The time may have come to add a welfare plan committee to your company’s governance of employee benefit plans. New legal obligations and other developments impose fiduciary risks for welfare plans similar to what already exist for retirement plans.
Most employers that sponsor a 401(k) plan or other retirement plan set up a committee to administer and oversee the plan. This is generally a best practice to ensure that the plan is properly administered in compliance with employee benefits laws and, for plans subject to the Employee Retirement Security Act of 1974 (ERISA), to have a process for following ERISA fiduciary duties. Fiduciary duties include acting prudently and in the best interests of participants, such as in overseeing service providers and monitoring plan fees.
It is less common for employers to set up a separate committee to oversee the health plan and other welfare benefits. More typically, the company’s benefits department handles design changes and administration of the plans, perhaps with Board approval of major changes. Even in self-insured plans, most employers have outsourced the day-to-day claims administration to the third-party administrator. When there is no designated committee or individual to make fiduciary decisions on ERISA plans, by default the plan sponsor (company) is the ERISA named fiduciary, which means the members of the governing body of the company (i.e., board of directors, managers, or partners, depending on type of entity) are the fiduciaries and potentially personally liable for breach of fiduciary duty with respect to the welfare plans.
Higher Fiduciary Stakes For Welfare Plans
The stakes are getting higher for welfare plan administration and oversight: new legislation, increasing DOL scrutiny and audits, and participant breach of fiduciary duty litigation have drastically changed the welfare plan fiduciary landscape. For example, the Consolidated Appropriations Act, 2021 (“CAA”) added new fiduciary obligations including that the fiduciaries must:
- File an annual attestation that service provider contracts do not include “gag clauses” that restrict knowledge of claims and other data;
- Report on pharmacy and prescription drug spending for health care services;
- Obtain and review fee disclosures for health plan brokers and consultants; and
- Prepare a comparative analysis of nonquantitative treatment limitations (“NQTL”s) under the Mental Health Parity and Addiction Equity Act of 2008 (“MHPAEA”) and regulations; this must be available to the DOL and to participants upon request.
The above is a non-exhaustive list and there are many more obligations for disclosures and compliance on health and welfare plans, both new and already existing (e.g., Affordable Care Act compliance). Fiduciaries of self-funded plans, in particular, need to handle many of these items themselves and often cannot rely on their service providers. To the extent that service providers are assisting with these obligations, the fiduciaries should review and revise provider service agreements accordingly.
Moreover, plaintiffs’ firms have been actively recruiting participants to join class actions involving health plans. One claim we can expect to increase – considering the history with retirement plans – is breach of fiduciary duty related to fees, using the provider compensation disclosures as a starting point. Fiduciaries have an obligation to review all fees and determine that they are reasonable in light of services; otherwise, the engagement could be a prohibited transaction. There is also increasing fiduciary pressure to ensure that service providers are properly administering claims.
Another area of high risk is mental health parity compliance. Plan sponsors have had difficulty (to put it mildly) in getting their third-party administrators to prepare the comparative analysis that is required under the CAA. The DOL is auditing employers to determine compliance, yet as a practical matter, employers often do not have the information required to prepare the required analysis and report. In this type of situation, it is especially important that fiduciaries carefully document that they are doing everything possible to comply with their legal obligations. This can help shield the fiduciaries from liability by showing good faith to the DOL.
Mitigating Risk Through a Welfare Plan Committee
The higher stakes for welfare plan administration may mean a committee should oversee the welfare plan administration to make sure nothing falls through the cracks – and to mitigate fiduciary risk and protect the company’s Board or other management from fiduciary liability. The best defense on a breach of fiduciary case is that a consistent and thorough process was followed in administering and interpreting the plan and complying with legal obligations. A welfare plan committee can help show evidence and documentation of the good process.
If a company decides to add a more formal process for welfare plan oversight and establishes a committee, the company should work with ERISA counsel to create a delegation and charter for the committee, as well as strong processes. It might make sense to use the same committee as the 401(k) committee, but in many cases the individuals with the welfare plan interest and expertise are not the same as the 401(k) committee members. The welfare plan committee should then be trained and regularly updated on their fiduciary duties and legal obligations for the welfare plans.