It took nine years in the case of Butler v. United Healthcare of Tennessee to determine who was responsible for a denied group health benefit claim.
The patient, covered by her husband’s ERISA health benefit plan, sought treatment for inpatient rehabilitation for substance abuse. Treatment for which was denied by United. The patient ultimately received the benefits to which she was entitled.
The important takeaway from this case is who is responsible for the improper administration of a welfare benefit plans: the plan sponsor or claims administrator?
Here’s the short version.
After seven years’ worth of internal claims reviews, trips to the Federal district court, remands to the plan for reconsideration, the Federal District Court required United to pay benefits plus interest and $99,000 in statutory penalties for its “arbitrary and capricious” decisions. The statutory penalty was awarded on the basis of United’s failure to play fair under the Department of Labor regulations governing the internal claims appeal process.
On appeal, the U.S. Court of Appeals for the Sixth Circuit, agreed that United had improperly denied the group health claim, but reversed the lower court’s award of statutory penalties. However, the statutory penalty of up to $110 per day applies to Plan Administrators that fail or refuse to respond to participant’s requests for documents and information enumerated in Section 104(b)(4) of ERISA within 30 days.
United’s failure to comply with the claims review requirements under a different statutory provision was determined not to be subject to the statutory penalty for violating ERISA Section 104(b)(4).
The Court’s opinion also concluded that the ERISA statutory penalty could not be assessed against United because it applies only to the “Plan Administrator,” not just any service provider. The Court held that the plan sponsor was the “Plan Administrator” in the absence of any contrary designation in the plan document. Accordingly, United, as the claims administrator, could not be tagged with the statutory penalty.
This case reflects the real world in that the plan sponsor is almost always the “Plan Administrator” with ultimate responsibility for plan operations. It follows that plan sponsors, as fiduciaries, could be saddled with liability for the conduct of non-fiduciary plan service providers.
But note that the holding in Butler that statutory penalties do not apply to violations of the DOL’s claims review regulations is not universal, and some courts have ruled otherwise. So, it is entirely possible that a case like Butler in another jurisdiction could result in the assessment of statutory penalties against the employer in addition to the judgment against the service provider for payment of the contested benefits plus interest.
A typical service agreement for a “claims administrator” vests ultimate authority over claims decisions with the employer as Plan Administrator. At the same time, most employers hire a TPA or claims administrator so they are not involved in deciding claims.
In an insured welfare plan, claims decisions govern the expenditure of insurance company funds, so the employer’s supposed ultimate authority over claims is probably a fiction. However, employers should not have to spend lots of money in attorneys’ fees to prove that proposition in court. Here are two practical suggestions
- The service agreement with the TPA or claims administrator should indemnify the employer for any mistakes of the service provider.
- Adequate fiduciary insurance coverage should be considered for the employer and employees with administrative or investment responsibilities for the plan. Remember, the ERISA fidelity bond protects the plan, not its fiduciaries, so fiduciaries should never rely on a plan’s fidelity bond.
You can read the entire court decision here.
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