TPA is a Fiduciary Under ERISA

[author: Angela Bohmann]

A recent Sixth Circuit Court of Appeals decision considered whether a third party administrator of a self-funded medical plan was a fiduciary under ERISA. Under ERISA, fiduciaries owe strict duties of loyalty and prudence to plan participants and beneficiaries and can be personally liable for losses if they are not. Many third party administrators of medical plans take the position that they operate without discretion and therefore are not fiduciaries.

The Guyan International v. Pritchard Mining Company decision considered a third party administrator that was contractually obligated to use the funds to pay medical claims but instead used the funds for its own purposes, causing hundreds of thousands of dollars worth of claims to go unpaid. It comingled those funds and used the funds for its own purposes, clearly a violation of its contract with the employer. The third party administrator claimed that it was not a fiduciary because it was not permitted to exercise discretionary authority or discretionary control over the management of the plan and did not exercise authority or control over the plan’s assets, as would be required under ERISA’s definition of fiduciary.

Because the third party administrator in fact took funds and used them for its own purposes, the court had no trouble concluding that the TPA had exercised control over the assets of a plan. The court noted that the TPA had authority to write checks on the plan’s accounts and had control over where the plan’s assets were deposited and when and how they were disbursed. The TPA exercised “practical control” despite the fact that its conduct was in derogation of its contracted authority. Therefore, the third party administrator was a fiduciary and liable for the misused contributions. The court distinguished mere possession or custody of assets, such as that of a bank that merely holds deposits, from actual control and use of plan funds by an entity for its own purposes.

Third party administrators who exercise control over the manner in which plan assets can be paid should take steps to insure that they meet their obligations under ERISA to use plan assets only for proper plan purposes.

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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