What Business Owners, Managers, and HR Professionals Need to Know About Their Duties Under ERISA

By Eric L. Buchanan

Employers who make the decision to offer employee benefits may not always understand that by providing employee benefits, the employer is creating “employee benefit plans” that are subject to a federal law called ERISA.  This paper will explain some of the basic rules, so that employers, managers, and HR professionals can begin to learn their obligations under ERISA and can best protect the employer while also helping employees who need their benefits.

Ten Things All Business Owners, Managers and HR Professionals Need To Know About ERISA:

I.               Employers who offer benefits have set up ERISA plans.

Employers who offer health benefits, life insurance, long term disability insurance, and similar employee benefits sometimes don’t understand that by offering those benefits, the employer has created an “employee welfare benefit plan” under the Employee Retirement Security Act of 1974 (“ERISA”). Once an ERISA plan is created, employers, as “plan sponsors” and also usually as “plan administrators” of most plans, have certain duties and obligations under federal ERISA law.

Similarly, employers who set up retirement plans also have created ERISA benefits plans.  Much of ERISA’s regulations cover ERISA retirement plans, but there are still specific rules about ERISA welfare benefits plans.  Employers should have a basic understanding of ERISA, and their role under ERISA when providing benefits plans.

II.            Employers are usually the “plan administrators” of the benefits plans offered by the employer.

Under ERISA, a “plan sponsor” is an entity that has decided to provide employee benefits to employees.  A plan sponsor can be an employer who offers benefits to employees or a union that offers benefits to its members.  The plan sponsor has the authority to decide what benefits are offered, to decide what an employee must do to be eligible for those benefits, to decide the terms of the plan, and to decide what needs to be done to amend the plan.  The plan sponsor also is allowed to designate who is going to make decisions under the plan, and what authority can be delegated to others to make decisions or amend the plan.

ERISA also requires that each plan must have a “plan administrator,” who is in charge of the plan, being responsible to ensure the plan operates under the law properly and provides the benefits that were promised.  Under ERISA, Congress requires the “plan administrator” to be a fiduciary, which is basically the same as a trustee of a trust or the executor of an estate.  Most plans state that the plan administrator is the person or entity that has the authority to make decisions about the plan, interpret the plan, amend the plan, or hire others to handle certain parts of the plan, such as making claims decisions.

Under ERISA, the plan administrator is the person designated in the plan documents to be the plan administrator.  If no one is named in the plan documents, ERISA deems the plan sponsor (i.e. usually the employer) to be the plan administrator.^[1]  Because many ERISA plans are actually drafted by the insurance companies that provide the benefits, the plan usually names the plan sponsor/employer as the plan administrator, even where one is named.

III.          As “plan administrators” employers must act as fiduciaries toward the benefits plans and the employees and dependents enrolled in the plans.

As explained above, ERISA states that employers, when they are plan administrators, must act as fiduciaries toward the employees and their dependents who are enrolled in the plans, which means that employers must act  “solely in the interest of the participants and beneficiaries” and with the “care, skill, prudence, and diligence” that a prudent person “familiar with such matter” would use when acting under similar circumstances.^[2]

IV.          Employers who are plan administrators have a duty to not only tell employees the truth, but a duty to tell employees and their dependents information about their benefits that the employee didn’t know to request.

Also, as fiduciaries, employers have a duty to communicate honestly and completely with employees about the employees’ rights under the benefits plans.  “The duty to inform is a constant thread in the relationship between beneficiary and trustee; it entails not only a negative duty not to misinform, but also an affirmative duty to inform when the trustee knows that silence might be harmful.”^[3]

For example, if an employee or even an employee’s representative or family member asks about one employee benefit that the employee might be eligible for, and the employer offers another benefit that the employee could apply for, the employer should provide that information.  In Krohn v. Huron Memorial Hospital, 173 F.3d 542, 548 (6th Cir. 1999), a nurse was hurt on the job and her husband inquired of her employer what she needed to do to apply for workers’ compensation benefits.  The employer also offered long term disability (“LTD”) benefits.  The Court of Appeals for the Sixth Circuit held that it was a breach of fiduciary duties under ERISA for the employer, as plan administrator, to fail to also tell the husband or the employee that she had the right to file for LTD benefits and that she needed to file within a certain amount of time under the company-sponsored LTD plan.

