In Edmonson v. Lincoln National Life Insurance Company, No. 12-1581, 2013 WL 4007553 (Aug. 7, 2013), the U.S. Court of Appeals for the Third Circuit affirmed summary judgment for the defendant insurance company in one of the many cases challenging the use in group insurance benefit plans of retained asset accounts.

Background

The litigation was brought by a beneficiary of a group life insurance plan whose sponsor had purchased group life insurance contracts from the insurer defendant.  The insurer paid benefit claims under the group contract through interest-bearing accounts backed by funds that the insurer retained until the account holders wrote checks or drafts against the account.  The plaintiff challenged the practice, which she claimed constituted a breach of fiduciary duty and a prohibited transaction under ERISA.  The plaintiff purported to sue on behalf of a class of beneficiaries under contracts issued by the insurer defendant who had received their benefits through a retained asset account.

District and Appeals Court Decisions in Edmonson

In February 2012, the U.S. District Court for the Eastern District of Pennsylvania entered an order granting judgment to the defendant on the grounds that assets backing the retained asset accounts were not plan assets and the defendant was not acting as an ERISA fiduciary with respect to the plan. 

On appeal, the Third Circuit ruled in favor of the defendant, albeit on somewhat different grounds.  With respect to the plaintiff’s claim that the defendant exercised fiduciary discretion in selecting the method of claims payment, the court held the insurer to be an ERISA fiduciary with respect to plan administration and management because the plan at issue permitted the insurer “some leeway” to decide how claims would be paid, and therefore conferred discretion upon it.

The court also held that the insurer’s selection of the method of claims payment involved exercising authority or control over a plan asset – the policy.  However, while the court held the insurer to fiduciary standards with respect to its selection of the method of payment, the court nonetheless concluded that the insurer did not breach its fiduciary duty of loyalty when it chose to settle claims via retained asset accounts because such accounts are not inconsistent with the beneficiary’s interests and the insurer’s potential to profit was “wholly dependent” on the beneficiaries’ actions.  The court noted that ERISA does not mandate nor preclude any specific mode of payment. 

Fiduciary Status and Standing

With respect to the plaintiff’s claim concerning the defendant’s investment of retained assets, the court held that the defendant was not a fiduciary with respect to that conduct because retained assets are not ERISA plan assets. 

In addition to its fiduciary analysis, the court also addressed issues of constitutional and statutory standing, ruling that the plaintiff had both constitutional and statutory standing to assert her claims in light of her allegations that (i) she suffered an alleged injury in fact with respect to any difference between the defendant’s investment earnings on retained assets and the crediting rate paid on retained asset accounts; (ii) her alleged injury was traceable to the defendant’s decision to settle benefit claims via retained asset accounts; and (iii) ERISA’s equitable relief provision afforded her a claim for disgorgement of ill-gotten profits.

One member of the three-judge panel expressed disagreement with these standing rulings in an opinion that dissented from that portion of the majority opinion, but otherwise joined the majority in affirming judgment for the defendant.  With respect to whether the plaintiff suffered any actual injury, in affirming judgment for the defendant on the merits, the court concluded “[p]ayment via the retained asset account, by itself, caused [the plaintiff] no injury,” because the plaintiff “could have … withdraw[n]” the funds from the account at any time.

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this informational piece (including any attachments) is not intended or written to be used, and may not be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.