Compliance January 11, 2016

Court Sides with Plan Sponsor in Wellness Program Challenge

Flambeau, Inc.’s requirement that employees participate in a wellness program to participate in its health plan is covered by an ADA safe harbor, a district court found.
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Although the Americans with Disabilities Act (ADA) generally prohibits employers from requiring their employees to submit to medical examinations, Flambeau, Inc.’s requirement that employees complete a health risk assessment and biometric test falls within the ADA’s “safe harbor,” which provides an exemption for activities related to the administration of a bona fide insurance benefit plan, a district court judge found.

Beginning in 2012, Flambeau required employees to complete the assessment and test only if they wanted to participate in the company’s insurance plan. U.S. District Judge Barbara B. Crabb of the U.S. District Court for the Western District of Wisconsin agreed with Flambeau’s argument that when viewed from this perspective, the assessment and testing were entirely voluntary and therefore not prohibited by the ADA.

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According to the court opinion, the information gathered through the wellness program was used to identify the health risks and medical conditions common among the plan’s enrollees. Except for information regarding tobacco use, the health risks and medical conditions identified were reported to Flambeau in the aggregate, so that it did not know any participant’s individual results, indicating that it was not using the wellness program to discriminate against any employees. Flambeau said it used this information to estimate the cost of providing insurance, set participants’ premiums, evaluate the need for stop-loss insurance, adjust the co-pays for preventive exams and adjust the co-pays for certain prescription drugs.

NEXT: Wellness program requirement was a ‘term’ of the health plan

In satisfaction of the ADA safe harbor conditions, Flambeau said the wellness program requirement constituted a “term” of its health insurance plan and that this term was included in the plan for the purpose of underwriting, classifying and administering health insurance risks. 

Crabb agreed, finding that Flambeau distributed handouts to its employees informing them of the wellness program requirement and also scheduled the wellness program’s health risk assessments and biometric testing so that they would coincide with the plan’s open enrollment period. Also, the plan’s summary plan description explained that participants would be required to enroll “in the manner and form prescribed by [Flambeau],” which put employees on notice that there might be additional enrollment requirements not spelled out in the summary plan description. 

In her opinion, Crabb used reasoning found in the 11th U.S. Circuit Court of Appeals decision in Seff v. Broward County. The court in that case found: “The parties do not cite, nor are we independently aware of, any authority suggesting that an employee wellness program must be explicitly identified in a benefit plan’s written documents to qualify as a ‘term’ of the benefit plan within the meaning of the ADA’s safe harbor provision.” 

Crabb rejected the Equal Employment Opportunity Commission’s (EEOC) reliance on a statement in its proposed wellness program regulations. In those regulations, the EEOC says, “The Commission does not believe that the ADA’s ‘safe harbor’ provision applicable to insurance as interpreted by the court in Seff v. Broward County, is the proper basis for finding wellness program incentives permissible.” Crabb noted that the EEOC’s proposed regulation speaks only to the safe harbor’s application to “wellness program incentives.” It says nothing about the safe harbor’s applicability to medical examinations that are part of a wellness program and are used to administer and underwrite insurance risks associated with an employer’s health plan. 

The decision in Equal Employment Opportunity Commission v. Flambeau, Inc. is here.

Compliance January 11, 2016

Excessive Fee Claims Against Principal Dismissed

Among other things, the 8th Circuit found Principal’s adherence to its agreement with a plan sponsor does not implicate any fiduciary duty.
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An appellate court has dismissed a plan sponsor’s lawsuit claiming its plan provider charged excessive fees to retirement plan participants.

Affirming a district court’s decision that McCaffree Financial Corp. failed to state a claim, the 8th U.S. Circuit Court of Appeals agreed that Principal Financial Group was not acting as a fiduciary under the Employee Retirement Income Security Act (ERISA) when it entered into a contract with McCaffree to offer separately managed accounts for McCaffree’s retirement plan for employees.

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The contract between McCaffree and Principal provided that plan participants could choose to invest their accounts among various separate accounts which invested in Principal mutual funds. Principal reserved the right to limit which separate amounts it made available to participants and McCaffree also had the ability to limit in which accounts employees could invest. Principal presented 63 accounts that could be included in the contract, and this was narrowed down to 29 accounts made available to plan participants.

The contract also provided that participants would pay both management fees and operating expenses to Principal. Principal assessed the management fees as a percentage of the assets invested in a separate account, and this percentage varied for each account according to its associated mutual fund. In addition, Principal could unilaterally adjust the management fee for any account, subject to a cap specified in the contract, and would have to provide participants with at least 30 days’ written notice of such change.

McCaffree entered into the contract in 2009. In 2014, it filed a lawsuit alleging that Principal charged participants invested in these separately managed accounts “grossly excessive management fees and other fees” in violation of its fiduciary duties under ERISA.

The appellate court said that to first state a claim of breach of fiduciary duty, a plaintiff must first plead facts demonstrating the defendant is a fiduciary. Principal was not a named fiduciary to the plan.

NEXT: Five arguments rejected

McCaffree argued that Principal’s selection of 63 separate accounts in the initial investment menu constituted both an exercise of discretionary authority over plan management and over plan administration, so it owed a fiduciary duty to make sure fees for the accounts were reasonable. However, the appellate court noted that the contract clearly identified each account’s management fee and authorized Principal to pass through expenses to participants. The court said sister circuits have held that a service provider’s adherence to its agreement with a plan sponsor does not implicate any fiduciary duty where the parties negotiated and agreed to the terms of the agreement in an arm’s-length bargaining process. Up until it signed the agreement with Principal, McCaffree remained free to reject its terms and contract with another service provider.                        

McCaffree argued that Principal acted as a fiduciary when it selected from the 63 accounts identified, the 29 accounts made available to plan participants. The company contends this winnowing process, after the parties entered into the contract, gave rise to a fiduciary duty to ensure the fees associated with the accounts were reasonable. The court found that McCaffree did not assert that only some of the 63 accounts had excessive fees or that during the winnowing process, Principal made sure participants only had access to the higher-fee accounts. The action subject to complaint is that excessive fees were charged for all the accounts in the contract, so McCaffree cannot base its excessive fee claims on any fiduciary duty Principal may have owed while selecting the 29 accounts, the court concluded.

The appellate court also rejected McCaffree’s argument that Principal’s discretion to increase fees and adjust amounts charged to participants supports its claim that Principal was a fiduciary. Again, the court said the company failed to plead any connection between this and its excessive fee allegations. McCaffree did not allege that Principal exercised this authority, resulting in excessive fees.

Similarly, the court found McCaffree’s allegation that Principal was a fiduciary because it provided participants with “investment advice” was unrelated to the context of the lawsuit. McCaffree also argued Principal inadequately disclosed the additional layer of management fee for the underlying Principal mutual funds in which the separate accounts were invested, but the court found the mutual fund fees were not subject to complaint, so this argument does not apply to the decision whether Principal was a fiduciary for actions relating to the complaint.

The decision in McCaffree Financial Corp. v. Principal Life Insurance Company is here.

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