V.             Employers must provide employees and their dependents copies of plan documents.

In addition to acting as a fiduciary, ERISA also requires employers, as plan administrators, to provide employees with copies of the plan documents when the employees enroll and within a certain amount of time after a plans change.

Employers, who are plan administrators also must provide employees or their covered dependents  a copy of any plan documents within 30 days of a written request for the plan documents.

Under ERISA, if an employer doesn’t provide the documents at the time required, or within 30 days of a written request for the plan documents, the employee can sue the employer for penalties.  Employers who are plan administrators, and who fail to provide the plan documents in the time required, can be made to pay up to $110 per day in penalties to the employee, plus attorneys fees.^[4]

VI.      Employers, who are plan administrators, should understand that they cannot just rely on the insurance company to provide information about employee benefits.

Under most employee welfare benefits plans, the employer purchases, or allows its employees to purchase insurance coverage that provides benefits such as health benefits, life insurance, or long term disability insurance.  In many cases, probably the vast majority, the employer decides what insurance employees may be covered by, then the employers allow the insurance company to draft the details of the insurance policy.  In many cases that insurance policy is the only document written that describes the benefits and what an employee has to do to receive the benefits.

Because these policies are drafted by the insurance companies, the insurance company usually names the employer as the plan administrator.  Or, in some cases, no plan administrator is named, which makes the employer the plan administrator by default.

ERISA rules and case-law is very strict and in most places, only the plan administrator can be sued for failing to provide plan documents.  Also, while the insurance company can be a fiduciary under ERISA, the employer, as plan administrator is also a fiduciary, and is equally responsible for giving employees complete and accurate information about their benefits, and what it takes to qualify for them.

VII.     Employers, as plan administrators, should have a good understanding of the application and appeal procedures under their employee benefits plans.

Because ERISA and its rules require plan administrators to act as fiduciaries, employers have an obligation to be able to not only answer employees questions about benefits accurately, but to advise them about what they need to do to apply for benefits, even if the employee doesn’t know what to ask. For example, if a long term disability policy says that the employee must file a claim within a certain amount of time, and the employee asks the employer about how to file for LTD, the employer needs to be able to give the employee accurate information.  Therefore, the employer should ensure that its HR or management personnel are familiar with the plans enough to explain to employees what they need to know about deadlines

Likewise, employers should understand the appeal procedures that are set out in the terms of the policy or plan.  If the employee misses an appeal deadline, based on bad advice from the employer, or based on inaccurate or incomplete information from the employer, that can lead to a claim by the employee against the employer for a breach of fiduciary duties.

VIII.    Employers, as plan administrators, should have a basic understanding of special rules that apply to ERISA appeals.

The U.S. Department of Labor has issued regulations under ERISA at 29 C.F.R. § 2560.503-1 that set out minimum requirements for claim decisions under ERISA.  For example, the claims regulations require that benefits claims decisions must be made within 90 days, with up to one 90-day extension.  However, the regulations have special rules for disability claims, requiring that the decision be made within 45 days, with up to two 30-day extensions.  There are also special rules for health care claims, which can require a decision in as short a period as 72 hours for “urgent care claims.”

The regulations also set out a minimum time that plans/policies can allow a claimant (i.e. the employee) to appeal.  The default rule is that the plan must allow 60 days to appeal, but that time is extended up to 180 days for health care claims and disability claims.

Once a claim is appealed, the ERISA decision-maker (i.e. the insurance company in most cases) must make a decision within 60 days with one 60-day extension.  For disability claims, the decision must be made within 45 days with one 45-day extension.  For health care claims, there are more special rules; for example, decisions on urgent care claims must be made in 72 hours, and post-service claims decisions must be made in no more than 60 days.

