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ERISA Compliance FAQs: Fiduciary Responsibilities Pt. 2

The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that sets minimum standards for employee benefit plans maintained by private-sector employers. ERISA includes requirements for both retirement plans (for example, 401(k) plans) and welfare benefit plans (for example, group health plans). ERISA has been amended many times over the years, expanding the protections available to ERISA benefit plan participants and beneficiaries.

ERISA includes standards of conduct for those who manage employee benefit plans and their assets, who are called “fiduciaries”.

This is a continuation of our Compliance Overview on frequently asked questions (FAQs) to help employers understand the basic fiduciary responsibilities applicable to plans under ERISA.

How Do the Fiduciary Duty Rules Affect Plan Operation?

Employee Contributions

If a plan provides for salary reductions from employees’ paychecks for contribution to the plan or participants make payments directly, such as the payment of COBRA premiums, the employer must deposit the contributions in a plan trust in a timely manner.

ERISA requires that participant contributions be deposited in the plan as soon as it is reasonably possible to segregate them from the company’s assets, but no later than the 15th business day of the month following the month in which the contributions were withheld from the employee’s paycheck. If employers can reasonably make the deposits sooner, the DOL will establish that date as the individual employer’s deadline for contribution remittance. For plans with fewer than 100 participants, salary reduction contributions deposited with the plan no later than the seventh business day following withholding by the employer will be considered contributed in compliance with the law.

Important Exception to ERISA’s Trust Requirement:

For participant contributions to cafeteria plans (also referred to as Section 125 plans), the DOL will not assert a violation solely because of a failure to hold participant contributions in trust. Other contributory health plan arrangements may obtain the same trust relief if the participant contributions are used to pay insurance premiums within 90 days of receipt.

Hiring Service Providers

Hiring a service provider in and of itself is a fiduciary function. When considering prospective service providers, an employer should provide each of them with complete and identical information about the plan and the desired services so that the employer can make a meaningful comparison. Some actions fiduciaries need to consider when selecting a service provider include:

  • Getting information from more than one provider;
  • Comparing providers based on the same information (for example, services offered, experience and costs);
  • Obtaining information about the provider itself, including financial condition and experience with plans of similar size and complexity;
  • Evaluating information about the quality of the firm’s services, including:
  • The identity, experience and qualifications of the platform and the professionals who will be handling the plan; 
  • Any recent litigation or enforcement action that has been taken against the provider and the provider’s experience or performance record; 
  • Evaluating cybersecurity controls in place with providers;
  • Ensuring that any required licenses, ratings or accreditations are up to date (for example, insurers, brokers, TPAs, health care service providers).
  • Reviewing that fees are reasonable.

An employer should document its selection (and monitoring) process, and, when using an internal administrative committee, should educate committee members on their roles and responsibilities.

Evaluating Fees

Fees are just one of several factors fiduciaries need to consider in deciding on service providers. When the fees for services are paid out of plan assets, fiduciaries will want to understand the fees and expenses charged and the services provided.

In comparing estimates from prospective service providers, employers should ask which services are covered for the estimated fees and which are not. Some providers offer a number of services for one fee, sometimes referred to as a “bundled” services arrangement. Others charge separately for individual services. Employers should compare all services to be provided with the total cost for each provider and consider whether the estimate includes services the employer did not specify or want. Remember, all services have costs.

Some service providers may receive additional fees from third parties, such as insurance brokers. Employers should ask prospective providers whether they get any compensation from third parties, such as finder’s fees, commissions or revenue sharing.

Plan expenses may be paid by the employer, the plan or both. In any case, the plan document should specify how fees are paid, and the fiduciary must ensure that those fees and expenses are reasonable, necessary for the operation of the plan, and not excessive for the services provided.

Monitoring Service Providers

An employer should establish and follow a formal review process at reasonable intervals to decide if it wants to continue using the current service providers or look for replacements.

When monitoring service providers, employers should:

  • Review the service providers’ performance; 
  • Read any reports they provide; 
  • Check actual fees charged; 
  • Ask about policies and practices (such as a TPA’s claims processing systems); 
  • Ensure that plan records are properly maintained; and 
  • Follow up on participant complaints.

Maintaining the Plan’s Benefits Claims Procedure

Under ERISA, group health and retirement plans must establish and maintain reasonable claims procedures that allow participants and beneficiaries to apply for and receive the plan’s promised benefits. Fiduciaries must maintain the plan’s procedures. DOL regulations provide minimum standards for benefit claims determinations for ERISA plans (including insured and self-funded plans). While many plans hire benefits professionals or insurance companies to process claims, it is important for an employer to understand the requirements before selecting a service provider who can comply with the standards.

A claim for benefits is a request for a plan benefit made in accordance with the plan’s procedures by a claimant (participant or beneficiary) or a claimant’s authorized representative. Questions concerning plan benefits, coverage and eligibility questions, and casual inquiries are generally not considered claims for benefits.

The key issues to become familiar with are the time frames for deciding claims, the contents for the notices of benefit denials and the standards for appeals of benefit denials. 

Are There Some Transactions That Are Prohibited?

Certain transactions are prohibited under ERISA to prevent dealings with parties who may be in a position to exercise improper influence over the plan. In addition, fiduciaries are prohibited from engaging in self-dealing and must avoid conflicts of interest that could harm the plan.

Prohibited parties (called parties-in-interest) include the employer, the union, plan fiduciaries, service providers and statutorily defined owners, officers and relatives of parties-in-interest. Some of the prohibited transactions are:

  • A sale, exchange or lease between the plan and party-in-interest;
  • Lending money or other extension of credit between the plan and party-in-interest; and
  • Furnishing goods, services or facilities between the plan and party-in-interest.

Other prohibitions relate solely to fiduciaries who use the plan’s assets in their own interest or who act on both sides of a transaction involving a plan. Fiduciaries cannot receive money or any other consideration for their personal account from any party doing business with the plan related to that business.

ERISA includes a number of exemptions that provide protections for the plan in conducting necessary transactions that would otherwise be prohibited. The DOL has the authority to grant additional exemptions. ERISA includes exemptions for many dealings that are essential to the ongoing operations of the plan. One of these exemptions allows the plan to hire a service provider as long as the services are necessary to operate the plan and the contract or arrangement under which the services are provided and the compensation paid for those services is reasonable.

The exemptions issued by the DOL can involve transactions available to a class of plans or to one specific plan. Both class and individual exemptions are available on the DOL’s webpage for technical guidance for employee benefit plans. More information on applying for an exemption is available in the DOL’s Exemption Procedures under Federal Pension Law. This publication and the procedures also apply to group health plans. 

Click here to download your copy of this Compliance Overview. If you have any questions about retirement plan services, or would like to begin talking to a retirement plan advisor, please get in touch by email or by calling (800) 388-1963.

Source: Department of Labor

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