ARTICLE
16 April 2024

Why Establish A Fiduciary Committee For Welfare Benefit Plans?

DW
Dickinson Wright PLLC

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Dickinson Wright is a general practice business law firm with more than 475 attorneys among more than 40 practice areas and 16 industry groups. With 19 offices across the U.S. and in Toronto, we offer clients exceptional quality and client service, value for fees, industry expertise and business acumen.
Many plan sponsors have read about the lawsuit filed against Johnson & Johnson alleging that it breached its fiduciary duties with regard to the prescription drug component of its group health plan..
United States Employment and HR
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Many plan sponsors have read about the lawsuit filed against Johnson & Johnson alleging that it breached its fiduciary duties with regard to the prescription drug component of its group health plan, causing participants to "overpay" for their prescriptions. Lewandowski v. Johnson & Johnson (Case No. 1:2024cv00671), filed February 5, 2024, in the federal district court in New Jersey. This type of lawsuit against a group health plan had been predicted by many following the enhanced disclosure and transparency provisions added to ERISA and the Internal Revenue Code by the Consolidated Appropriations Act of 2021.

If the lawsuit survives a motion for summary judgment and results in a monetary settlement or a damages recovery against the plan's fiduciaries, it is likely that there will be multiple copycat lawsuits, just as happened in the case of lawsuits filed against retirement plan sponsors alleging participants paid "excessive" recordkeeping and investment fund fees.

Overview of ERISA's Fiduciary Duty Rules

The fiduciary duty rules of ERISA Section 404 apply to welfare benefit plans just as they apply to retirement plans. In summary, a fiduciary must discharge its duties with regard to a plan solely in the interest of the participants and beneficiaries and:

  1. For the exclusive purpose of providing benefits to participants and beneficiaries and defraying reasonable expenses of administering the plan (the "exclusive purpose" or "exclusive benefit" rule, also referred to as the duty of loyalty);
  2. With the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims (the "prudent person" rule); and
  3. In accordance with the plan documents (to the extent consistent with ERISA).

Specific Obligations for Welfare Benefit Plans

Plan sponsors who maintain only fully insured welfare benefit plans may think that they don't have to focus on fiduciary compliance, as the insurance carrier handles the payment of claims and the plan sponsor's only financial obligation is to timely remit premium payments. However, even a fully insured plan has multiple obligations that cannot be fully outsourced to the insurer, such as:

  1. Making sure that participant contributions are transmitted for the payment of insurance premiums within 90 days of receipt;
  2. Deciding how to allocate a medical loss ratio ("MLR") rebate;
  3. Making eligibility decisions. Even though the insurer will decide whether benefits are payable, the plan fiduciary must decide whether an employee and his/her dependents are eligible to participate in the plan. For example, if the plan sponsor is an "applicable large employer" under the Affordable Care Act and is using the "lookback" measurement method, the plan sponsor must decide which employees are working an average of 30 hours per week under the relevant measurement period;
  4. Understanding and avoiding prohibited transactions;
  5. Disseminating all necessary participant notices and communications, which include:
    • The summary plan description (SPD) and any necessary summaries of material modifications (SMM);
    • The summary of benefits and coverage (SBC) for a group health plan;
    • The summary annual report (SAR), if the plan is required to file an annual report on Form 5500;
    • COBRA notices;
    • HIPAA notices;
    • The Newborn and Mothers' Health Protection Act notice;
    • The Women's Health and Cancer Rights Act notice;
    • CHIP notice;
    • Medicare Notice of Creditable Coverage;
    • No Surprise Billing notice; and
    • Information on converting group life insurance following termination of employment.
  6. Reviewing and deciding whether a medical child support order is qualified;
  7. If required, completing and timely filing an annual report on Form 5500; and
  8. Adopting and amending a plan document to keep it current. The insurance policy does not usually comply with the ERISA Section 403 plan document rules.

And, of course, selecting and monitoring the insurer (or third-party administrator or other service provider) is a critical part of any plan sponsor's responsibilities.

