Fiduciary And Ethical Responsibility

Question 1

Describe how the prudent expert rule under ERISA differs from the traditional prudent man rule under the common law of trusts.

Answer 1

The prudent expert rule under ERISA differs from the traditional prudent man rule under the common law of trusts in three important respects:

1) The plan fiduciary under ERISA must invest plan assets not in the same way as he or she would handle his or her personal estate but must look to how similar pension plans under similar circumstances are being invested.
2) . An ERISA fiduciary must exercise the skill of an expert in the management of pension plans.
3) . The focus is not on the performance of the individual plan investment that and how the investment contributes to the net performance of the pension portfolio as a whole.

Question 2

What trade-offs should be weighed in investing a pension plan portfolio under the prudent expert rule?

Answer 2

When investing a pension plan portfolio under the prudent expert rule, the fiduciary should weigh the risk of loss against the opportunity for gain, taking into consideration the following elements:

1) The liquidity and current return of the portfolio relative to the liquidity requirements of the plan.
2) The projected return of the portfolio relative to the funding objectives of the plan.
3) The composition of the portfolio with regard to diversification.

Question 3

Are a plan administrator’s decisions on benefits claims accorded deference by the courts? Explain.

Answer 3

A plan administrator’s decisions and benefits claims normally are accorded deference by the courts unless there is a substantive issue raised as to whether:

A. The relevant terms of the plan are overly vague or ambiguous.
B. The plan document fails to expressly include a provision that the courts should defer to the administrative decisions of the plan’s fiduciaries, or
C. There is an apparent conflict of interest, and the fiduciary would be personally or institutionally affected by the benefit decision.

Question 4

What is a prohibited transaction?

Answer 4

A prohibited transaction occurs under ERISA if a fiduciary causes the plan to engage in a transaction with a parity in interest that would constitute the:

A. Sale or exchange, or leasing, of any property between the plan and a party in interest.
B. Lending of money or other extension of credit between the plan and a party in interest.
C. Furnishing of goods, services for facilities between the plan and a party in interest.
D. Transfer to or use by or for the benefit of a party in interest of any assets of the plan.
E. The acquisition, on behalf of the plan, of any employer security or employer real property not otherwise specifically exempted by law or regulation.

Question 5

Who is a party in interest?

Answer 5

The term “party in interest” is broadly defined as including nearly everyone who has a direct or in direct association with a plan and specifically includes, but is not limited to, the following:

A. A plan fiduciary (such as an administrator, officer, trustee or custodian of the plan).
B. The legal counsel or employee of the plan.
C. Any other person providing services to the plan.
D. An employer whose employees are covered by the plan.
E. An employee organization, any of whose members are covered by the plan.
F. A direct or indirect 50% or more owner of an employer sponsor of the plan.
G. Certain relatives of the foregoing persons.
H. The employees, officers, directors and 10% shareholders of certain other parties in interest.
I. Certain persons having a statutorily defined direct or indirect relationship with other parties in interest.

Question 6

Explain how a plan fiduciary can obtain an exemption from a prohibited transaction restriction.

Answer 6

Upon application to the secretary of labor, a plan fiduciary may request an exemption to prospectively enter into what would otherwise be deemed a prohibited transaction upon the secretary’s finding that granting such an exemption would be administratively feasible, demonstrably in the interests of the plan and of its participants and beneficiaries, and otherwise protective of the rights of the plans participants and beneficiaries.

NOTE: The pension protection act of 2006 amended ERISA to provide six broad new exemptions from the prohibited transaction rules including transactions between plans and persons who are parties in interest by reason of being service providers to such plans.

Question 7

Who is a fiduciary under ERISA?

Answer 7

ERISA defines a plan fiduciary as any person who:

A. Exercises any discretionary authority or control over the management of a plan.
B. Exercises any authority or control concerning the management for disposition of its assets, or
C. Has any discretionary authority or responsibility in the administration of the plan.

Question 8

Is fiduciary status limited to those individuals with a formal title? Explain.

