Guest Article

(From the September 5, 2006 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

No Trust Requirement for Cafeteria Plans, Fourth Circuit Confirms

A recent decision by the Fourth Circuit Court of Appeals highlights some interesting issues relating to applying the ERISA trust and fiduciary requirements to employee pre-tax premium contributions to a self-insured group health plan. Phelps, et al. v. CT Enterprises, Inc., et al., 2006 U.S. App. LEXIS 20480 (4th Cir. 2006). Basically, the court's decision reaffirms the Department of Labor's (DOL) position that employee premium contributions made through IRC § 125 cafeteria plans do not have to be held in trust, but still are ERISA plan assets and must be handled accordingly. The court's decision also addresses the issue of how much time employers have to transfer participant premium contributions to the plan administrator so they can be used to pay benefits or plan administration expenses.

Background

The primary issue in the case was whether the employer had violated any ERISA fiduciary duties with respect to handling employees' pre-tax premium contributions to a self-insured group health plan. The employees made their contributions to the group health plan through an IRC § 125 cafeteria plan, which is the only way such contributions could be made on a pre-tax basis.

As a general rule, all ERISA plan assets must be held in trust and used for the exclusive purpose of paying benefits and reasonable plan administration expenses. See ERISA §§ 403 and 404. Employee premium contributions to welfare benefit plans become plan assets as soon as they can be reasonably segregated from the employer's general assets, but in no event later than 90 days after the amounts would have been paid to the employee in cash. See DOL Reg. § 2510.3-102.

Even though employee premium contributions made through IRC § 125 cafeteria plans are ERISA plan assets, the DOL has taken the position employers do not have to hold these contributions in trust. See DOL Technical Release No. 92-01 (May 28, 1992) [available at www.dol.gov/ebsa/Newsroom/tr92-01.html]. However, the basic ERISA fiduciary requirements for using these contributions only to pay benefits and reasonable plan administration expenses still apply.

Case Summary

In this case, the employer was experiencing financial problems and eventually stopped sending enough money to the group health plan administrator to pay claims. The employer later told its employees that it was terminating the group health plan, but did not provide any information about the status of unpaid claims incurred prior to the termination date. A group of employees sued to recover these unpaid claims, arguing the employer breached its fiduciary duties by failing to remit the employees' contributions to the plan administrator in a timely manner.

The Fourth Circuit Court of Appeals reiterated the general principle that employers do not have to hold participant contributions through IRC § 125 cafeteria plans in trust, but such contributions are "plan assets" that must be handled in accordance with ERISA's fiduciary standards. Among other things, this means employers may not use participant contributions to pay the company's general operating expenses or to benefit the company in any other way.

Based on the evidence presented, the court of appeals concluded the employer did remit all employee contributions to the plan administrator as soon as they could be reasonably segregated from the employer's general assets. These transfers were occurring weekly before the employer started having financial problems, but much less frequently after those problems developed -- although still within the 90-day maximum period established by DOL regulations. However, the court of appeals ruled "an employer does not breach a fiduciary duty merely because the timing of payments to the plan administrator is altered in the face of an onset of adverse circumstances."

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Taina Edlund 202.879.4956, Laura Edwards 202.879.4981, Mike Haberman 202.879.4963, Stephen LaGarde 202.879-5608, Bart Massey 202.220.2104, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Carlisle Toppin 202.220.2067, Tom Veal 312.946.2595, Deborah Walker 202.879.4955. Copyright 2006, Deloitte.