Tag Archives: employee benefit plans

Built For Reform: Third Party Administrators And The Affordable Care Act

The Affordable Care Act (ACA) is considered the most significant, albeit poorly written, law that Congress has passed in the last 50 years. As regulators devise the details needed for the law to be fully implemented, unprecedented new administrative and compliance burdens are looming for employers. Independent Third Party Administrators (TPAs) have decades of experience guiding employers through the pitfalls of government rules and requirements. This expertise makes independent Third Party Administrators invaluable to employers trying to mitigate the impact of health care reform.

A Brief History Of The Third Party Administrator Industry
Most employee benefit plans are highly technical and difficult to administer. Those complexities gave birth to the Third Party Administrator industry.

While there are reports of a Third Party Administrator operating as early as 1933, the modern Third Party Administrator concept is rooted in servicing mostly pension plans codified in the 1946 Federal Taft-Hartley Act. Such plans are typically comprised of several employers whose employees belong to a single union.

By the late 1950s, there were also a few Third Party Administrators specializing in servicing medical plans sponsored by single employers. The industry boomed after the enactment of the Employee Retirement Income Security Act of 1974, as employers began exploring the option of self-funding when traditional insurance coverage failed to meet their cost expectations. Today, the administration of self-funded medical plans is the primary line of business for many independent Third Party Administrators.

Employers that self-fund assume the financial risk of paying claims for expenses incurred under the plan. Medical, dental, vision, and short-term disability plans, as well as Health Reimbursement Arrangements (HRAs), can all be part of a self-funded program.

Most employers sponsoring self-funded medical plans purchase stop loss coverage to limit their risk. An insurance carrier becomes liable for the claims that exceed certain pre-determined dollar limits.

The Value Of A Third Party Administrator-Administered Self-Funded Program
Employers can choose to administer their self-funded plans in-house. However, few have the experience to do it well. Considering the heavy penalties for regulatory non-compliance, self-administration is generally ill-advised.

Some insurance carriers offer Administrative Services Only (ASO) contracts to employers that wish to self-fund but rely on the carrier to do the paperwork. Unfortunately, most insurance carriers have benefit administration systems that are too inflexible to accommodate the unique plan designs that are the hallmark of self-funding. In addition, they are more attuned to the legal requirements applicable to fully insured products, which differ dramatically from those for self-funded plans.

Insurance carriers may assume financial risk under an Administrative Services Only contract by providing the stop loss coverage. Conversely, Third Party Administrators are not risk-taking entities so they are clearly in a position to act in the best interest of the plan and its members.

The independent Third Party Administrator industry was built on change. Never having settled for the “one-size-fits-all” approach of the fully insured model, independent Third Party Administrators maintain sophisticated information technologies that adapt easily to new demands, as well as professional staff accustomed to responding to regulations that continually reshape employee benefits in profound ways.

Independent Third Party Administrators usually provide a broad range of à la carte services to self-funded employers: plan design, claims processing, placement of stop loss coverage, case management, access to networks and disease management, wellness, and utilization review vendors, eligibility management and enrollment, subrogation, coordination of benefits, plan document and summary plan description preparation, billing, customer service, compliance assistance, ancillary benefits and add-ons such as Section 125 plans, consulting, and COBRA and HIPPA administration. Independent Third Party Administrators are best at customizing their services and plans to suit a client’s specific needs including benefit philosophies, demographics, risk tolerance, and compliance requirements.

A fully insured arrangement cannot compete with a thoughtfully designed, Third Party Administrator-administered self-funded program. Employers that self-fund enjoy increased financial control, lower operating costs, flexibility with plan design, a choice of networks, detailed reporting of plan usage and claims data, and effective cost management.

The Challenges Of The Affordable Care Act
When small employers (those with fewer than 50 full-time equivalent employees) offer health benefits, the coverage is usually fully insured. However, self-funding has gained momentum among small employers.