Answer 8

Fiduciary status extends not only to those persons named in the plan documents as having express authority and responsibility in the plans investment for management but also covers those persons who exercise any discretion or control over the plan regardless of their formal title. Fiduciary status under ERISA depends on a person’s function, authority and responsibility; and is not determined to merely on a title or label.

Question 9

Are professional service providers to a plan considered fiduciaries? Explain.

Answer 9

Professional service providers to a plan acting strictly within their professional roles and not exercising discretionary authority or control over the plan or providing investment advice for fees or other compensation are unlikely to be considered fiduciaries of the plan.

Question 10

Need to know-review answer.

Answer 10

Plan trustees and administrators, by the very nature of their functions and authority, would be considered fiduciaries.

A written plan document is required to provide for named fiduciaries having authority to control and manage the plan so that employees know who is responsible for its operation.

ERISA forbids persons convicted of any of the wide variety of specified felonies from serving as a fiduciary advisor, consultant for employee of a plan for a period of the latter of five years after conviction or five years after the end of imprisonment for such crime.

A fine of up to $10,000 for imprisonment for not more than one year may be imposed against the named fiduciary and others for an intentional violation of this prohibition.

Question 11

Explain the penalties involved if a plan fiduciary breaches of fiduciary requirements of ERISA.

Answer 11

A plan fiduciary breaching the fiduciary requirements of ERISA is to be held personally liable for any losses sustained by the plan resulting from the breach. The fiduciary is further liable to restore to the plan any profits realized by the fiduciary through the improper use of the plan assets.

Question 12

What penalties may be imposed on a fiduciary for engaging in a prohibited transaction?

Answer 12

If found to have engaged in a prohibited transaction with a plan, a fiduciary as a disqualified person would be subject to an excise tax payable to the US treasury equal to 15% of the amount involved in the transaction occurring after August 5, 1997, for each year that prohibited transaction was outstanding, plus interest and penalties on this excise tax. This excise tax increases to 100% of the amount involved upon failure to remedy the transaction upon notification.

The secretary of labor may separately assess a civil penalty under ERISA of up to 5% of the amount involved in a prohibited transaction for each year in which it continues, or 100% of the amount involved if not corrected within 90 days of notice from the secretary.

Question 13

May a fiduciary be held liable for breach is committed by a co-fiduciary? Explain.

Answer 13

A plan fiduciary is liable for the fiduciary breaches of other fiduciaries for the same plan if such fiduciary participates knowingly in or knowingly undertakes to conceal and act or omission of a co-fiduciary knowing such action constitutes a breach; imprudently fails to discharge his or her own fiduciary duties under the plan; or has knowledge of the co-fiduciary’s breach and makes no reasonable effort under the circumstances to remedy the breach.

Question 14

Describe how the fiduciary provisions of ERISA may be enforced.

Answer 14

Enforcement of the fiduciary provisions of ERISA may be by civil action brought in federal or state court by a plan participant or beneficiary (individually or on behalf of the class of plan participants and beneficiaries), by the secretary of labor or by another plan fiduciary.

Question 15

May the plan contain a provision relieving a fiduciary of personal liability? Explain.

Answer 15

Exculpatory provisions written into a plan document or other instrument to relieve a fiduciary of liability for fiduciary breaches against the plan are void and not to be given no effect under ERISA. A plan may purchase liability insurance for itself and for its fiduciaries to cover losses resulting from their acts or omissions if the insurance policy permits recourse by the insurer against the fiduciaries in case of a breach of fiduciary responsibility.

Question 16

Describe the bonding requirements for fiduciaries.

Answer 16

Every fiduciary of an employee benefit plan and every other person who handles plan funds or property is required to be bonded, naming the plan as the insured, in an amount fixed at the beginning of each plan year as not less than 10% of the amount of funds handled but in no event less than $1000.

Question 17

In addition to a fiduciary’s personal liability for restoring losses sustained by the plan, what other sanctions may be applied for a breach of the fiduciary’s responsibilities?