The regulations also set out other rules regarding what minimum rules the decision-makers must make to keep the claims process reasonable.  For example, claimants must be provided “the opportunity to submit written comments, documents, records, and other information relating to their claim.” The regulations also set out what information must be provided to claimants during the appeal process, such as copies of all the documents relevant to their claim, and information about any medical or vocational expert that was relied on in making any claim decision.

IX.       Employers, as plan administrators, should have a basic understanding of special rules that apply if an ERISA claim is denied and must go to court.

One of the most important things for employers, employees, and people helping the employees to understand is that if an ERISA claim is denied, and the claim goes to court, the employee is not entitled to a jury trial.  The employee/claimant cannot put on witnesses or present any new evidence to a court.

Instead, under ERISA the court reviews only those documents that the insurance company or ERISA administrator had when a final decision was made on the claim; this includes the plan documents, the documents submitted by the employee/claimant to support the claim, and information already in the hands of the insurance company and ERISA administrators.

This means that if a claim is denied, it is crucial for the employee/claimant to submit the right kind of information to support the claim.  If the person is going to have an attorney help with the claim, it is crucial for the attorney to get involved during the claim process, in order to help submit the evidence supporting the claim.  Attorneys can help get information from treating doctors, not just the medical records, but opinions about how disabled the person is, or how a certain treatment was medically necessary.

Most claimants don’t understand just what an insurance company is looking for, but attorneys who regularly handle these claims have experience on how to best build a good record.  But, if the employee/claimant waits until the claim is denied on appeal, the record is closed and the attorney can’t get the best evidence before the court.

 X.        Employers, employees, and their attorneys should work together to help the employee with his or her claim, when an insurance company wants to deny benefits.

Employers offer employee benefits to keep good employees and to reward loyal employees.  Employers should not be required to be in the middle of a dispute between some insurance company that has decided to deny an employee’s claim, and the employee who now needs the benefits promised in the insurance policy offered as an employee benefit.

Unfortunately, insurance companies usually set up plans that name the employer as plan administrator, or, at least, result in the employer being plan administrator.  Also, unfortunately, over the last 40 years of ERISA litigation, insurance companies have argued that employers have responsibilities under ERISA to provide plan documents, while the insurance companies don’t have that obligation.

Also, as explained above, ERISA generally puts obligations on employers, as plan administrators, to act as fiduciaries and to communicate with employees.

The best advice for employers, when acting as plan administrators, is to fully communicate with their employees and their attorneys about the employees’ benefits and any questions about the employees’ claims.  If the employer is communicating and providing documents, the employee and employer can be on the same side in getting claims paid by insurance companies that should be paid.

 What are Employer’s basic duties?

• Assuming there’s a third party handling the claims (as with most health benefits, life benefits, and disability benefits provided by an insurance company), what are an employer’s responsibilities?
  • Enroll employees
  • Make sure premiums are paid for insured benefits (or contributions made for trust-funded benefits)
  • Provide information
    • Automatically
      • Benefit plan summary plan descriptions (SPDs) on enrollment
      • Summaries of annual changes to plans
      • Annual pension/investment summaries
      • COBRA notices 44 days from trigger
      • Information to people you know need it
      • On request
        • Plan documents, SPDs, 5500s w/in 30 days of request
        • Answers to questions about benefits from employees
        • Provide information employees need to know, even if they don’t know or think to ask
• Don’t discriminate

How did we get here?  A Brief History of ERISA

In 1974 Congress passed the Employee Retirement Income Security Act of 1974 (“ERISA”) to protect retirees’ benefits, especially those benefits provided by large companies and unions. Congress felt the need to pass this land-mark legislation because unions and large employers sometimes could deny their members or employees the retirement benefits that were promised, and then make it very difficult for the employee or union member to seek legal help for those denied benefits.

