May 26, 2019

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TPAs, Plan Fiduciaries Should React Proactively to U.S. Department of Labor Settlement

In light of the recent settlement between the U.S. Department of Labor (DOL) and a health plan third-party administrator (TPA), plan fiduciaries and TPAs should re-examine, or even re-negotiate, portions of their current TPA service agreements to avoid potentially significant legal and financial ramifications.

On July 14, 2017, the U.S. District Court for the Southern District of New York approved a settlement agreement between the DOL and MagnaCare—a health plan TPA based in Long Island, New York. The overarching focus of the DOL's lawsuit was the TPA's lack of transparency in its administrative service agreements. Specifically, the DOL's lawsuit alleged that MagnaCare breached its fiduciary obligations due to the lack of clarity surrounding the "network management fees" contained in its administrative service agreements. While MagnaCare maintains the DOL's charges against it were unfounded, the U.S. District Court for the Southern District of New York has approved the settlement agreement.

Pursuant to the settlement, MagnaCare is required to pay, at minimum, $16 million dollars— about $1.5 million to the DOL and at least $14.5 million to compensate its health plan clients for the alleged improper network management fees. In addition to the significant financial penalty, the settlement also includes a detailed guide for how MagnaCare (and presumably other TPAs) must structure their TPA agreements to ensure their fee structures comply with ERISA's fiduciary requirements moving forward, especially as relates to transparency of fees.1

The settlement's implication for TPAs is clear—a TPA has a fiduciary duty to establish and maintain transparent fee arrangements. If a TPA fails to do so, it exposes itself to significant financial risk.

The settlement's impact on health plan fiduciaries is slightly less apparent on its face. Still, the DOL's lawsuit and the subsequent settlement serve as important guidance to health and welfare plan fiduciaries that the DOL is emphasizing the importance of a fiduciary's responsibility to enter into reasonable arrangements and understand the nature of payments received by third-party service providers.

As a result, plan fiduciaries must be increasingly vigilant about their fiduciary duties, namely: (1) ensuring that they carefully review, analyze, and understand each service agreement prior to execution; (2) closely monitoring the fees that those service providers charge the plan to ensure that they are both reasonable and within the parameters of the service agreement; and (3) ensuring that any prohibited transactions, including any conflicts of interest with the plan and participants, are avoided.

Accordingly, TPAs and health and welfare plan fiduciaries alike should use this settlement agreement as a tool for negotiating, or re-evaluating, their current and future TPA administrative service agreements.


1Additionally, the DOL required MagnaCare to rework its claims procedures—specifically those relating to emergency medical care—to ensure that those procedures comply with ERISA.
© Polsinelli PC, Polsinelli LLP in California

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David Isaacson, Polsinelli Law Firm, Chicago, Employment Law Attorney
Associate

As an associate in the firm’s Employee Benefits and Executive Compensation practice, David Isaacson counsels public and private companies of all sizes and across all industries to help address the full range of legal, financial, and administrative issues relating to their compensation and benefit plans in order to attract, motivate, and retain employees. He works with seasoned Polsinelli employee benefits and executive compensation attorneys to provide counseling services that align legal strategies with practical approaches to achieve successful outcomes for each client...

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Henry Talavera, Polsinelli PC, Retirement Plan Implementation Lawyer, Employee Benefits Attorney
Shareholder

Henry Talavera’s experience representing clients before the IRS and U.S. Department of Labor, along with his prior experience as a federal government attorney, enables him to handle complex issues for clients.

Henry has a broad-based, comprehensive practice that involves all areas of employee benefits law related to benefit programs and arrangements for employees, directors, and independent contractors. His extensive experience includes guidance relating to public, private, and tax-exempt employers on the design, implementation, and administration of all types of welfare plans and tax-qualified retirement plans, including defined benefit and plans intended to qualify under sections 401(k), 403(b) and 457(b) of the Internal Revenue Code.

214.661.5538
Steven L. Imber, Polsinelli PC, Insurance Regulatory Attorney, Enforcement Actions Lawyer,
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Steve Imber chairs Polsinelli's Insurance Business and Regulatory group.  As a former General Counsel at a state insurance department, Steve Imber has the knowledge and experience to provide quality counsel to insurers, third party administrators, insurance agencies, medical discount plans and other insurance regulated entities. His practice includes representing and assisting clients on multi-state and national licensing projects, research projects, enforcement actions, market conduct examinations, audits and compliance programs and various other regulatory and...

913.234.7469
Shareholder

Justin Liby has a talent for organizing and managing large national and multi-state licensure and research projects. This knack provides him with a solid foundation for crafting and implementing sound, efficient strategies that achieve success for his clients. Justin concentrates his efforts on helping the insurance industry navigate the formidable federal and state regulatory maze to achieve the industry’s business needs. He stays current in the insurance industry's evolution, as well as the legislation and regulatory activity impacting the industry.

...
913-234-7427
Counsel

Jennifer Osborn Nix works diligently for insurance companies, third-party administrators, and other regulated entities to further their goals and help them remain compliant within the 50-state regulatory scheme. She focuses on insurance regulatory and compliance issues, with a primary emphasis on life and health insurance matters.

Jennifer works with many regulated entities, including many in the health care sector, who rely on her for research, advice, strategic counsel, and licensing.

913.234.7472