H&W: Don’t Have a Trust? …Are you sure?

Do you self-insure your employee medical benefit plan?  Do you fund benefit claims from your general assets?  Do you use a separate bank account for payment of claims? Have you given thought to whether by doing these things you have unknowingly established an ERISA trust?  If not, read on.

A recent case decided by the United States Court of Appeals for the 9^th Circuit provides a potent reminder that an employer can create a trust for plan assets even if it does not have documents that explicitly mention a trust.  In Barboza vs. California Association of Professional Firefighters (CAPF), the defendant, CAPF, maintained a disability plan for its members.  It was funded by contributions from plan participants which, according to the plan document, were held by the Plan exclusively in the name of CAPF for the benefit of the participants.   The document never used the terms “trust” or “trustee” but the court held that this was immaterial.  The court noted that the plan document required CAPF to hold legal title to “all property, monies and contract rights” as well as all of the funds maintained in connection with the Plan.  This was sufficient to create a fiduciary relationship between CAPF and plan participants – i.e., a trust.

Boy, That’s Really, Really Interesting.  Why Do I Care?

Most employers that have self-funded plans pay benefits from their general assets and, to that extent, ERISA’s trust requirements do not apply.  Many of those employers also require their employees to contribute to the cost of coverage.  Those employee contributions are, by definition, plan assets and ordinarily would need to be held in trust.  However, in guidance dating back to 1992 (TR 92-01), the Department of Labor has assured employers that it would not enforce the trust requirements if the employee contributions were held in general assets and were withheld from the employees’ wages through the operation of a Section 125 (cafeteria) plan.  The guidance also provided relief from the reporting and disclosure requirements that would otherwise apply to a trust; e.g., Form 5500 and Summary Annual Reports.

So, if an employer does use a Section 125 plan to withhold employee contributions, does this mean that it’s home free?  Is life ever that simple?  TR 92-01 makes it clear that it does not apply to the extent that the employer has in fact segregated employee contributions (and employer contributions, for that matter) from its general assets.  And as the Barboza case teaches us, it is possible for an employer to create a fiduciary relationship with respect to given funds, even if it does not necessarily intend to do so.

The result in Barboza flowed directly from the language of the plan document, but that’s not the only route by which fiduciary status can arrive unexpectedly on an employer’s doorstep.  This brings us back to the questions posed at the beginning of this article.  The mere fact that the employer has segregated funds into an account from which it intends to pay benefits may be sufficient to impose a trust on the funds and fiduciary status on the employer with respect to those funds¹.

To determine whether that has, in fact happened, the following are among the questions that should be considered:

• Is the account actual or notional?
• Is the account held in the employer’s name or in the name of the plan?
• Does the documentation surrounding the account suggest that the funds can be used for a purpose other than paying benefits?
• Does the plan document require such an account to be created?
• Has the employer represented to participants that the fund is for the payment of benefits?
• Is the account a “zero-balance” account or can its assets accumulate?
• Does the plan’s TPA write claims checks directly on the account or are account funds deposited into a TPA-owned account for payment of claims?

Unfortunately, the consequences of maintaining these types of arrangements are anything but black or white.  The devil is ever in the details. Employers that believe they are exempt from ERISA’s trust and reporting requirements because they think they are paying claims from general assets should make sure that counsel has reviewed the relevant documentation and employer practices to ensure that they have not inadvertently established a trust.

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¹We have framed this discussion around self-insured plans since they are more likely to experience issues related to fund segregation than are fully-insured plans.  However, it is possible for an employer to create a separate account from which it pays insurance premiums and such accounts can present similar issues.