If you’re unsure about your benefits team members’ responsibilities and potential liabilities, you’re not alone. It’s a question we hear frequently from new clients. This page will bring you up to speed on some specifics.
The Employer
If you are the employer, your role on the benefits team is to:
- Determine the plan design, adopt the plan document, and keep the plan document up to date with the ever-changing employee benefit plan laws and regulations.
- Make contributions to or pay benefits under the plan to the extent required by the plan.
- Administer the plan or appoint the plan administrator (see separate role description below).
- Appoint the plan’s trustee, if necessary (see separate role description below).
- Adopt an investment policy, if necessary.
- Hire third parties to assist you, if necessary, such as a third party administrator, a benefits consultant, an actuary, an employee benefits attorney, and an accountant (see separate role descriptions below).
- Make decisions involving the amendment or the termination of the plan.
As the sponsor of an employee benefit plan, you are ultimately responsible for the overall design of the plan, such as the categories of employees who can participate and the benefits to be provided. You also decide the general manner in which the plan will be administered, as well as the circumstances under which it will be amended and terminated.
Once the overall objectives of your company’s plan have been determined, you need to adopt a plan document and a trust document if the plan is going to be funded (e.g., a qualified retirement plan). You must then decide whether to act as the plan administrator or appoint a plan administrator and, if the plan is funded with a trust, appoint the trustee(s) and adopt an investment policy.
You may also want to hire a third party administrator (TPA) to assist you with the administration of the plan because you may not be familiar with the rules and regulations that govern employee benefit plans or do not have the human resources to handle all of the administrative requirements of such plans internally. A TPA will work with you, the plan administrator, and the trustee(s) in determining who meets the plan’s eligibility requirements, the amount of the contributions, and the extent of the participants’ benefits. A TPA will also assist you in keeping each of your employee benefit plans in compliance with the numerous employee benefit plan laws. This function is extremely important because a plan that does not comply with such laws can result in adverse tax consequences to you and the participants and subject the plan’s fiduciaries to personal liability. You should have a written service agreement with each TPA to avoid misunderstandings as to the TPA’s role and your responsibilities.
Once all the plan documents and the players are in place, the plan can be implemented and administered by:
- Determining who is eligible to be in the plan.
- Funding the plan in the manner required by the plan.
- If the plan is funded with a trust, making contributions to the trust from employer contributions, employee contributions, or both, and determining how the trustee will invest the trust’s assets.
- If the plan is fully insured, paying insurance premiums from employer contributions, employee contributions, or both, or, if plan benefits are to be paid out of your general assets, making sure that the funds are available.
- For plans that are not fully insured, processing claims for benefits and paying approved claims either out of the trust, if the plan is funded with a trust, or out of your general assets if it is not.
- Testing the plan each year under the applicable nondiscrimination tests.
- Complying with the various reporting and disclosure requirements applicable to the plan.
Employer Fiduciary Liability In General
Although the employer is the plan’s sponsor, whether it is a plan fiduciary will depend on how the plan is administered and what the plan document says. If one or more employees (or members of the board of directors) of the plan sponsor are responsible for the day to day administration of the plan or are responsible for the investment of plan assets, the employees and their employer probably will be treated as fiduciaries of the plan. Furthermore, many plan documents, particularly prototype documents, specify that the employer is the ERISA plan administrator of the plan. It is important for you to read your company’s plan document to determine who is the designated plan administrator.
In general, you should avoid the plan’s designation of the employer as the plan administrator. If the employer is the designated plan administrator, the employer’s board of directors and officers can be held liable as fiduciaries of the plan even though they may know very little about the day to day operations or investments of the plan. Generally, we recommend that the plan provide that an administrative committee designated by the employer will be the plan administrator. In this way, the employer can designate as the plan administrator a group of individuals who understand that they will be plan fiduciaries and who have some appreciation for the operation of the plan. Of course, the employer will be responsible for the prudent selection and monitoring of the administrative committee.
Limiting Employer Fiduciary Liability
Apart from designating an administrative committee to serve as the plan administrator, there are other ways for the employer to limit its fiduciary liability. These include:
- Designating an institution rather than an employee (particularly the owner) of the company to serve as the plan’s trustee.
- Hiring a registered investment advisor to take responsibility for the investment of the plan’s assets.
- Making plan participants responsible for the investment of their own accounts, in the case of a defined contribution plan, such as a 401(k) plan or a profit sharing plan (see the FAQ regarding participant-directed investments).
- Making sure that the company and the plan administrator receive appropriate and expert outside advice and assistance from benefits experts such as a third party administrator, an employee benefits attorney and a benefits consultant.