Prior to ERISA, employers and employees had to deal with a mishmash of conflicting state laws, such that employers did not always understand which law would apply and employees might not know which state to seek legal help in. Suppose a truck driver was a member of the Teamsters Union whose headquarters might be in Pennsylvania, and he worked for a company whose headquarters might be in New Jersey and he drove his truck on a route from Chicago to Indianapolis  Suppose also the truck driver lived in Ohio, and the truck driver’s pension was managed by a pension management firm in New York City.  In that truck driver’s case, if the Teamsters’ union mismanaged the pension fund, so that the truck driver’s benefits were less than promised, the truck driver would potentially have five or six different states whose laws could apply to any questions about whether he was being paid the proper point pension. In this situation, which state’s law would apply? Where would the truck driver sue?

Congress passed the ERISA law which provided federal law to cover this situation with one set of rules and with one set common procedures to apply.

However even though ERISA was passed to address concerns over pension plans, Congress at the last minute also added provisions to the law so that ERISA would cover other employee benefits, such as life insurance, health insurance, or long term disability insurance.

Unfortunately, because most of the ERISA bill was drafted to address issues related to pension plans, the law did very little to specifically regulate other employee benefits provided through insurance policies. However, Congress made clear that the Department of Labor in the Secretary of Treasury to both issue regulations and that the courts should fill in gaps in the law. Unfortunately after 40 years, the courts have filled in those gaps in the  law to put more duties and responsibilities on employers.

ERISA law applies broadly to employee benefits.  Except all for government employers and those church employers who do not opt-in to ERISA, the federal ERISA law applies to virtually all employee benefits.  ERISA also has a strong preemption provision, which means that ERISA law trumps state laws dealing with employee benefits, with few exceptions, such as laws regulating insurance companies.

 What does it mean to be an ERISA fiduciary?

Congress enacted ERISA to protect the interests of participants, and their beneficiaries, from abuses in the administration and investment of private retirement plans and employee welfare plans. “…ERISA established minimum standards for the vesting of benefits, funding of benefits, carrying out fiduciary responsibilities, reporting to the government, and making disclosure to participants.” Donovan v. Dillingham, 688 F.2d 1367, 1370 (11^th Cir. 1982). (See also: 29 U.S.C. § 1001 (a); Leigh v. Engle, 727 F.2d 113, 139 (7^th Cir. 1984.))

ERISA’s purpose is effectuated by its provisions establishing standards of conduct, responsibility, and obligation for fiduciaries and by providing appropriate remedies, sanctions, and ready access to the courts for plan participants and their beneficiaries who are wrongfully denied benefits. (29 U.S.C. § 1001 (b), ERISA §2.) To this end, Congress enacted ERISA provisions requiring that all assets of an employee benefit plan be held in a trust by one or more trustees (29 U.S.C. § 1103 (a), ERISA §403), each of whom is a fiduciary (29 U.S.C. § 1002 (21) (a), ERISA §3 (21) (a)), subject to comprehensive standards of conduct. (29 U.S.C. § 1104-1113, ERISA §404-504.) ERISA dictates that every plan fiduciary shall discharge his duties with respect to plan, “solely in the interest of the participants and beneficiaries” and with the “care, skill, prudence, and diligence” that a prudent person “familiar with such matter” would use when acting under similar circumstances. See: Donovan v. Estate of Fitzsimmons, 778 F.2d 298, 302 (7^th Cir. 1985.); 29 U.S.C. § 1104 (a) (1), ERISA §404 (a) (1)^[5].

ERISA was created for the benefit of plan participants and beneficiaries and to regulate the conduct of ERISA fiduciaries, not to shield the fiduciaries from responsibility and liability for their breaches of fiduciary duty. Firestone Tire & Rubber Co. v. Bruch, 109 S. Ct. 948, 955 (1989).

ERISA Plan Administrators and other ERISA fiduciaries are under an obligation to communicate with a plan participant, and to fully inform a plan participant of the material facts necessary to assist with a claim.  ERISA requires that fiduciaries “discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and—(A) for the exclusive purpose of: (i) providing benefits to participants and their beneficiaries. . .” ERISA § 404(1), 29 U.S.C. § 1104.

Courts have held that an ERISA fiduciary is specifically charged with the obligations of a trustee, who “is under a duty to communicate to the beneficiary material facts affecting the interest of the beneficiary which he knows the beneficiary does not know and which the beneficiary needs to know for his protection.”  Krohn v. Huron Memorial Hospital, 173 F.3d 542, 548 (6th Cir. 1999) (citing Restatement (Second) of Trusts).

