By: Amanda Sonneborn and Meg Troy,

On August 20, 2012, the Sixth Circuit affirmed a district court’s decision that a third-party administrator breached its fiduciary duties to a number of employee benefit plan sponsors by paying its own expenses with funds that were supposed to pay participant claims despite language in the relevant contracts that expressly stated that it was not a fiduciary. Guyan International Inc. v. Professional Benefits Administrators Inc., No. 11-3126.

In reaching this decision, the Court addressed the important question whether Professional Benefits Administrator (PBA) was a fiduciary under ERISA with respect to Plaintiffs’ employee health benefit plan.  PBA was a third-party claims administrator who paid medical providers for claims incurred under the plan.  Although PBA was contractually obligated to keep plaintiffs’ funds in segregated accounts and not to use these funds for its own purposes, it instead commingled and misappropriated the funds, and failed to pay hundreds of thousands of dollars in owed claims.

Relying on the text of ERISA, which provides that a person is a fiduciary with respect to a plan to the extent he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, the Court found that PBA was a fiduciary.  Specifically, it held that the threshold for becoming a fiduciary is lower for entities handling plan assets than for entities managing the plan, and that an entity exercising any authority or control over disposition of a plan’s assets is a fiduciary. 

The Court specifically rejected PBA’s argument that it could not be a fiduciary because it lacked discretionary authority over plan assets, explaining that it merely has to exercise any authority or control over plan assets to be a fiduciary.  It also explained that any language in a contract purporting to limit its fiduciary status did not override its functional status as a fiduciary.  Thus, because PBA, as a third-party administrator, had the power to write checks on the plan account and exercised that power, it was an ERISA fiduciary to the extent that it did so.  Further, because PBA used Plan funds in ways contrary to how it had agreed to use them demonstrated that PBA had practical control over Plan funds once it received them from the Plaintiffs.

Having determined that PBA was a fiduciary, the Court easily went on to find that PBA breached its fiduciary duty by using Plan assets for its own purposes, in what it described as a classic case of self-dealing.

This case raises important issues for plan sponsors who utilize third party administrators to assist in administration of their plans.  It also highlights the fact that even if an administrative service agreement or other agreement attempts to limit fiduciary status, a party’s actions may still cause it to be deemed a fiduciary.