Guest Article

DOL Sues Association, Plan Administrator and Trustees for Overpaying $906,621 in Administrative Services

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Summary: The DOL lawsuit alleges that an employer welfare association, a plan administrator and plan trustees breached their fiduciary duty and engaged in prohibited transactions by overcharging and not seeking competitive bids.

(June 5, 2000) - The U.S Department of Labor (DOL) is suing an employer association, its health plan administrator and four trustees for allegedly causing the plan to overpay $906,621 for administrative services, in a lawsuit filed March 31 (Herman v. McQuatters, NDNY).

The New York Equipment Dealers Association in Liverpool, N.Y., plan administrator Richard McQuatters and the trustees are being charged with several ERISA violations, including breach of fiduciary duty and engaging in prohibited transactions.

Facts of the Case

The association is a nonprofit organization that covers 325 retail, wholesale and distribution businesses. A trust was created in 1990 to provide medical dental, life insurance and disability benefits to approximately 1,400 participants in the association. The trust was funded through either a self-funded program or insurance contracts.

The association was also a service provider to the trust. Therefore, it was a party in interest under ERISA's prohibited transaction rules, which generally prohibit a plan fiduciary from entering into any transaction with a party in interest.

A party in interest is: (1) a person who provides fiduciary or other services to a plan; (2) an employee or employer organization whose employees or members are covered by the plan; (3) owners or officers of a plan sponsor; and (4) family members and other parties closely related to fiduciaries, service providers, sponsors, officers or owners.

In early 1990, the trustees decided that the association should provide the trust with office space, utilities, equipment, supplies and the services of association executive vice president McQuatters as trust administrator, along with other support personnel.

McQuatters recommended that the association charge the trust for these services using a fee schedule used by CIGNA in its dealings with the association. McQuatters would receive 5 percent of the association's annual profits.

The trustees approved McQuatters' proposal. Neither McQuatters nor the trustees solicited bids from other service providers or reviewed the appropriateness of the association's fee schedule relative to the services being provided to the trust. Between 1991-1997, the arrangement was renewed upon McQuatters' recommendation without the solicitation of bids or review of the fee schedule.

In 1997, an accounting firm hired by three trustees reported that between 1992 and 1996, the trust had been overcharged $906,621. However, those trustees made no effort to obtain reimbursement from the association.

DOL Allegations

The lawsuit is a result of an investigation by DOL's Boston office. The DOL alleges that the defendants violated ERISA by:

• entering into the administrative services contract solely based on McQuatters' recommendation without soliciting competitive bids;
• renewing the contract between 1991-1997 without soliciting bids from other service providers or reviewing the appropriateness of the fee schedule;
• overcharging the trust $906,621 for the administrative services; and
• failing to seek reimbursement of the overcharges after receiving the accountant's report.

Therefore, the DOL argues that:

1. the trustees and McQuatters breached their fiduciary duty by failing to act solely in the interest of-- and for exclusively providing benefits to -- trust participants and beneficiaries, and with the care, skill, prudence and diligence required of ERISA fiduciaries;
2. the trustees are liable for the fiduciary breaches of their co-fiduciaries because they knowingly participated in those breaches, failed to discharge their fiduciary duties and enabled each other to commit the breaches and failed to make reasonable efforts to remedy the breaches, despite being aware of them;
3. McQuatters:
   • engaged in prohibited transactions by furnishing the trust with goods, services and facilities by a party of interest and/or transferring trust assets to a party in interest,
   • engaged in self dealing by receiving 5 percent of association profits, which included payments for administrative services -- therefore dealing with the trust assets in his own interest and for his own account, and
   • represented adverse interests by acting in transactions involving the trust on behalf of a party whose interests were adverse to the interests of the trust or its participants and beneficiaries; and
4. the association engaged in prohibited transactions by renewing the contract without soliciting bids or reviewing the fee schedule.

The DOL is seeking restitution for all losses -- plus interest or lost opportunity costs -- incurred by the trust, a permanent injunction against McQuatters barring him from serving as an ERISA plan fiduciary or service provider, the correction of the prohibited transactions violations by the association, attorney's fees and other equitable relief.

Implications

Under the facts given, McQuatters was a plan fiduciary and therefore had a duty to protect plan assets. He also was the administrator managing the trust. Similarly, the association was a plan fiduciary, and had trust management duties. As a trustee, the association sold the services of its vice president to the trust that it was protecting. Associations typically provide services to trusts. A party in interest may receive reasonable compensation for those services, but may not receive any compensation from the plan if the party is a full-time employee of the plan sponsor.

Plan fiduciaries that have compensation arrangements with -- or have approved such arrangements between -- parties in interest and their plans may want to review those transactions for compliance with ERISA's prohibited transaction rules.

Any transaction should be reviewed by an independent trustee. The review should include a comparison of the cost of services in the community. The independent trustee may want to hire expertise to evaluate services for comparability in cost relative to the extent and quality of services given.

Reprinted with permission from the Employers Guide to Self-Insuring Health Benefits. Copyright 2000, Thompson Publishing Group, Inc. All rights reserved.

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