In 2014, large employers (those with 50 or more full-time equivalent employees) will be subject to the Affordable Care Act’s “pay or play” requirements. A large employer must offer its full-time employees (working at least 30 hours per week or 130 hours total in any given month) and their children minimum essential coverage that is affordable and provides minimum value. Otherwise, the employer will be subject to a penalty if any of its full-time employees obtains health coverage through a Health Insurance Exchange (now called a Health Insurance Marketplace) and is certified as eligible for a premium tax credit.

The premiums for fully insured coverage are expected to rise significantly due to the Affordable Care Act imposing an annual fee on most insurers, modified community rating in the individual and small group markets, and expensive mandates for essential health benefits. Self-funded plans are exempt from these requirements. In addition, while Affordable Care Act requirements will likely inflate insured premiums, stop loss premiums remain competitive (even for small employers).

Self-Funding As A Strategy For Overcoming The Affordable Care Act’s Challenges
Depending on size, employers must make important decisions about managing the costs associated with health care reform. They can provide coverage or not provide coverage (and possibly pay a penalty), reduce hours, eliminate jobs, or find a way to offer a cost-effective and compliant plan.

Independent Third Party Administrators are the experts at self-funding. A Third Party Administrator can custom design a high quality, Affordable Care Act-compliant, self-funded program that a small or large employer can offer at a controlled cost. For employers looking for flexible solutions to manage costs while continuing to recruit and retain talented employees, a Third Party Administrator-administered self-funded program with medical stop loss coverage is a viable solution.

Risks Plan Sponsors And Fiduciaries Face When Employee Benefit Responsibilities Are Mishandled

A $27 million plus settlement announced by the Department of Labor on July 7 shows the big liability that employer, union or association plan sponsors and their fiduciaries risk by failing to take appropriate steps when deciding who will serve as fiduciaries or other plan sponsors or setting the compensation paid by the plan for those services.

The settlement announced last week against the National Rural Electric Cooperative Association (NRECA), like the $1.2 million plus judgment obtained by Labor Department litigators against the California fruit and nut company, Western Mixers Inc., and its owners and management in late May, shows the significant risks that employer, union and association health plan sponsors and fiduciaries run from mishandling employee benefit responsibilities.

Companies And Fiduciaries Often Face Significant, Under-Recognized Fiduciary Exposures
Employee benefit plan vendor selection and compensation arrangements made by employer or union, association or other employee benefit plan sponsors, fiduciaries and service providers are coming under increasing scrutiny by the Employee Benefits Security Administration (EBSA). While the Employee Retirement Income Security Act of 1974 (ERISA) technically grants plan sponsors and fiduciaries wide latitude to make these choices, the exercise of these powers comes with great responsibility (see these three additional articles: Plan Sponsors. Their Owners & Management & Others Risk Personal Liability If Others Defraud Plans or Mismanage Employee Benefit Plan Responsibilities, New Rules Give Employee Benefit Plan Fiduciaries & Investment Advisors New Investment Advice Options, and DOL Proposes To Expand Investment Related Services Giving Rise to ERISA Fiduciary Status As Investment Fiduciary).

Associations, employer and other plan sponsors, and other entities and individuals who in name or in function possess or exercise discretionary responsibility or authority over the selection of plan fiduciaries, administrative or investment service providers or other services to the plan or the establishment of their compensation generally must make those decisions in accordance with the fiduciary responsibility and prohibited transaction rules of the Employee Retirement Income Security Act. Among other things, these rules generally require that fiduciaries exercising discretion over these and other plan matters:

  • Must act prudently for the exclusive benefit of plan participants and beneficiaries;
  • Must not involve the plan or its assets in any arrangement that is listed as a prohibited transaction under ERISA § 406; and
  • Must not act for the benefit of themselves or any third party.

Although often misunderstood by companies and their management, these responsibilities generally attach whenever a company or individual is either named as a fiduciary or in fact possesses or exercises discretionary responsibility or authority over plan investments, assets, administration or other fiduciary matters, including but not limited to the selection of fiduciaries and service providers, investments or expenditures of funds or other discretionary matters.

