Association Health Plans

On June 5th, the Department of Labor (DOL) and defendants in the Associated Industries of the Inland Northwest (AIIN) ERISA litigation reached a settlement and consent order which was submitted to Eastern Washington Chief United States District Court Judge Thomas Rice. The proposed settlement ends two years of litigation over DOL alleged violations of ERISA’s interested party transaction rules, fraud, and breach of fiduciary duties. In reaching the settlement, defendants neither admitted nor denied DOL allegations.

Apart from the obvious direct impact of the settlement on the Trusts spun out of the original AET Trust (the Associated Employers Trust, Commercial Construction Health and Welfare Trust, Columbia Retail Benefits Trust, Greater Columbia Manufacturing Benefits Trust, Greater Northwest Health Industry Benefits Trust, and Pacific Business Resource Benefits Trust), DOL’s settlement terms provide some important insights into regulatory expectations for those who administer association health plans (AHPs). Below I highlight settlement terms and emphasize aspects of the settlement that should inform AHP Trust operations.

The Settlement

To understand the settlement, here is a brief dictionary of terms used:

  • Defendants” – James DeWalt; Robert G. Bakie; Jack L. Fallis, Jr.;
    Jeffrey A. Barton; Associated Industries Management Services, Inc.
    (“AIMS”); Associated Industries of the Inland Northwest (“AIIN”); and
    Associated Employers Health and Welfare Trust (“AET Trust”).
  • Trusts” – all five trusts named above and connected to AIIN.
  • Paying Defendants” – James DeWalt; Robert G. Bakie; Jack L. Fallis, Jr.; Jeffrey A. Barton; AIMS; and AIIN.
  • TPA Provider” – any company providing administrative services to the Trusts.
Money

The Paying Defendants must pay $1,000,000 to AIIN to be held for the benefit of the Trusts.

The Paying Defendants must pay a fine of $200,000 to DOL.

Each side must cover their own costs, expenses, and attorney fees.

Trustees

AIMS employees are barred from serving as Trustees for any of the Trusts. Each of the Trusts must have at least three trustees appointed by participating employers. An individual may serve as Trustee on more than one of the Trusts; therefore, it’s theoretically possible to have three individuals serving as Trustees for all of the Trusts. Any employer employed by or compensated by AIMS or by a company controlled by AIMS cannot participate in Trustee selection.

An Independent Fiduciary

Each of the Trusts, individually and collectively, must retain an “Independent Fiduciary” from three candidates provided by DOL. The Independent Fiduciary will be paid reasonable compensation from the settlement funds which may otherwise be spent for the benefit of Trust participants. The Independent Fiduciary will oversee the Trusts until December 31, 2027 operating under a three-year renewable contract unless another Independent Fiduciary replaces the initial chosen Fiduciary.

Trust Contracts

The Independent Fiduciary “will have the sole responsibility and authority to select all TPA Providers for the Trusts.” Every TPA Provider must disclose to the Trusts all direct and indirect compensation in connection with Trust services from any source other than the Trust and must transfer to the Trust any such compensation not disclosed.

The Independent Fiduciary has sixty days from the date of appointment to make a request for proposals for TPA Providers and must consider at least three bids. The Fiduciary must select the best proposal but is not required to select the cheapest. If AIMS submits a bid and is selected, the Trust must put the AIMS contract out for bid at least every three years.

Compensation Disclosure

Each Trust must disclose, either on their website or in an attachment to the group master application provided to employers, all compensation paid to service providers that is calculated as a percentage of contributions or premiums. If compensation is expressed as a percentage fee, the disclosure must include the Trust’s “load table…which shall include the percentage of the quoted rate that will be paid to the insurance carriers for premiums and the aggregate percentage that will be paid to each Disclosed Provider for fees.”

In addition, the disclosure must list and describe any direct or indirect compensation paid but not included in the percentage disclosure along with a certification by the Trustees that no other undisclosed compensation has been provided. If a PEPM formula is used, the Trust must provide an illustration of the calculation and the disbursement of the amount calculated. All of this information must be included in an addendum in each participating employer’s monthly Trust billing.

Training

All Trustees and service provider staff with Trust duties must receive annual fiduciary training from a qualified attorney that includes training in the Trust’s structure and operation.

ERISA Compliance Insights

A review of the twenty-seven page settlement agreement provides the following insights into DOL tolerance for various methods of administering AHPs and compensating Plan service providers.

  • DOL did not prohibit the Trusts from contracting with the AIMS or AIIN; rather, DOL required regular, competitive bidding for any arrangement with AIMS or AIIN for goods or services to the Trusts.
  • DOL appears to favor contract duration periods of three years; although, DOL noted that the Independent Fiduciary could exercise judgment in deciding when a contract bid process was in the best interest of Trust beneficiaries if the contract did not involve AIMS or AIIN.
  • DOL did not require particular qualifications for appointment of trustees by participating employers; a trustee need not be a Trust beneficiary nor a Trustee for only one of the Trusts.
  • DOL reiterated the ERISA standard of “reasonable compensation” for Trust administration which does not mean cheapest available.
  • DOL repeated the ERISA standard for fiduciary behavior –  “care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person 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, based on the objectives, risk tolerance, financial circumstances, and needs of the plan(s), without regard to the financial or other interests of [themselves or others].”
  • AHPs involved in the collection of fees not intended to pay Plan benefits and administration should exercise extreme caution to avoid characterization of these fees as ERISA Plan assets available only for Plan benefits and reasonable administrative expenses. If an AHP bill includes a fee (membership or otherwise) for the “privilege” of Plan participation to be remitted to the sponsoring association for its own purposes, the fee is not part of Trust operations and must be disclosed and collected from employers in a manner that avoids employee or beneficiary contribution for these non-Plan costs.

Let’s be careful out there.

 

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