An employer with a self-funded plan must comply with all of the foregoing obligations and has additional challenges, including monitoring claims and placing stop-loss insurance.

Complying with the Duty of Prudence

The Department of Labor summarizes the duty of prudence under ERISA as follows:

Prudence focuses on the process of making fiduciary decisions, so a fiduciary should document decisions and the basis for those decisions. For instance, when hiring a plan service provider, a fiduciary may want to survey a number of potential providers, asking for the same information and providing the same requirements. By doing so, a fiduciary can document the process and make a meaningful comparison and selection.

* * *

... fiduciaries can limit their liability in certain situations. One way fiduciaries can demonstrate that they carried out their responsibilities properly is to document the processes used to carry out their fiduciary responsibilities.

See, "Understanding Your Fiduciary Responsibilities Under a Group Health Plan" which may be accessed here.

Based on the foregoing and drawing on the case law on the "excessive fee" retirement plan cases, the process used in hiring service providers is critically important in demonstrating that the fiduciary exercised its duty of prudence.

For example:

  • Did the fiduciary select the service provider through an RFP process?
  • Did the fiduciary engage an expert to help them evaluate the RFP responses?
  • Did the fiduciary ask questions and fully understand the service provider's services and fees?
  • Did the fiduciary have ERISA counsel review the service provider agreement?
  • Did the fiduciary receive the ERISA Section 408(b) compensation disclosures, ask questions, and understand how and when all fees and costs will be paid and by whom?

Establishment of a Benefits Committee

These and other plan administration decisions may best be made by a "benefits committee" appointed to act as the fiduciary for the plan sponsor's welfare benefit plans. Forming a benefits committee to oversee the administration of welfare benefit plans has a number of advantages.

  • The committee members can be designated as the plan fiduciary: this protects other company officers and board members from being named as defendants in a lawsuit against the plan (assuming they are not exercising fiduciary functions). Even if the board delegates plan administration to a benefits committee, the board and other officers have an ongoing fiduciary duty to monitor the committee's performance.
  • The committee can be comprised of experts or subject matter specialists from different areas of the company who can weigh in on issues, resulting in more informed decisions.
  • The committee can demonstrate that the plan sponsor engaged in a prudent process in selecting plan service providers, including through periodic RFPs, and regularly monitors their performance and related fees.
  • The committee can ensure that decisions are made in an impartial and uniform manner, and without discriminating for or against participants.
  • The committee minutes can document other important decisions, such as eligibility decisions and appeal decisions (for a self-funded plan) which establishes a record for a future challenge or Department of Labor audit.
  • The committee can engage experts such as ERISA counsel to assist it with compliance matters and in reviewing vendor contracts.

Best practices for forming and operating a benefits committee include:

  • Make sure the committee members have appropriate experience and interest in acting as fiduciaries. Members may include representatives from the employer's human resources and finance functions.
  • The committee should meet regularly – at least quarterly – to review the plan and service provider performance.
  • Circulate an agenda prior to the meeting.
  • Appoint a secretary to keep minutes, which should document all important decisions and the process followed by the committee in making those decisions.
  • The minutes should be retained electronically in a format where they can be accessed if necessary.
  • The committee may invite experts such as agents/brokers and ERISA counsel to attend meetings where they can provide updates and expert advice.
  • A committee charter is not required by law, but can be helpful in outlining the scope of the committee's responsibilities.

A properly run benefits committee can be a tremendous resource in demonstrating that the plan sponsor followed a prudent, thoughtful, thorough, and diligent process in engaging a service provider. Documenting the process can go a long way toward protecting against allegations of a breach of fiduciary duty.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

ARTICLE
16 April 2024

Why Establish A Fiduciary Committee For Welfare Benefit Plans?

United States Employment and HR

Contributor

Dickinson Wright is a general practice business law firm with more than 475 attorneys among more than 40 practice areas and 16 industry groups. With 19 offices across the U.S. and in Toronto, we offer clients exceptional quality and client service, value for fees, industry expertise and business acumen.
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