A November 2020 Western District of Virginia court decision, Hammer v. Johnson Senior Ctr., stresses the importance of protecting ERISA plan participant funds while also identifying health and welfare plan fiduciaries and their responsibilities.

Background

In this case, Ms. Hammer was an employee of Johnson Senior Center and a participant in the health plan it offered to employees. She contributed her portion of the plan premium from her paycheck. At one point, the employer/plan sponsor failed to make the required monthly payment to the insurer and the health plan lapsed. During this same period, Hammer was undergoing lung cancer treatment and her claims were denied. 

Hammer brought this lawsuit against the company, and individually against the owner, and others who worked for the company. While several other issues in this matter continue to be litigated, the court concluded that the employer/plan sponsor and individual owner violated their ERISA fiduciary duties of loyalty, care and prudence by not applying Hammer’s contributions toward health plan premiums, among other reasons. 

Fiduciary Duties Regarding the Protection of Participant Contributions

It is well established that any amounts contributed by employees or other individuals, like COBRA participants, for coverage under an ERISA plan (“participant contributions”) are “plan assets” subject to ERISA’s fiduciary rules. When an employer/plan sponsor is in possession of participant contributions, additional compliance obligations and special considerations must be observed. 

According to the U.S. Department of Labor (“DOL”), the primary fiduciary responsibility of fiduciaries, including the plan sponsor, is to run the plan solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits and paying plan expenses. A company or individual can attain fiduciary status in three ways: 

  • The company/individual is named as a fiduciary in the plan document (e.g., the plan document specifically names the plan administrator).
  • The company/individual can be named by another fiduciary pursuant to a procedure specified in the plan document.
  • The company/individual is a “functional” fiduciary because of the actions they take with respect to a plan. As is most relevant to this particular case, a company/individual could be a functional fiduciary under ERISA if s/he or it:
    • exercises any discretionary authority or discretionary control respecting management of the plan or exercises any authority or control respecting management or disposition of its assets, or
    • has any discretionary authority or discretionary responsibility in the administration of the plan.

Thus, regardless of their title or whether they are mentioned directly or indirectly in the plan document, individuals can become fiduciaries by virtue of the plan functions they perform.

The plan documents in the Hammer case did not name the employer or its owner as fiduciaries. However, the Court found that the employer had discretionary control over participant contributions since the contributions were deposited in an employer account. It found that the owner was a fiduciary because, at the time the health plan lapsed, he was the only one with authority over the company’s bank accounts since he was primarily running the company. As a result, he was responsible for making sure the health plan bill was paid. This meant he exercised control with respect to the health plan’s administration, management, and assets. 

Instead of paying the health bill, the Court determined that the company’s funds (including the participant contributions) were used to pay corporate expenses. The Court found this use of participant contributions was a breach of fiduciary duty by the company and the primary owner. While the Court did not address this issue, using plan assets to pay corporate contributions is also a prohibited transaction under ERISA that could result in excise taxes and potential penalties.

Takeaway

In addition to the plan sponsor (the employer), certain employees of the employer exercise discretion or control over participant contributions in the purchase of insurance policies for insured plans or paying health expenses for self-funded plans. Regardless of their title or whether they are mentioned directly or indirectly in the plan document, individuals can become fiduciaries by virtue of performing these functions.

This case is a sober reminder that these fiduciaries should make sure that participant contributions are used for the exclusive purpose of providing benefits and paying permissible plan expenses. A failure to do so make the fiduciary personally liable for breaches of their fiduciary duties or obligations resulting in potential lawsuits and liability to themselves and the company.  

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

 NOTICE OF DISCLAIMER

The information herein is intended to be educational only and is based on information that is generally available. HUB International makes no representation or warranty as to its accuracy and is not obligated to update the information should it change in the future. The information is not intended to be legal or tax advice. Consult your attorney and/or professional advisor as to your organization’s specific circumstances and legal, tax or other requirements.