Intro to Self-Funding

Understanding ERISA & Fiduciary Duty

An Introduction to ERISA*

For companies who have moved to self-funding or are considering doing so, ERISA is a name to be familiar with. It is the main governing law for self-funded plans and it is enforced by the Department of Labor (DOL). This is the definition the DOL provides:

“The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that sets minimum standards for most voluntarily established pension and health plans in private industry to provide protection for individuals in these plans.”

With ERISA, there are some key health plan guidelines. Here’s a sampling:

  • Requires plan administrators to give participants important plan information in writing, including plan features and funding
  • Requires plans to create a grievance and appeals process participants can utilize to inquire about decisions made about plan benefits
  • Requires plans to operate with fiduciary duty

What is Fiduciary Duty?

The concept of fiduciary duty is fundamental to self-funding as ERISA was passed to serve as the ultimate consumer protection law. It is meant to ensure that the people who administer a self-funded health plan do so in the most “prudent” way possible, and that they are acting solely with the best interests of participants and beneficiaries in mind and with the exclusive purpose of providing benefits to them.

Primarily, the entity that establishes and operates the plan is considered the official plan administrator. This is typically the employer, the plan sponsor or a board of trustees. Others who assist with the operations of a plan can be considered fiduciaries if they have discretionary powers delegated to them. These entities can include third party administrators (TPAs), brokers, and stop loss carriers – if such entities have agreed to take on fiduciary responsibility.

Two important points the DOL makes regarding fiduciary status are:

  • “Fiduciary status is based on the functions performed for the plan, not by a person’s or entity’s title.”
  • “The key to determining whether individuals or entities are fiduciaries is whether they are exercising discretion or control over the plan.”

Something else to keep in mind regarding fiduciary duty under ERISA is that the protections and prohibitions it sets forth are far stronger – and much different – than those in place with insurance law or normal business practice. In adhering to ERISA law, there is an expectation to maximize both the security and size of plan assets as well as ensure accurate payments to (or on behalf of) eligible plan participants. Fiduciary duty also encompasses the need to accurately and appropriately process plan claims, as well as ensure the payment of only reasonable plan expenses.

Enforcing Fiduciary Duty

There are several ways that questions of fiduciary duty can be brought to the attention of the DOL. For example, an investigation can be initiated based on information from the U.S. Department of Health & Human Services (HHS) or patient advocacy groups. Litigation and lawsuits can also originate from the complaints of participants, informants or others.

When determining if fiduciary duty was exercised appropriately in a self-funded plan, every plan transaction is reviewed individually and each decision is made on a case-by-case basis. The DOL can investigate situations on a civil or criminal basis. If it is determined that fiduciary duty was not carried out – whether intentionally or unintentionally – corporate and personal liability can be at stake.

Despite a fiduciary’s best efforts, plan operation mistakes can happen. The DOL provides programs that provide an avenue to encourage ERISA compliance via voluntary self-correction for a number of specific violations, including failure to pay participant contributions in a timely manner and late filing of forms. For more information, visit the Corrections Programs page of the DOL website.

Self-funded health plans are different from fully insured ones in that they are mainly governed by the DOL and its ERISA law. Many employers who choose the self-funding structure will partner with a TPA, and the two will work together to meet the requirements under this rule.

*Please note: the information on this page provides a simplified overview of ERISA and fiduciary elements. It is not intended as a legal interpretation or advice, nor as a substitute for the advice of legal or health benefits professionals.