A federal district court in New Jersey has issued an important decision for sponsors of plans subject to ERISA. The case in question, Lutz Surgical Partners PLLC, et al v. Aetna Inc., et al, deals with the issue of cross-plan offsetting. In this case, the federal Court determined that Aetna’s cross-plan offsetting was a violation of plan fiduciary duties under ERISA §404(a) and a violation of prohibited transactions under ERISA §406(b)(2).
Cross-plan offsetting occurs when a third-party administrator (TPA) believes it has overpaid a healthcare provider for services rendered to participants under a particular ERISA plan. The TPA requests repayment from the provider, and if the provider does not grant repayment, the TPA unilaterally decides to withhold payment to the same healthcare provider for services rendered under a separate and distinct plan.
ERISA section 404(a) – Fiduciary duty of exclusive benefit
ERISA fiduciaries must discharge their duties with respect to a plan solely in the interest of the participants and beneficiaries and ... for the exclusive purpose of... providing benefits to participants and their beneficiaries.” The Court in Lutz v. Aetna determined that
“[W]hile undertaking the offsetting, Aetna is discharging its duty of benefit payment under Plan B, which should be done for the exclusive purpose of serving the interests of the Plan B participants and beneficiaries. However, such an offsetting serves another purpose unrelated to Plan B, i.e., recovering overpayments made under Plan A. Therefore, Aetna's practice of cross-plan offsetting violates Section 404(a).”
ERISA section 406(b)(2) – Prohibited transactions
ERISA section 406(b)(2) prohibits plan fiduciaries from acting in “any transaction involving the plan on behalf of a party... whose interests are adverse to the interests of the plan or the interests of its participants or beneficiaries.” This is a “per se prohibition of a transfer between two funds where the trustees are identical but the participants and beneficiaries are not.” The federal Court in Lutz v. Aetna stated that
“Here, Aetna, as an ERISA plan administrator, acts as the fiduciary for both Plan A and Plan B, whose participants and beneficiaries are not identical. By “failing to pay a benefit owed to a beneficiary under one plan in order to recover money for the benefit of another plan,” the practice of cross-plan offsetting “may constitute a transfer of money from one plan to another.”
Other Court Opinions on Cross-Plan Offsetting
The Lutz decision is not the first to deal with the issue of cross-plan offsetting, but it is the biggest decision to date finding offsetting is a violation of ERISA. In a 2019 decision in the Eighth Circuit Court of Appeals, the Court didn’t go so far as to find that UnitedHealth Group was in violation of ERISA, but did state that the practice of cross-plan offsetting was not contemplated in the agreement and governing plan instrument. See our prior Benefit Beat article on the Eighth Circuit case.
Advice for Plan Sponsors
Certainly this won’t be the last of litigation regarding cross-plan offsetting. Therefore, sponsors of plans subject to ERISA will want to address this issue with their third-party administrators.
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