By: HUB’s EB Compliance Team

Last month we explained that as an employer sponsoring an ERISA-covered plan, you are a fiduciary. In this piece in our series on fiduciary duties, we’ll delve deeper into one of the specific duties required of fiduciaries: the Exclusive Purpose/Exclusive Benefit rule under ERISA. As these terms are used interchangeably, the remainder of this piece will refer to this rule as simply the Exclusive Benefit rule.

The Rule

The Exclusive Benefit rule requires that fiduciaries discharge their duties solely in the interest of plan participants and beneficiaries, and for the exclusive purpose of providing benefits to those participants and beneficiaries as well as defraying reasonable plan administration expenses.

In more simple terms, this means that everything the plan fiduciaries do must be done in the interest of only plan participants and beneficiaries, and must be done in furtherance of providing benefits and defraying plan administrative expenses. Any actions that are not done in the interest of plan participants and beneficiaries, or with any purpose other than providing benefits and defraying plan administrative expenses would violate this duty.

Plan Assets

Although this rule may sound relatively straight forward, there’s several situations plan fiduciaries can encounter that may implicate this rule. For example, in an earlier piece, we discussed plan assets and the ERISA trust requirement. Using plan assets for any purpose other than providing benefits or defraying reasonable plan expenses would violate the exclusive benefit rule.

Another, perhaps counterintuitive, example is annual ACA Reporting. Because reporting applies whether an Applicable Large Employer offers a plan or not, it is an employer requirement rather than a plan requirement. Therefore, using plan assets to help defray the cost of ACA Reporting would violate the exclusive benefit rule.

Plan Service Providers

This rule is also implicated when plan fiduciaries select third parties that provide services to the plan. Examples of these service providers include COBRA administrators, FSA vendors, and (for self-funded plans) third party administrators (“TPAs”) or administrative services only providers. Plan fiduciaries who fail to adequately review service providers before making selections risk paying fees that may not be considered to defray reasonable plan expenses.

ERISA does not require plan fiduciaries to select the lowest cost providers. Such a requirement would cause a race to the bottom by service providers, without regard for the quality of the services. Instead, the requirement is that plan fiduciaries select service providers based on overall prudence (which is itself another fiduciary duty we’ll discuss in a future piece). This could well mean a plan selects a more expensive FSA vendor whose technology is more advanced, or who has better references from similarly-situated companies, compared to other vendors.

Selection of service providers does not mean the work of plan fiduciaries is complete. Once in place, service providers must be monitored to ensure their performance is as promised, and their fees are in line with their quoted pricing. For example, there have been several court cases involving TPAs including hidden charges in their fees charged to plans. One such case resulted in the TPA paying over $14.5 million to its clients to settle the case.

Plan Participants

Plan fiduciaries can also run afoul of this rule when ineligible individuals are allowed to knowingly participate in the plan. For most employers this thankfully isn’t a frequent occurrence, but it does arise from time to time. Examples of this could include allowing family members who shouldn’t otherwise be eligible to enroll in the plan (or remain on the plan after they are no longer eligible), acquiescing to former spouses being covered as if they were the current spouse of an employee, or extending benefits to 1099 contractors.

Each of these situations conflicts with the exclusive benefit rule because although these individuals may be plan participants, they aren’t eligible participants. By not being eligible, these individuals aren’t entitled to benefits under the plan, which in turn means the plan fiduciaries would be using plan assets to benefit individuals other than plan participants or beneficiaries.

Conclusion

Being a fiduciary is significant and requires a focus on doing what is best for participants and beneficiaries, as well as using plan assets only to provide benefits and defray reasonable plan expenses. In coming months, we will explore the additional duties that apply to fiduciaries.

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.