The Sixth Circuit Reminds Claim Administrators Of The Dangers Of A Breach of Fiduciary Duty When Handling Plan Assets


The Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. § 1001, et seq., was passed with the goal of protecting plan assets so that those assets would be available for plan participants and beneficiaries.  See Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504, 510-11 (1981).   Under ERISA § 3(21)(A), 29 U.S.C. § 1002(21)(A), any person who “exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets” is a fiduciary under ERISA.  It is a breach of ERISA fiduciary duty to use plan assets for the fiduciary’s own purposes.  ERISA § 504(a)(1), 29 U.S.C. § 1104(a)(1); and ERISA § 506(b)(1), 29 U.S.C. § 1106(b)(1).

In Pipefitters Local 636 Ins. Fund v. Blue Cross and Blue Shield of Mich., __ F.3d __, 2013 WL 3746217 (6th Cir. July18, 2013), the Sixth Circuit ruled that Blue Cross and Blue Shield of Michigan (“BCBSM”) breached its ERISA fiduciary duty because it paid certain state fees from the self-funded plan assets without being authorized to do so by the plan.  Since 1996, BCBSM has been required by the State of Michigan to pay one percent of its revenues as a “Medigap” fee for defraying senior citizen medical care costs.  BCBSM entered into an administrative services agreement with the plaintiff to administer claims and allow access to its network, which would allow for payment of medical services at the discounted negotiated rates.  The agreement did not address the payment of the Medigap fee.  BCBSM, however, added the Medigap fee to the discounted fee owed to providers and collected the fee from the plan assets, and passed that Medigap fee on to the state.  As a result, the Medigap fee was being collected from the plaintiff’s ERISA plan assets.  The district court granted summary judgment and awarded plaintiff $284,970.84 after it found that BCBSM collected the Medigap fee between June 2002 and January 2004, which was a breach of its fiduciary duty.

On appeal, the Sixth Circuit affirmed the district court ruling, finding that the act of applying the Medigap fee to the payments was a discretionary act, and BCBSM was not authorized under the administrative services agreement to charge those fees.  The Sixth Circuit ruled “[w]here a fiduciary uses a plan’s funds for its own purposes, as is the case here with Defendant using the [Medigap] fees it discretionarily charged to satisfy the Medigap obligation it owed to the state of Michigan, such a fiduciary is liable under § 1104(a)(1) and § 1106(b)(1).”  2013 WL 3746217, at * 7.

The Sixth Circuit’s ruling demonstrates the dangers of handling plan assets and the importance of having the administrative services agreement set forth the parties’ obligations.  If BCBSM had reached an agreement that the Medigap fees were part of the administrative fee charged by BCBSM, then plaintiff could not allege breach of fiduciary duty because the fees would not have been plan assets.  If the administrative services agreement stated that BCBSM could add the Medigap fees to the discounted payments for covered services, then plaintiff similarly could not allege a breach of fiduciary duty because BCBSM would have been administering the plan in accord with the plan terms.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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