Mass. Laborers’ Health and Welfare Fund v. Blue Cross Blue Shield of Mass., 2022 WL 952247 (D. Mass. 2022)
A self-insured multiemployer union health plan sued its third-party administrator (TPA) under ERISA and state law, claiming that the TPA “violated its fiduciary duties and the terms of the plan by failing to process claims correctly, overpaying benefits, neglecting to recoup overpayments properly, and refusing to provide the information needed by the [plan] to verify that claims were priced appropriately.” The TPA argued that its duties to the plan were solely contractual, not fiduciary in nature.
As the court explained, an entity may be an ERISA fiduciary either by being named as such in the plan or by being a “functional fiduciary.” The court said there was no evidence that the TPA was a named fiduciary, finding “unconvincing” the plan’s argument that the use of the plural “fiduciaries” in portions of the summary plan description meant that the TPA (in addition to the plan’s trustees) was a named fiduciary. An entity may be a functional fiduciary to the extent it exercises discretionary authority or control over plan management, or any authority or control over management or disposition of plan assets. The court examined the parties’ administrative services agreement and the TPA’s actions to analyze functional fiduciary status. The TPA maintained a provider network, negotiated rates with providers, and handled day-to-day claims administration. The plan did not argue that the TPA was a functional fiduciary based on those activities, but because it “made benefit determinations that exceeded negotiated rates,” and made decisions regarding recovery of overpayments, actions the plan said involved the exercise of discretion. The court disagreed, concluding that while the TPA may have exercised minor discretion in carrying out its contractual duties, it was not enough to make the TPA a functional fiduciary based on discretionary authority over plan management.
The court next considered whether the TPA had authority or control over plan assets. To cover administrative fees and benefit payments, the plan paid the TPA weekly a predetermined amount based on estimated costs, with monthly reconciliation and adjustment based on actual administrative fees and benefit claims paid. The plan asserted that the amounts paid to the TPA constituted plan assets, and that the TPA exercised authority and control over those assets. Explaining that ordinary principles of property rights determine whether amounts are plan assets, the court determined that the amounts were not plan assets once transferred to the TPA. They were not held in the plan’s name or segregated from other TPA assets, and the TPA bore the risk of loss. Importantly, the court disagreed with the Sixth Circuit’s Hi-Lex decision, which reached the opposite conclusion regarding plan asset status in a similar arrangement between a plan and TPA (see our Checkpoint article), and which was treated in a subsequent case as “conclusively establishing” that same TPA’s fiduciary breach with respect to a different plan (see our Checkpoint article). According to the court, the Hi-Lex decision suggests that TPAs and self-insured plans are “nearly powerless to enter into an arrangement that would treat employer and employee contributions as anything other than plan assets, even when neither party intends such a result.” Furthermore, under Hi-Lex, TPAs would have difficulty avoiding becoming functional fiduciaries unless they pay claims out of their own funds—a result that ERISA “surely does not mandate.” The court dismissed the ERISA claims as well as the state-law claims, which may be refiled in state court.
EBIA Comment: The Hi-Lex decision likely made many TPAs uneasy, so they will appreciate that this court has called the Sixth Circuit’s reasoning into question. Plans and TPAs will want to keep an eye on this case. The plan has appealed to the First Circuit, which may reach a different conclusion, potentially leading to a circuit split and consideration of the issue by the U.S. Supreme Court. For more information, see EBIA’s ERISA Compliance manual at Sections XXVIII.B (“Who Is a Fiduciary?”) and XIV.D.2 (“Paying Benefits From Other Than General Assets Raises Questions”). See also EBIA’s Self-Insured Health Plans manual at Section XXIII.C.5.c (“Obligations of Service Provider”).
Contributing Editors: EBIA Staff.