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

When one company purchases another, there can be significant implications to the obligation to provide health benefits. Former employees of the seller company are typically entitled to continue health benefits under COBRA if they lose coverage as a result of the transaction. The traditional view is that the seller company has the obligation to provide COBRA coverage. But what happens when the seller company ceases operation and terminates its health plan? How do these displaced employees get continuation coverage.

It is not uncommon, in an asset purchase transaction, for the buyer to assume a substantial portion of the operations of the selling company. In many instances, the buyer also agrees to take on and hire former employees of the seller. These types of arrangements give rise to special considerations for employee benefit plans, the continuation of health coverage being one of them.

The COBRA regulations contain a number of regulations explaining what happens to qualified beneficiaries in the event of an asset purchase transaction. 26 CFR 54.4980B-9 includes provisions that deal specifically with continuation rights and obligations in an asset purchase transaction. Included in these regulations is an explanation of instances where the buyer is obligated to provide the continuation coverage under its own plan, even though it may not have ever employed the individual employees.

In the context of a business reorganization, the regulations recognize the existence of a “M&A qualified beneficiary.” In an asset sale, this is someone who has a COBRA qualifying event prior to or in connection with the sale and whose last employment prior to the qualifying event was associated with the assets being sold. Under this definition, an employee working for the seller company who loses coverage as a result of the asset sale (typically through termination of employment) would be an “M&A qualified beneficiary.”

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I happen to be working on a matter regarding the status of an entity as a "fiduciary" for a plan and it has caused me to revisit some basic principles of ERISA that reminded me of the importance of understanding fiduciary status.

ERISA defines fiduciary status as (i) exercising discretionary authority or discretionary control respecting management of such plan or control of the disposition or management of plan assets, (ii) rendering investment advice for a fee with respect to money or property of the plan, or (iii) having discretionary authority or responsibility for administration of the plan.  It is this third one that caused me to look a little deeper into the issue.  What types of things would qualify as having discretion in plan administration?

In 29 CFR 2509.75-8, the Department of Labor looked at some purely administrative functions and decided the following:

"Q: Are persons who have no power to make any decisions as to plan policy, interpretations, practices or procedures, but who perform the following administrative functions for an employee benefit plan, within a framework of policies, interpretations, rules, practices and procedures made by other persons, fiduciaries with respect to the plan:

(1) Application of rules determining eligibility for participation or benefits;
(2) Calculation of services and compensation credits for benefits;
(3) Preparation of employee communications material;
(4) Maintenance of participants' service and employment records;
(5) Preparation of reports required by government agencies;
(6) Calculation of benefits;
(7) Orientation of new participants and advising participants of their rights and options under the plan;
(8) Collection of contributions and application of contributions as provided in the plan;
(9) Preparation of reports concerning participants' benefits;
(10) Processing of claims; and
(11) Making recommendations to others for decisions with respect to plan administration?

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I was looking at my 401(k) balance this week and it struck me that I have no idea how fees and costs are allocated to our plan.  My first reaction was that this seems to be a confirmation that lawyers are their own worst clients.  But as I thought about it more, it struck me that, after LaRue (which is still the hot topic in benefits' circles), someone might be interested in 401(k) fees.

The Employee Benefits Security Administration has a site called "A Look at 401(k) Fees."  It provides a nice summary of the fees and costs associated with plan administration and also an explanation of how the various fees and expenses are calculated and how participants could compare fees and expenses.  What is missing is an explanation of how those fees and costs are set and how they are monitored.  There is also no clear cut statement of how expenses can or should be shared by the participants and the plan sponsor.

In 1998, a document titled "Study of 401(k) Plan Fees and Expenses," the Pension and Welfare Benefit Administration concluded that fees and expenses were being increasingly born by participants.  In December of 2006, the Department of Labor issued rules detailing the information plan sponsors must share with participants about how fees are calculated and allocated.  Today, I suspect that more and more of the total cost of plan administration is being allocated to participants.  And therein lies the rub.

Participants don't have the ability to negotiate fees with service providers, cannot monitor fees and expenses on an ongoing basis and very likely could not understand how costs would be attributed to their individual accounts.   They would also not have the ability to conduct audits of service providers without assistance from plan sponsor.  On the other had, the plan sponsor gets to make all the decisions about how costs will be allocated, what service provider to retain, what level of monitoring is appropriate and when an audit might be appropriate.  In other words, the sponsor holds all the card. 

So how long before participants start making claims against plan sponsors for not protecting them against excessive fees and costs?  How long before participants start making claims for breaches of fiduciary duty against plan sponsors for retaining service providers that charge too much?  How long before participants can bring claims against employers for not bearing 100% of the costs of plan administration instead of sharing it with participants?  As it turns out, not long at all.

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I recently came across a situation that reminded me about the importance of knowing the definitions contained in each plan separate from each other.  In this particular case, a disability plan and a life insurance plan had two separate definitions for "actively at work" that actually were not in agreement and created a significant conflict. 

The disability policy defined "actively at work" as being regularly schedule to work or receiving payroll from the company.  The life insurance coverage defined "actively at work" as being actually working and performing a job function.  Factually, the company had an employee who went out as a result of an illness in October of 2006, but stayed on the payroll.  In March of 2007, he applied for and received long term disability and came off the payroll.  Unfortunately he passed away in December of 2007.

From the disability carrier's point of view, he had ceased employment in March of 2007, when he ceased receiving payroll.  But from the life insurance carrier's point of view, he ceased being actively at work in October of 2006, when he actually stopped performing his job function.  Both coverages used the same term, and both coverages had a different way of defining it. 

It is important for employers as plan sponsors to review and identify inconsistencies in plan (and insurance coverage) definitions so that they can adequately administer benefits.  There may not be any way to make all providers use the same definition so it is essential that the employer understand how each coverage defines not only eligibility, but also its own terms.

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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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