The Plan Administrator
The role of the in-house plan administrator is to:
- Develop written policies and procedures for the operation of the plan (e.g., enrollment forms, claims forms, qualified domestic relations procedures for a retirement plan or qualified medical child support procedures for a health plan, or procedures for allowing participants to direct the investment of their accounts under a retirement plan).
- Advise participants and beneficiaries on how the plan works, such as through the publication of a summary plan description (SPD).
- Keep track of the participants’ eligibility for benefits under the plan (e.g., for each employee, keep track of name, address, social security number, marital status, date of birth, date of hire, compensation, and job classification).
- Make decisions on benefit claims and the payment of benefits.
- Assure compliance with the applicable laws and regulations to include maintaining the paperwork for both the employer and any interested government agencies, such as the Internal Revenue Service, the Department of Labor, and, for certain retirement plans, the Pension Benefit Guaranty Corporation.
The plan administrator may be the employer or an administrative committee made up of key executives who are familiar with personnel matters. Because of the complexities of the employee benefit plan rules, the plan administrator (or the employer) may wish to hire a third party administrator (TPA) to assist with the administration of the plan. Remember, however, that even if a TPA is hired, the plan administrator is still responsible for supervising the TPA and making any discretionary decisions with respect to the operation of the plan.
Plan Administrator Liability In General
As mentioned earlier, ERISA requires every plan to have a plan administrator or named fiduciary (this is not the “third party administrator” or “TPA”). Generally speaking, the plan administrator designated under the plan has the responsibility for making decisions with respect to:
- Eligibility to participate in the plan.
- The determination of the amount of benefits payable under the plan.
- The approval or denial of benefit claims.
Given these responsibilities, employers generally find it best to designate a specific employee or group of employees (an “administrative committee”) with first-hand knowledge of, and responsibility for the operation of the plan, as the plan administrator.
There are several advantages to appointing a specific employee or employee committee as plan administrator in that it:
- Enables the employer to clearly identify the person or persons who make a formal action on behalf of the plan, thereby achieving continuity and consistency in plan interpretation and benefit decisions.
- Removes the employer itself, or its management, from becoming party to any lawsuits brought with respect to plan benefits, thereby limiting the introduction of other issues involving the employee’s employment relationship (e.g., poor employee performance) and focusing the inquiry upon the decision made in terms of the plan.
- Permits the establishment of a clear and consistent benefit claims procedure that has the best chance to be carried out and, as a result, has the best chance to withstand a court challenge.
The decision to make the plan administrator a single individual or a committee depends upon the preferences of the employer. Appointment of a single individual who is most familiar with the plan such as an employee benefits manager may be appropriate in the cases of some smaller companies. For larger companies, the appointment of a small committee, for example, one comprised of the director of human resources, the benefits manager, and a human resources manager, may be equally appropriate.
The appointment of the individual or individuals to serve as the plan administrator should be made in light of the objectives mentioned above, namely to:
- Establish the most efficient and effective structure for administration of the plan.
- Allocate and delegate functions to the entity or persons best suited for the particular task.
- Clearly delineate such allocations and delegations in the plan documents.
Although there are always exceptions to the rule, our general recommendation is that the employer should appoint, as plan administrator, the person or persons who are most familiar with the day to day administration of the plan, are charged with its maintenance and operation, and who have the particular expertise to interpret the plan and apply it in the proper manner to the employer’s work force.
Limiting Plan Administrator Liability
The best way for the plan administrator to limit its liability under ERISA is to practice procedural prudence. That is, acting in a deliberate and prudent manner after fully consulting the relevant plan documents and expert advisers (if needed). The prudent plan administrator should:
- Make sure it has carefully read and understands the plan document.
- Establish uniform written policies to govern areas of plan administration that are not adequately addressed in the plan document, such as plan loans, hardship withdrawals, and the handling of QDROs.
- Carefully document its decisions and the basis for each significant decision.
- Retain qualified advisors and experts to assist it with areas of plan administration where it does not have the requisite knowledge.
- If you are an employee and have been asked to serve on your company’s administrative committee, you may want to ask whether your company will indemnify you (hold you harmless) from legal liability, except in cases of a willful fiduciary breach. Many companies also provide fiduciary liability insurance for members of their administrative committee.
The Plan Trustee
The role of the plan trustee is to:
- Invest the plan’s assets held by the trust, which may consist of employer contributions, employee contributions, or both, within the guidelines established by ERISA (if it applies to the plan).
