Avoiding ERISA lawsuits and breaches of fiduciary responsibility: Lessons from litigation

Recent litigation and agency settlements have reminded employers sponsoring employee benefit plans under ERISA that they are fiduciaries by definition (and their advisors might be functional fiduciaries).  That means that they owe a heightened duty of care to the plans, and more importantly, to the beneficiaries of those plans. Knowing that, employers can take steps to mitigate potential breaches of their fiduciary duty.

Background

Qualified retirement plans have been the subject of a spate of lawsuits over the years, alleging various violations of fiduciary duties by the plan sponsors and resulting in favorable settlements for the plan participants. Many of the suits were “excessive fee” claims that argued the fiduciary did not take sufficient care to avoid those excessive fees. Those claims seem to have slowed down recently, as employers have taken steps to monitor the fiduciary process leading to the decisions regarding the advisor fees.

Related: Fiduciary-minded benefits: the roles and responsibilities of advisors 

Until recently, welfare benefit plans, including group medical plans, have avoided litigation more successfully. There have been lawsuits, but not with the same frequency as there has been with respect to retirement plans. Perhaps the absence of potential punitive damage awards made welfare plans less attractive as targets to plaintiffs’ attorneys.  In general, the damages won in court would be the benefits owed under the plan (although it has been possible for a court to award attorney’s fees).  Recent lawsuits and agency actions might be signs of more active future litigation against plan sponsors as fiduciaries of their plans.

Recent fiduciary lawsuits and agency activity

Johnson & Johnson – An employee of Johnson & Johnson sued the company and the company’s Pension & Benefits Committee and individual members. The lawsuit asserts that they violated their fiduciary duties to the company’s health plans by not negotiating better prices for generic specialty drugs. The complaint asserts that the J&J health care plan paid more for several drugs than was necessary because, the plaintiff claimed, lower prices were available at various retail outlets than the plan paid via its PBM’s (Express Scripts) formulary. The complaint alleges that the failure to negotiate caused the plan participants to pay more than necessary for the drugs in the plan and even depressed wages for the employees due to the increased costs for prescription drugs being paid by the plan.

Mayo Clinic – A Mayo Clinic employee sued Mayo claiming its health plan and its TPA (Medica) underpaid claims and passed on costs to participants that should have been paid by the plan.

The complaint claims that Medica used “deceptive, misleading, arbitrary” pricing methods that allowed for inconsistent reimbursement rates in violation of the law and Mayo’s and Medica’s fiduciary responsibility with respect to the plan’s administration. Moreover, the plan did not provide accurate or complete information through an employee benefits portal, including how it calculates out-of-network reimbursement costs and deductibles. The claim also states that some providers were listed as being in-network when, in fact, they were not, which led to the employees having to pay higher costs.

Group term life/evidence of insurability settlements

The Department of Labor (DOL) has announced several settlements with life insurers (Unum, Lincoln, Prudential, Mutual of Omaha, United of Omaha and Companion Life) that required them to pay benefits for claims they had previously denied because they never received and approved required “evidence of insurability” (EOI) from the insured.  Typically, the employers provided and paid for a base level of group term life (GTL) from the insurers for their employees. The employees could purchase additional GTL subject to an acceptance of their EOI by the insurers. However, the EOI forms in many cases were never submitted to the insurers even though the additional premiums had been deducted from the employees’ paychecks and submitted to the insurers. When the beneficiaries submitted claims, the insurers denied them due to the absence of the approved EOI. The settlements generally required the insurers to pay any claims if the premiums were paid for a year or more.  They also included additional requirements for processing the benefits and claims including refunds of premiums in some cases. 

Related: Pharmacy benefit design: Johnson & Johnson lawsuit ushers in new ‘duty of prudence’ standard

While the DOL settled with the insurers, these plans were all part of employer GTL programs and the employers could have been the subject of the enforcement activity from the DOL.  There is some dispute whether the employers met their obligations to properly forward the EOI forms from the insurers to the employees. Employers need to be vigilant to make sure that they have a process in place to forward EOI forms to employees and not deduct premium payments before the EOI is approved by the carrier.

Key employer takeaways

Standard for judicial review of employer actions – The Supreme Court, in Firestone v Bruch, provides guidance for employers.  That case stated that a court will not overrule an employer’s interpretation of its plan provided the employer’s actions were not “arbitrary and capricious.”  Therefore, the employer is generally free to administer the plan and interpret the plan terms as it sees them. However, in order to demonstrate that its actions were not arbitrary and capricious, the employer needs to demonstrate that it had a rational process behind its actions.  

Also: How the first ‘fiduciary duty’ lawsuit for health benefits affects employers and employees

To demonstrate that, employers should consider adopting policies and procedures to interpret and administer their plans and document their determinations. If the employer’s decisions are later challenged, the employer can demonstrate that it had a rational process and it came to a reasoned decision.   If the employer can show that, a court will not intervene with its own determination as to the “correct” interpretation.

Mitigating potential litigation

There are steps that employers can take to mitigate potential litigation that claims the employer violated its fiduciary duties, which apply to both welfare and retirement plans.

Employers are, by definition, ERISA fiduciaries. Employers should therefore exercise due caution and care in the execution of their fiduciary duties. That will include some or all of the following:

• Appoint a health and welfare benefits committee that meets regularly to consider the plan administration and ensure compliance with ERISA.
• Establish a regular process to review and monitor all plan vendors and their activities on behalf of the plan and the employer.
• Document the meetings, discussions, and conclusions of the committee (with the guidance of legal counsel).
• Implement fiduciary training to provide guidance and support in the administration of employer plans.
• Review all vendor agreements and service provider contracts including the vendor methodology and limitations.
• Consider costs and benefits of all agreements and document decision process – lowest cost is not necessarily the optimal option.
• Purchase appropriate ERISA fidelity bonds (which protect the plan from fraud or dishonesty) as well as consider fiduciary liability coverage for other breaches of fiduciary liability.
• Seek indemnification provisions from vendors to permit recovery for the plan for losses caused by the vendor and conversely avoid indemnifying the vendors for other errors.
• Determine whether plans should be bundled under ERISA or whether the employer would want to keep them as excepted.

Conclusion

Employer-sponsored retirement plans have been the target of fiduciary duty lawsuits ever since ERISA was promulgated in 1974.  Welfare benefit plans, such as health care plans, have traditionally not been the targets of those lawsuits, even though the sponsoring employers have had the same fiduciary obligations that apply to retirement plans.  That is probably because the nature of the plans and that they were traditionally fully insured meant that employers did not exercise a lot of fiduciary discretion, so likely did not violate those obligations very often.  With the changes to the design of those plans, and the need for more employer discretion, there is more room for employers to violate their fiduciary obligations.  However, they can take steps to ensure that they are meeting those obligations, and by documenting their process, will be able to avoid most of the ERISA lawsuits and enforcement actions — or at least resolve them favorably.

Jay Kirschbaum is Director of Benefits Compliance for World Insurance Associates.