Sixth Circuit Addresses Plan Assets and Limitations Issues in Holding Service Provider’s Fee Assessments Constituted Self-Dealing

by Goodwin

In Hi-Lex Controls, Inc. v. Blue Cross and Blue Shield of Michigan, No. 13-1773/13-1859 (May 14, 2014), the U.S. Court of Appeals for the Sixth Circuit held that a service provider violated ERISA’s prohibition on fiduciary self-dealing when it assessed undisclosed fees against a self-funded health plan. In reaching this conclusion, the court addressed issues regarding the identification of ERISA plan assets and the application of the “fraud or concealment” exception to ERISA’s statute of limitations.


In Hi-Lex, beginning in 1991, an employer that maintained a self-funded health plan entered into contracts with a third party administrator (“TPA”). Under the contracts, the plan obtained administrative services from the TPA and access to the TPA’s network of medical providers. The contracts provided that the TPA was to receive a monthly administrative fee equal to a dollar amount multiplied by the number of covered plan participants. In 1993, the TPA began to retain revenue, in addition to the administrative fee, by “adding certain mark-ups” to the amounts hospitals within its network charged the plan for medical services, and retaining the amount of the mark-ups for its own benefit.  (The Sixth Circuit referred to this retained revenue as the “Disputed Fees.”)

In 2011, the employer and the plan sued the TPA in federal district court alleging that the TPA had violated ERISA in assessing the Disputed Fees. On summary judgment, the district court ruled that the TPA functioned as an ERISA fiduciary in assessing the Disputed Fees and, after a bench trial, held that (i) the plaintiffs’ claims were not time-barred and (ii) the TPA’s assessment of the fees violated its fiduciary duties.

Court of Appeals Decision

On appeal, the Sixth Circuit affirmed. The court rejected the TPA’s argument that the plaintiffs’ claims were precluded by ERISA Section 413(2), which bars claims made more than three years after actual knowledge of the violation. In making this statute of limitations argument, the TPA emphasized that the employer obtained actual knowledge of the Disputed Fees in 2007, but did not bring suit until 2011. The Sixth Circuit, however, held that the case fell within Section 413’s exception, that provides that “in the case of fraud or concealment [an] action may be commenced not later than six years after discovery of [the] violation.”

The Court of Appeals noted that the circuit courts are split regarding whether this “fraud or concealment” exception applies (i) where the underlying ERISA violation sounds in fraud, see Caputo v. Pfizer, Inc., 267 F.3d 181, 192-93 (2d Cir. 2001), or instead (ii) where the defendant has actively concealed its  wrongdoing, see Larson v. Northrop Corp., 21 F.3d 1164, 1174 (D.C. Cir. 1994). It concluded, however, that it did not need to “take sides” on this circuit split, because it found (i) that the TPA had committed fraud in connection with the underlying violation by knowingly omitting information about the Disputed Fees in the contracts, and also (ii) that the TPA had actively concealed the violation by subsequently denying it had retained revenue beyond its contractual administrative fee. In addition, the Sixth Circuit upheld the district court’s finding that the employer had exercised due diligence in reviewing the administrative costs of the plan prior to 2007, when it discovered the existence of the Disputed Fees.

The TPA also argued that its retention of the Disputed Fees was not an ERISA fiduciary violation because those fees were not paid from ERISA plan assets. In this regard, the Disputed Fees were paid from a bank account that was used to pay benefit claims under the plan and that was funded by periodic transfers from the employer. Beginning in 2003, those transfers included participant contributions – which the TPA acknowledged constituted plan assets under Department of Labor (“DOL”) regulations. See 29 C.F.R. Section 2510.3-102(a)(1). But the substantial majority of (and, before 2003, the entirety of) the funds in the account came from employer contributions, which the TPA argued were not plan assets.

The Sixth Circuit disagreed. Relying on DOL authority and the relevant case law, the court reasoned that the employer contributions in the account would be considered to be ERISA plan assets if, under “ordinary notions of property rights,” the plan had a beneficial interest in the funds held in the account. It held that plan participants “had a reasonable expectation” of such a beneficial interest based on several actions and representations of the parties, including statements in the plan’s summary plan description, the TPA’s exclusive check writing authority over the account to pay benefit claims under the plan, and quarterly statements and other data provided by the TPA to the employer with regard to the account. The court also indicated that, in its view, the account was analogous to a trust under common law because (even though no formal trust had been created) the employer had transferred funds to the account for the purpose of paying benefit claims and authorized administrative fees.

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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