Fifth Circuit Holds Company Owner Personally Liable for Diverting Health Plan Contributions

By: HUB’s EB Compliance Team

A recent Fifth Circuit decision serves as a reminder that fiduciary status under the Employee Retirement Income Security Act of 1974 (“ERISA”) follows control, not job title. In Sonderling v. Sills, the court affirmed a $209,466.34 judgment and a permanent fiduciary-service ban against the sole owner of a Louisiana company after he withheld employee premium contributions from insurers and left self-funded medical claims unpaid.

Although unpublished and non-precedential, the decision illustrates how closely the Department of Labor (“DOL”) and courts scrutinize who actually controls plan assets and claims-payment decisions, and not merely who is named in plan documents.

ERISA’s Functional Fiduciary Standard

A person is a fiduciary with respect to a plan to the extent they exercise discretionary authority or control over plan management or administration, or they exercise any authority or control over disposition of plan assets. Fiduciary status is not conferred by title or plan-document designation; it turns on a functional, fact-specific inquiry into whether the individual was performing a fiduciary function when taking the noted action. Fiduciaries owe duties of loyalty and prudence and are personally liable to make the plan whole for losses resulting from a breach. Employee premium contributions withheld from pay become plan assets as soon as they can reasonably be segregated from the employer’s general assets. Once that threshold is crossed, redirecting those funds to cover other obligations is a fiduciary breach, not a cash-flow decision.

What Happened in Sonderling v. Sills

Coastal Bridge Company, L.L.C. (“Coastal”) sponsored a welfare benefit plan offering that included, among other benefits, a self-insured medical plan administered by a third-party administrator (“TPA”) under an administrative services agreement. Coastal’s president and sole owner was an authorized signatory on the company’s bank account, directed its finances, and — according to Coastal’s own chief financial officer — was the ultimate decision-maker on which bills were paid.

In 2019, Coastal stopped forwarding previously withheld employee contributions to insurance carriers for fully-insured lines of coverage. Subsequently, the insurance carriers terminated coverage, yet Coastal kept withholding the contributions from paychecks through late December. Coastal also sporadically failed to reimburse the TPA for medical claims, including $19,618.23 in employee contributions withheld in December 2019, which prompted the TPA to suspend claims processing.

Coastal’s owner then terminated the plan’s coverage without timely arranging a run-out agreement to process claims incurred before termination. At least 78 plan participants had claims denied, leaving $172,351.35 in unpaid medical expenses. While Coastal later paid $78,119.85 to the TPA, this amount covered only previously processed claims, not the denied run-out claims.

The DOL sued Coastal’s owner personally, not just the company. During the case, the owner was asked to admit or deny certain facts, to which he never responded. Based on the lack of a response, the court treated those facts as true…including that the owner controlled the Plan’s management and its money, and that he counted as both a “fiduciary” and a “party in interest” under the relevant laws.

Why the Fifth Circuit Affirmed — and What It Means for Plan Sponsors

The Fifth Circuit agreed with the lower court and affirmed the owner was a fiduciary in practice, even though he wasn’t named as one on paper. It didn’t matter that Coastal’s HR director signed the services agreement, or that the agreement named Coastal — not the owner — as the plan sponsor. What mattered was the actual control of the Plan’s money and who decided which bills got paid. The court also held that money trouble does not excuse a fiduciary from failing to send in employee contributions. The court upheld the full $209,466.34 judgment — $172,351.35 for denied claims and $37,114.99 for unremitted contributions — along with the permanent ban on the owner from acting as a plan fiduciary.

For plan sponsors, several practical points can follow:

1. Control matters, not your title. If you decide where plan money goes or which bills get paid, you can be held personally liable — no matter what the plan documents say.
2. Treat withheld paycheck money as plan money right away. Under 29 C.F.R. § 2510.3-102, money withheld from paychecks must be set aside from the company’s regular funds as soon as possible. Using it for anything else, even briefly, creates personal risk.
3. Money problems are not an excuse. Being short on cash doesn’t excuse you from paying what the plan owes.
4. The cost can go beyond repayment. A fiduciary must repay what the plan lost. The DOL can also add a penalty of 20% of the amount recovered, and courts can bar you from ever serving as a plan fiduciary again.

Conclusion

Sonderling v. Sills sends a clear message: the person who actually controls a company’s money — not just the name on the plan paperwork — is responsible for how employee contributions and medical claims get paid. Owners and officers who can sign checks or move money should make sure contributions are set aside and claims get paid on time, especially when cash is tight, and the temptation to use plan money for something else is strongest.

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.