Employers that sponsor health and welfare plans for their employees rarely run them alone. They hire insurers, third-party administrators, and other service providers to process claims, calculate benefits, make claims decisions, answer participant questions, update plan participants, and keep the plan running day to day. Each of these providers faces a critical decision at the start of the engagement: to what extent, if any, is the provider serving the plan in a fiduciary capacity? Put another way, will it wear a fiduciary or non-fiduciary hat when it performs any given task for the plan?

The decision has profound consequences. A provider wearing the fiduciary hat takes on ERISA’s strict duties of diligence and prudence, and the liability that comes with those duties. A provider acting in a non-fiduciary capacity is generally not exposed to claims for breach of fiduciary duty arising from its work and often is able to assert strong preemption defenses to other non-ERISA claims. As such, in many cases, fiduciary status is the predominant, if not dispositive, question in litigation against service providers. A huge class of claims rises and falls on one issue: whether the provider was acting as a fiduciary when it took the action—or failed to take the action—the participant is complaining about.

Fiduciary Status Is Functional

An insurer, plan administrator, or other service provider does not become a fiduciary just because it provides services to a plan or its participants. Entities become functional fiduciaries by exercising discretion and fiduciary power over plan assets. If the service provider exercises discretion over plan assets or administration, the service provider is likely a functional fiduciary; if the service provider does not exercise discretion, it likely does not owe participants fiduciary obligations. This functional fiduciary status attaches even where the service provider lacks formal designation or authority to serve in a fiduciary capacity.

And a provider that is a fiduciary for one purpose is often not a fiduciary for all purposes. Under 29 U.S.C. § 1002(21)(A), a person is a fiduciary with respect to a plan only “to the extent” it exercises discretionary authority or control over the plan’s management or administration. Courts take the “to the extent” concept seriously. The Eighth Circuit has explained that a person “is a fiduciary only with respect to those portions of a plan over which he exercises discretionary authority or control respecting management of such plan.” The court has also observed that “[f]iduciary status under ERISA is not an all or nothing concept,” so a court “must ask whether a person is a fiduciary with respect to the particular activity in question.”

This functional approach is built into the elements of the claim for breach of fiduciary duty. To plead a breach of fiduciary duty, a plaintiff must allege that (1) the defendant was a fiduciary of the plan, (2) the defendant was acting in that capacity when it engaged in the challenged conduct, and (3) the defendant breached a fiduciary duty. Plaintiffs often gloss over the second element, yet it frequently decides the case.

The Mismatch Problem

Consider a health insurer that is a plan fiduciary only because it has discretionary authority to determine the acceptance or denial of payment of claims. Now suppose a participant sues, not because a claim decision violated plan terms, but because the insurer continued to communicate to plan participants that insurance coverage was still in effect when it was not.

The defense response is straightforward. Communicating with participants about coverage is a function separate and apart from that limited zone of discretionary responsibility over claims. The service provider has no substantial discretion over plan assets when it communicates with participants. That communication function is purely administrative. If the service provider’s only discretion over plan assets is adjudicating claims, then the provider wore a non-fiduciary hat when it made the communications at issue and should not be subjected to fiduciary duties.

Practical Takeaways

• For service providers: Define the scope of any delegated discretion clearly in service agreements. Limit or eliminate discretion to be exercised outside of well-defined fiduciary activities. Be conscientious about that choice in the service agreement and then perform consistently with the service agreement.
• For plan sponsors: Understand which fiduciary functions you are delegating and which you are keeping.
• For litigators on either side: Start with the same question every time: Was this service provider defendant a fiduciary for this particular activity? Answering that question correctly, and early, shapes the pleadings, the dispositive motion practice, and the available remedies.

The Employment Law & Litigation team at Lasher is here to help with this and other Employment Law issues.