Answer 17

In addition to a fiduciary’s personal liability for restoring losses sustained by the plan as a result of a breach of the fiduciary’s responsibilities, the fiduciary also may be liable for:

A. Court-ordered attorney fees and costs incurred to remedy the breach.
B. Punitive damages awarded by a court against the fiduciary.
C. Special damages in an amount equal to the profits received by a fiduciary resulting from the wrongful use of plan assets.
D. Mandatory assessment of a civil penalty equal to 20% of the amount recovered by the secretary of labor on account of a fiduciary breach.

Question 18

May the fiduciary responsibility of investing the assets of the plan be transferred to an investment manager? Explain.

Answer 18

In duly appointing an investment manager in writing and in accordance with the procedural requirements of ERISA, the fiduciary responsibility for investing or otherwise managing the assets of the plan may be transferred to the manager within the terms of the delegation. Yet, the named fiduciary would still be held liable for imprudently selecting or retaining the Manager or for permitting, concealing or failing to remedy a known breach of that fiduciary’s responsibility to the plan.

Question 19

How is and ERISA plan, fund or program established?

Answer 19

Generally, a plan, fund or program under ERISA is established if, from the surrounding circumstances, a reasonable person can ascertain the intended benefits, a class of beneficiaries, the source of financing, and procedures for receiving benefits.

So, for example, an informal severance practice can be an ERISA plan if a pattern of benefits has developed over the years. The “bare purchase of insurance” generally constitutes an establishment or maintenance of a plan, but only if the employer contributes to the plan or otherwise endorses it.

Question 20

Define a participant or beneficiary for the purpose of an ERISA benefit claim.

Answer 20

An ERISA benefit claim can be brought by a participant or beneficiary. For this purpose, a participant is any employee or former employee who is for may become eligible to receive a benefit, or whose beneficiaries may become eligible to receive a benefit. A nonemployee in an ERISA plan (such as a partner or owner) is considered a beneficiary with standing to pursue a benefit claim. Also, under ERISA, a benefit claim can be brought for benefits due, or for declaration of a right to future benefits; generally extra-contractual damages and punitive damages are unavailable.

Question 21

Need to know-review answer.

Answer 21

The subject of numerous US Supreme Court decisions, the appropriate equitable relief provision of ERISA section 502(a)(3) continues to generate much debate over its scope and meaning. Interpretation disputes often occur over cases other than those brought by participants or beneficiaries seeking a claim of benefits or those brought by a medical plan trying to enforce subrogation rights or recover an overpayment of benefits.

Question 22

What level of protection does ERISA section 510 offer?

Answer 22

ERISA section 510 is the nonretaliation, nondiscrimination provision. An employer cannot terminate an employee to avoid benefit coverage or benefit claims. But the employer can change plan design even if it has an adverse impact on one employee or a group of employees. When there is a general desire to reduce costs, the fact that fringe costs are reduced along with wage costs is not evidence of a section 510 violation. But difficult class action issues arise when a corporate decision (such as a plant closing or layoff) is driven in part by benefit cost considerations.

Question 23

List several special issues that can trigger health plan litigation.

Answer 23

The following have been cited as special issues that can trigger health plan litigation:

1. Failure to provide COBRA notices and coverage
2. Exclusions of experimental medical treatments
3. Erroneous certification claims
4. Reduction or elimination of retiree health benefits

Question 24

Need to know-review answer.

Answer 24

While a third-party administrator (TPA) cannot be sued as a fiduciary under ERISA, and action for promissory estoppel may arise if the TPA misled the plaintiff.

NOTE: Promissory estoppel is the legal doctrine allowing recovery on a promise made without consideration when the reliance on the promise was reasonable, and the promised relied on it to his or her detriment.

Question 25

Discuss ERISA exemption as it relates to health plan litigation.

Answer 25

ERISA prenatal any state law (whether an enacted law, regulation or case law) that relates to an ERISA benefit plan. The term “relates to” has been construed broadly. This type of preemption is known as “conflict preemption”. ERISA does not preempt state laws regulating insurance, securities or banking. But a self-funded ERISA plan cannot be deemed to be an insurer (or banker) for the purpose of applying a state insurance (or banking) law. In addition to ERISA’s express preemption provision, ERISA has been held to preempt any state regulation that directly interferes with ERISA’s enforcement scheme. This is known as “complete preemption” or “field preemption”.

