempted at the same time because the underlying fact pattern – whether or not capable of supporting successful claims under ERISA– turn on the terms of an ERISA governed plan. The end result is that a plaintiff would not be able to recover at all – or even have any viable causes of action – against the defendant. I discussed it, in fact, right here in this PowerPoint slide in my presentation, which referenced a case, Aubuchon v. Benefirst, in which I pursued that defense strategy. As my fellow panelists at the seminar and I discussed, it is a conceptually elegant and perfectly logical argument, but one that courts generally don’t like, finding that, much as the dissent did in the Sixth Circuit case referenced in the article, the circumstances either cannot or should not be interpreted in a manner that would leave the plaintiff with no viable cause of action under ERISA itself while simultaneously eliminating any state law rights by operation of preemption.
Here, though, the Sixth Circuit accepted that argument and found the plaintiff to have no viable claims, for this reason, against a defendant. It is interesting to note, though, that the defendant who benefited from that here is a bank. For whatever reason, banks – traditional, old-fashioned depository/lending institution type banks – make out very well in ERISA litigation when a party tries to bring them in, as happened in this case, as a functional or deemed fiduciary, based on the bank’s role in handling and distributing a plan asset; there is a long history of cases, although perhaps relatively few in number, placing such an institution outside of the role of fiduciary for purposes of ERISA litigation, when the bank is serving in a traditional banking role as a depository or lending institution. Add in the impact of preemption, and a bank that is merely holding the plan assets or lending against them (or supposedly only doing that, as the facts alleged in the case before the Sixth Circuit, as is often true in similar cases, could be construed as involving much more than that on the part of the bank in question) is in a very privileged position when it comes to defending litigation over its involvement with an ERISA governed plan.
The decision is McLemore v. EFS, and you can find it here.
Fee and Expense Disclosure: No Such Thing as a Free Lunch
I have commented before, including here, on the fact that there is some inherent tension between the fact that the administration of 401(k) plans costs something and the obligation of sponsors to, nonetheless, keep those costs down. One of the hoped for goals of the Department of Labor’s effort to shed light on fees, expenses, costs and revenue sharing is to make sure that plan sponsors and fiduciaries have an accurate understanding of the expenses paid to run their plans, with the implicit assumption that they will then act on that knowledge (which they will, if they don’t want to end up a defendant in a future excessive fee/costs claim, likely filed as a class action in many cases).
Ary Rosenbaum does a beautiful job in this piece here of explaining the costs of administration, where they are buried, the belief of some – particularly smaller – plan sponsors that they are not paying for plan administration, and the impact on this system that the new disclosure regulations are likely to have. Ary writes regularly on 401(k) management issues, most of which I read, and I think this is his best piece yet. I highly recommend it, particularly for anyone looking for a nice, short yet comprehensive, introduction to the subject (it also has great pictures, if you like alligators).
On Problems in the Sponsor/Third Party Administrator Relationship
Ouch. Here’s the story of a payroll company that overpaid salary for years to an employee of its client company, because that employee was authorized to provide the payroll company with payroll information and direct it to issue payments; according to the case, she requested additional payments to herself and the payroll company made those payments. Who bears the loss here, the client company or the payroll company it hired? The former, not the latter, because the contract between the client and the payroll company could most fairly be interpreted as assigning the risk in that manner. Here is the opinion, and blogger Stanley Baum down in New York has a detailed review of the case here.
Anyone, like me, who has represented third party administrators hired by plan sponsors has seen the outline of this problem before, although often under less sinister circumstances; disputes in this relationship usually arise out of performance issues by the third party administrator relating to its operation of a benefit plan, followed by litigation over who is responsible and to what degree for those problems. Inevitably, as in the case of this payroll administrator, the linchpin of the dispute becomes the terms of the contract between the parties, and often those contracts are written in ways that protect the third party administrator from, or strongly limit its liability for, losses from its operation of the plan. As I have argued in court in the past when speaking on behalf of a third party administrator in that relationship, if the sponsor wanted different performance obligations or stronger remedies for performance failings, it should have written them into the contract in the first place. That is the story here, as well: any third party administrator contract requires looking a little bit into the future and guessing at the potential problems that may occur down the road, and allocating responsibility for them in the contract before they occur. Sure, its easier said than done, but that should be part of what a plan sponsor is paying for when it hires an attorney to deal with these types of contracts.