Fiduciary Duties for Health and Welfare Plans: Duty to Administer Plan According to its Written Terms

By: HUB’s EB Compliance Team

Last month in our series on fiduciary duties for health and welfare plans we discussed the duty of prudence. This month we’ll cover the duty to administer the plan according to its written terms (the “written terms requirement”). This duty stems from the core ERISA requirement that plans have a written document, i.e., the plan document. Once the plan has such a document, this document controls how the plan must be administered. 

Write it Down

Fiduciaries are required to administer plans “in accordance with the documents and instruments governing the plan” (ERISA Sec. 404(a)(1)(D)). To follow the written terms of the plan, the plan must actually have written terms. These terms are designed to be formally written in legalese, i.e., formal and specific. This is sometimes in contrast to summary documents, including the plan’s summary plan description (“SPD”), which are intended to be written in more plain language (although some health and welfare plans do let their SPDs double as plan documents).

In addition to the formal plan document, plans may have written procedures. For example, ERISA-governed group health plans should have written procedures for handling qualified medical child support orders or QMCSOs. While the procedures are not part of the plan document, they are an “instrument[] governing the plan”. Therefore, plan fiduciaries must follow them.

Having a plan document and appropriate written procedures also protect fiduciaries. If a plan does not have a plan document, there is no source of authority to resolve most plan disputes. If no plan document exists, courts typically look to the SPD or other summary documents to determine the plan’s terms. Past practices of the plan administrator may also be taken into consideration and in the absence of a document, those practices may not be consistent. Inconsistent practices can lead to bad outcomes. As a result, plan documents are required and employer-sponsored plans need to have them.

Potential Pitfalls

Once the plan document is established, plan fiduciaries are obligated to follow it, even when they think the outcome may be less than desirable. The formal plan document gives fiduciaries something to appeal to as a way of supporting their decision.

When employees miss their initial or annual enrollment windows they often ask to change their elections after the new plan year has started. This is almost inevitable, no matter how long the employer provides, or the methods of communication used to announce the enrollment window. Plan fiduciaries need to follow the plan documents, which describe the initial and annual enrollment periods and the fact that outside of these periods, eligible employees need to experience a qualifying event under the plan to change their elections during the plan year. Fiduciaries who allow exceptions absent highly unusual circumstances breach their duty to follow the written terms of the plan (to say nothing of the potential tax risks for violating cafeteria plan rules).

As another example, employees that need to take a leave of absence during the year may be allowed to maintain their benefits for a period of time. However, at some point the written terms of the plan likely require employees on leave to be moved to COBRA if they wish to continue their medical coverage. If a plan fiduciary doesn’t move such an employee to COBRA, they aren’t following the written terms of the plan and breaching their fiduciary duties.

Finally, self-funded health plans often receive claims for services the plan does not cover. The employee may be desperate and pleading with the company to pay for the service, even though it is excluded under the terms of the plan. If the plan fiduciaries approve the payment without either plan language that would allow the payment or, if none exists, an amendment to the plan terms, they may be violating the terms of the plan and breaching their fiduciary duties (this does not even take into account the potential stop loss or other implications of such a change). While plan terms can be amended to cover the service, it generally would need to apply to all plan participants and communicated. Before making such a change, the sponsor (in its non-fiduciary capacity) could consider the cost of covering that service for all participants and dependents.

The examples above are just three of the common scenarios employers face which implicate their fiduciary duties. Note in the first two examples above, failure to administer the plan according to the written terms may lead to additional exposure in the form of denied claims (either by the insurance carrier or, in the case of a self-funded plan, a stop loss carrier) which could result in the plan fiduciary bearing the cost of those claims.

The One Narrow Exception

While fiduciaries are required to follow the plan documents, there is one narrow exception. The duty under ERISA reads that fiduciaries are required to discharge their duties, “in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with [ERISA]” (ERISA Sec. 404(a)(1)(D), emphasis supplied). Therefore, if the law changes before the plan document is updated, the fiduciaries should follow the law (and then update the plan documents as promptly as possible to reflect the law).

Conclusion

Maintaining a plan document is a core ERISA requirement. Plan administrators must administer the plan according to the plan document. While plan participants and even plan administrators may not agree with the plan language, this is still the controlling language of the plan and failure to follow it can result in a breach of fiduciary duty, among many other issues. Next month, we will wrap up our series by talking about how fiduciaries can help protect themselves.

If you have any questions, please contact your HUB Advisor. View more compliance articles in our Compliance Directory.

NOTICE OF DISCLAIMER

Neither Hub International Limited nor any of its affiliated companies is a law or accounting firm, and therefore they cannot provide legal or tax advice. The information herein is provided for general information only and is not intended to constitute legal or tax advice as to an organization’s or individual's specific circumstances. It is based on Hub International's understanding of the law as it exists on the date of this publication. Subsequent developments may result in this information becoming outdated or incorrect and Hub International does not have an obligation to update this information. You should consult an attorney, accountant, or other legal or tax professional regarding the application of the general information provided here to your organization’s specific situation in light of your or your organization’s particular needs.