This article should not be considered a comprehensive guide to the ERISA plan asset, fiduciary responsibility, trust or exclusive benefit requirements, or the requirements applicable to ERISA plan sponsors utilizing a trust. ERISA plan sponsors should consult with legal counsel regarding compliance with the fiduciary responsibilities of ERISA, Part 4, discussed in part below.

Introduction

A class action lawsuit was filed by and on behalf of participants of a group health plan sponsored by Johnson & Johnson (plaintiffs).  The lawsuit, alleging mismanagement of the prescription drug benefit program, was filed against the following parties (defendants):

1. Johnson & Johnson as the plan sponsor
2. The pension and benefits committee of Johnson & Johnson and specific members of such committee

The complaint alleges, among other things, that defendants failed to act as prudent experts would have when selecting the plan’s pharmacy benefit manager (PBM) and negotiating pricing for prescription drugs covered by the plan. A key factor underlying these allegations is Johnson & Johnson’s plan is funded through a trust. As of this article’s date (May 2024), this case is still in the initial stages of the litigation process (filed February 2024).

Considering this recent litigation, this article briefly describes some special considerations for plans with plan assets, including those utilizing a trust.

NOTE: This article is intended to be informational and does not comment on the soundness of any specific strategies for selecting a PBM or designing a plan’s pharmacy benefits or on the merits of plaintiffs’ (e.g., Johnson & Johnson plan participants’) claims.

ERISA Protection: The Big Picture

ERISA requires every employee benefit plan to be established and maintained pursuant to a written instrument that provides “for one or more named fiduciaries who jointly or severally shall have authority to control and manage the operation and administration of the plan.” In most cases, employers who sponsor welfare benefit plans for their employees are considered fiduciaries of the plan.

Prudence and Undivided Loyalty

Fiduciary duty generally applies to “every act taken in a fiduciary capacity.” In addition, ERISA outlines specific fiduciary duties. This article discusses several, but not all, of the fiduciary duties required by ERISA.

Fiduciaries are expected to perform their duties with the care, skill, prudence, and diligence that a prudent expert would use and with like aims. ERISA also requires fiduciaries to act solely in the interests of participants and beneficiaries, commonly referred to as the duty of undivided loyalty.

ERISA was primarily enacted to protect pension plan participants. At the time, regulating welfare benefit plans was a secondary concern. However, since ERISA was enacted, employee welfare benefit plan requirements have significantly expanded. While ERISA claims alleging mismanagement of funds are not uncommon in the retirement plan landscape, this class action lawsuit against Johnson & Johnson could mark a shift in the welfare benefit plan landscape. As a result, plan sponsors should evaluate whether third party administrators and other vendors of their welfare benefit plans are chosen and monitored with the same care, skill, prudence, and diligence that an expert acting in the sole interest of participants and beneficiaries would use to choose and monitor third party administrators.

Plan Assets

Employee welfare benefit plan sponsors should consider taking a moment to assess whether they sponsor any plans that may be subject to the same level of scrutiny as the health plan in the Johnson & Johnson case due to holding plan assets in trust. In addition, this case highlights the importance of ensuring plans comply with ERISA’s fiduciary requirements specifically applicable when a plan is “in possession of plan assets.”

Sponsors of employee welfare benefit plans will likely possess plan assets while performing administrative functions if the plan collects participant contributions, as participant contributions become plan assets the moment they can reasonably be segregated from an employer’s general assets (and in no event later than 90 days after being withheld or contributed). In addition, funds in possession of the plan sponsor in excess of what can be attributed to participant contributions, even those originating from the plan sponsor’s general assets, are at times considered plan assets under ERISA.

Examples of situations in which funds other than participant contributions can become plan assets include:

Formal Irrevocable Trust

Funds held in trust by ERISA welfare benefit plans are considered plan assets under ERISA. This includes plan sponsor contributions to the trust and investment returns on the trust assets.

Separate Accounts

If the sponsor of a self-insured welfare benefit plan establishes a separate account for paying claims instead of paying claims from their general assets, this could result in all amounts held in that separate account being considered plan assets.

In other words, this could result in employer contributions and any earned interest within the account being considered plan assets. A crucial factor to be considered in determining whether these additional amounts are considered plan assets is whether the plan has a beneficial interest in the account. This will depend on whether the relevant documents, actions, or representations show an intention that funds in the account belong to the plan.

Example 1: A plan sponsor utilizes a separate account to fund plan benefits. The account is in the plan sponsor’s name and contains general assets of the plan sponsor. Typically, segregation of funds in this manner does not, on its own, result in additional funds being designated as plan assets.
Example 2: A plan sponsor utilizes a separate bank account in the plan’s name to fund plan benefits. Typically, segregation of funds in this manner will result in additional funds being designated as plan assets.

It is not always clear if the segregation of funds will cause the additional funds to become plan assets. However, this is a common employer strategy, especially in administering health reimbursement arrangements (HRAs) and health flexible spending accounts (FSAs). A potential solution may be giving the TPA check writing authority over an account that otherwise belongs to and is for the benefit of the plan sponsor. Sponsors of employee welfare benefit plans are strongly encouraged to discuss the current funding structures of self-insured plans with legal counsel to determine if the strategies could lead to additional funds being treated as plan assets.

Regulatory and Legislative Strategy Group