29 Nov To Be or Not to Be: Court Holds TPA “To Be” an ERISA Fiduciary
Source: UBA
by Julia M. Vander Weele
In a somewhat surprising opinion, a Michigan federal trial court recently held that a third-party administrator of two self-funded employer health plans was an ERISA fiduciary. As a result, the TPA was held liable for breaching its fiduciary duty by not disclosing certain of its fees that had been charged to the plans. This case may spur plan sponsors and TPAs to re-examine their funding arrangements and service agreements.
The case (Borroughs Corp. v. Blue Cross Blue Shield of Michigan) involved two self- funded ERISA health plans that had entered into administrative service agreements (ASAs) with Blue Cross Blue Shield of Michigan (the TPA) for claims administration services. As is common in many TPA arrangements, the employers regularly advanced amounts to the TPA for the purpose of paying benefit claims. The TPA also deducted its own administrative fees from the transferred amounts. The ASAs contained loose references to certain types of administrative fees, but without specifying how those fees were to be calculated.
ERISA provides that a person is a fiduciary with respect to a plan to the extent he or she (i) exercises any discretionary authority or discretionary control respecting management of the plan, or (ii) exercises any authority or control respecting management or disposition of its assets. Historically, the courts have employed a “functional test” for determining fiduciary status. They have thus examined the actual conduct of the parties, rather than just the formal plan documents.
This court’s decision hinged on its finding that the amounts sent to the TPA were ERISA plan assets, notwithstanding the fact that the ASAs specifically stated that the amounts were not plan assets. Although the court recognized that mere custody or possession of plan assets does not make an entity an ERISA fiduciary, the court concluded that the TPA in this case was a fiduciary because its ability to allocate to itself an administrative fee (and to decide the amount of that fee) demonstrated its control over plan assets.
The court’s analysis focused on the discretionary nature of the administrative fee. This case may thus be distinguished from instances in which a TPA simply collects routine fees that are fixed under the terms of a contract. Plan sponsors and TPAs who do not intend for a TPA to act as a fiduciary should carefully review their agreements to ensure that all administrative service fees are clearly spelled out. That should help to avoid creating unexpected fiduciary status.
Julia M. Vander Weele, Partner Spencer Fane Britt & Browne LLP