How to Comply with ERISA’s Prohibited Transactions Requirements For Group Benefit Plans
November 10, 2020 | By: Joseph M. Hannon, Esq.
The Employee Retirement Income Security Act of 1974 (“ERISA”), the principal federal law which regulates the benefit plans marketed to employers in this country, imposes specific requirements on most employer-sponsored “welfare benefit plans” (defined to include such things as life insurance, medical benefits and disability benefits). Government and church plans are exempted from ERISA, though church plans can elect to subject themselves to ERISA’s requirements. And even if the benefits are self-insured, as is often the case with respect to medical plans, ERISA’s requirements apply. Most employer sponsored health plans, are then, subject to ERISA and its Prohibited Transaction Exemption (“PTE”) rules.
ERISA has two major components: a) reporting and disclosure requirements, and b) the imposition of fiduciary responsibilities on those persons having discretionary authority as to ERISA plans. Stated another way, ERISA’s drafters saw a need to protect welfare benefit plans from self-interested transactions by fiduciaries of the plan; so specific transactions are prohibited. But, as with any rules, exemptions were needed to let fiduciaries (and persons they hire to provide specific services (often referred to as “parties in interest”)) provide necessary services. This article will provide a brief overview of the issues.
Fiduciaries are defined as those persons who have discretionary, as opposed to ministerial, discretion in establishing and/or interpreting a plan’s parameters. The standard of care imposed on ERISA fiduciaries is the so-called “prudent man” standard. Under it, a fiduciary is expected to carry out his/her responsibilities “with the care, skill, prudence, and diligence under the circumstances then 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.” At the same time, a plan fiduciary is expected to “discharge his duties … solely in the interest of [plan] participants (covered employees) and beneficiaries … for the exclusive purpose[s] of: (i) providing benefits to participants and their beneficiaries; and (ii) defraying reasonable expenses of administering the plan” (emphasis added).
As mentioned above, ERISA enumerates specific prohibited transactions. More specifically as it pertains to readers of this article, a fiduciary is prohibited from causing a plan to engage in a transaction if the fiduciary knows or should know that any such transaction constitutes a direct or indirect: (1) sale or exchange, or leasing, of any property between the plan and a party in interest; … and; (3) furnishing of goods, services, or facilities between the plan and a party in interest. In addition, a fiduciary may not: (1) deal with the assets of the plan in the fiduciary’s own interest or own account; (2) act in the fiduciary’s individual or other capacity in any transaction involving the plan on behalf of a party (or represent a party) whose interests are adverse to the interests of the plan or the interests of its participants or beneficiaries; or (3) receive any consideration for the fiduciary’s own personal account from any party dealing with such plan in connection with a transaction involving the assets of the plan.
Read literally, it would be virtually impossible for a plan to function. So, Congress wrote some exemptions into the scheme of prohibited transactions. Most notable for the reader’s purposes are exemptions for
- Contracting or making reasonable arrangements with a party in interest for office space, or legal, accounting, or other services necessary for the establishment or operation of the plan, if no more than reasonable compensation is paid therefor …and
- Any contract for life insurance, health insurance, or annuities with one or more insurers … if the plan pays no more than adequate consideration (and, other conditions, including disclosure of compensation, are met)…
Succinctly, then, compensation for rendering services to an ERISA plan will be acceptable if 1) the services are necessary for the functioning of the plan (e.g., for claims administration), 2) are reasonable, and 3) there’s proper disclosure, when the circumstances call for it.
Affected parties may also apply to the Secretary of the Department of Labor (the “Secretary”) for an exemption based on the particular circumstances of the case. An exemption will not be granted by the Secretary unless the exemption is: (1) administratively feasible; (2) in the interests of the plan and of its participants and beneficiaries; and (3) protective of the rights of the participants and beneficiaries of such plan. Many such prohibited transaction exemptions or “PTEs” have been issued, including ones which address the circumstances under which benefits (and the compensation payable with respect to the procurement of such benefits) may be purchased and others which address the use by employers of captive insurers. There are three types of PTEs: individual (apply to applicant only), class (which may be relied upon by persons in substantially the same factual position) and EXPRO (substantially similar to at least 2 exemptions in last 5 years).
With respect to arrangements specifically involving insurers and third-party administrators of ERISA welfare plans, the Secretary has issued a number of such exemptions. With respect to insurers and the products they sell, PTE 84-24 is the most relevant class exemption. In relevant part, it provides that compensation, e.g., commissions “expressed as a percentage of gross annual premium payments…”, can be paid to an agent or broker under the circumstances outlined in the PTE. These include the disclosure of any such commissions, as well as a “…description of any charges, fees, discounts, penalties or adjustments which may (also) be imposed under the recommended contract…” The PTE was recently amended but not in a way which affect the requirements just outlined. So even though ERISA does not itself specifically require disclosure, the Secretary, by virtue of his enforcement authority, has required it.
When establishing an employee welfare benefit plan, it is essential to eliminate any prohibited transactions and/or ensure that any such transaction is protected by a PTE. If there’s any doubt, it’ a good idea to consult legal counsel.