Recent lawsuits have emphasized that employers who sponsor employee benefit plans under the Employee Retirement Income Security Act (ERISA) are fiduciaries. This fiduciary duty means that employers owe an increased duty of care to the plans and their beneficiaries. As a result, employers should take certain precautions to avoid lawsuits based on a breach of their fiduciary duty.
Retirement Plans
In recent years, retirement plans subject to ERISA have been the constant subject of lawsuits based on the breach of fiduciary duty. These lawsuits have often led to favorable results for plan participants, particularly in cases alleging that plan sponsors have charged participants excessive administrative fees. More recently, these lawsuits have slowed as employers have taken steps to more closely monitor the process of assessing administrative and advisor fees passed along to plan participants.
Group Medical Insurance Plans
Historically, welfare benefit plans, including group medical insurance plans, have been more successful in avoiding litigation. Litigation has been less frequent due in part to the unavailability of potential punitive damages awards. Generally, damages in these suits are limited to benefits owed under the plan, although attorneys' fees awards are possible. Nonetheless, these lawsuits are increasing in frequency.
For instance, a Johnson & Johnson employee recently sued the company, its Pension & Benefits Committee, and individual committee members, alleging that they violated their fiduciary duty to medical insurance plan participants by failing to negotiate better prices for generic specialty drugs. In their complaint, the employee claimed that plan participants paid more for these drugs than necessary because lower prices were available than the plans paid through Express Scripts' formulary, which was its pharmacy benefits manager (PBM).
In another recent case, a Mayo Clinic employee sued the company, claiming its health plan and its TPA, Medica, used "deceptive, misleading, arbitrary" pricing methods that resulted in inconsistent reimbursement rates that violated the plan's fiduciary duty. The employee also accused the plan of failing to provide accurate or complete information through its employee benefits portal, such as how it calculates out-of-network reimbursement costs and deductibles and listing some out-of-network providers as in-network, leading to unexpectedly higher costs.
Group Term Life Insurance Plans
The U.S. Department of Labor (DOL) has settled enforcement actions with several life insurance companies requiring them to pay benefits for claims previously denied due to never receiving and approving "evidence of insurability" (EOI) from the insured party. In most cases, employers provide and purchase a certain level of group term life (GTL) insurance for employees from the insurance companies. Employees could purchase optional additional insurance coverage if they submitted EOI and the insurance company approved it. However, the employees never submitted the EOI forms, although the additional premiums were deducted from the employees' paychecks and paid to the insurance companies. When the beneficiaries later submitted claims, the insurance companies denied the claims based on a lack of EOI.
The DOL settlements required insurance companies to pay the claims if the insureds had paid the increased premiums for one year or more. The settlements also imposed additional requirements for processing benefits and claims and, in some cases, refunding premiums.
Employers should have a process for forwarding the EOI forms to the insureds in these cases. They should also not deduct additional premiums for optional life insurance coverage from the insured until they have confirmed that the insurance company has received and approved the EOI form from the employee.
General Recommendations for Employers
Employers are free to administer their ERISA-governed plans and interpret their terms so long as they do not do so arbitrarily and capriciously. As a result, employers need to demonstrate a rational process behind their actions. Employers can demonstrate a rational process by adopting policies and procedures to interpret and administer their plans.
Employers can also take some general steps to minimize the potential for litigation from an alleged breach of fiduciary duty concerning their employee welfare and retirement plans. Some of these steps may include the following:
- Create and maintain a health and welfare benefits committee that handles plan administration and ERISA compliance.
- Institute a regular process to monitor and review all plan vendor and service provider activities.
- Regularly review and revise all contracts with plan vendors and service providers, ensuring they include appropriate indemnification provisions.
- Hold regular fiduciary duty training for all affected parties.
- Purchase appropriate ERISA fidelity bonds and consider fiduciary liability coverage.
- Determine whether plans should be bundled under ERISA or kept separate.
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.