Employee Benefits Lawyer & Attorney : Fox Rothschild Law Firm : Health Care, Retirement, ERISA : Philadelphia, New York, Northeast

Using Section 125 plans and their various components have become almost standard for any company offering employee benefits packages.  The use of pre-tax dollars for payment of premiums, flexible spending account and dependent care accounts seems almost common place.  However, the ease of use and implementation of these plans has also caused many plan sponsors to forget one of the basics of benefit plan administration: they have to have appropriate documentation.

Cafeteria plans generally meet the definition of "employee benefit plans" under ERISA that requires them to have appropriate documentation, such as summary plan description, that identify the plan sponsor, its obligations and the rights of the participants.  Frequently sponsors use "off the self" documentation received from plan service providers without making sure the documentation is sufficient to satisfy ERISA obligations.  Documentation is particularly important when considering making changes to plan administration because the law assumes the documents will be properly amended and appropriate notices will be sent to plan participants. 

Our recommendation is that every employer that sponsors a Section 125 plan take the necessary step of having documentation created and maintained, regardless of the nature of the benefits available under plan.  Otherwise, there is no reference source available to answer questions.

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In the world of employee health plans, subrogation (and its partner, reimbursement) might be one of the most misunderstood concepts in plan administration.  Subrogation exists where the plan steps into the shoes of the injured party by virtue of the payment of benefits.  The plan takes over the ability of the injured participant to sue the person or entity that cause the injury.  Reimbursement, on the other had, is an obligation on the part of the injured participant to pay back the plan benefits paid from a recovery source.

For example, a participant is injured in a fall at a store.  The participant sues the the store owner for his injuries.  The participant's medical bills are paid by the plan.  Subrogation means that the plan has the ability to assert a claim against the store for the medical bills paid.  Reimbursement means that when the participant recovers from the store, the participant must pay back the plan for the covered medical expenses.

One basic way to control plan costs is to enforce subrogation and reimbursement provisions.  By recovering claims paid from another responsible party, the plan limits its own expenses.  But a plan has to be clear about what right is has and how it intends to enforce that right.  If it is relying on subrogation alone, the plan must be prepared to pursue a claim against the responsible party directly.  If reimbursement is implicated, then the plan must be prepared to make demand for reimbursement from the participant. 

Whichever right a plan has, I believe it could be considered a breach of fiduciary duty for a plan to not pursue subrogation or reimbursement to recoup plan expenses.  Since the fiduciary obligation is to protect the plan as a whole, the fiduciary has an obligation to pursue those funds the plan is entitled to receive, either from the original tortfeasor through subrogation, or from the participant through reimbursement.

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In LaRue v. DeWolfe, decided by the Supreme Court on February 20, the US Supreme Court validated the ability of individual plan participants to seek remedies for breach of fiduciary duty outside of traditional "plan" remedies.  As previously interpreted, remedies for breach of fiduciary duties were limited to those for the plan as a whole.  LaRue forces plan administrators to rethink this posture.  The decision clarifies that, for individual account plans, remedies for the individual account are akin to remedies for the plan at large.  This means individual participants can now seek relief even if the only injury to the plan was to their individual account.

The impact of this decision will probably be most readily felt by administrators of 401(k) plans and other defined contribution plans that have participants that actively change investment directives or directly transmit investment instructions to outside advisors or custodians.  The participant will assume that the plan fiduciary is guaranteeing that the instructions will be correctly followed.  For plans utilizing self-direction of investments, it would be worthwhile for fiduciaries to consider educating participants about their individual responsibilities to monitor account activities and how important it is for them to notify the fiduciary of any problems.  Fiduciaries could also consider using a separate provision in participation agreements that provide some measure of protection by obligating the participant to provide notice.

From my perspective, the decision should serve as a warning to fiduciaries that they have to establish definitive, written investment procedures and then be prepared to adhere to those procedures to avoid potential claims.

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