On May 14, 2014, in Hi-Lex Controls, Inc. v. Blue Cross Blue Shield of Michigan, the US Court of Appeals for the Sixth Circuit affirmed district court rulings that a third-party administrator (TPA) functioned as an ERISA fiduciary, that it breached its fiduciary duties under ERISA by failing to disclose fees to an employer, and that the employer's claims were not time-barred (Nos. 13-1773, 13-1859 (6th Cir. May 14, 2014)).

Under administrative services agreements (ASAs) first entered into in 1991, Blue Cross Blue Shield of Michigan served as the TPA for a self-funded health plan sponsored by Hi-Lex Controls, Inc., an automotive supply company with approximately 1,300 employees. In exchange for administering employee claims and offering the employer access to its provider networks, the TPA charged the employer a monthly administrative fee. In 1993, the TPA began retaining additional, undisclosed fees from amounts transferred to it by the employer to pay claims. After learning of the undisclosed fees several years later, the employer sued the TPA in district court claiming, among other things, that the TPA breached its ERISA fiduciary duties by inflating plan hospital charges with hidden fees. The district court ruled that the TPA was an ERISA fiduciary and that it violated ERISA's prohibition on fiduciary self-dealing (in addition to ERISA's general fiduciary duties), and that the employer's claims were not time-barred. The TPA appealed.

Affirming the district court, the Sixth Circuit concluded that the TPA functioned as an ERISA fiduciary regarding the employer's health plan. The court noted that it had recently concluded, in a separate case involving the same TPA, that the TPA was an ERISA fiduciary:

The TPA argued that it was not an ERISA fiduciary because ERISA fiduciary status does not arise if a contract gives one party the unilateral right to retain funds as compensation for services under an ERISA plan. The court rejected that argument and cited to an exception to the rule where the contract allows the party to exercise discretion regarding the right to retain funds. The court also noted that the ASA gave the TPA discretion to determine the amount of the disputed fees -- a right the TPA exercised.

The Sixth Circuit affirmed the district court's conclusion that the employer's claims were not time-barred under ERISA's statute of limitations because the employer could validly invoke the extended six-year statute of limitations, measured from the date the violation was discovered, for cases involving fraud or concealment. The Sixth Circuit concluded that the TPA committed fraud by knowingly misrepresenting information about the disputed fees in the ASA, Form 5500 Schedule As and monthly claims reports. This included a representation to the employer in annual renewal documents that the TPA's administrative fees were "all-inclusive."

TPAs and employers may find instructive the Sixth Circuit's analysis of the factors supporting its conclusion that the TPA held plan assets and therefore functioned as an ERISA fiduciary. Notably, the Court was not persuaded by the TPA's argument that neither it nor the employer maintained a separate bank account set aside exclusively for funds intended to pay participants' expenses. Although no trust was created in this case, the factors identified by the court, which included SPD language, were sufficient to establish the employer's intent to place plan assets with the TPA.