A fiduciary must give complete and accurate information in response to participant’s questions.  Drennan v. General Motors, 977 F.2d 246, 251 (6th Cir. 1992).  “Misleading communications to plan participants regarding plan administration (for example, eligibility under a plan, the extent of benefits under a plan) will support a claim for breach of fiduciary duty.”  Id., citing Berlin v. Michigan Bell Telephone Co., 858 F.2d 1154, 1163 (6th Cir. 1988).  A fiduciary breaches its duties by materially misleading plan participants, regardless of whether the fiduciary’s statements or omissions were made negligently or intentionally.  Berlin, 858 F.2d at 1163-64.  Finally, the Sixth Circuit has agreed:

The duty to inform is a constant thread in the relationship between beneficiary and trustee; it entails not only a negative duty not to misinform, but also an affirmative duty to inform when the trustee knows that silence might be harmful.

Krohn v. Huron Memorial Hospital, 173 F.3d 542, 548 (6th Cir. 1999), citing Bixler v. Central Pa. Teamsters Health and Welfare Fund, 12 F.3d 1292, 1300 (3rd Cir. 1993).

For example, when an employer, as plan administrator, distributes a brochure promising accidental death and dismemberment (ADD) coverage with a total disability provision and solicit enrollment at that time, and then later actually provides ADD coverage without a disability provision, all the while never informing plan participants of the material difference between what was promised and what was provided, is to materially mislead plan participants.  It is, therefore, a breach of fiduciary duty. Berlin v. Michigan Bell Telephone, 858 F.2d at 1163-64.  This behavior is precisely “misleading communications to plan participants regarding plan administration (for example, eligibility under a plan, the extent of benefits under a plan) [that] will support a claim for breach of fiduciary duty.” Drennan v. General Motors, 977 F.2d at 251.

once an ERISA beneficiary has requested information from an ERISA fiduciary who is aware of the beneficiary’s status and situation, the fiduciary has an obligation to convey complete and accurate information material to the beneficiary’s circumstance, even if that requires conveying information about which the beneficiary did not specifically inquire.” [Kenseth v. Dean Health Plan, Inc., 610 F.3d 452 (7th Cir. 2010)] at 466 (emphasis in original) (alteration omitted) (quoting Gregg v. Transp. Workers of America Int’l, 343 F.3d 833, 845-46 (6th Cir. 2003)). “Regardless of the precision of his questions, once a beneficiary makes known his predicament, the fiduciary ‘is under a duty to communicate … all material facts in connection with the transaction which the trustee knows or should know.'” Id. at 467 (alteration in original) (quoting Restatement (Second) of Trusts § 173, cmt. d (1959)).

Killian v. Concert Health Plan, 2013 U.S. App. LEXIS 22657, 34-35 (7th Cir., 2013)

Endnotes

¹ 29 U.S.C. § 1002(16)(A)

² Donovan v. Estate of Fitzsimmons, 778 F.2d 298, 302 (7^th Cir. 1985.); 29 U.S.C. § 1104 (a) (1), ERISA §404 (a) (1).

³ Krohn v. Huron Memorial Hospital, 173 F.3d 542, 548 (6th Cir. 1999), citing Bixler v. Central Pa. Teamsters Health and Welfare Fund, 12 F.3d 1292, 1300 (3rd Cir. 1993).

⁴ 29 U.S.C. § 1132(c).

⁵29 U.S.C. §1104, ERISA §404 sets out strict duties for ERISA fiduciary:

‘(a) Prudent Man Standard of Care.–

Subject to §§403(c) and (d), 4042, and 4044, a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries, and –

(A) for the exclusive purpose of:

(i) providing benefits to participants and their beneficiaries; and ••••

(B) with the care, skill, prudence, and diligence under the circumstances than prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims;

(C) by diversifying the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so; and

(D) in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of this title and title IV.’ (Emphasis Added.)