- Distribute benefits based on instructions from the plan administrator.
- Report to the plan administrator (and in some cases the IRS).
- Not all employee benefit plans are funded with a trust, however, most retirement plans are funded with a trust (unless the plan is fully insured or a nonqualified deferred compensation plan that funded out of the employer’s general assets). Some welfare plans are funded with a trust, usually a tax-exempt trust under the rules applicable to a voluntary employees’ beneficiary association (VEBA).
A trustee can be an individual, such as the company owner or a key employee, or an institution, such as a trust company or the trust department of a bank. When there is more than one trustee, they may share responsibility for all duties equally or each might become personally responsible for specific duties. In either case, it is critical that each has an accurate understanding of their respective responsibilities from the outset.
Note that some defined contribution retirement plans allow participants to direct the investment of their own accounts. Under such arrangements, the trustee’s role will be to execute those instructions in an efficient and timely fashion on behalf of the participants. Contrary to popular belief, however, this feature does not totally relieve the trustee from your fiduciary responsibilities with respect to the investment of the plan’s assets.
Plan Trustee Liability In General
A plan trustee can have a considerable amount of authority and legal responsibility if it is an active trustee – one that is primarily responsible for the holding and investment of the plan’s assets. Alternatively, a passive plan trustee can have a much more limited role – one that involves holding title to plan assets and following the investment directions of an investment committee, an investment manager, or plan participants. Whether a trustee will serve as an active or passive trustee generally is a matter of plan design. It is very important to review the plan and trust agreement to determine the nature and extent of the trustee’s duties and authority.
Apart from handling plan investments, a plan trustee is responsible for keeping detailed trust accounting records with respect to the trust’s investment transactions, including the fair market value of plan assets as of the “valuation” date specified under the plan. Certainly, difficulties can arise in valuing plan assets that are not readily tradable. In these instances, it is sometimes desirable to obtain an independent appraisal of such assets.
Limiting Trustee Liability
Before a person consents to serve as the trustee (or one of the trustees), the person should make sure that he or she fully understands the nature of the appointment and the theoretical extent of the liability. Will the trustee be responsible for investing the plan’s assets? Will the trustee be asked to hold title to and to value non-tradable assets?
If a person accepts appointment as a plan trustee, he or she can limit their fiduciary liability by:
- Agreeing to serve only as a passive/directed trustee.
- Having a regulated financial institution (e.g., a bank, trust company, or investment company) serve as the actual custodian of the plan assets.
- Making sure that he will have access to proper and adequate legal advice (if warranted).
- Properly documenting in writing all of his significant decisions as trustee and basis for each such decision.
- Obtaining fiduciary liability insurance coverage.
The Third Party Administrator (TPA)
The TPA’s role is to:
- Advise the employer and the plan administrator regarding the administration of the plan in general.
- Assist the plan administrator in keeping track of the participants’ eligibility for benefits under the plan.
- Assist the plan administrator and the employer in determining the appropriate funding for the plan.
- Assist the plan administrator in handling benefit claims and the payment of benefits.
- Assist the employer and the plan administrator with reporting and compliance.
Because most employers and plan administrators are not familiar with the rules and regulations that govern employee benefit plans or do not have the human resources to handle all of the administrative requirements of such plans internally, TPA’s are hired to assist the employer, the plan administrator, and the trustee(s). They can help them to determine who meets the plan’s eligibility requirements, the amount of the contributions, and the extent of the participants’ benefits. They also assist them in keeping their employee benefit plans in compliance with the numerous employee benefit plan laws. This function is extremely important because a plan that does not comply with such laws can result in adverse tax consequences to the employer and the participants and subject the plan’s fiduciaries to personal liability. The TPA should have a written service agreement with each employer or plan administrator that hires you in order to avoid misunderstandings as to your role and their responsibilities.
Although the TPA can provide important assistance to the employer and the plan administrator, all responsibility ultimately falls on the employer and the plan administrator to make sure that the plan is properly maintained. Therefore, the TPA may give advice, but the employer and plan administrator must make the final decisions and oversee the operation of the plan.
Third Party Administrator (TPA) Liability In General
Whether a TPA will be exposed to fiduciary liability under ERISA depends on how it establishes and maintains its service relationship with the plan sponsor or plan administrator. The TPA is in business to render aid to plan administrators but not to do the plan administrator’s job. A plan administrator may employ a TPA to give it options and advice, to help it keep abreast of the changes in the law that do or may affect the plan, its operation and its participants, to perform the ministerial tasks, such as number crunching, and to do whatever other recordkeeping tasks that the parties agree upon. Note that the TPA is working at the plan administrator’s direction just as any other agent would. The TPA gives advice, but the plan administrator makes the decisions. The TPA prepares reports based on information from the plan administrator (and from the trustee), the plan administrator distributes and signs those reports as the party responsible for their accuracy. The TPA should not be able to make discretionary decisions about the plan’s operation and should not have any control over the plan or its assets. In most cases, the TPA is not a plan fiduciary.
