TPA Banking Issues

[Guest AHayhow]

Can any other TPAs out there provide guidance to us to find the regulations that address the banking issues associated with COBRA and FSA Administration? For instance, is it necessary to maintain a separate checking account for each client for whom we accept and reconcile premium payments (or FSA deductions)? If not, can we have one interest bearing checking account? Thanks for your help.

[Ron Snyder]

This is an matter that should be considered carefully, as it raises a number of issues. The alternatives appear to be:

1. Separate accounts for each client. This is a safe method of handling the funds. The TPA should not have signature authority over the account, although software permits printing of the employer's signature. No need to order separate checks for each client in this day of laser printers, so this approach is acceptable from most perspectives. The TPA can claim that it is not a fiduciary under this method, although that is a fact question for the court to determine.

2. One TPA claims payment account. This method would seem to work in states where TPA firms are licensed under state law (and bonded). The TPA would have signature authority over the account and would be a fiduciary. Since TPAs are licensed and regulated under state insurance laws (in about 15 states), this would avoid a problem with an illegal trust business.

3. Single-employer trust. This method would work but is almost identical to no. 1 above. The only difference is that the account is a trust account, so this would require additional (financial) reporting each year. There is no advantage to the employer or TPA with this method, only to the participants. (Their interests would be more protected.) TPA cannot serve as trustee, as that would create a trustee business and violate banking laws.

4. Multiple-employer trust. This method could work, but raises issues of MEWA reporting and disclosures and would require an independent (bank?) trustee, thus incurring additional expense.

[Guest AHayhow]

Actually, we decided to go with maintaining one checking account for all COBRA clients and one checking account for all FSA clients and a general opertaing account in which to deposit the employer funds. Money will be transferred from the general account into the appropriate checking accounts as funds are needed.

Normally, under ERISA, all plan assets have to be held in trust. However, ERISA Technical Release 92-10 (which is still good law since it has not been

superseded) has suspended the trust requirement for assets in a cafeteria

plan (your FSAs). Also, the trust requirement is suspended for premiums paid

to fully insured plans. That means an employer simply has to hold the assets

in a general account until they pay it out. The regulations say that the

money must be paid to the insurance company within 90 days of receipt. The

FSAs are paid in accordance with the terms of the Plan. You would stand in

the shoes of the employer as his agent.

Thanks

[Ron Snyder]

The Technical Release was intended to address the situations where the employer held funds in a separate account, not a situation in which a TPA commingled assets of separate plans. Your post is inconsistent: you correctly state that "an employer simply has to hold the assets in a general account until they pay it out". But yet you state that "we decided to go with maintaining one checking account for all COBRA clients and one checking account for all FSA clients and a general opertaing account in which to deposit the employer funds". Yet your initial post indicated that you are a TPA, not the employer.

If you are a TPA, your approach likely violates state banking law as well as resulting in a MEWA subject to DOL and state regulation, unless an exemption is provided under state law and you have qualified for that exemption.