Participant Money: Treat with Upmost Care (article)
Generally, ERISA places certain standards upon plan sponsors for administering a benefit plan. Specifically, participant contributions to a plan must be applied only to the payment of benefits and reasonable administrative expenses of the plan. When employees make a premium contribution through salary reduction, the contribution becomes a plan asset as soon as the contribution can be "reasonably" segregated from the employer's general assets and the money must be placed in trust without delay or paid to an insurer. The intent of this rule is to ensure that the money be used strictly for the benefit of plan participants and beneficiaries, and not to inure to the benefit of others including the plan sponsor. Note, there is non-enforcement guidance contained in DOL Technical Release 92-01 for contributory welfare benefit plans for participant contributions when made through the terms of an IRC Section 125 (cafeteria) plan. This non-enforcement guidance does not, however, provide an exception to the fiduciary duties nor does it provide an exception to the exclusive benefit rule, i.e., all plan assets must be used for the exclusive benefit of plan participants and beneficiaries.
A recent court case (In re Harris, 2017 WL 65392 (B.A.P. 8th Cir. 2016) highlights the importance of these rules. In this matter, a plan sponsor collected participant contributions on a monthly basis to pay premium for a group health plan. The plan sponsor placed these monies into its general accounts rather than segregating them into a separate trust and used some of the monies to pay other corporate expenses, including the CEO’s home equity loan. Over a period of 10 months, the premium payments were not remitted timely and checks bounced. Coverage under the plan for the participants was eventually canceled. The Department of Labor filed a lawsuit against the plan sponsor alleging he violated ERISA by failing to remit the withheld healthcare premiums and thus, breached his fiduciary duty of loyalty to the plan participants. The District Court entered judgment in favor of the DOL in the total amount of $67,839.60.
The information contained in this article is provided as general guidance and may be affected by changes in law or regulation. This article is not intended to replace or substitute for accounting or other professional advice. Please consult a CBIZ professional. This information is provided as-is with no warranties of any kind. CBIZ shall not be liable for any damages whatsoever in connection with its use and assumes no obligation to inform the reader of any changes in laws or other factors that could affect the information contained herein.