If, however, a TPA exercises discretion and control over the plan, or some part of it, then, to that extent, the TPA may become a plan fiduciary. The courts often examine the issues of differing fact patterns to determine who is and who is not a plan fiduciary and although they seem to be becoming more and more liberal in their interpretations of facts the underlying rule remains the same. Discretion and control over the plan, its operation and its terms are the key. If you are a TPA, make sure that the plan administrator you are assisting takes its position seriously.
Limiting TPA Liability
The best way for a TPA to control and limit its ERISA liability is to educate the plan sponsor, the trustee and the plan administrator about their roles regarding the operation and administration of the plan and to make sure it does not make discretionary decisions with respect to the plan. In order to keep the respective roles and duties straight, we strongly recommend that the TPA use a written service agreement that clearly spells out its role, its services, and most importantly, those responsibilities that do not belong to it but rather to the other parties.
The Benefits Consultant
The benefits consultant’s role is to:
- Provide advice concerning the design and operation of a plan.
- Assist with the preparation and review of plan documents.
A benefits consultant may be totally independent of the plan’s TPA or an experienced member of the TPA’s staff. They usually provide assistance to the employer with respect to plan design issues. For example, if the employer wants to implement an insured medical plan, the benefits consultant may recommend the best plan design and the insurance company with the most appropriate policy features and rates. He or she may also assist the plan administrator with making sure that the plan administrator understands its responsibilities with regard to the overall operation and compliance of the plan. Occasionally, they will help to represent the plan in connection with any audits or investigations by the Internal Revenue Service or Department of Labor.
Benefits Consultant Liability In General
Much like the situation of a TPA, whether a benefits consultant will be exposed to fiduciary liability under ERISA depends on how it establishes and maintains its service relationship with the plan sponsor or plan administrator. The benefits consultant is in business to advise plan sponsors and plan administrators but not to do their jobs. A plan administrator may employ a benefits consultant to give it options and advice or to help it keep abreast of the changes in the law. The sponsor may employ the benefits consultant to assist it with plan design issues. In most cases, the benefits consultant is not a plan fiduciary.
If, however, a benefits consultant exercises discretion and control over the plan, or some part of it, then, to that extent, the benefits consultant may become a plan fiduciary. The courts often examine the issues of differing fact patterns to determine who is and who is not a plan fiduciary and although they seem to be becoming more and more liberal in their interpretations of facts the underlying rule remains the same. Discretion and control over the plan, its operation and its terms are the keys.
Limiting Benefits Consultant Liability
The best way for a benefits consultant to control and limit its ERISA liability is to educate the plan sponsor, the trustee and the plan administrator about their roles regarding the operation and administration of the plan and to make sure it does not make discretionary decisions with respect to the plan. In order to keep the respective roles and duties straight, we strongly recommend that the benefits consultant use a written service agreement that clearly spells out its role, its services, and most importantly, those responsibilities that do not belong to it but rather to the other parties.
The Actuary
The actuary’s role is to:
- Calculate contribution levels for defined benefit pension plans and certain employee welfare benefit plans (e.g., a self-insured medical plan funded through a trust).
- Provide any required certifications or reports to the IRS or the PBGC with respect to the plan’s funding status and funding methods.
- Assist the plan administrator with the determination of an individual participant’s accrued benefit under a defined benefit pension plan.
The actuary’s services will be needed if a company plans to institute a defined benefit pension plan, certain types of cross-tested defined contribution retirement plans, or certain self-insured employee welfare benefit plans. They are trained in mathematics and statistics. They review the funding status of the plan and determine the contributions that should be paid to a plan in order to fund the promised benefits as they become payable. They generally are responsible for filing an actuarial certification (Schedule B) as part of a defined benefit pension plan’s annual return/report (Form 5500).
Actuary Liability In General
Much like the situation of an attorney or an accountant, an actuary is in business to provide specific plan related services (in this case, actuarial) to plan sponsors and plan administrators. In most cases, the actuary is not a plan fiduciary.