Since the earliest days of the Employee Retirement Income Security Act, the Employee Benefits Security Administration as well as private plaintiffs have aggressively enforced these and other fiduciary responsibility rules. In recent years, the Employee Benefits Security Administration has taken further steps to tighten and enforce these protections such as the new fee disclosure rules recently implemented by the Employee Benefits Security Administration and other fiduciary guidance (see, for example, Western Mixers & Officers Ordered To Pay $1.2M+ For Improperly Using Benefit Plan Funds For Company Operations, Other ERISA Violations. See also Plan Administrator Faces Civil & Criminal Prosecution For Allegedly Making Prohibited $3.2 Million Real Estate Investment and Tough Times Are No Excuse For ERISA Shortcuts).

As illustrated by the NRECA Settlement and the Western Mixers, Inc. judgment, plan sponsors or fiduciaries that violate these rules risk personal liability to the plans for the greater of profits realized or losses sustained by the plan, plus attorneys’ fees and costs, as well as exposure to an EBSA-assessed ERISA civil penalty equal to 20% of the amount of the fiduciary breach.

$27+ Million NRECA Settlement
According to a July 5, 2012 announcement, the National Rural Electric Cooperative Association will restore $27,272,727 to three association-sponsored employee benefit plans covered by the Employee Retirement Income Security Act to settle U.S. Department of Labor Employee Benefits Security Administration charges that the association violated the Employee Retirement Income Security Act by selecting itself as a service provider to the plans, determining its own compensation and making payments to itself that exceeded the National Rural Electric Cooperative Association’s direct expenses in providing services to the employee benefit plans.

Following an investigation, the Employee Benefits Security Administration accused the National Rural Electric Cooperative Association of violating the Employee Retirement Income Security Act by selecting itself to act as the administrator of various association employee benefit plans and arranging for the National Rural Electric Cooperative Association to receive unreasonable compensation for these services which the National Rural Electric Cooperative Association set without the use of independent parties to prudently verify the appropriateness of the selection or compensation arrangements. The Employee Benefits Security Administration said these arrangements violated the self-dealing and other fiduciary responsibility requirements of the Employee Retirement Income Security Act.

Headquartered in Arlington, the National Rural Electric Cooperative Association is a nonprofit trade association for electric power cooperatives. The sponsored plans are open to members of the trade association as well as the association’s employees. As of 2010, the latest information available, the National Rural Electric Cooperative Association 401(k) Plan had 68,970 participants, the National Rural Electric Cooperative Association Retirement Security Plan had 64,286 participants and the National Rural Electric Cooperative Association Group Benefits Plan had 73,644 participants.

Under the terms of the agreement, the National Rural Electric Cooperative Association will not provide administrative services to the National Rural Electric Cooperative Association Retirement Security Plan, the National Rural Electric Cooperative Association 401(k) Plan and the National Rural Electric Cooperative Association Group Benefits Plan without entering into a written contract or agreement with the plans that must be approved by an independent fiduciary. The independent fiduciary must determine whether the use of the National Rural Electric Cooperative Association to provide administrative services to the plans is prudent and reasonable, determine the categories of direct expenses that the National Rural Electric Cooperative Association may charge to the plans and the methods of calculating those expenses, and monitor the National Rural Electric Cooperative Association’s compliance with certain terms of the agreement.

The agreement also provides that during a 60-month period following the implementation date, the National Rural Electric Cooperative Association shall discount the amount of permissible direct expenses for which it seeks reimbursement from all three plans in the amount of $22,727,272. The balance of the settlement payment, $4,545,455, already has been paid directly to the National Rural Electric Cooperative Association 401(k) Plan. In addition to the amounts returned to the plans, the National Rural Electric Cooperative Association will pay $2,727,276 in civil penalties.

“This settlement sends a clear message to plan fiduciaries that they cannot profit from selecting themselves to provide services to plans,” said Phyllis Borzi, assistant secretary of labor for employee benefits security in announcing the settlement.

