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A Service of OnQue Technologies, Inc. |
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What Is Your ERISA Fiduciary Duty To
Beneficiaries?
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August 14, 2003
Santa Rosa, CA |
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Employers and plan administrators who administer COBRA continuation coverage (and other benefits plans)
have a special duty under federal law to protect the interests and rights of participants and beneficiaries.
This is known as the ERISA fiduciary duty, or the duty of loyalty. The U.S. Supreme Court has held that
plan participants and beneficiaries may bring individual claims under ERISA for breach of this duty,
separate from the statutory penalties available for failing to properly administer benefits plans.
Unfortunately, the law provides only general guidance as to who is a fiduciary and what constitutes a
breach of duty. The Department of Labor (DOL) advises that fiduciary responsibility will depend on the
specific facts of each situation.
This COBRA Tip discusses the fiduciary responsibilities employers have to plan participants and beneficiaries
under ERISA, and makes reference to a recent federal court case, Weeks v. Western Auto Supply, in which an
employer was sued because its Human Resources Manager supplied wrong information to a COBRA beneficiary.
Although the Weeks case was ultimately dismissed, other courts have ruled against employers in very similar
fact situations. Defending against breach of duty lawsuits can be very expensive, whether won or lost.
Who is an ERISA fiduciary?
The Employee Retirement Income Security Act (ERISA) is the federal law that governs standards for
health and retirement plans administered by private sector employers. It requires plans to provide
participants with accurate information regarding benefits and imposes fiduciary duties on anyone who
exercises discretionary control or authority over benefits plans.
Before deciding whether a breach of duty has occurred, it is necessary first to define "fiduciary" for
ERISA purposes. A person who acts in a fiduciary relationship to another is held to a higher legal standard
than an ordinary person, who may be merely negligent when committing erroneous acts that harm another.
Fiduciaries hold plan assets in trust for beneficiaries and administer benefits under those plans;
therefore they have a special legal duty to act in the best interests of those beneficiaries.
ERISA specifically defines a person or entity as a plan fiduciary if that person:
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Exercises any discretionary authority or discretionary control respecting management of the benefits plan,
or disposition of its assets; or
- Has any discretionary authority or discretionary responsibility in the administration
of the benefits plan.
The Department of Labor (DOL), which enforces ERISA, explains:
"Fiduciary status is not just a matter of title. If a person exercises the requisite authority over
plan administration, then that person is a fiduciary." The Weeks case was dismissed because the judge
didn't think the employer's designated Human Resources Manager was an ERISA fiduciary.
What are a fiduciary's duties?
The primary responsibility of fiduciaries is to administer the benefits plan solely in the
interest of participants and beneficiaries for the purpose of providing benefits. Fiduciaries
must follow the terms of plan documents to the extent that the terms of the plan are consistent
with the law under ERISA. A breach of this duty can occur through affirmative acts or inaction,
and "courts can take whatever action is appropriate against fiduciaries that breach their duties
under ERISA," according to the DOL.
When faced with the issue, many courts have ruled that ERISA fiduciaries have a duty to disclose truthful
and complete information, particularly when specific inquiries are made regarding benefits. In one such case,
an employer breached its duty by failing to inform a beneficiary about COBRA election rights when asked about
conversion rights under a health plan. A breach of duty can also occur when a fiduciary makes false
representations regarding employee benefits. When faced with the issue, many courts have ruled that
ERISA fiduciaries have a duty to disclose truthful and complete information, particularly when specific
inquiries are made regarding benefits. In one such case, an employer breached its duty by failing to
inform a beneficiary about COBRA election rights when asked about conversion rights under a health plan.
A breach of duty can also occur when a fiduciary makes false representations regarding employee benefits.
How is "discretionary authority" determined?
The judge in Weeks v. Western Auto Supply took a very literal view of the definition of fiduciary, and the
outcome seems clearly harsh from the beneficiary's point of view. Given the same set of facts, other courts
have not been so strict in their interpretation of the ERISA duty, ruling that employers can be liable for
breach of duty based on the acts of employees. For example, in a successful suit against Wal-Mart, the
beneficiary was instructed to consult a service representative about obtaining health coverage. He did so,
and was given incorrect advice. In that case, a federal appeals court noted that when an employee of the
plan administrator gives misleading information, which beneficiaries are justified in relying upon, then
the plan may be sued for breach of fiduciary duty.
Conclusion:
Despite the court's ruling in Weeks that the Human Resources Manager was not a fiduciary, it would be a
mistake to conclude that employees and others who act in official capacities on behalf of a benefits plan are
merely functionaries immune to charges of breach of duty. Whether a person acts as a fiduciary under ERISA
when administering COBRA will be decided in each case, taking into consideration the amount of decision-making
authority the person has, how much he or she knows about the operations of the benefits plan, and to what
extent the person has authority to act on behalf of the plan. Whether or not you agree with the outcome in the
Weeks case, remember that administration of rights and benefits under group health plans carries with it a high
level of duty for the protection of the plan's beneficiaries. To avoid allegations of breach of duty, it is
important to provide beneficiaries with as much information about benefits as possible, particularly when
responding to specific inquiries.
For general information about ERISA, click here:
Department of Labor Employment Benefits Security Administration
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Related Court Case |
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HR Manager Gives Wrong Information About COBRA Benefits |
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This information is provided by
OnQue Technologies, Inc. for educational purposes only and does not constitute
legal advice. If legal advice or other professional assistance is required, the
services of a competent professional should be sought.
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Copyright © 2003 OnQue Technologies, Inc. All Rights Reserved.
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