Question 26

Explain how the employee retirement income security act (ERISA) of 1974 went beyond the common law of trust and establishing or extending new legal standards of conduct for plan fiduciaries.

Answer 26

ERISA swent beyond the common law of trusts in the following respects in establishing the following standards:

A. Sole benefit standard - plan fiduciaries are required to act solely in the interest of the plans participants and beneficiaries for the exclusive purpose of providing plan benefits and defraying the reasonable administrative expenses of the plan.

B. Prudent expert rule - a fiduciary must fact with the 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.

C. Diversification rule - it should be noted that under ERISA a fiduciary is still required to diversify plan investments unless it is clearly prudent not to do so, closely resembling the fiduciary principal under the common law of trusts known as the diversification rule.

D. Plan document rule - A fiduciary must follow strictly the terms of the written plan document (unless it is in violation of ERISA) and administer the plan in a fair, uniform and non-discriminatory manner.

E. Prohibited transactions rule - unless otherwise exempted, a fiduciary must not allow the plan to engage directly or indirectly in transactions prohibited under ERISA.

Question 27

Using the health insurance portability and accountability act (HIPAA) enforcement framework, describe the enforcement authority of federal agencies with regards to the patient protection and affordable care act of 2010.

Answer 27

Under the HIPAA enforcement framework, the following federal agencies have enforcement authority:

A. The US Department of Labor (DOL) may enforce PPACA’s insurance market reforms against group health plans through investigations, audits and lawsuits. Moreover, participants and beneficiaries may sue to enforce PPACA’s provisions against noncomplying plans and health insurance issuers. A failure to amend a plan to comply with PPACA, and a failure to administer the plan in compliance with PPACA, could be treated as a breach of fiduciary duty for which the plan trustee may be personally liable.

B. The Internal Revenue Service (IRS) may assess excise taxes upon group health plans (and church plans) that do not comply with PPACA’s Insurance market reforms. For group health plans, the penalty upon a noncomplying plan sponsor is $100 per day of noncompliance per affected individual, and such violations must be self reported to the IRS on IRS form 8928.

The tax is assessed upon the employer or, in the case of a multi employer plan, the plan.

Penalties and other assessments may not be paid from plan assets. Penalties must be paid by either the breaching fiduciary or the fiduciary liability carrier.

C. The department of Health and Human Services (HHS) enforces PPACA’s insurance market reforms against health insurers and nonfederal governmental plans (such as state and municipal employee health plans). HHS may assess penalties of up to $100 per day, per affected individual, for each day of noncompliance.

Question 28

Which of the following statements concerning the duties and liabilities of persons designated as fiduciaries under ERISA is correct?

A. Every person associated with an employee benefit plan is a fiduciary.
B. The standard of care required of fiduciaries is basically not to commit a misdemeanor or felony.
C. Fiduciaries are always jointly and severally liable for the breaches of trust of each other.
D. A planned me purchase liability insurance for its fiduciaries to cover losses resulting from their acts or omissions.
E. An exculpatory clause must be included in a plan.

Answer 28

D. A plan may purchase liability insurance for its self and for its fiduciaries to cover losses resulting from their acts or omissions if the insurance policy permits recourse by the insurer against the fiduciaries in case of a breach of fiduciary responsibility.

Question 29

ERISA provides that a fiduciary shall discharge his or her responsibilities according to which of the following standards?

I. Solely in the interest of the participants and beneficiaries.
II. For the exclusive purpose of providing benefits and defraying reasonable administrative expenses.
III. With the 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.

A.  I only
B.  I and II only
C.  I and III only
D.  II and III only
E.  I, II and III

Answer 29

E. I, II and III.

Question 30

All the following persons are considered parties in interest under the ERISA prohibited transactions provisions EXCEPT:

A. Any fiduciary
B. A participant or beneficiary receiving benefits
C. A person providing services to a plan
D. Any employer or union whose employees or members are covered by a plan
E. A direct or indirect owner of 50% or more of the business interest

Answer 30

B. A participant or beneficiary receiving benefits.