In rare cases, an actuary that exercises discretion and control over the plan, or some part of it, may become a plan fiduciary. The courts often examine the issues of differing fact patterns to determine who is and who is not a plan fiduciary and although they seem to be becoming more and more liberal in their interpretations of facts the underlying rule remains the same. Discretion and control over the plan, its operation and its terms are the keys.
Limiting Actuary Liability
The best way for an actuary to control and limit its ERISA liability is to educate the plan sponsor, the trustee and the plan administrator about their roles regarding the operation and administration of the plan and to make sure it does not make discretionary decisions with respect to the plan. In order to keep the respective roles and duties straight, we strongly recommend that the actuary use a written service agreement that clearly spells out its role, its services, and most importantly, those responsibilities that do not belong to it but rather to the other parties.
The Benefits Attorney
Your employee benefits attorney’s role is to:
- Provide legal advice concerning the design of the plan.
- Assist with the preparation and review of the plan documents and any amendments to the plan.
- Provide legal advice concerning the operation of the plan (including assisting the employer or the plan administrator with the correction of any defects) and cautioning the plan’s fiduciaries against prohibited transactions.
- Assist the employer and the plan administrator with government audits and investigations.
An employer’s employee benefits attorney should provide expert advice on the overall strategy and development of the plan itself, plus answer any questions surrounding the roles and responsibilities of all parties involved. Employers should rely on them to review plan and trust documents, participant communications, the overall operation of the plan and, most crucially, any audits or investigations by the Internal Revenue Service or the Department of Labor.
Many of the laws applicable to retirement plans are extremely complex. A violation can result in fines, otherwise avoidable excise taxes, and even the disqualification of the entire plan to the detriment of the employer and the participants. Your benefits attorney can work with the plan administrator and the TPA to determine if a plan compliance issue has occurred and the best way to correct any identified problems.
Attorney Liability In General
Much like the situation of an actuary or an accountant, an attorney is in business to provide specific plan related services (in this case, legal) to plan sponsors and plan administrators. In most cases, the attorney is not a plan fiduciary.
In rare cases, an attorney that exercises discretion and control over the plan, or some part of it, may become a plan fiduciary. The courts often examine the issues of differing fact patterns to determine who is and who is not a plan fiduciary and although they seem to be becoming more and more liberal in their interpretations of facts the underlying rule remains the same. Discretion and control over the plan, its operation and its terms are the keys.
Limiting Attorney Liability
The best way for an attorney to control and limit its ERISA liability is to educate the plan sponsor, the trustee and the plan administrator about their roles regarding the operation and administration of the plan and to make sure it does not make discretionary decisions with respect to the plan. In order to keep the respective roles and duties straight, we strongly recommend that the attorney use a written service agreement that clearly spells out its role, its services, and most importantly, those responsibilities that do not belong to it but rather to the other parties.
The Certified Public Accountant’s Role
The CPA’s role is to:
- Handle trust accounting if the plan is funded with a trust (unless this task has been assigned to someone else).
- Prepare and review tax and information returns (unless this task has been assigned to someone else).
- Verify the trust financial reports through a financial audit if the plan is funded with a trust and an audit is required.
The CPA’s principal task is to audit the financial statements that go to the Department of Labor for a large employee benefit plan (generally, at least 100 participant’s on the first day of the plan year). In addition, if the plan is funded with a trust, the CPA may be asked to determine whether any of the plan’s investments result in unrelated business taxable income (UBTI). If the trust income includes UBTI, the trustees must file income tax returns and pay resulting income taxes. Because CPA’s are generally familiar with the financial and tax status of the employer that sponsors the plan, they may also may become involved in working with other plan advisors on plan design and income tax deduction issues.
Accountant Liability In General
Much like the situation of an actuary or an attorney, an accountant is in business to provide specific plan related services (in this case, accounting) to plan sponsors and plan administrators. In most cases, the accountant is not a plan fiduciary.
In rare cases, an accountant that exercises discretion and control over the plan, or some part of it, may become a plan fiduciary. The courts often examine the issues of differing fact patterns to determine who is and who is not a plan fiduciary and although they seem to be becoming more and more liberal in their interpretations of facts the underlying rule remains the same. Discretion and control over the plan, its operation and its terms are the keys.
Limiting Accountant Liability
The best way for an accountant to control and limit its ERISA liability is to educate the plan sponsor, the trustee and the plan administrator about their roles regarding the operation and administration of the plan and to make sure it does not make discretionary decisions with respect to the plan. In order to keep the respective roles and duties straight, we strongly recommend that the accountant use a written service agreement that clearly spells out its role, its services, and most importantly, those responsibilities that do not belong to it but rather to the other parties.