TPA Liability

[Guest wingnut]

Where does the liability lie? If the TPA is processing claims and performing its due diligence in assuring an expense is viable and then the expense is not; what are the consequences? and who holds the liabality? Could the TPA be laible for issuing a remiubursment check that shouldnt? (example: An employee submitted a claim for a dependent( they said) and that "dependent" was not being claimed by the participating employee)

[papogi]

Not to try to get around your question, because it is a valid one and should be addressed, but what are the actual circumstances of your employee and the supposed dependent? There are instances where someone can be reimbursed for medical expenses for a "dependent" even though the employee can't take the exemption on his/her taxes. The exemption is largely a moot point when it comes to HCFSA's. There is a slightly looser definition of dependent that should be used for FSA's.

[Guest wingnut]

the "dependent" is the mother of the participant. Is there a better way of verifying this information? the way I see it it is the particpants responsibility and therefore his liability if he tries to "cheat" the system.

[papogi]

If your participant provides more than half of his mother's support, he can be reimbursed through a HCFSA for her expenses.

As far as TPA liability, you will hear lots of opinions on this. You are right that it can be argued that it is the participant's responsibility to submit claims for eligible individuals. FSA's operate like Schedule A medical expenses, except that the tax savings are realized through the participant's payroll. If the employee instead tried to write off expenses for dependents on Schedule A, would the IRS send a letter asking for proof that the dependent is eligible? No. They leave it up to the taxpayer to be honest and truthful, and be subject to any penalties should the IRS perform a tax audit. Why treat the FSA any differently? If the employee is reimbursed illegally, it's between the employee and the IRS. On the other hand, TPA's are hired to administer benefits based on how the plan doc is written. If the plan doc says that dependents up to age 19, and then 23 if a FTS, are covered, then it is the TPA's responsibility to adhere to the written rules. If you reimburse someone outside of the document's eligibility provisions, it can be a breach of contract, and the TPA is responsible. Plan docs for FSA's can have their own definition of "dependent", and don't have to use the IRS definition. If the plan doc does not address dependents, and instead says to follow applicable IRS rules, then you may have a case, but liability seems to be shifting to TPA's as time goes by. My opinion is that, as the plan administrator, it is the TPA's responsibility to make sure that reimbursements follow 125 rules with respect to participant eligibility and reimbursment legality. There is so little 125 IRS audit activity, as well as the view that "it's the employee's money", that there's not much impetus to spend much time on eligibility, however.

[Guest wingnut]

Ok. Thank you for your reply. I am learning some valuable things here. I have one more question. Does the employer assume any liablity in the event that claims are being processed improperly? And is there any literature out there to prove that there is/is not liablity on the employer so we can prove it to a prospective client?

[papogi]

ERISA 405(a)(3) and 405© state that a plan sponsor will be responsible for any TPA fiduciary wrongdoings if the plan sponsor is aware of the wrongdoing and made no attempt to correct it. Otherwise, only the TPA is responsible as long as the plan sponsor can prove that it does monitor the TPA's practices periodically. In Harris Trust and Saving Bank v. Salomon Smith Barney Inc., 503 US 238 (S Ct, June 12, 2000), a TPA can be required to restore inappropriately distributed funds to the plan.

There are conflicting cases concerning whether a TPA performing claims administration is also a fiduciary. In general, courts usually decide that TPA's are not fiduciaries when they only process claims, claims are sent directly to them, and the TPA decides whether the claims should be covered. In most cases, I think the employer will still be held responsible, unless they can prove that the TPA was not making the client aware of its practices. Regular monthly reporting is important. Be sure to have hold harmless provisions in your contracts with your clients. The further you are away from being a fiduciary, the better your protections.