Western Mixers $1.2+ Million Judgment
In May, the Department of Labor got a judgment against a California fruit and nut supplier Western Mixers Inc., its owners and certain officers for failing to properly handle their company’s retirement, health and other employee benefit plans moneys and other responsibilities. Under the judgment entered in Solis v. Frank L. Rudy et. al. and Western Mixers Inc. Money Purchase Pension Plan, Western Mixers Inc., its owners and officers will pay a total of $1,287,901 to the company’s pension plan, plus a 20 percent penalty to the Department of Labor.

Following an investigation by the Labor Department’s Employee Benefits Security Administration, the Labor Department charged that Western Mixers Inc. and two officers who served as trustees of the plan failed to make approximately $952,511 in mandatory employer contributions for the benefit of participants and beneficiaries. Investigators also found that the same two officers as well as the company’s chief financial officer made $565,000 in unauthorized withdrawals from the plan accounts, comingling those funds in the company’s general accounts and using them for the benefit of the business.

Labor Department officials sued the company and the officers for violation of the fiduciary responsibility rules of the Employee Retirement Income Security Act. The Employee Retirement Income Security Act generally requires that plan trustees and other plan fiduciaries carry out duties with respect to an employee benefit plan assets prudently for the exclusive benefit of participants.

Pursuant to the consent judgment, the company and its officers admitted to violation of the Employee Retirement Income Security Act. During the course of the investigation leading up to the lawsuit, the company previously repaid to the plan $485,000 of the total funds identified as missing by the Labor Department. According to an announcement of the U.S. Department of Labor on May 14, 2012, Midwest Mixers Inc.’s officers agreed to repay $802,901 to participants’ accounts within 10 day of the judgment.

In addition to repaying the missing funds with interest, defendants also must pay a penalty equal to 20 percent of the recovered amount. The court also has appointed an independent fiduciary to terminate the plan and to collect, marshal, pay out and administer plan assets. Frank L. Rudy and David H. Bolstad, owners of the company, are removed as plan trustees and fiduciaries. Together with Robert J. Fischer, Western Mixers, Inc.’s chief financial officer, they are permanently enjoined and restrained from violating the Employee Retirement Income Security Act and from serving as fiduciary or service providers to any ERISA-covered plan in the future.

Despite these well-document fiduciary exposures and a well-established pattern of enforcement by the Labor Department and private plaintiffs, many companies and their business leaders fail to appreciate the responsibilities and liabilities associated with the establishment and administration of employee benefit plans.

Frequently, employer and other employee benefit plan sponsors fail adequately to follow or document their administration of appropriate procedures to be in a position to demonstrate their fulfillment of these requirements when selecting plan fiduciaries and service providers, determining the compensation paid for their services, overseeing the performance of these parties, or engaging in other dealings with respect to plan design or administration.

In other instances, businesses and their leaders do not realize that the functional definition that the Employee Retirement Income Security Act uses to determine fiduciary status means that individuals participating in discretionary decisions relating to the employee benefit plan, as well as the plan sponsor, may bear liability under many commonly occurring situations if appropriate care is not exercised to protect participants or beneficiaries in these plans.

For this reason, businesses and associations providing employee benefits to employees or dependents, as well as members of management participating in, or having responsibility to oversee or influence decisions concerning the establishment, maintenance, funding, and administration of their organization’s employee benefit programs need a clear understanding of their responsibilities with respect to such programs, the steps that they should take to demonstrate their fulfillment of these responsibilities, and their other options for preventing or mitigating their otherwise applicable fiduciary risks.

In light of the significant liability risks, employer, association and other employee benefit plan sponsors and their management, plan fiduciaries, service providers and consultants should exercise care when selecting plan fiduciaries and service providers, establishing their compensation and making other related arrangements.

To minimize fiduciary exposures, parties participating in these activities should seek the advice of competent legal counsel concerning their potential fiduciary status and responsibilities relating to these activities and take appropriate steps to minimize potential exposures.