Plan representatives as fiduciaries: How far down the totem pole does the designation apply?
The issue: Does a plan participant have a duty to repay the plan after settling with a third party over an injury claim?
“Fiduciary;” a very important and often feared role in the risk industry. If you operate in any benefits role, be it in welfare benefit plans, retirement plans, or financial advisory roles, this particular F-word probably rolls off the tongue with little effort or backlash. Who is a fiduciary? What are the responsibilities of one? How does one become a fiduciary, do they choose to be one or do they inherit the classification because of an action they take? The answer is both!
All these questions are grappled with ad nauseum within the offices of a benefits advisor. Most seemingly avoid the classification like the plague, preferring to avoid altogether the liability that comes with the designation. Others accept it as a reality of the world and embrace its complexity. Still, others, likely become fiduciaries in the way they act, often without even realizing it. For those in the latter category, how far down the totem pole can the designation be applicable? Why might a plan sponsor want the tag, at least in some limited form, available to anyone who gains possession of a plan asset?
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This particular discussion of fiduciary designation became very tangible a few years back when the Supreme Court of the United States rendered a decision in Montanile v. Board of Trustees of Nat. Elevator Industry Health Benefit Plan that a plan participant who settled a third-party injury claim, came into possession of the settlement fund from the third party, and then proceeded to spend it on non-traceable assets, was not responsible to reimburse the plan because the lack of an identifiable and traceable fund meant the plan was seeking legal relief rather than equitable relief, the former being considered an inappropriate form of relief under the Employee Retirement Income Securities Act (“ERISA”).
While health care subrogation practitioners hoped the Court would limit this rule and the clear motivation created for a plan participant to obtain the money and spend it on non-traceable assets wherever possible; the prevailing wisdom ruled the day and the Court again provided participants with relief from their obligations to their colleagues and self-funded benefit plans.
What if, however, the very act of taking the money, which ERISA jurisprudence has overwhelmingly held is a plan asset to be held in a constructive trust by a plan participant (insofar as such obligation is clearly set forth within the terms of the plan) and then exercising control in a manner that prejudices the plan’s entitlement to that specific fund, creates a fiduciary obligation? Could a plan seek relief against a plan participant in the form of penalties for breaching its fiduciary duty to the plan to hold and return those funds to the plan? For the moment … probably not!
ERISA grants plan fiduciaries an exclusive remedy by way of §502(a)(3)’s grant of “appropriate equitable relief.” To assess penalties under ERISA, a plan would need to first establish that a participant can be a fiduciary, and then overcome the exclusivity of this remedy and convince a court of competent jurisdiction that, in fact, actions under ERISA’s punitive provisions should apply, the likes of which could result in anywhere from small fines to significant financial sums and even criminal penalties, in the most severe instances. So, might a plan sponsor be able to establish the fiduciary status of a plan participant?
The Department of Labor indicates that a fiduciary is anyone who exercises discretionary control or authority over plan management or plan assets [emphasis added], anyone with discretionary authority or responsibility for the administration of a plan, or anyone who provides investment advice to a plan for compensation or has any authority or responsibility to do so are subject to fiduciary responsibilities. Plan fiduciaries include, for example, plan trustees, plan administrators, and members of a plan’s investment committee. Plan fiduciaries must manage the plan in the interests of the participants of the plan for the exclusive purposes of providing benefits and paying plan expenses. They must act prudently, seek to minimize plan losses, follow the terms of the plan documents, and avoid conflicts of interest.
In light of this definition, consider a plan participant who is in a serious automobile accident, has $100,000.00 in medical bills, obtains proceeds from a third-party insurance policy for the person responsible for the accident, and then, despite owing the funds back to their benefit plan subject to the terms of the plan’s third-party reimbursement provision, fails to reimburse the plan and rather spends the funds on a family vacation. Has this participant not gained possession and “exercised control” over these funds by their actions? Assuming all concede that to be the case, next we determine whether that settlement fund is a plan asset.
Without getting too far into the statutory lingo of ERISA and the Code of Federal Regulations (after all, you’re better off getting through the entire article than to doze off at this point … right?!) the Supreme Court of the United States has on several occasions asserted that settlement funds obtained by a plan participant arising from an accident with a third party, and subject to the appropriate language of a properly established health benefits plan, is indeed a plan asset. Courts have also established that to the extent such plan language is established, the plan participant is holding those funds in a constructive trust for the benefit of the plan.
It does not take too much legal training or acumen to connect the dots here – if a fiduciary can be generally defined as anyone who exercises control over a plan asset, and a plan participant that obtains a settlement from a third party, that by the terms of the participants’ plan is owed back to the plan in the form of equitable relief or restitution, it should stand to reason that a participant who takes action with those funds in a manner that is detrimental to the plan is engaging in a breach of a fiduciary duty.
Interesting though the question may be, it has yet to be subject to the scrutiny of many courts in any meaningful way, accordingly, we are left only to theorize about whether the first prong of this concept is met – i.e., whether the participant can be a fiduciary. At least one court, however, has considered the possibility: United Food & Commer. Workers’ Union Local 1995, 210 B.R. 188 (Bankr. N.D. Ala. 1997) held that one must intend to enter a trust relationship, rather than just a contractual one. Although in that case the court determined that there was no intent to create a trust relationship, with this ruling the court effectively conceded that it is possible for a plan participant to act in a way that would confer upon it fiduciary designations and responsibilities.
It is unquestionable that a plan participant who obtains a third-party settlement is gaining possession and exercising control over a piece of special property (as it is effectively treated by the law and courts) that does not belong to them. While plans have an opportunity to intercept that action in many instances, every single day a plan misses out on an opportunity because it did not have the ability to catch all of them, or the participant took specific action to avoid the obligation. The participant in that instance is clearly acting only in their own best interests and not in the best interests of the rest of the plan beneficiaries. Should plan participants be allowed full scale immunity under the guise of the fundamental differences between legal and equitable remedies? Up to this point, the law appears to favor such immunity from responsibility. One can only hope that law adjusts in some way to provide some meaningful disincentive toward such action.
Christopher M. Aguiar, Esq, is vice president of legal recovery and stop-loss services for The Phia Group, LLC.
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