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Employers Act as Fiduciaries When Managing Premium Payments for Benefit Plan

by | Apr 26, 2022 |

The Sixth Circuit Court of Appeals, in Chelf v. Prudential Insurance Company of America, has determined that a district court erred in dismissing a claim for breach of fiduciary duty based on ERISA’s “ministerial function” exception.  Specifically, the Sixth Circuit revived a widow’s claim that an employer violated ERISA when it made errors in collecting and paying an employee’s life insurance premiums.

Law.  DOL regulations provide that certain “person[s] who perform…purely ministerial functions” for an employee benefit plan are not fiduciaries.  However, this exception is limited to “persons who have no power to make any decisions as to plan policy, interpretations, practices or procedures, but who perform [certain specified] administrative functions for an employee benefit plan.”

One of the administrative functions (specified within the DOL regulations) is the “[c]ollection of contributions and application of contributions as provided in the plan.”  This provision, however, applies only to a specified group—those persons who are collecting and applying benefits while exercising no discretionary authority or plan management.  As the provision explains, “a person who performs purely ministerial functions…is not a fiduciary because such person does not have discretionary authority or discretionary control respecting management of the plan, does not exercise any authority or control respecting management or disposition of the assets of the plan, and does not render investment advice with respect to any money or other property of the plan and has no authority or responsibility to do so.”

Background.  In Chelf, the spouse’s husband passed away while on disability leave from his employer, and she filed a claim under the employer’s basic and optional life insurance plans.  The plan’s insurer approved the claim for basic life insurance, but denied the claim for optional benefits on the basis that that the decedent’s optional life insurance coverage had lapsed and terminated prior to his death.

District Court.  The spouse sued the employer in federal district court, alleging that it breached its fiduciary duty by mishandling his coverage under the optional life insurance plan.  In particular, she argued that the employer: (i) did not inform the decedent of his right to convert the optional life insurance policy; (ii) did not communicate with him about the payment of premiums or the alleged termination of the optional insurance; and (iii) failed to apply his unpaid time off to cover the cost of his premiums while on disability.

In response, the employer filed a motion requesting that the matter be dismissed.  The district court granted the employer’s motion to dismiss, reasoning that the spouse failed to state a claim because the employer’s handling of the premiums was an administrative, not fiduciary, function, and that the employer had no duty under ERISA to provide notice of conversion rights outside of the plan documents.  The spouse appealed the decision.

Sixth Circuit.  The Sixth Circuit first reviewed the portion of the spouse’s claims involving the allegations of mishandling of plan assets.  The Sixth Circuit noted that, in reaching its decision, the district court relied on an exception contained in ERISA regulations which provides that certain persons who perform purely “ministerial functions” are not plan fiduciaries.  The Sixth Circuit found that this exception did not apply to the employer because it “indisputably exercised control over the Plan’s assets when it handled [the decedent’s] premiums, exercised control over the disposition of the Plan’s assets, and had discretionary authority over the administration of the Plan.” Ultimately, the Sixth Circuit found that the employer was “acting in a fiduciary capacity” and not a “purely ministerial” capacity by mishandling the decedent’s premium payments, and accordingly the spouse’s allegations “are [sufficient] to state a claim for breach of fiduciary duty.”

The Sixth Circuit next reviewed the portion of the claim regarding the employer’s alleged failure to disclose.  Specifically, the Court explained that it had only recognized a breach of duty for a fiduciary’s failure to disclose information not expressly required to be disclosed by ERISA in three situations: “(1) an early retiree asks a plan provider about the possibility of the plan changing and receives a misleading or inaccurate answer or (2) a plan provider on its own initiative provides misleading or inaccurate information about the future of the plan or (3) ERISA or its implementing regulations required the employer to forecast the future and the employer failed to do so.”

In the instant case, the Court concluded that none of the spouse’s allegations fit within these three specific categories, and it further rejected her argument that the welfare plan imposed an affirmative duty on the employer to disclose certain information.  In particular, the Court observed that the complaint “did not allege that the terms of the life insurance policy required [the employer] to provide [the decedent] with notice of his right to convert. Nor did [the spouse] allege that the Plan or SPD had any such requirement that would have given rise to such an independent duty.”  Therefore, the Court affirmed the decision to dismiss the failure to disclose claims.

Employer Takeaway.  The Chelf case serves as an important reminder to employers that they may be held liable where their employees experience a loss in coverage under their welfare benefit plans from the mishandling of premium payments.