5 Steps to Evaluate Your ERISA Liability

In the wake of a lawsuit against Johnson & Johnson (J&J) for alleged breach of fiduciary duty in their benefits planning, employers nationally are reassessing their own vulnerabilities. This post is intended as informational and does not constitute legal advice.

This case, which accuses both the benefits planning committee and individual HR leaders of overpaying on pharmacy costs, has sent ripples through the corporate world, highlighting the potential for similar legal challenges.

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What does ERISA actually say

At the heart of these legal challenges is the concept of fiduciary duty, as defined under the Employee Retirement Income Security Act (ERISA) of 1974. Specifically, ERISA law states: "(B) with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man 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;" (29 U.S. Code § 1104 - Fiduciary duties).

So what does prudent actually mean? This means that a fiduciary's actions are evaluated based on what was known or should have been known, considering the information available at the time, not based on how things turned out later. The issue for employee benefits resides with the lack of publicly available information.

For J&J’s benefit planning committee, was there enough publicly available information on drug prices and other dynamics that they violated their fiduciary duty? It will be difficult to prove yes, but that is the crux of the argument.

Take a step back and quick self-assess the easy things

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1. Your benefit strategy – Have you done or do you have a formal process for a broker or consultant RFP that occurs on a semi-regular basis?

The nice part about the employer<>broker relationship is that the broker consults and provides market expertise on  the majority of the benefits strategy – with oversight from the employer. In this situation, an employer is paying a third party with specific qualifications to design and implement a strategy. But, nearly 1/3rd of employers have had their same broker the past five years. Ensure you have a process in place to justify your choice for your insurance broker or consultant.

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2. Your broker compensation – Is what you are paying your broker excessive?

Broker compensation is a large plan expense each year and therefore could be scrutinized by someone external. Broker compensation benchmarks though are not widely available and only recently have more transparency rules been enacted to see the full picture. Reviewing 25K+ fully insured plans from the most recent 12 months, it is easy to see the variation in broker compensation. For employers of similar size ranges and industry, broker compensation can vary by 3X+ from the 25th percentile to the 75th percentile. While geography and several other plan design features can have an effect, the values should be more closely centered around the mean.

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3. Other ERISA payouts – What are your other plan expenses that could be scrutinized?

Each plan is different and can vary based on your benefits strategy. Therefore each plan can have different expenses that are material – some can be pharmacy carve out related, tax strategy driven or other programs. Evaluate you major line items to ensure their amount can be justified.

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4. Contracts & Gag Clauses – Do your contracts follow the new legal guidelines?

Defined as contractual terms that restrict the sharing of cost, quality, or claims data with plan members or sponsors, gag clauses have come under scrutiny. Code section 9824, ERISA section 724, and PHS Act section 2799A-9, a “gag clause” is a contractual term that directly or indirectly restricts specific data and information that a plan or issuer can make available to another party. The federal government now requires employers to attest annually that their contracts do not have gag clauses. This is an easy one – make sure you are following the regulations.

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5. Correct Tax Filings – Are your Dept of Labor filings accurate or a source of potential liability?

As you know, if you have 100+ employees, you have to file your benefit plan each year with the Dept of Labor; if under 100 and you offer a retirement plan, you also have to file. This form and process are nuanced at best. Fully-insured companies have a litany of items to report, self-insured items are limited.

10% of employers over the last five years have a material issue with one of their filings including missing schedules, incorrect broker compensation, materially wrong data reported and more. This is an easy way to open yourself up to liability.

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In this evolving legal landscape, understanding and fulfilling your fiduciary duty is more critical than ever. The lawsuit against J&J serves as a stark reminder of the potential consequences of failing to meet these obligations. We're committed to helping employers navigate these complexities with our free assessment service.

If you would like to see the broker compensation benchmarks for your industry, region and size or a short assessment of your Dept of Labor filings, feel free to reach out to us directly.

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