On April 7, 2015, in Barboza v. Cal. Ass'n of Prof'l Firefighters, the US Court of Appeals for the Ninth Circuit concluded that a third-party administrator (TPA) violated ERISA's prohibited transaction rules involving self-dealing and breached ERISA's fiduciary standards by paying its own fees from plan assets under a long-term disability plan for which the TPA provided administrative services (No. 11–15472, (9th Cir. Apr. 7, 2015)).

The case began as a benefits dispute between a participant in an ERISA-governed long-term disability (LTD) plan and the non-profit corporation that managed the plan on behalf of various California firefighter associations and unions. The corporation hired a third-party administrator (TPA) to handle the plan's day-to-day operations, under an administrative services agreement (ASA) with the plan. The plan was funded by monthly participant contributions that were held in a checking account for which the plan's TPA had checkwriting authority. If a participant submitted a claim to the TPA that adequately demonstrated a disability, the TPA issued a disability payment to the participant from the account for the appropriate amount. The TPA also paid plan expenses from the account, which included its own administrative service fees.

In addition to his benefits lawsuit, the participant claimed that the corporation and TPA breached their ERISA fiduciary duties by:

The district court ruled in favor of the corporation and TPA regarding the trust requirement and fee payment claims, but ruled for the participant regarding the SAR claim. The parties appealed to the Ninth Circuit.

Under ERISA's trust requirement, plan assets generally must be held in trust by one or more trustees. The participant and the DOL (in an amicus brief) argued that the LTD plan failed to satisfy ERISA's trust requirement. The participant and the DOL argued that ERISA requires parties to specify their responsibilities regarding ERISA plan assets in a document titled "trust instrument" that:

Also, the DOL apparently took the view that under regulations implementing ERISA's trust requirement, parties must use express words of trust.

The Ninth Circuit rejected these arguments, holding that neither ERISA nor its underlying regulations require creation of a document that includes specific terminology to satisfy ERISA's trust requirement. As a result, the court concluded that the LTD plan satisfied ERISA's trust requirement and that the corporation was operating under a valid trust:

The Ninth Circuit also rejected the argument that the corporation failed to maintain "exclusive authority and control" over the plan's assets, as required under ERISA, because it delegated plan administration duties to the TPA. The court noted that the controlling plan instrument entrusted the TPA with administering the plan, under the management and supervision of the corporation's board of directors.

The participant was more successful regarding his challenge to the TPA's practice of paying its own fees and expenses from plan assets held in the plan's checking account (29 U.S.C. § 1106(b)(1)). The participant argued that this practice was a per se violation of ERISA's prohibited transaction rules involving self-dealing because the TPA, as a plan fiduciary, was dealing with plan assets for its own account. (The parties did not dispute that the TPA was a plan fiduciary.)

The Ninth Circuit concluded that an exception to ERISA's prohibited transaction rules that allows plan fiduciaries to receive reasonable compensation for performing duties did not apply to a fiduciary who pays itself from plan funds (29 U.S.C. § 1108(c)(2)). The court agreed with the participant that:

The Ninth Circuit rejected the participant's claim that the corporation and TPA breached their fiduciary duties by failing to distribute a SAR. The court concluded that the plan satisfied a regulatory exemption for totally unfunded welfare plans (29 C.F.R. § 2520.104-44(b)(1)(i)).

We don't often see circuit court cases addressing ERISA's trust and prohibited transaction rules in the health plan context, and this case is a reminder that those rules apply and can be invoked, as they were here, in litigation that begins as a benefits claim denial. The Ninth Circuit's conclusion that the TPA violated ERISA's self-dealing and fiduciary standards is good reason for TPAs to revisit their fees payment arrangements to make sure those arrangements don't run afoul of the prohibited transaction rules. Notably, according to the Ninth Circuit, because fiduciary self-dealing is a per se violation of ERISA, it was irrelevant that the TPA in this case was authorized to pay its own fees and expenses from plan assets under its ASA with the plan.